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Module 1
Unit 1
Introduction to Marketing
Structure:
1.1
Objectives
1.2
Introduction
1.3
Definitions of market and marketing
1.4
Concept of Marketing
1.5
The Exchange Process
1.6
Elements of Marketing Concept
1.6.1
The marketing Strategy
1.6.2
The Marketing Mix
1.7
Functions of Marketing
1.8
Importance of Marketing
1.8.1.
Importance of marketing to the society
1.8.2.
Importance of marketing to the company
1.8.3.
Importance of marketing in developed economy
1.8.4.
Importance of marketing in underdeveloped or
Developing economy
1.8.5.
1.9
Importance of marketing in Indian economy
Perspectives of Marketing
1.10 Old Concept or Product- oriented Concept
1.11 New or Modern or Customer- oriented Concept
1.12 Difference between Old & New Concepts of Marketing
1.13 Summary
1.14 Keywords
1.15 Exercise
1.1 Objectives
After studying this unit, you will be able to:

Compare alternative definitions of marketing.

Explain the functions of marketing

Explain the various elements of the marketing concept.

Identify and assess the benefits and costs of a marketing approach.

Distinguish between ‘product- oriented concept’ and ‘customer- oriented
concept’.
1.2 Introduction
Marketing Management is one of the key areas of management. The
marketing philosophy of business assumes that an organization can best
service, prosper and profit by identifying and satisfying the needs of its
customers. Organizations today strongly believe that profit goals will be
reached through satisfied customers. The twenty-first-century marketing
professional will need to have the analytical capacity to handle increasing
amounts of data, possess creative talents to define products and develop
strategies to compete in global markets. This unit deals with meaning,
importance and functions of marketing. The old and modern concepts of
marketing are dealt with in detail.
1.3 The Definition Of Market And Marketing
What is market?
The term ‘market’ is derived from the Latin word ‘mercatus’, which means ‘to
trade’ (i.e. to purchase and sell goods). It also means merchandise, ware
traffic and place of business.
Types of Markets: There are many bases of classification of markets. They
are:
(a) Classification on the bases of geographical area: On the basis of the
geographical area, markets can be classified into four types. They are:
1. Local Market: When the purchase and sale of goods involve buyers
and sellers of a small local area, say, a village or a town, there is
said to be a local market. Local market is common in the case of
perishable commodities like vegetables, fruits, milk, fish etc., and in
the case of bulky and cheap articles, such as stones, sand, bricks,
etc.
2. Regional Market: When the purchase and sale of goods involve
buyers and sellers of a region, say, a few villagers or a few towns,
there is said to be a regional market. Such a market is common in
the case of food grains such as rice, wheat, etc.
3. National Market: When the purchase and sale of goods involve
buyers and sellers of the entire nation, there is said to be a national
market. This type of market is common in the case of commodities
such as cotton, jute, tea, textiles, paper, cement, iron and steel
goods, etc.
4. International or World Market: When the purchase and sale of
goods involve buyers and sellers of many nations, there is said to be
an international or world market. World market is common in the
case of commodities such as gold, silver, precious stones, tea,
spices, etc.
(b) Classification on the basis of the position of sellers in the market:
On the basis of the position of seller in the markets, the following
classification is made:
1. Primary Market: Primary market is the market where the primary
producers of farm products sell their products to the wholesalers or
their agents.
2. Secondary Market: Secondary market is the market where the
wholesalers sell their products to the retails for sale to the
consumers.
3. Terminal Market: Terminal market is the market where the retailers
sell the goods to the final consumers.
(c) Classification on the basis of time:
On the basis of time, markets may be classified into three types. They
are:
1. Very short period Market: A very short period market is a market
where no attention is paid to the adjustment of the supply of the
product according to the demand. This type of market exists for a
very short period, say, a day, and at a particular place. It is generally
concerned with perishable goods like fruits, vegetables, milk, etc.
2. Short period Market: Where some consideration is paid for the
supply to meet the demand, but sufficient time is not available for the
adjustment of the supply of goods to the demand for it, there is said
to be a short period market. This type of market exists for a short
period, say, a week.
3. Long period Market: When sufficient time is available for the
adjustment of the supply of goods in accordance with the demand for
the same, there is said to be a long period market. Such a market is
concerned with durable goods, and so, the sellers hold the goods for
a long period.
(d) Classification on the basis of the volume of business transacted:
On the basis of the volume of business transacted, markets may be
classified into two types. They are:
1. Wholesale Market: Wholesale market is the market where goods
are sold in bulk to dealers for resale. In this market, generally,
wholesalers sell goods to retailers.
2. Retails Market: Retail market is the market where goods are sold in
small quantities to the ultimate consumers. In this market, generally
retailers sell goods directly to the final consumers.
(e) Classification on the basis of the nature of goods sold:
On the basis of the nature of goods sold, markets may be classified into
two types. They are:
1. Consumer Goods Market: Consumer goods market is the market
for consumer goods (i.e. goods needed for use or consumption by
final consumers).
2. Industrial Goods Market: Industrial goods market is the market for
industrial goods (i.e. goods meant for use by producers in the
process of production).
(f) Classification on the basis of the subject matter of sale:
On the basis of subject matter of sale, markets may be classified into
four categories. They are:
1. Commodities Market: Commodities market is the market where
different types of commodities. Such as raw material, semi- finished
goods, capital goods and consumer goods are bought and sold.
2. Capital Market: Capital market is the market where capital is bought
and sold. This includes: 1.Capital market proper – where banks
and other financial agencies provide long-term capital or finance to
the needy borrowers, 2. Money market – where banks and other
financial agencies provide short-term capital or finance to the needy,
3. Stock market – where stocks, shares, bonds debentures and other
securities are bought and sold, 4. Foreign exchange market –
where foreign exchanges, i.e. Currencies of different countries are
bought and sold.
4. Service Market: Service market is the market where services such
as transport and communication, insurance etc, are marketed or
provided.
5. Labour Market: Labour market is the market where labour is
marketed.
(g) Classification on the basis of the nature and mode of business
transactions:
On the basis of the nature and mode of business transactions, markets
may be classified into two categories. They are:
1. Spot Market or Cash Market: Spot market is the market where
goods are physically transferred from the sellers to the buyers and
the buyers make payments to the sellers immediately after the sales
are effected.
2. Futures Market or Forward Market: Futures market is the market
where no physical delivery of goods and payment for the purchases
take place, but only future contracts are entered into.
(h) Classification on the basis of regulation:
On the basis of regulation of the market, markets may be classified into
two types. They are:
1. Regulated Markets: Regulated markets are markets that are
regulated by statutory measures. Regulated markets for agricultural
goods, produce exchanges, stock exchanges etc. are the examples
of regulated markets.
2. Unregulated or Free Markets: Unregulated markets are markets
which are unregulated or not controlled by the statutory measures.
They mostly operate freely on the basis of market forces, viz.,
demand and supply.
(i) On Economic basis: On economic basis, market may be classified into
three types. They are:
1. Perfect Market: It refers to a market or market situation where there
is perfect competition. Competition is said to be perfect when the
sellers and buyers of a particular commodity are so numerous that
none of the sellers or buyers have to sell or buy at a single uniform
price. Price is determined by the market forces of supply and
demand.
2. Imperfect Market: Imperfect market refers to a market or market
situation where there is imperfect competition. Competition is said to
be imperfect when any of the essentials of perfect competition is
absent. In other words, competition is said to be imperfect when it
has the features of both competition and monopoly.
3. Monopoly Market: Monopoly market refers to a market or a market
situation where a single seller controls the entire supply of a
commodity which has no close substitutes.
What is marketing?
Many definitions exist with different emphasis on the functional process &
activities that constitute marketing. Some important definitions are
discussed here.
The Chartered Institute of Marketing defines marketing as follows:
“Marketing is the management process for identifying, anticipating &
satisfying consumer’s requirements profitably.”
The focus of this definition is on the need of balancing customer satisfaction
with the overall objective of an organization, that is, profit. It is based on the
belief that these two concepts are inter-related and no organization can
survive and grow without creating a balance between these two.
Another definition of marketing proposed by American Management
Association is as follows:
“Marketing is the process of planning and executing the conception, pricing,
promotion & distribution of ideas, goods & services to create exchanges that
satisfy individual and organizational objectives.”
Many experts feel that this definition presents marketing as a functional
process conducted by marketing department. It’s also felt that marketing in
recent times, has grown to become an organizational philosophy of ‘an
approach to doing business’ and the AMA definition does not focus on
strategic aspects of marketing. This has led to some recent definitions of
marketing mooted by strategists, such as the following:
“Marketing is a management process whereby the resources of the whole
organization are utilized to satisfy the needs of selected customer groups in
order to achieve the objectives of both parties. Marketing, then, is first &
foremost an attitude of mind than services or functional activities.”McDonald.
“Marketing is so basic that it cannot be considered a separate function at
par with other functions such as manufacturing or personnel. It’s first a
central dimension of the entire business. It’s the whole business seen from
the point of view of its final result, that is, the customer’s point of view...”.
Drucker.
1.4 Concept of Marketing
The Marketing philosophy of business assumes that an organization can
best service, prosper and profit by identifying and satisfying the needs of its
customers. This however is a recent thinking. Various definitions of
Marketing have been given from different perspectives, exchange and utility
being the two important ones.
The Marketing Concept, a philosophy of early 1950s gave marketing a much
more important role in business. To apply this concept, an organization must
meet three basic needs.
First, it must truly believe in the customer’s importance. Most of the
companies give lip service to this idea; no manager wants to be caught
saying that customers are not important. By contrast, a genuine customer
orientation demands a fervent commitment of people, time, and monetary
resources to implement this orientation.
Second, marketing efforts must be integrated. Specific and measurable
goals should be set; all marketing activities should be co-ordinated. If
various departments follow their own private agendas in conducting
marketing activities, the organization may lose sight of customer’s needs.
Finally, management must accept the assumption that profit goals will be
reached through satisfied customers. Clearly, the path to profit is not a
simple one; all business firms compete within a complex environment that
demands astute management of organizational resources and efforts.
Nevertheless, managers must have confidence that if their material needs
by offering quality products at fair prices are fulfilled, their companies will
make money. Similarly, not-for-profit organizations will achieve their
financial and other goals if they satisfy their customers and members. Figure
1.1 illustrates these three pillars of the marketing concept, which are
necessary conditions in creating satisfactory exchange and in making
marketing a true philosophy of business.
The Marketing Concept
(Achieve goals by
meeting customer’s
needs)
Customer Orientation
All marketing
activities are focused
on providing
satisfaction
Integrated marketing
All marketing
activities
are coordinated
Profit follow customer
satisfaction
Profit aims will be met when
the needs and wants of the
market-place are
successfully served
Fig. 1.1: Key Assumptions of the Marketing Concept
1.5 The Exchange Process
A central part of any definition of marketing is the exchange, which is giving
something of value in return for something of value. A product is anything
customers will exchange something of value for, usually because it satisfies
a need or a want. Marketers divide products into three categories:
(1) goods, or physical items; (2) services, or activities that provide some
value to the recipient; and (3) ideas, or concepts that provide intellectual or
spiritual benefits to the customer.
Regardless of the nature of the exchange, certain conditions must exist
before the exchange can occur. At the minimum, the following five
conditions are necessary for successful exchange:

At least two parties must be involved.

Each party must have something that interests the other party.

Each party must be able to communicate and deliver.

Each party must be free to accept or reject any offer from the other
party.

Each party must consider it desirable, or at least acceptable, to deal
with the other party.
The absence of even one of these conditions can cause the best strategies
and plans to fail.
The Production Era
The Industrial Revolution of the eighteenth century was the beginning of the
production era, which lasted until the late 1920s. During this period,
companies focused on the manufacturing process. They looked for ways to
produce their goods faster and more efficiently. The production era had
sellers’ markets in many industries, meaning that demand for products
exceeded supply.
Production
Era
Industrial
Revolution
The
Sales Era
Sales Era
1930
Marketing Era
1950
Present
Fig. 1.2: The Evolution of Marketing: Manufacturers began to make marketing
a priority in the 1950s and are still learning to put customers first
The period from approximately 1930s to 1950, during which companies
focused on promoting and distributing their products.
The Marketing Era
The period that began in the 1950s and continues today, during which
companies formed marketing departments, began to pay attention to
customer wants and needs, and started implementing the marketing
concept.
Marketing Concept
The idea of maximizing long-term profitability by integrating marketing with
other parts of the company and meeting customer needs and wants.
1.6 Elements Of The Marketing Concept
To apply the marketing concept, marketers must do three things; meet
customer needs and wants, achieve and maintain long-term profitability, and
integrate marketing with the other functions in the company, as shown in
Figure 1.3. These companies believe in customer orientation. This is
essentially a managerial philosophy in which the customer is central to
everything the company does.
Marketing in the Future
The twenty-first-century marketing professional will need to have the
analytical capacity to handle increasing amounts of data, the creative talents
to define products and develop messages for a crowded marketplace, and
the social awareness to navigate in complex global markets. Add a strong
dose of technological knowledge and ethical sensitivity, and you’ll have a
pretty good idea of what the marketing challenge will look like in the next
century.
Financ
e
Driver:
Customer
Need and
Wants
Marketing
Research
Technical
Support
Objective:
Long term
Profitability
FUNCTIONAL
INTEGRATION
Manufacturi
ng
Material
Handlin
g
Administrati
on
Servic
e
Fig. 1.3: The Marketing Concept: The marketing concept combines functional
Reintegration with customer satisfaction and long-term profitability.
The Marketing Strategy
It is the overall plan for marketing a product that includes selecting and
analyzing a target market and creating and maintaining a marketing mix.
The Marketing Mix
Once you’ve identified your target market, the next step is to create the
marketing mix, which is a set of four elements: product, price, distribution,
and promotion (see Figure 1.4). You have a lot of control over the elements
in your marketing mix, but you have very little control over the environment
in which you’re operating. For example, Daewoo can decide which cars it
will make but it can not decide what the pollution control laws will be in India
three years from now. Because of the amount of influence these external
forces have, marketers think about the marketing mix in the context of their
overall business environment
External Forces
Competition
Economics
Nature
Politics
Regulation
Technology
Society
Product
Promotion
Distribution
MARKETER
Price
CUSTOMER
The Marketing Mix
Fig. 1.4: The Marketing Mix: The marketing mix is a combination of product,
price, distribution, and promotion; remember that external forces play a role
in the definition and management of your marketing mix.
Product
Products are integral to the exchange process; without them, there is no
marketing. As pointed out earlier, a product can be a good, service, or an
idea. Astute marketers realize that a product is actually a “bundle of value”
that meets customers’ expectations. For example, when you buy a pair of
Action shoes endorsed by cricket star Kapil Dev, you get more than leather,
rubber, and laces. You buy a little piece of Kapil Dev’s image.
Price
It is the value, usually in monetary terms that sellers ask for in exchange for
the products they are offering.
Pricing and product image are closely related. If the grape juice of similar
quality were packaged in two bottles, one with a generic label and one with
the Lever’s label, the latter could command a higher price. Customers will
pay a higher price for a well-known, well-regarded product, partly because
of the image created through advertising and other promotions. High prices
can help create a top-of-the-line image. Some marketers opt; luxury
products even advertise their high prices.
Distribution
It is the process of moving products from the producer to the consumer,
which may involve several steps and the participation of multiple.
Promotion
It includes a variety of techniques, including advertising, sales promotion,
public relations, and personal selling, that are used to communicate with
customers.
Industrial marketers also rely heavily on promotion. A machine tool marketer
can use magazine advertising; a dealer can organise sales-incentive
contest, trade shows, and make press releases to promote products. IBM,
Apple, Compaq, and other computer suppliers combine extensive personal
selling with advertising and public relations. For expensive, complex
products and systems, close interaction between-buyer and seller is often
required, which leads to a lot of personal selling in such markets.
Marketers’ selection of advertising media reflects their overall promotional
strategy for a product.
Manufacturer
Wholesaler
Retailer
Customer
OR
Manufacture
Customer
Fig. 1.5: Marketing Channels: Marketing channels, also called distribution
channels, move products from producers to consumers; two examples are
shown here.
Industrial marketers may also advertise in a range of specialized and
general-interest business magazines to reach potential buyers.
1.7 Functions Of Marketing
The delivery of goods and services from producers to their ultimate
consumers or users include many different activities. These different
activities are known as marketing functions. Different scholars have
described different functions of marketing. Some of the eminent scholars
have described the functions of marketing as under:
G.B. Giles described seven functions of marketing: (1) Marketing Research,
(2) Marketing planning, (3) Product development, (4) Advertisement and
sales promotion, (5) Selling and distribution, (6) After sale services and
(7) Public relations.
Tousley, Clark and Clark, have described eight functions of marketing:
(1) Purchasing, (2) Standardization, (3) Collection, (4) Transportation,
(5) Finance, (6) Risk bearing, (7) Marketing promotion and (8) Sales.
Cundiff and Still have divided the functions of marketing into three
categories as follows:
Table 1.1 Functions of Marketing
(i) Merchandizing Functions
(ii) Physical Distribution
Functions
Functions
1. Product Planning and
1. Storage
Developments
2. Standardization and
2. Transportation
Gradation
3. Purchases and Collection
Information
4.
(iii) Auxiliary
1. Arrangement
of Finance
2. Risk-Bearing
3. Collection of
Market
Sales
In brief, the functions of marketing can be explained as under:
1. Merchandizing Functions
Merchandizing functions of marketing include all those functions of
marketing which are performed in relation to create a demand of a product
and to make it available in a specific-market having some specific needs.
Following are the functions included in this group:
i)
Product planning and development: It is the time when every
activity of a producer clusters around the needs and wants of
consumers. Today, a producer produces only those goods and
services which are required by his customers. A producer has to
produce the goods and services according to the needs of his
customers so that the object of customer satisfaction may be
achieved. He has to make the design, size, weight, price and packing
of his product according to the changing needs and tastes of his
customers. Therefore, the very first function of marketing is to plan a
product and to develop it so that it may satisfy the expectations of
customers.
ii)
Standardizing and grading: Standardizing and grading—are two very
important aspects of marketing of today, because with the help of
these two aspects, marketing functions become easy, production
becomes uniform, prices become equal and marketing becomes
extensive.
iii)
Buying and assembling: For the purpose of functions of marketing,
buying means the acquisition of goods and services by the seller or
industrial user for the purpose of resale. Though ultimate consumers
also purchase the goods and services for the satisfaction of their
needs, such purchases are not included within the purview of the
functions of marketing. Assembling, for the purpose of functions of
marketing, means the collection of different types of goods and
services by mediators for the purpose of resale.
iv)
Selling: Selling is the object around which all the activities of
marketing cluster because no activity in the world of marketing is
completed unless and until the real sale of goods and services bought
or acquired by the seller or intermediary has been effected.
Broadly speaking, marketing does not mean to sell the goods and
services only. It includes the discovery of tastes and wants of the
customers, production of goods and services according to their tastes,
creation of demand, real sale, and after-sale services. For the
achievement of this purpose, it becomes essential for the marketing
personnel to establish effective co-ordination among the activities of
advertisement, personnel selling, sales promotion and after-sale
service.
2. Physical Distribution Functions
Physical distribution functions of marketing are the activities performed for
the purpose of distributing the goods and services to their real-consumer.
These functions include all the functions related to the transportation of
goods and services from the place of producer or seller to the place of
buyer. It includes following two functions:
i)
Storage: Storage is considered to be main activity of marketing these
days. Whenever and wherever the production is seasonal and
consumption is parental or whenever and wherever the consumption is
seasonal but the production is parental, the goods are to be stored in
good condition from the time of production till the time of consumption.
Storage aims at meeting different objects such as – reading the time
between
production
and
consumption,
to
get
the
expected
appreciation in prices, to capture the market etc.
ii)
Transportation: Transportation refers to the real distribution of goods
from the place of production to the place of consumption.
3. Auxiliary Functions
Auxiliary functions are the functions which make the process of marketing
easy and convenient. It includes the following functions:
i)
Marketing finance: Marketing finance means the arrangement of
adequate finance for the distributing the goods and services to their
real consumers.
ii)
Risk bearing: Marketing involves many large risks. Some of the risks
can be insured, e.g. flood, fire, theft, robbery, loot, etc. On the other
hand, some of the risks cannot be insured, e.g. fall in the prices,
changes in the demand, changes in the fashion, changes in the tastes
of consumers etc. These risks can never be eliminated, however,
these can be minimized through effective system of sales forecasting,
market
research,
advertisement,
sales
promotion,
product
diversification etc.
iii)
Market information: Market information plays a vital role in the
success of an enterprise. A businessman has to collect different types
of market information so that he can chalk out his market programme
and policy according to the information gathered. Market information
includes the collection of data regarding trend of market, government
policy, price policy of different business enterprises, tastes of
consumers, change in fashion, scientific development, channels of
distribution, media of advertisement etc. No business effort can be
successful in the absence of this information. These informations are
collected by different business enterprises, specialized agencies,
government, and research scholars at different times.
iv)
Pricing: Pricing is perhaps the most important decision taken by a
businessman. It is the decision upon which the success or failure of an
enterprise depends to a large extent. Therefore, price must be
determined only after taking all the relevant factors into consideration.
While determining pricing policy, the factors to be considered are – cost
of production, severity of competition, prices of competitors, marketing
policy, government policy, the buying capacity of consumers etc.
An analytical study of all the functions of marketing discussed above makes
it clear that marketing is a very wide term including all the activities ranging
from the discovery of needs and wants of consumers to their satisfaction.
1.8 Importance Of Marketing
Marketing has acquired an important place for the economic development of
the whole country. It has also become a necessity for attaining the object of
social welfare. As a result of it, marketing is considered to be the most
important activity in a business enterprise while at the early stage of
development it was considered to be the last activity. For convenience, the
importance of marketing may be explained as under:
1. Importance of marketing to the society
Importance of marketing to the society can be explained as under:
i)
Delivery of standard of living to the society: Main liability of
marketing is to produce goods and services for the society according
to their needs and tastes at reasonable price. Marketing discovers
needs and wants of the society, produces the goods and services
according to these needs, creates demand for these goods and
services, encourages customers to use them, and thus, improves the
standard of living of the society.
ii)
Decrease in distribution cost: Second important liability of marketing
is to control the cost of distribution. Decrease in cost of distribution
directly affects the prices of products because the cost of distribution
constitutes to be an important part of the total cost of distribution.
iii)
Increasing employment opportunities: Employment opportunities
are directly affected by the development of marketing. Successful
operation of marketing activities requires the services of different
enterprises
and
organization
such
as
wholesalers,
retailers,
transportation, storage, finance, insurance and advertising. These
services provide employment to a large number of persons.
iv)
Protection against business slump: Business slump causes
unemployment, slackness in the success of business and great loss to
the economy. Marketing helps in protecting society against all these
problems.
v)
Increase in national income:
Successful operation of marketing
activities creates, maintains and increases the demand for goods and
services in the society. It results in the increased level of production
and it increases the scope and area of marketing. This increase, in
turn, increases the national income which is beneficial to the whole
society.
2. Importance of marketing to the company
Marketing is considered to be the most important activity of all the business
activities. It has become a necessity for the successful operation of all other
business activities.
Peter F. Drucker has rightly said, “Marketing is the business.” All the
business activities are directed on the basis of marketing decisions. The
success of an enterprise depends to a large extent upon the success of its
marketing activities.
i)
Helpful in business planning and decision making: It is very risky
to take the decision in respect of production only on the basis of
production capacity of an enterprise, especially in the light of
increasing competition and changing circumstances. Therefore, it
becomes necessary to decide what can be sold before deciding what
can be produced. It is necessary to decide what quantity of a particular
product can be sold in the market and what measures would be
applied for getting loyalty of customers to the product. Unless and until
these key decisions are taken, it is not practical to take the decision
regarding production, purchase, finance, type of product and quantity
of production. Marketing is very helpful in taking such decisions.
ii)
Increase in the profit: The main objective of every company is to
earn the maximum profits by successful operation of its activities.
Maximization of profits can be possible only through the successful
operation of the activities of the marketing department and not through
the production or finance department.
iii)
Helpful in communication between society and business:
Marketing is an effective media of communication between society and
company.
3. Importance of marketing in developed economy
In all the developed countries of the world, marketing is considered to be the
key of economic activity for industrial growth and expansion. Really
speaking, developed countries are in a greater need of efficient marketing
than underdeveloped countries because in a developed country, generally,
the production is carried on at very large scale through the use of latest
technology and equipments. In these countries, the production is much
more than the demands. Therefore, product diversification takes place and a
stiff competition is found in the market. It requires the marketing system to
be much more effective so that the produced goods and services can be
sold.
4. Importance of marketing in underdeveloped or developing economy
Marketing has a vital role to play in the development of an underdeveloped
country. A rapid development of an underdeveloped country is possible only
through the modern techniques of marketing. Importance of marketing goes
on increasing in these countries with every increase in industrialization and
urbanization because marketing is an important tool for producing the goods
and services at large scale and for selling this production successfully in the
market.
5. Importance of marketing in Indian economy
Indian economy is a developing economy. During recent years, the
functions of marketing in India have undergone tremendous changes. It is
being recognized as a profession based on a systematic part of knowledge.
These changes have increased the liabilities of marketing managers these
days. This all has resulted in many important achievements in India such as:
(i) Increases in employment opportunities; (ii) Balanced growth of the
country; (iii) Increase in per capita income; (iv) Increase in the sale of goods;
(v) Increase in profits; (vi) Development of the means of communication;
(vii) Development of the means of transportation; (viii) Development of the
means of warehousing; (ix) Development of new media of advertisement
and sales promotion; (x) Development of banking and insurance industries;
(xi) Development of packing industries; (xii) Development of new means of
finance;
(xiii)
Expansion
in
the
scope
and
area
of
marketing;
(xiv) Improvement in the standard of living; (xv) Industrial progress;
(xvi) Maximum utilizations of available resources; (xvii) Increase in exports;
and (xviii) Increase in the national income of the country.
1.9 PERSPECTIVES OF MARKETING
Studies have revealed that different organizations have different perceptions
of marketing. And these differing perceptions have led to the formation of
different concepts of marketing such as the following:
1. The Exchange Concept
2. The Production Concept
3. The Product Concept
4. The Selling Concept
5. The Marketing Concept
6. The Societal Marketing Concept
1. The Exchange Concept: The exchange concept of marketing, as the
very name indicates, holds that the exchange of a product between the
seller and the buyer is the central idea of marketing. While exchange
does form a significant part of marketing, to view marketing as a mere
exchange process would amount to a gross undermining of the essence
of marketing. A proper scrutiny of the marketing process would readily
reveal that marketing is much broader than exchange. Exchange covers
the distribution aspect and the price mechanism involved in marketing.
The other important aspects of marketing, such as concern for the
customer, generation of value satisfactions, creative selling and
integrated
action
for
serving
the
customer,
get
completely
overshadowed in the exchange concept of marketing.
2. The Production Concept: This philosophy holds that customers favor
those products with low offer price and easy availability.
Thus this
concept holds that high production efficiency and wide distribution
coverage would sell the product offered to the market.
Organizations voting for this concept are impelled by a drive to produce
all that they can. Naturally, they get focussed on production and put all
their efforts toward that aspect of the organization. They do achieve
efficiency in production. But their thinking is guided by the assumption
that the steep decline in unit costs arising from the maximization of
output would automatically bring them all the customers and all the
profits that they need.
patronage.
But, they do not get the best of customer
Customers, after all, are motivated by a variety of
considerations in their purchases. As a result, the production concept
fails to serve as the right marketing philosophy for the enterprise.
Production concept is applicable in situations where demand exceeds
supply.
3. The Product Concept: This philosophy holds that customer favors
quality, performance, innovative features etc. The buyer will admire such
products.
Therefore firms following this philosophy believe that by
making superior products and improving their quality overtime, they will
be able to attract customers.
The product concept is somewhat different from the production concept.
Whereas the production concept seeks to win markets and profits via
high volume of production and low unit costs, the product concept seeks
to achieve the same result via product excellence - improved products,
new products and ideally designed and engineered products. It also
places the emphasis on quality assurance. They spend considerable
energy, time and money on research and development and bring in a
variety of new products.
Organizations which follow this concept concentrate on achieving
product excellence. They do not bother to study the market and the
consumer in depth. They get totally engrossed with the product and
almost forget the consumer for whom the product is actually made.
They fail to find out what the consumers actually need and what they
would gladly accept. When organizations fall in love with the product, it
leads to marketing Myopia because the focus is on the product rather
than on the customer needs.
Marketing Myopia
The term ‘Marketing Myopia’ is coined by Prof. Theodore Levitt.
A
coloured or crooked perception of marketing and a short-sightedness
about business executive’s attention to production or product or selling
aspect at the cost of the customer and his actual needs, creates myopia.
It leads to a wrong or inadequate understanding of the market and
hence failure in the market place. The myopia even leads to wrong or
inadequate understanding of the very nature of the business in which a
given organization is engaged and thereby affects the future of the
business as well. Levitt explained further that while business that
maintains itself through the changing times, there is some fundamental
characteristic in each business. And this fundamental characteristic
invariably relates to the basic human need which the business seeks to
serve and satisfy through its products. A wise entrepreneur or marketing
man would understand this important fact and define his business in
terms of this fundamental characteristic of the business rather than in
terms of the products and services manufactured and marketed by him
at a given point of time. For example, The Railways should define their
business as transportation, the movie makers should define business as
entertainment and the beverage marketers should define their business
as nutrition.
4. The Selling Concept: This philosophy holds that customer, if left alone,
would not buy enough of the company’s products. The organization
must, therefore undertake an aggressive selling and promotion effort.
As more and more markets became buyers markets and the
entrepreneurial problem became one of solving the shortage of
customers rather than that of goods, the sales concept became the
dominant idea guiding marketing. Most firms practice this concept when
they have overcapacity. This concept maintains that a company cannot
expect its product to get picked up automatically by the customers. The
company has to consciously push its products. Aggressive advertising,
high-power personal selling, large scale sales promotion, heavy price
discounts and strong publicity and public relations are the tools used by
organizations that rely on this concept. As a result, the public often
identifies marketing with hard selling and advertising.
But marketing based on hard selling carries high risks. It assumes that
customers who are coaxed into buying a product will like it and if they
don’t, they won’t badmouth about it or complain to consumer
organizations, and will forget their disappointment soon and buy it again.
These assumptions do not have base.
One study showed that
dissatisfied customers may badmouth the product to 10 or more
acquaintances and bad news travels fast.
Selling concept is practiced more aggressively with unsought goods,
goods that buyers normally do not think of buying such as insurance,
encyclopedias etc.
These industries have perfected various sales
techniques to locate prospects and hard sell them on their product’s
benefits. It is also practiced in the non-profit area by fund raisers and
political parties.
5. The Marketing Concept: The marketing concept holds that the key to
achieving its organizational goals consists of the company being more
effective than competitors in creating, delivering and communicating
customer value to its chosen target markets.
This concept was born out of the awareness that marketing starts with
the determination of consumer wants and ends with the satisfaction of
those wants. The concept puts the customer both at the beginning and
at the end. It says that any business should be organized around the
marketing function, anticipating, stimulating and meeting customer’s
requirements. The customer has to be the centre of the business
universe and not the organization.
A business cannot succeed by
supplying products and services that are not properly designed to serve
the needs of customers.
The marketing concept rests on four pillars. They are:
a) Target market
b) Customer needs
c) Integrated marketing
d) Profitability.
This can be illustrated with the help of the following figure which
differentiates it from selling concept.
Starting point
Focus
Means
Objectives
Selling
Concept
Factory
Product
Selling &
Promotion
Profits through
sale volume
Marketing
Target
Customer
Integrated
Profit through
Concept
market
needs
marketing
customer
satisfaction
Selling Vs Marketing
a) Target market: A marketer has to define the market to which it will
direct its efforts. The specification and identification of market would
enable the marketer to design specific marketing strategies. A target
market is defined as a set of actual and potential buyers of a product,
service or idea. A buyer, who has interest in the product, income and
willingness to buy can broadly be called as potential buyer. However, it
might not be possible for the marketer to target all of them. There might
be geographical barriers, unsuitability of product to certain climatic
conditions or inability of the marketer to reach certain hilly or remote
areas. Thus, a small portion of potential market might become part of
the target market.
The following figure clarifies the target market and penetrated market.
No. of prospectus
Potential
Market
Available Market
Buyer
Qualified available
market
Target/Served
Market
Penetrated
Market
The penetration of product is difficult even if the potential market is large.
b) Customer needs: A company can define its target market but fail to
correctly understand the customers’ needs.
Understanding customer
needs and wants is not always simple. Some customers have needs of
which they are not fully conscious or they cannot articulate their needs
or they use words that require some interpretation.
There are five types of needs.
They are stated needs, real needs,
unstated needs, delight needs and secret needs. Responding only to
the stated need may shortchange the customer.
A responsive marketer finds a stated need and fills it. He is going to
lose the customer in the near future. An anticipative marketer looks
ahead into what needs customers may have in the near future.
A
creative marketer discovers and produces solutions customers did not
ask for but to which they enthusiastically respond. Therefore companies
must go beyond just asking consumers what they want. This is
necessary because a company’s sales come from two groups, new
customers and repeat customers. One estimate shows that attracting a
new customer can cost five times as much as pleasing an existing one
and it might cost sixteen times as much to bring the new customer to the
same level of profitability as the lost customer. Customer retention is
thus more important than customer attraction.
c) Integrated marketing: When all the company’s departments work
together for serving the customers, the result is integrated marketing.
Integrated marketing takes place on two levels; first, the various
marketing functions – sales force, advertising, customer service, product
management, Marketing Research must work together. Second,
marketing must be embraced by the other departments, they must also
think of the customer. According to David Packard of Hewlet-Packard,
“Marketing is far too important to be left only to the marketing
department.”
To foster team-work among all departments, the company carries out
internal marketing as well as external marketing. Internal marketing is
the task of hiring, training and motivating able employees who want to
serve customers well. External marketing is marketing directed at people
outside the company. The following figure illustrates the relevance of
integrated marketing.
Customer
Marketing
Productio
n
Finance
Legal
HRD
Integrated Marketing
d) Profitability: The ultimate purpose of the marketing concept is to help
organizations achieve their objectives. In the case of private firms, the
major objective is profit. In the case of non-profit and public
organizations, it is surviving and attracting enough funds to perform
useful work. Private firms should not aim for profits as such but to
achieve profits as a consequence of creating superior consumer value.
A company makes money by satisfying customer needs better than its
competitors.
6. The Societal Marketing Concept: This concept holds that the
organization’s task is to determine the needs, wants and interests of
target markets and do deliver the desired satisfactions more effectively
and efficiently than competitors in a way that preserves or enhances the
consumer’s and the society’s well-being.
The societal marketing concept calls upon marketers to build social and
ethical considerations into their marketing practices. They must balance
the often conflicting criteria of company profits, consumer want,
satisfaction and public interest.
The following diagram shows the features of various concepts.
Marketing Management Process in the Marketing Philosophies
Concepts or
Philosophies
Stage 1
Stage 2
Stage 3
Result of Stage
1-3
Profits
Production
Concept
Vague idea
about
customer
wants
Mass
Production
Mass
Production
Product
availability at a
low price
Profit
through
mass
standardization
Product
Vague idea
about
customer
needs
Superior
product by
R&D
Distribution
without
proper
marketing
mix
Superior
performance
product
availability
Profit
through
marketing
myopia
Selling
Concept
Vague idea
about
customer
needs
Mass
production
and
distribution
Maximum
use
of
selling
technique
Product
availability
buyer inertia
Profit
through
hard-sell
Marketing
Concept
Analyze
target market
Know what
customer
needs
Integrated
marketing
Product as per
customer
requirements
Profit
through
customer
satisfaction
Social
Marketing
Concept
Analyses
target market
and
know
customer
needs
Study
customer
needs
in
the light of
ecological
impurities
Integrated
market with
ecological
constraints
Product as per
customer
requirements
and ecological
constraints
Profit
through
human
satisfaction
Concept
1.10 Old Concept Or Product-Oriented Concept
This is the classical concept of marketing which says that marketing is a part
of production process. Look at some definitions:
American Marketing Associations: “Marketing is the performance of
business activities that direct the flow of goods and services from the
producer to consumer or user.”
“Marketing comprises both buying and selling activities.”- Prof. J.F. Pyle
Above two definitions of marketing confine the marketing to sale and
purchase only. These definitions do not include any allied activity of
marketing such as transportation, storage, financing, insurance, risk-bearing
etc.
According to Tousley, Clark and Clark, “Marketing consists of those efforts
which affect transfers in the ownership of goods and services and provide
for their physical distribution.”
This definition of marketing includes the factor of physical distribution also
along with sale and purchase of goods and commodities. Thus, this
definition is wider than earlier definitions.
Characteristics of old product-oriented concept of marketing: Main
characteristics of this concept of marketing are as follows:
1. It stresses upon production.
2. It assumes that marketing is only the physical distribution of goods and
services from producer to consumer.
3. It assumes that marketing starts after the goods have been produced
and it ends after the goods have been sold.
4. It does not provide for any allied activity of marketing such as,
transportation, warehousing, insurance, financing etc.
5. According to this concept, the ultimate object of marketing is to
maximize the profits by maximizing the sales.
1.11 New Or Modern Or Customer-Oriented Concept
Modern concept of marketing is a customer-oriented concept. This concept
is based on the assumption that a business and industrial enterprise can
achieve its object of maximizing the profits only when it considers the needs
and wants of its consumers and it tries for the satisfaction of these needs
and wants. Look at some definitions:
“Marketing is a total system of interacting business activities designed to
plans price, promote and distribute want – satisfying products and services
to the present and potential customers.”- William J. Stanton
“Marketing is the delivery of standard of living to the society.”- Prof. Paul
Manure
“Marketing is the process of discovering and translating consumer needs
and wants into product and service specifications, creating demand for
these products and services and then in turn expanding this.”- Prof.
Malcolm, McNair
“Marketing is the business process by which products are matched with the
market and through which the transfers of ownership are effected.’’- Cundiff
and Still
Thus, new concept of marketing emphasizes the satisfaction of consumers.
This concept believes that marketing begins and ends with the customers. It
stresses that a business and industrial enterprise stands only for the
customers. Satisfaction of consumer needs is the only way of success. This
concept is based on earning profits through the satisfaction of consumers.
According to this concept, a producer must produce what his consumers
need; price must be fixed what his consumers can afford; production must
be in the quantity what is consumers require and the goods must be
distributed through the channels which are most suited to his consumers.
Modern concept of marketing has some specific characteristics as follows:
1. The consumer is the king and therefore, the satisfaction of consumer
must be the prime object of an enterprise.
2. The functions of marketing must be recognized as the most important
functions of an enterprise.
3. Needs and wants of the customers must be identified properly and
deeply before starting production.
4. Production must be in accordance with these needs and wants.
5. All the resources of production must be utilized to their best extent so
that the cost of production may be minimized.
6. Profits must be increased only by reducing the cost of production or by
reducing the cost of sales and not by increasing the selling price. Every
activity of an enterprise must start with the consumer and end with the
satisfaction of consumer.
1.12 Difference Between Old And New Concepts Of
Marketing
Old
Concept
Modern
Concepts
Goods and
Services
Sales
Profit through Sales
Discovery of
consumer needs
Production of Goods
and Services
Creation of
Demand
Sales
After Sales Service
Profit through
customers
satisfaction
Fig. 1.6: Graphic representation of old and new concepts of marketing
The difference between old and new concepts of marketing can be easily
understood on the following basis:
Table 1.2
Basis of Difference
Old Concept of Marketing
1
New Concept of Marketing
2
3
1. Orientation
This concept is product
oriented.
This concept is consumer
oriented.
2. Target
The target of this concept is
The object of this concept is to
to earn the maximum profits
by maximizing the sales.
maximize the profits through
satisfaction of consumer needs.
This concept is no way
According to this concept.
related with the
standard of living
marketing is the creation and
delivery of standard of living to
of society.
the society.
According to this concept
According to this concept
marketing starts only after
marketing starts with the
the goods have been
discovery of consumer needs.
3. Contribution
in Standard
of Living
4. Starting
Point
produced.
5. Satisfaction
This concept does not
According to this concept every
of Consumer
consider the needs and
business activity clusters around
Needs and
wants
wants of consumers.
the needs and wants of consumers
According to this concept
According to this concept
6. End of
Process
marketing ends with the
marketing ends with the
physical distribution of goods satisfaction of consumer needs.
and services.
7. Marketing
It does not provide for
It stresses upon intensive
Research
Marketing Research.
Marketing Research.
This concept does not
This concept considers allied
consider any allied
activity of marketing.
activities of marketing to be its
important part.
8. Allied
Activities
of Marketing
1.13 Summary
Dear Students, in this unit we have introduced the concept of marketing,
elements of marketing, marketing mix like product, price, promotion and
distribution etc. different functions of marketing, difference between old and
new marketing concept etc.
1.14 Keywords
Local Market
Regional Market
National Market
International or World Market
Primary Market
Secondary Market
Terminal Market
Very short period Market
Short period Market
Long period Market
Wholesale Market
Retails Market
Consumer Goods Market
Industrial Goods Market
Commodities Market
Capital Market
Stock market
Service Market
Labour Market
Spot Market or Cash Market
Futures Market or Forward Market
Regulated Markets
Unregulated or Free Markets
Perfect Market
Imperfect Market
Monopoly Market
Exchange Process
Production Era
Sales Era
Marketing Era
Purchasing
Standardization
Collection
Transportation
Finance
Risk bearing
Marketing promotion
Sales
Merchandizing Functions
Product planning and development
Standardizing and grading
Buying and assembling
Selling
Physical Distribution Functions
Auxiliary Functions
Marketing Finance
Risk bearing
Market information
Pricing
Exchange Concept
Production Concept
Product Concept
Marketing Myopia
Selling Concept
Marketing Concept
Societal Marketing Concept
Target Marketing
Integrated Marketing
1.15 Exercise
1.
Define marketing. Explain the various functions of marketing
2.
Differentiate old and new/modern concept of marketing.
3.
What do you understand by selling concept?
4.
Differentiate selling vs marketing.
5.
Why marketing is an important for economic development?
Unit 2
Modern Concept Marketing
Structure:
2.1
Objectives
2.2
Introduction
2.3
Impact of Modern Concept of Marketing
2.3.1
Helpful in product development
2.3.2
More social satisfaction
2.3.3
Impact towards national economy
2.4
The Strategic Process
2.5
Environmental Considerations
2.6
Marketing Process – An Overview
2.7
Marketing Audit
2.8
Marketing Environment
2.9
Characteristics of Marketing Environment
2.10 Summary
2.11 Exercises
2.1. Objectives
After studying this unit you will be able to know
- Impact of modern concept of marketing
- The marketing environment in which the organization has to put all its
effort to satisfy the customer.
- The characteristic of marketing environment.
- Marketing process
- The process of Marketing Audit
2.2. Introduction
In the previous unit we have discussed about modern/new concept of
marketing. Modern concept in marketing focused on consumer and
consumer satisfaction. Operating is present IT era, the customer satisfaction
is challenging job for any organization. In this unit we will discuss about the
impact of modern concept of marketing, marketing environment and the
necessity of knowing marketing environment.
2.3. Impact of Modern Concept of Marketing
The impact of modern concept of marketing may be described as under:
1. Helpful in product development
Modern concept of marketing is very helpful in the discovery and
development of new products because this concept is based on intensive
research regarding needs, wants and behaviour of consumers.
2. More social satisfaction
Modern concept of marketing stresses upon the satisfaction of needs and
wants of consumers. Thus, this concept provides for greater social
satisfaction. In fact, it creates and delivers the standard of living to the
society.
3. Impact towards national economy
Modern concept of marketing is important not only from the consumers and
producers point of view but also from the point of view of the country as a
whole. This concept provides more employment, makes maximum
exploitation of the resources of the quantity, restricts the wastages to the
minimum and upgrades the industrial production. It provides more and new
goods and services to the society and increases the standard of living.
Thus, this concept of marketing is very helpful in the overall growth and
development of the country.
On the above discussion, it can be concluded that the importance of new
concept of marketing is increasing day by day and it is meeting the
objectives.
2.4. The Strategic Process
Before penetrating too deeply into the details of strategic management, it is
useful to study the overall process. The Basic Strategic Management
Process Model is illustrated in Figure 2.1.
Fig. 2.1: The Basic Strategic Management Process Model
Figure 2.1 illustrates that strategic management is designed to effectively
relate the organization to its environment. The environment includes
political, social, technological, economic elements.
2.5. Environmental Considerations
The Context of Strategic Management
The outermost part of the model represents the environment in which the
strategic management process takes place. The environment can be viewed
as consisting of four elements: the social, political, technological and
economic facets. The social facet of the environment consists of the human
relationships of the organization and strategists to individuals, to groups,
and to society in general. This facet involve ethical and moral considerations
and the responsibilities strategic managers have over check individuals
because of their humanity and not because of any legal, economic, political
forces they may bring to bear.
The political facet of the environment consists of the laws and regulations
applicable to the enterprise and the courts and government officials who
interpret and enforce them, along with other groups and institutions in
society which wield power. The increasing burden of laws and regulations is
of concern to every manager.
In addition to government, there are many other groups and institutions in
society which hold power. Organizational strategists are influenced and
seek to influence these groups and institutions.
Technology is defined as “the science of the application of knowledge to
practical purposes . . . the totality of the means employed by people to
provide itself with the objects of material culture.” So the technological facet
of the environment is the sum total of machines, materials, and knowledge
which go into the production of goods and services. The technological facet
should not be confused with ‘“high-tech,’’ which is the advanced, mostly
electronic, technology involved in computers, robotics, space travel, and so
forth. The technological facet includes these elements, of course, but it also
includes all kinds of machines and systems for accomplishing practical
purposes.
The economic facet of the environment consists of financial markets,
sources of capital, product and service markets, demand for goods and
services, and opportunities for profits along with changes and trends in the
economy The economic facet of the organizational environment is
considered by many to be the most important.
2.6. Marketing Process – An Overview
The entire process of strategic marketing is characterized by different
stages of planning, decision-making also control. The marketing process of
organization revolves around these questions.
–
Where are we at present?
–
Where do we want to go?
–
How can we reach there?
–
Which is the best way to reach?
–
How can we ensure the success?
These questions are inter-related with different phase of marketing process
and a set of time dimensions are identified as past. From this phase we
learn about our strengths, weaknesses and potential pitfalls.
Future is an inspirational key, where we want to reach through our strategic
planning.
The planning Process
The starting point of process involves the various stages of exploring
organization & environment. Identifying where the organization is and the
long & short term goals, is the first step towards planning. An analysis of the
environment, the controlling factors i.e. market, computers and stockholders
is also instrumental for planning.
The different elements of a marketing analysis are:
–
Marketing Audit
–
Environment analysis
–
SWOT analysis
–
Establishing objectives
2.7. Marketing Audit
An organization’s performance in market place is largely implemented &
governed by three factors:

The current market position.

Nature of environmental threats & opportunities.

The organization’s ability to cope with strengths & weaknesses.
Purpose of marketing audit:
Marketing audit is designed to provide an understanding on the above three
issues and build foundation for development of overall marketing strategy.
Expressed in simple form, an audit answers the following questions:
Where is the company?
Where does it want to go?
How, should the company organize its resources to reach there?
Definition: An audit is a systematic, critical & vanished review and appraisal
of the organization, its operations & systems and the whole environment in
which it operates. A marketing audit is a part of the larger corporate analysis
and is chiefly concerned with the marketing environment, marketing
functions, objectives, policies and operations.
This audit is a starting point for a strategic marketing planning process and
gives a clear picture of environmental threats & opportunities and marketing
capabilities.
The audit is also seen as a means by which an organization can identify its
strengths and the weaknesses as they relate to external opportunities &
threats.
On the whole, major elements & benefits of a marketing audit are:

The analysis of external environment & internal capabilities.

The evaluation of past performance and present activities.

The identification of future opportunities & threats.
Structure of the marketing audit
The structure of the audit consists of mainly three elements:

The organization’s environment.

Its marketing system.

Its marketing activities.
The first stage of audit is designed to establish the different dimensions of
environment, the way it changes and how these changes may have a direct
impact on business. The second stage is concerned with assessing the
capabilities of internal systems i.e. to what extent these systems can handle
the changes and demands of environment. The third stage deals with
individual component of marketing mix and review of the present activities.
2.8. The Marketing Environment
Environmental scanning is an essential part of marketing management. This
unit underscores the importance of understanding environmental change in
order to make good marketing decisions. First, the growing importance of
the environment is discussed. Then, the characteristics of the environment
are defined and an overview is provided of the social, technological,
economic, governmental, and natural environments as they relate to
marketing.
Environmental Importance
The marketing environment is more important to management today than
ever before. This is both because the rate of environmental change has
increased and because there are more teases of important environmental
changes.
First, consider the rate of environmental change. It should be remembered
that all of the development experienced by humankind has occurred within a
mere moment of history. If we were to equate the earth’s history to the
distance around the world, the last 50 years, the period of most-rapid
development, would equal only one foot. Yet an unprecedented acceleration
in environmental change occurred during that brief period and people today
are experiencing a unique chapter in human history.
In addition, new types of environmental change have come to the forefront.
Economic factors go to the core of business activity, and historically, they
have always been important to marketing management. Until around 1900,
such factors effectively represented the firm’s entire macro-environment. At
the turn of the century, however, governmental and legal forces became
more significant, as evidenced by anti-trust legislation. The significance of
government has grown greatly over the past few decades. Even the recent
deregulation of selected industries has meant turbulent times for the
companies involved.
During the 1930s, the growth of labour organizations further affected the
decision realm of management. More recently, consumer groups have used
tactics similar to those of labour. Labour and consumer groups highlight a
movement toward a pluralistic and interdependent society of interest groups,
with business no longer the dominant element. Demands on businesses
also arise from their stockholders and from citizens in the communities
where they are located. The net result of these developments is several
more types of important external changes than existed a few decades ago.
This has forced management to invest more time and energy in monitoring
the environment.
What implications do such changes have for strategic marketing planning?
And how should line marketers cope with the environment? These questions
reflect a growing recognition by both corporate strategic planners and line
marketers
that
ignoring
the
threats
and
opportunities
posed
by
uncontrollable environmental change is nothing short of folly. Although
environmental analysis by itself is no panacea, the penalty for not
monitoring the environment can be severe, if not fatal. Consistent with this
theme, a study concluded that corporate strategic planning had become
more closely geared to marketing.
2.9. Characteristics
of
the
Marketing
Environment
The environment of anything is as large or small, and as simple or complex,
as one’s definition of it. Changing consumer incomes, technological
innovation, changing government agencies and shifting consumer values
are examples of the marketing environment. This environment includes
those things that are external, largely uncontrollable, changing, constraining,
and potentially relevant. The marketing environment includes non-marketing
departments within the firm, as well as markets, competitors, and the macro
environment.
Marketers are primarily adapters. They adapt their products, prices,
promotion, and distribution to fit the marketplace, as was true for the auto
industry during the energy crisis. Certain environmental forces are partially
controllable, but most are largely uncontrollable. Some changes in
environmental factors, such as shifting population characteristics, represent
a key source of uncertainty.
A snapshot of the environment surrounding most organizations is shown in
Exhibit 2.2. It is the view of a marketing vice president looking outward from
the home turf. The first visible part of the environment comprises
surrounding offices and personnel within the company, the intraorganizational
environment.
Within
each
environmental forces that must be dealt with.
company,
there
may
be
Exhibit 2.2: The Marketing Environment
Exhibit 2.2 also shows the environment outside the corporation in layers
representing both the immediacy of the factors to marketing management
(the closer, the more-immediate) as well as the frequency with which
management has to deal with such factors. However, to focus only on the
inner layer, or task environment, is to ignore changes in the macro
environment that cause the task environment to change. It is critical to
understand these macro changes to better anticipate changes in markets
and competitive relationships.
Looking just beyond the corporate wall, marketers work with independent
parties that require constant attention; these include such marketing
intermediaries as distributors, advertising agencies, and marketing research
firms. This task environment includes markets and competitors. The task
environment should be thought of as mediating between the macro
environment and management; changes in markets and competitors often
result from macro-environmental changes.
2.10.
Summary
In this unit we have understood the importance of business environment
factors like, political, social, technology, economic environment etc. and the
characteristics of marketing environment.
2.11.
Keywords
Product development
Social satisfaction
National economy
Strategic Process
Marketing Audit
Environment analysis
SWOT analysis
Establishing objectives
Marketing environment
2.12.
Exercises
1. Explain the strategic management process model.
2. Discuss the various environmental issues
3. Explain the different elements of marketing analysis
4. Explain marketing environment from the point of view of marketing
management.
Unit 3
Consumer Behavior Analysis
Structure:
3.1. Objectives
3.2. Introduction
3.3. Meaning and characteristics of Consumer behavior
3.4. Importance of the study of Consumer Behaviour
3.5. Factors Influencing Consumer Behavior
3.7.1.
Internal or Psychological factors
3.7.2.
Social factors
3.7.3.
Cultural factors
3.7.4.
Economic factors
3.7.5.
Personal factors
3.7.6.
Other factors
3.6. Buying Roles
3.7. Types of Buying Behaviour
3.8. Types of Buying Behavior Purchase Decision Process
3.7.1.
Complex Buying Behaviour
3.7.2.
Dissonance-Reducing Buying Behaviour
3.7.3.
Habitual Buying Behaviour
3.7.4.
Variety –Seeking Buying Behaviour
3.9. What Buying Decision do Business Buyers Make?
3.10.
Who Participates in the Business Buying Process?
3.11.
What are the Major Influences of Business Buyers?
3.12.
How do Business Buyers Make their Buying Decisions?
3.13.
Summary
3.14.
Keywords
3.15.
Exercise
3.1. Objectives
After studying this unit, you will be able to:

Describe the characteristics of consumer behaviour.

Explain the factors influencing consumer behaviour.

Mention the types of buying behaviour.

Describe the consumer purchase decision process.

Explain buyer behaviour models.
3.2. Introduction
The aim of marketing is to meet and satisfy target customers' needs and
wants. The modern marketing concept makes customer the central point of
organization efforts. The focus, within the marketing concept to reach the
target customer, sets the ball rolling for analyzing each of the conditions of
the target market. The presence of buyers' markets for many products, the
growth of consumerism and the enactment of Consumer Legislation in 1960
have also created special interest in consumer behaviour or buyer
behaviour.
3.3. Meaning and Characteristics of Consumer
Behaviour
The field of consumer behaviour studies how individuals, groups and
organizations select, buy, use and dispose of goods, services, ideas or
experiences to satisfy their needs and desires.
Definition of Consumer Behaviour:
According to Walters & Paul, "Consumer behaviour is the process whereby
individuals decide what, when, where, how and from whom to purchase
goods and services." According to Webster, "Buyer behaviour is all
psychological, social and physical behaviour of potential customers as they
become aware of, evaluate, purchase, consume and tell other people about
products and services.”
Characteristics of Consumer Behaviour:
1. Consumer behaviour or buyer behaviour is the process by which
individuals decide whether, what, when, from whom, where and how
much to buy.
2. Consumer behaviour comprises both mental and physical activities of
a consumer.
3. It covers both visible and invisible activities of a buyer.
4. Buyer behaviour is very complex.
5. Buyer behaviour is very dynamic.
6. An individual's behaviour is influenced by internal and external
factors.
7. It is an integral part of human behaviour.
8. In many cases, it is the sum total of the behaviour of a number of
persons.
9. It is influenced by a number of marketing stimuli offered by the
marketer.
10. It involves both psychological and social process.
11. Consumer behaviour is basically social in nature.
3.4. Importance of the study of Consumer Behaviour
What motivates the buyer? What induces him to buy? Why does he buy a
specific brand from a particular shop? Why does he shift his preferences
from one shop to another or from one brand or another? How does he react
to a new product introduced in the market or a piece of information
addressed to him? What are the stages he travels through before he makes
the decision to buy? These are some of the questions that are of perennial
interest to the marketing man, as product and promotion strategies revolve
around these questions. In all his marketing strategies and plans, he makes
assumptions as to how the buyers would behave and respond to his
marketing programmes. Knowledge of the buyer and his buying motives and
buying habits, is thus a fundamental necessity for the marketing man.
The study of consumer behaviour is of vital importance for the following
purposes:
1. Production Policies: A study of consumer behaviour gives an insight
into the various factors or attributes in a particular product which prompt
a consumer to purchase that product. Such knowledge will help the
producer to pay special attention to those attributes in his product to
attract the customers. Thus it helps in formulating the production
policies.
2. Price Policies: The study of consumer behaviour enables the marketer
to know why a customer purchases the product, because of low cost or
social status. This information can be utilized for deciding the price of
such products. Thus it helps in deciding pricing policies.
3. Distribution Policies: Knowledge of consumer behaviour is helpful in
taking decisions regarding the channels of distribution as it depends on
the characteristics of buyer.
4. Sales Promotion Policies: It helps the marketers to know the buying
motives of the consumers to make purchases and to use the information
gathered about buying motives in advertising media to awaken the
consumers' desire to purchase. Thus, it helps in formulating sales
promotion policies.
5. Exploiting Marketing Opportunities: A study of consumer behaviour
helps the marketers to understand the consumers' needs, aspirations,
expectations, problems etc. This knowledge will be useful to the
marketers in exploiting marketing opportunities and meeting the
challenges of the market.
6. Consumers do not always act or react as the theory would suggest:
For example, consumer of the past reacted to price levels as if price and
quality had positive relation. Today, consumers seek value for money,
less price but with superior features. The consumers’ response indicates
that the shift has occurred.
7. Consumer
preferences
are
changing
and
becoming
highly
diversified: This shift has occurred due to availability of more choice
now. Thus study of consumer behaviour is important to understand the
changes.
8. Rapid introduction of new products: Rapid introduction of new
products with technological advancement has made the job of studying
consumer behaviour more imperative. For e.g., the information
technology is changing rapidly in personal computer industry.
9. Implementing the “Marketing Concept”: This calls for studying the
consumer behaviour, as customers need to be given priority. Thus
identification of target market before production becomes essential to
deliver the desired customer satisfaction and delight.
3.5. Factors influencing Consumer Behaviour
The consumer behaviour or buyer behaviour is influenced by several factors
or forces. They are:
1. Internal or Psychological factors
2. Social factors
3. Cultural factors
4. Economic factors
5. Personal factors
6. Other factors
The following diagram shows the influence of various factors on consumer
behaviour:
Exhibit 3.1: Factors influencing the consumer behaviour
3.5.1
Internal or psychological factors: The buying behaviour of
consumers is influenced by a number of internal or psychological
factors. They are
Beliefs and Attitudes
a) Motivation b) Perception
c) Learning
d)
e) Personality.
a) Motivation : In the words of William J Stanton: “A motive can be
defined as a drive or an urge for which an individual seeks satisfaction. It
becomes a buying motive when the individual seeks satisfaction through
the purchase of something”. From this definition, it is clear that a motive
is an inner urge that moves a person to some action.
Motivation is the force that activates goal-oriented behaviour.
Motivation acts as a driving force that impels an individual to take action
to satisfy his needs. So it becomes one of the internal factors influencing
consumer behaviour.
Man is a perpetual wanting animal. Therefore, when one need is
satisfied, a new need at a higher level emerges. These needs have
been classified by Abraham H. Maslow, who called it ‘Hierarchy of
Needs’. The following diagram shows that:
Self
actualization
needsneeds
Esteem
Exhibit 3.2: Maslow’s Five-level Hierarchy of Needs
Socio-cultural needs
As man has hierarchy of needs, marketing managers must try to
Safety or security needs
stimulate the concerned needs of the human beings and convert them
into motives.
Physiological needs
b) Perception: A motivated person is ready to act. How the person
acts is influenced by his perception of the situation. According to
Bernand Berelson and Gary A. Steiner, “Perception is the process by
which an individual selects, organizes and interprets information inputs
to create a meaningful picture of the world.” People form different
perceptions of the same stimulus because of three perceptional
processes viz. selective exposure, selective distortion and selective
retention.
Selective exposure: A person may be exposed to a number of stimuli
every day. But it is not possible for him to give attention to all these
stimuli. He will pay attention only to a few selected stimuli after
screening. It is found out by research that people are likely to notice only
those stimuli which relate to their current needs. So, marketers must try
to find out which stimuli will the people notice.
Selective distortion: People who notice the same stimuli may not
interpret them in the same way as intended by the marketers. They may
interpret them to fit their own beliefs or attitudes, which differ from
person to person. It explains the tendency of the people to adopt
information in a way that will support what they already believe.
It
suggests that the marketers must try to understand the mind-set of the
consumers and how they will affect interpretation of stimuli i.e.
advertisements and sales information.
Selective retention: People tend to forget a number of stimuli or
information to which they are exposed. They will retain only those
information which support their beliefs and attitudes. They remember
only that information in which they are interested and have strong buying
motives. Therefore, the marketers must make an appeal to the buyers’
strong motives.
c) Learning: It is defined as the changes in the behaviour of an
individual arising from the past practice or previous experience. The
buying behaviour is critically affected by their learning experience. The
learning process occurs through the interplay of drives, stimuli, cues
responses and reinforcement. A drive is a strong internal stimulus which
calls for action. This becomes a motive when it is directed towards a
particular stimulus object. It motivates a person to act towards the
satisfaction of the needs.
The objects are stimuli which satisfy the
drives. Cues are minor stimuli which determine when, where and how
the buyer responds. It may be seeing the object in the television every
day, hearing about discount in price etc. This puts him into action. The
response of satisfaction or dissatisfaction is reinforced. This learning
process results in habits, attitudes and beliefs. A marketing manager
can build a demand for their products by associating it with strong
drives, using motivating cues & providing positive reinforcement.
d) Beliefs & Attitudes: People through acting and learning, develop
their beliefs and attitudes, which, in turn, influence their buying
behaviour. Beliefs refer to a descriptive thought which a person has
about something. Marketing managers are generally interested in the
beliefs that the people formulate about specific products and services.
An attitude is a state of mind or feeling.
It may be described as a
person’s emotional feelings, action, tendencies towards some idea or
object. It explains a person’s relatively consistent evaluations, feelings
and tendencies towards an object or idea. Attitudes cannot be changed
easily, because a person’s attitudes settle into a consistent pattern. So
the marketing managers should usually try to fit firm’s products into
existing attitudes rather than trying to change the attitudes themselves.
e) Personality: It refers to the personal traits & qualities that determine
an individual’s behaviour such as dominance, adventurousness,
sociability, friendliness, responsibility etc.
personality
are
self-concept,
roles
to
The primary features of
be
played
levels
of
consciousness.The self-concept or self image indicates how a person
sees himself and how he believes others to see him at a particular time.
3.5.2. Social factors: The social factors influencing consumer behaviour
are: a) Family, b) Reference Groups, c) Roles and status.
a) Family: There are two types of families in the buyer’s life viz.
Nuclear family and Joint family. Family members can strongly influence
the buyer behaviour, particularly in the Indian contest. The tastes, likes,
dislikes, life styles etc. of the members are rooted in the family buying
behaviour.
The family influence on the buying behaviour of a member may be
found in two ways i) the family influence on the individual personality,
characteristics, attitudes and evaluation criteria, ii) the influence on the
decision-making process involved in the purchase of goods and
services. In India, the head of the family may alone or jointly with his
wife decide upon a purchase. So marketers should study the role and
the relative influence of the husband, wife and children in the purchase
of goods and services.
b) Reference group: A reference group is a group of people with
whom an individual associates. It is a group of people who influence a
person’s attitudes, values and behaviour directly or indirectly.
The
various reference groups are:
i) Membership groups: They are those groups to which the person
belongs and interacts. These groups have a direct influence on their
member’s behaviour.
ii) Primary groups: They refer to groups of friends, family members,
neighbours, co-workers etc. In this case, there is fairly continuous or
regular, but informal interaction.
iii) Secondary groups: They include religious groups, professional
groups etc. Here, there is less continuous interaction.
iv) Aspirational groups: These are groups to which a person would
like to join as member. People are also influenced by these groups.
v) Dissociative groups: These are groups whose value an individual
rejects.
The reference group exerts strong influence on one’s behaviour. Therefore
knowledge of reference groups is quite essential for marketers for
successful marketing. This makes it easier for the marketers to know
why consumers behave in a particular way.
In a reference group, there may be a group leader who acts as an
opinion leader and whose life style is most likely to be adopted by others
in the group. So marketers must try to contact and impress upon the
opinion leader to popularise their products.
c) Roles and status: A person participates in many groups – family,
clubs, organisations etc. The person’s position in each group can be
defined in terms of role and status. A role consists of the activities that a
person is expected to perform. Each role carries a status. People
choose products that communicate their role and status in society.
Marketers must be aware of the status symbol potential of products and
brands.
3.5.3
Cultural factors: Cultural factors consist of a) Culture, b) Sub
culture
c) Social class.
a) Culture : Culture is the most fundamental determinant of a person’s
wants and behaviour. The growing child acquires a set of values,
perceptions, preferences and behaviours through his or her family and
other key institutions.
Culture influences considerably the pattern of
consumption and the pattern of decision-making.
Marketers have to
explore the cultural forces and have to frame marketing strategies for
each category of culture separately to push up the sales of their
products or services.
b) Sub-culture: Each culture consists of smaller sub-cultures that
provide more specific identification and socialization for their members,
sub-cultures
include
nationalities,
religions,
racial
groups
and
geographic regions. Many sub-cultures make up important market
segments and marketers have to design products and marketing
programs tailored to their needs.
c) Social class: Consumer behaviour is determined by the social class
to which they belong. Social class is relatively a permanent and ordered
division in a society whose members share similar value, interest and
behaviour.
Social class is not determined by a single factor, such as income but it is
measured as a combination of various factors, such as income,
occupation, education, authority, power, property, ownership, life styles,
consumption pattern etc.
There are three different social classes in our society. They are upper
class, middle class and lower class. These three social classes differ in
their buying behaviour. Upper class consumers want high class goods
to maintain their status in the society. Middle class consumers purchase
carefully and collect information to compare different producers in the
same line and lower class consumers buy on impulse. Therefore
marketing managers are required to study carefully the relationship
between social classes and their consumption pattern and take
appropriate measures to appeal to the people of those social classes for
whom their products are meant.
3.5.4
Economic Factors
Consumer behaviour is influenced largely by economic factors. The
various economic factors that influence consumer behaviour are
a) Personal Income
b) Family income
c) Income expectations
d) Savings
e) Liquid assets of the Consumer
f)
Consumer credit
g) Other economic factors
a) Personal Income: The personal income of a person is an important
determinant of his buying behaviour.
The gross personal income of a person consists of disposable income
and discretionary income.
The disposable personal income refers to the actual income (i.e. money
balance) remaining at the disposal of a person after deducting taxes and
compulsorily deductible items from the gross income. An increase in the
disposable income leads to an increase in the expenditure on various
items. A fall in the disposable income, on the other hand, leads to a fall
in the expenditure on various items.
The discretionary personal income refers to the balance remaining after
meeting basic necessaries of life.
This income is available for the
purchase of shopping goods, durable goods and luxuries. An increase in
the discretionary income leads to an increase in the expenditure on
shopping goods, luxuries etc. which improves the standard of living of a
person.
b) Family income: Family income refers to the aggregate income of all
the members of a family.
Family income influences the buying behaviour of the family.
The
surplus family income, remaining after the expenditure on the basic
needs of the family, is made available for buying shopping goods,
durables and luxuries.
c) Income Expectations: Income expectations are one of the
important determinants of the buying behaviour of an individual. If he
expects any increase in his income, he is tempted to spend more on
shopping goods, durable goods and luxuries. On the other hand, if he
expects any fall in his future income, he will curtail his expenditure on
comforts and luxuries and restrict his expenditure to bare necessities.
d) Savings: Savings also influence the buying behaviour of an
individual. A change in the amount of savings leads to a change in the
expenditure of an individual. If a person decides to save more out of his
present income, he will spend less on comforts and luxuries.
e) Liquid assets: Liquid assets refer to those assets which can be
converted into cash quickly without any loss. Liquid assets include cash
in hand, bank balance, marketable securities, etc. If an individual has
more liquid assets, he goes in for buying comforts and luxuries. On the
other hand, if he has less liquid assets, he cannot spend more on buying
comforts and luxuries.
f)
Consumer credit: Consumer credit refers to the credit facility
available to the consumers desirous of purchasing durable comforts and
luxuries. It is made available by the sellers, either directly or indirectly
through banks and other financial institutions.
Hire purchase,
installment purchase, direct bank loans etc. are the ways by which credit
is made available to the consumers.
Consumer credit influences consumer behaviour.
If more consumer
credit is available on liberal terms, expenditure on comforts and luxuries
increases, as it induces consumers to purchase these goods, and raise
their living standards.
g) Other economic factors: Other economic factors like business
cycles, inflation, etc. also influence the consumer behavour.
3.5.5
Personal Factors: Personal factors also influence buyer behaviour.
The important personal factors which influence buyer behaviour are:
a) Age
b) Occupation
c) Income
d) Life Style
a) Age: Age of a person is one of the important personal factors
influencing buyer behaviour.
People buy different products at their
different stages of life cycle. Their taste, preference, etc also change
with change in life cycle.
b) Occupation: Occupation or profession of a person influences his
buying behaviour.
The life styles and buying considerations and
decisions differ widely according to the nature of the occupation. For
instance, the buying of a doctor can be easily differentiated from that of
a lawyer, teacher, clerk, businessman, landlord, etc. So, the marketing
managers have to design different marketing strategies to suit the
buying motives of different occupational groups.
c) Income: Income level of people is another factor which can exert
influence in shaping the consumption pattern. Income is an important
source of purchasing power. So, buying pattern of people differs with
different levels of income.
d) Life Style: Life style to a person’s pattern or way of living as
expressed in his activities, interests and opinions.
Life style of a person determines his interaction with the society in which
he lives.
Marketing managers have to design different marketing strategies to suit
the life styles of the consumers.
3.5.6. Other Factors
Other factors include factors, such as political factors, legal factors,
technological factors and ethical factors which influence the buying
behaviour of consumers.
a) Political Factors: Political factors have an important impact on the
pattern of consumption. In a controlled economy, the consumption
pattern is determined by the Government. But in a free capitalistic
economy, consumers have economic freedom and wider choice and are
free to spend their income in any way they like.
b) Legal Factors: In every country, consumer expenditure is governed by
legal factors like taxes, tax laws, etc. If the taxes are low and legal
restrictions are less, consumer expenditure will be more. On the other
hand, if taxes are high and restrictions on the purchases are more,
consumer expenditure will be less.
c) Technology:
Consumers,
sophisticated goods.
usually,
prefer
more
up-to-date
and
Technological advances contribute to the
production and availability of modern goods. As more and more modern
goods are released to the market, the more will be the consumer
expenditure on those goods. So, technological advances also influence
the buying behaviour of consumers.
d) Ethical Considerations: Ethical considerations (i.e. the sense of
morality) have an important effect on the buying behaviour of the
consumers. For instance, if people are religious and spiritual-minded,
they spend less on modern comforts and luxuries. On the other hand, if
people are educated, civilised and advanced, they spend more on
comforts, and luxuries.
3.6. Buying Roles
For many products, it is easy to identify the buyer. Men normally choose
their shaving equipment and women choose their pantyhose. Other
products involve a decision-making unit consisting of more than one person.
Consider the selection of a family automobile. The teenage son may have
suggested buying a new car. A friend might advise the family on the kind of
car to buy. The husband might choose the make. The wife might have
definite desires regarding the car’s size and interior. The husband might
make the financial offer. The wife might use the car more often than her
husband.
Thus we can distinguish five roles people might play in a buying decision:

Initiator: A person who first suggests the idea of buying the particular
product or service.

Influencer: A person whose view or advice influences the decision.

Decider: A person who decides on any component of a buying decision:
whether to buy, what to buy, how to buy, or where to buy.

Buyer: The person who makes the actual purchase.

User: A person who consumes or uses the product or service.
A company needs to identify these roles because they have implications for
designing
the
product,
determining
messages,
and
allocating
the
promotional budget. If the husband decides on the car make, then the auto
company will direct advertising to reach husbands. The auto company might
design certain car features to please the wife. Knowing the main participants
and their roles helps the marketer fine-tune the marketing program.
3.7. Types of Buying Behaviour
Consumer decision-making varies with the type of buying decision. There
are great differences between buying toothpaste, a tennis racket, a personal
computer, and a new car. Complex and expensive purchases are likely to
involve more buyer deliberation and more participants. Assael distinguished
four types of consumer buying behaviour based on the degree of buyer
involvement and the degree of differences among brands.
Four types of buying behaviour:
High involvement
Low involvement
Significant differences
Between brands
Complex buying
behaviour
Variety-seeking
buying behaviour
Few differences between
Brands
Dissonance-reducing
buying behaviour
Habitual buying
behaviour
3.7.1
Complex Buying Behaviour: Consumers go through complex
buying behaviour when they are highly involved in a purchase and aware of
significant differences among brands. Consumers are highly involved when
the product is expensive, bought infrequently, risky and highly selfexpressive. Typically the consumer does not know much about the product
category and has much to learn. For example, a person buying a personal
computer may not know what attributes to look for. Many of the product
features carry no meaning: “16K memory”, “disc storage”, “screen
resolution” and so on.
This buyer will pass through a learning process characterized by first
developing beliefs about the product, then attitudes, and then making a
thoughtful purchase choice. The marketer of a high-involvement product
must understand the information-gathering and evaluation behaviour of
high-involvement consumers. The marketer needs to develop strategies that
assist the buyer in learning about the attributes of the product class, their
relative importance, and the high standing of the company’s brand on the
more important attributes. The marketer needs to differentiate the brand’s
features, use mainly print media and long copy to describe the brand’s
benefits, and motivate store sales personnel and the buyer’s acquaintances
to influence the final brand choice.
3.7.2 Dissonance-Reducing Buying Behavior: Sometimes the consumer
is highly involved in a purchase but sees little difference in the brands. The
high involvement is again based on the fact that the purchase is expensive,
infrequent, and risky. In this case, the buyer will shop around to learn what
is available but will buy fairly quickly because brand differences are not
pronounced. The buyer may respond primarily to a good price or to
purchase convenience.
After the purchase, the consumer might experience dissonance that stems
from noticing certain disquieting features of the product or hearing favorable
things about other brands. The consumer will be alert to information that
might justify his or her decision. The consumer will first act, then acquire
new beliefs, and end up with a set of attitudes. Here, marketing
communications should aim to supply beliefs and evaluations that help the
consumer feel good about his or her brand choice.
3.7.3 Habitual Buying Behavior: Many products are bought under
conditions of low consumer involvement and the absence of significant
brand differences. Consider the purchase of salt. Consumers have little
involvement in this product category. They go to the store and reach for the
brand. If they keep reaching for the same brand, it is out of habit, not strong
brand loyalty. There is good evidence that consumers have low involvement
with most low-cost, frequently purchased products.
Consumer behaviour in these cases does not pass through the normal
belief/attitude/behaviour sequence. Consumers do not search extensively
for information about the brands, evaluate their characteristics, and make a
weighty decision on which brand to buy. Instead, they are passive recipients
of information as they watch television or see print ads. Ad repetition creates
brand familiarity rather than brand conviction. Consumers do not form a
strong attitude towards a brand but select it because it is familiar. After
purchase, they may not even evaluate the choice because they are not
highly involved with the product. So the buying process is brand beliefs
formed by passive learning, followed by purchase behaviour, which may be
followed by evaluation.
Marketers of low-involvement products with few brand differences find it
effective to use price and sales promotions to stimulate product trial, since
buyers are not highly committed to any brand. In advertising, a lowinvolvement product, a number of things should be observed. The ad copy
should stress only a few key points. Visual symbols and imagery are
important because they can easily be remembered and associated with the
brand. The ad campaigns should go for high repetition with short-duration
messages. Television is more effective than print media because it is a lowinvolvement medium that is suitable for passive learning. Advertising
planning should be based on classical conditioning theory where the buyer
learns to identify a certain product by a symbol that is repeatedly attached to it.
Marketers can try to convert the low-involvement product into one of higher
involvement. This can be accomplished by linking the product to some
involving issue, as when Crest toothpaste is linked to avoiding cavities. Or
the product can be linked to some involving personal situation, for instance,
by advertising a coffee brand early in the morning when the consumer wants
to shake off sleepiness. Or the advertising might seek to trigger strong
emotions related to personal values or ego defense. Or an important
product feature might be added to a low-involvement product, such as by
fortifying a plain drink with vitamins. These strategies at best raise consumer
involvement from a low to a moderate level; they do not propel the
consumer into highly involved buying behaviour.
3.7.4 Variety-Seeking Buying Behaviour: Some buying situations are
characterized
by low
consumer
involvement
but
significant
brand
differences. Here consumers are often observed to do a lot of brand
switching. An example occurs in purchasing cookies. The consumer has
some beliefs, chooses a brand of cookies without much evaluation, and
evaluates it during consumption. But next time, the consumer may reach for
another brand out of boredom or a wish for a different taste. Brand switching
occurs for the sake of variety rather than dissatisfaction.
The marketing strategy is different for the market leader and the minor
brands in this product category. The market leader will try to encourage
habitual buying behavior by dominating the shelf space, avoiding out-ofstock conditions, and sponsoring frequent reminder advertising. Challenger
firms will encourage variety seeking by offering lower prices, deals,
coupons, free samples, and advertising that presents reasons for trying
something new.
3.8. Consumer Purchase Decision Process
1) Problem Recognition: The buying process starts when the buyer
recognises a problem or need. The need can be triggered by internal
stimuli such as hunger, thirst etc. or external stimuli such as looking at
items in the shop, neighbour’s purchase etc. Marketers need to identify
the circumstances that trigger a particular need.
By gathering information from a number of consumers, marketers can
identify the most frequent stimuli that spark an interest in a product
category.
Problem
Information
search
Evaluation of
alternatives
Purchase
decision
Recognition
Postpurchase
behaviour
Exhibit 3.3: Consumer Purchase Decision Process
2) Information Search: An aroused consumer will be inclined to search for
more information. An individual passes through two stages of
information search. In the first stage i.e., Heightened attention stage is a
milder search where the person simply becomes more receptive to
information about a product. In the second stage i.e., an active
information search he looks for reading material, phoning friends and
visiting stores to learn about the product.
An individual gets information from the following four sources:
a) Personal Sources: Family, friends, neighbours, acquaintances.
b) Commercial Sources: Advertising, sales persons, dealers, packaging,
displays.
c) Public Sources: Mass media, consumer-rating organisations.
d) Experiential Sources: Handling, examining, using the product.
The relative amount and influence of these information sources vary with the
product category and the buyer’s characteristics. The consumer receives
most information from commercial sources, as this source performs the
informing function. Personal sources perform the evaluation function and is
the most effective source.
Through gathering information an individual comes to know about
competing brands and their features. The following figure shows the
successive sets in the consumer decision process.
Exhibit 3.4: Successive Sets in the Consumer Decision Process
The total set shows the brands available to the consumer, awareness set
shows the brands out of total set known by the consumer, consideration set
shows the brands which meet the initial buying criteria and choice set
includes a few brands which remain as strong contenders. Then the person
makes a final choice from this set.
Therefore a company must strategize to get its brand into the prospects
awareness set, consideration set and choice set. It must also be aware of
the other brands in the consumers’ choice set so that it can plan strong
competitive appeals. In addition, a company should identify the consumer’s
information sources and evaluate their relative importance. Consumers
should be asked how they first heard about the brand, what information
came in later and the relative importance of the different information
sources.
The
answer
will
help
the
company
prepare
effective
communications for the target market.
3) Evaluation of Alternatives: How does the consumer process the
competitive brand information and make a final judgement of value? It
turns out that there is no simple and single evaluation process used by
all consumers or even by one consumer in all buying situations. There
are several decision evaluation processes. Most current models of the
consumer evaluation process are cognitively oriented-that is, they see
the consumer as forming product judgements largely on a conscious
and rational basis.
Certain basic concepts will help us understand consumer evaluation
processes. We see the consumer as trying to satisfy a need. The consumer
is looking for certain benefits from the product solution. The consumer sees
each product as a bundle of attributes with varying capabilities of delivering
the sought benefits and satisfying this need. The attributes of interest to
buyers vary by product:

Cameras: Picture sharpness, camera speeds, camera size, price.

Hotels: Location, cleanliness, atmosphere, cost.

Mouthwash:
Color,
effectiveness,
germ-killing
capacity,
price,
taste/flavor.

Tires: Safety, tread life, ride quality, price.
Consumers differ as to which product attributes they see as relevant or
salient. They will pay the most attention to the ones that will deliver the
sought benefits. The market for a product can often be segmented
according to the attributes that are salient to different consumer groups.
The most salient attributes may not be the most important ones. Marketers
should be more concerned with the importance of attributes than with their
salience. They should measure the importance weights that consumers
attach to the various attributes.
The consumer is likely to develop a set of brand beliefs about where each
brand stands on each attribute. The brand beliefs make up the brand image.
The consumer’s brand beliefs will vary with his or her experiences and the
effect of selective perception, selective distortion and selective retention.
Purchase Decision: In the evaluation stage, the consumer forms
preferences among the brands in the choice set. The consumer may also
form a purchase intention to buy the most preferred brand. However, two
factors can intervene between the purchase intention and the purchase
decision.
Exhibit 3.5: Steps between evaluation of alternatives and purchase decision
The first factor is the attitudes of others. The extent to which another
person’s attitude reduces one’s preferred alternative depends upon two
things: (1) the intensity of the other person’s negative attitude towards the
consumer’s preferred alternative and (2) the consumer’s motivation to
comply with the other person’s wishes. The more intense the other person’s
negativism and the closer the other person is to the consumer, the more will
the consumer adjust his or her purchase intention. The converse is also
true: A buyer’s preference for a brand will increase if someone he or she
likes favors the same brand. The influence of others becomes complex
when several people close to the buyer hold contradictory opinions and the
buyer would like to please them all.
Purchase intention is also influenced by unanticipated situational factors.
The consumer forms a purchase intention on the basis of such factors as
expected family income, expected price and expected product benefits.
When the consumer is about to act, unanticipated situational factors may
erupt to change the purchase intention. Thus preferences and even
purchase intentions are not completely reliable predictors of purchase
behaviour.
A consumer’s decision to modify, postpone or avoid a purchase decision is
heavily influenced by perceived risk. Expensive purchases involve some risk
taking. Consumers cannot be certain about the purchase outcome. This
produces anxiety. The amount of perceived risk varies with the amount of
money at stake, the amount of attribute uncertainty and the amount of
consumer self-confidence. A consumer develops certain routines for
reducing risk, such as decision avoidance, information gathering from
friends, and preference for national brand names and warranties. The
marketer must understand the factors that provoke a feeling of risk in
consumers and provide information and support that will reduce the
perceived risk.
Post-Purchase Behaviour: After purchasing the product, the consumer will
experience some level of satisfaction or dissatisfaction. The consumer will
also engage in post-purchase actions and product uses of interest to the
marketer. The marketer’s job does not end when the product is bought but
continues into the post-purchase period.
Post-purchase Satisfaction: After purchasing a product, a consumer may
detect a flaw. Some buyers will not want the flawed product, others will be
indifferent to the flaw and some may even see the flaw as enhancing the
value of the product. Some flaws can be dangerous to consumers.
Companies making automobiles, toys and pharmaceuticals must quickly
recall any product that has the slightest chance of injuring users.
What determines whether the buyer will be highly satisfied, somewhat
satisfied or dissatisfied with a purchase? The buyer’s satisfaction is a
function of the closeness between the buyer’s product expectations and the
product’s perceived performance. If the product’s performance falls short of
customer expectations, the customer is disappointed; if it meets expectations,
the customer is satisfied; if it exceeds expectations, the customer is delighted.
These feelings make a difference in whether the customer buys the product
again and talks favourably or unfavourably about the product to others.
Post-purchase Actions: The consumer’s satisfaction or dissatisfaction with
the product will influence subsequent behaviour. If the consumer is satisfied,
he or she will exhibit a higher probability of purchasing the product again.
The satisfied customer will also tend to say good things about the brand to
others. Marketers say: “Our best advertisement is a satisfied customer.”
A dissatisfied consumer responds differently. The dissatisfied consumer will
try to reduce the dissonance because a human being strives “to establish
internal harmony, consistency or congruity among his opinions, knowledge
and values.” Dissonant consumers will resort to one of two courses of
action. They may try to reduce the dissonance by abandoning or returning
the product or they may try to reduce the dissonance by seeking information
that might confirm its high value (or avoiding information that might confirm
its low value).
Exhibit 3.6: How Customers Handle Dissatisfaction
They can send owners a magazine containing articles describing new
features of product. Post-purchase communications to buyers have been
shown to result in fewer product returns and order cancellations. In addition,
they can provide good channels for customer complaints and for speedy
redressal of customer grievances. In general, companies should provide
consumers with maximum channels for venting complaints to the company.
Smart companies will welcome customer feedback as a way to continually
improve their offer and performance.
Post-purchase Use and Disposal: Marketers should also monitor how the
buyers use and dispose of the product. If consumers find new uses
for the product, these should interest the marketer because these uses can
be advertised. If consumers store the product in their closet, this indicates
that the product is not very satisfying and word-of-mouth would not be
strong. If they sell or trade the product, new-product sales will be depressed.
If they throw the product away, the marketer needs to know how they
dispose of it, especially if it can hurt the environment, as is the case with
beverage containers and disposable diapers. All said, the marketer needs to
study product use and disposal for clues to possible problems and
opportunities.
Exhibit 3.7: How Customers Use or Dispose of Products
Understanding consumer needs and buying processes is essential to
building effective marketing strategies. By understanding how buyers go
through need recognition, information search, evaluation of alternatives, the
purchase decision and post-purchase behaviour, marketers can pick up
clues as to how to meet buyer needs. By understanding the various
participants in the buying process and the major influences on their buying
behaviour, marketers can design effective marketing programs for their
target markets.
3.9. What Buying Decisions Do Business Buyers
Make?
The business buyer faces many decisions in making a purchase. The
number of decisions depends on the type of buying situation.
Major Types of Buying Situations: Robinson and others distinguish three
types of buying situations, which they call buy classes. They are the straight
rebuy, modified rebuy and new task.
Straight Rebuy: The straight rebuy describes a buying situation where the
purchasing department reorders on a routine basis (e.g., office supplies,
bulk chemicals). The buyer chooses from suppliers on its “approved list,”
giving weight to its past-buying satisfaction with the various suppliers. The
“In-suppliers” make an effort to maintain product and service quality. They
often propose automatic re-ordering systems so that the purchasing agent
will save re-ordering time. The “out-suppliers” attempt to offer something
new or to exploit dissatisfaction so that the business buyer will consider
buying some amount from them. Out-suppliers try to get a small order and
then enlarge their “purchase share” over time.
Modified Rebuy: The modified rebuy describes a situation where the buyer
wants to modify product specifications, prices, delivery requirements or
other terms. The modified rebuy usually involves additional decision
participants on both the buyer and seller sides. The in-suppliers become
nervous and have to protect the account. The out-suppliers see an
opportunity to propose a “better offer” to gain some business.
New Task: The new task describes a purchaser buying a product or service
for the first time (e.g., office building, new weapon system). The greater the
cost and / or risk, the larger the number of decision participants, the greater
their information gathering, therefore the longer the time to decision
completion. The new-task situation is the marketer’s greatest opportunity
and challenge. The marketer tries to reach as many key buying influences
as possible and provide helpful information and assistance. Because the
complicated selling involved in the new task, many companies use a
missionary sales force consisting of their best sales people.
New-task buying passes through several stages. Ozanne and Churchill
identified the stages as awareness, interest, evaluation, trial and adoption.
They found that communication tools varied in effectiveness at each stage.
Mass media were most important during the initial awareness stage; sales
people had their greatest impact at the interest stage and technical sources
were the most important during the evaluation stage. Marketers needed to
employ different tools at each stage of the new task buying process.
3.10.
Who Participates in the Business Buying
Process ?
Who does the buying of the trillions of dollars’ worth of goods and services
needed by business organizations? Purchasing agents are influential in
straight-rebuy and modified-rebuy situations, whereas other department
personnel are more influential in new-buy situations. Engineering personnel
usually have major influence in selecting product components and
purchasing agents dominate in selecting suppliers. Thus in new-buy
situations, the business marketer must first direct product information to the
engineering personnel. In rebuy situations and at supplier selection time,
communications should be directed primarily to the purchasing agent.
Webster and Wind call the decision-making unit of a buying organization the
buying centre, defined as “all those individuals and groups who participate in
the purchasing decision-making process, who share some common goals
and the risks arising from the decisions.” The buying center includes all
members of the organisation who play any of six roles in the purchase
decision process.

Users: Users are those who will use the product or service. In many
cases, the users initiate the buying proposal and help define the product
specifications.

Influencers: Influencers are persons who influence the buying decision.
They often help define specifications and also provide information for
evaluating alternatives. Technical personnel are particularly important as
influencers.

Deciders: Deciders are persons who decide on product requirements
and / or on suppliers.

Approvers: Approvers are persons who authorise the proposed actions
of deciders or buyers.

Buyers: Buyers are persons who have formal authority to select the
supplier and arrange the purchase terms. Buyers may help shape
product specifications, but they play their major role in selecting vendors
and negotiating. In more complex purchases, the buyers might include
high-level managers participating in the negotiations.
Gatekeepers: Gatekeepers are persons who have the power to prevent
sellers or information from reaching members of the buying centre. For
example, purchasing agents, receptionists and telephone operators may
prevent sales persons from contacting users or deciders.
Within any organisation, the buying centre will vary in the number and type
of participants for different classes of products. More decision participants
will be involved in buying a computer than in buying paper clips. The
business marketer has to figure out: Who are the major decision
participants? What decisions do they influence? What is their level of
influence? What evaluation criteria do they use?
3.11.
What are the Major Influence of Business
Buyers ?
Business buyers are subject to many influences when they make their
buying decisions. Some marketers assume that the most important
influences are economic. They see the buyers as favouring the supplier who
offers the lowest price, or best product, or most service. This view suggests
that business marketers should concentrate on offering strong economic
benefits to buyers.
Other marketers see buyers responding to personal factors such as favours,
attention, or risk avoidance. A study of buyers in ten large companies
concluded that…corporate decision-makers remain human after they enter
the office. They respond to “image”; they buy from companies to which they
feel “close”; they favour suppliers who show them respect and personal
consideration, and who do extra things “for them”; they “over-react” to real
or imagined slights, tending to reject companies which fail to respond or
delay in submitting requested bids.
Business buyers actually respond to both economic and personal factors.
Where there is substantial similarity in supplier offers, business buyers have
little basis for rational choice. Since they can satisfy the purchasing
requirements with any supplier, these buyers will place more weight on the
personal treatment they receive. Where competing offers differ substantially,
business buyers are more accountable for their choice and pay more
attention to economic factors.
Webster and Wind have classified the various influences on business
buyers into four main groups: environmental, organizational, interpersonal,
and individual. These groups are described next.
Environmental Factors: Business buyers are heavily influenced by factors
in the current and expected economic environment, such as the level of
primary demand, the economic outlook and the cost of money. In a
recession economy, business buyers reduce their investment in plant,
equipment and inventories. Business marketers can do little to stimulate
total demand in this environment. They can only fight harder to increase or
maintain their share of demand.
Companies that fear a shortage of key materials are willing to buy and hold
large inventories. They will sign long-term contracts with suppliers to ensure
a steady flow of materials. Du Pont, Ford, Chrysler and several other major
companies regard supply planning as a major responsibility of their
purchasing managers.
Business buyers are also affected by technological, political and competitive
developments in the environment. The business marketer has to monitor all
of these forces, determine how they will affect buyers and try to turn
problems into opportunities.
Organizational Factors: Each buying organization has specific objectives,
policies, procedures, organizational structures and systems. The business
marketer has to be familiar with them. Such questions arise as: How many
people are involved in the buying decision? Who are they? What are their
evaluation criteria? What are the company’s policies and constraints on the
buyers?
Exhibit 3.8: Factors influencing business buyer behaviour
Interpersonal Factors: The buying centre usually includes several
participants with differing interests, authority and persuasiveness. The
business marketer is not likely to know what kind of group dynamics will
take place during the buying decision process, although whatever
information he or she can discover about the personalities and interpersonal
factors would be useful.
Individual Factors: Each participant in buying process has personal
motivations, perceptions and preferences. These are influenced by the
participant’s age, income, education, professional identification, personality,
attitudes toward risk and culture. Buyers definitely exhibit different buying
styles. These are “keep-it-simple” buyers, “own expert” buyers, “want-thebest” buyers and “want-everything-done” buyers. Some younger, highly
educated buyers are “computer whizzes” and make rigorous analyses of
competitive proposals before choosing a supplier. Other buyers are “tough
guys” from the “old school” and play off the sellers.
Business marketers must know their customers and adapt their tactics to
known environmental, organizational, interpersonal and individual influences
on the buying situation.
3.12.
How do Business Buyers Make their Buying
Decisions?
Business buyers do not buy goods and services for personal consumption
or utility. They buy goods and services to make money or to reduce
operating costs or to satisfy a social or legal obligation. A steel company will
add another furnace if it sees a chance to make more money. It will
computerise its accounting system to reduce the costs of doing business. It
will add pollution-control equipment to meet legal requirements. To buy the
needed goods, business buyers move through a purchasing or procurement
process. Robinson et. al, have identified eight stages of the industrial buying
process and called them buy phase. These stages are shown in Table 8-1.
All eight phases apply to a new-task buying situation and some of them to
the other two types of buying situations. This model is called the buy grid
framework. We will describe the eight steps for the typical new-task buying
situation.
Problem Recognition: The buying process begins when someone in the
company recognizes a problem or need that can be met by acquiring a good
or a service. Problem recognition can occur as a result of internal or external
stimuli. Internally, the most common events leading to problem recognition
are the following:
The company decides to develop a new product and needs new equipment
and materials to produce this product.
A machine breaks down and requires replacement or new parts.
Purchased material turns out to be unsatisfactory and the company
searches for another supplier.
A purchasing manager senses an opportunity to obtain lower prices or
better quality.
Externally, the buyer may get new ideas at a trade show, or see an ad, or
receive a call from a sales representative who offers a better product or a
lower price.
Major Stages (Buy phases) of the Industrial Buying Process in Relation to
Major Buying Situations (Buy classes)
BUY CLASES
New Task
Rebuy
Modified
Straight Rebuy
1. Problem recognition
Yes
Maybe
No
2. General need
Yes
Maybe
No
3. Product specification
Yes
Yes
Yes
4. Suppliers search
Yes
Maybe
No
5. Proposal solicitation
Yes
Maybe
No
6. Supplier selection
Yes
Maybe
No
description
Buy phases
7. Order-routine specification Yes
8. Performance review
Yes
Maybe
Yes
No
Yes
General Need Description: Having recognised a need, the buyer proceeds
to determine the general characteristics and quantity of the needed item.
For standard items, this is not much of a problem. For complex items, the
buyer will work with others-engineers, users and so on-to define the general
characteristics. They want to establish the importance of reliability,
durability, price and other attributes desired in the item. The business
marketer can render assistance to the buyer in this phase by describing the
various criteria to be considered in meeting this need.
Product Specifications: The buying organization next develops the item’s
technical specifications. A product-value-analysis engineering team is
assigned to the project. Product value analysis is an approach to cost
reduction in which components are carefully studied to determine if they can
be redesigned or standardized or made by cheaper methods of production.
The team will examine the high-cost components in a given product-usually
20% of the parts account for 80% of the costs. The team will also identify
over-designed product components that last longer than the product itself.
The team will decide on the optimal product characteristics. Tightly written
specifications will allow the buyer to refuse merchandise that fails to meet
the specified standards.
Suppliers, too, can use product-value analysis as a tool for positioning
themselves to win an account. By getting in early and influencing buyer
specifications, the supplier has a good chance of being chosen in the
supplier selection stage.
Supplier Search: The buyer now tries to identify the most appropriate
suppliers. The buyer can examine trade directories, do a computer search,
phone other companies for recommendations, watch trade advertisements,
and attend trade shows. The supplier’s task is to get listed in major
directories, develop a strong advertising and promotion program, and build a
good reputation in the marketplace. Suppliers who lack the required
production capacity or suffer from a poor reputation will be rejected. Those
who qualify may be visited to examine their manufacturing facilities and
meet their personnel. The buyer will end up with a short list of qualified
suppliers.
Proposal Solicitation: The buyer will now invite qualified suppliers to
submit proposals. Some suppliers will send only a catalog or a sales
representative. Where the item is complex or expensive, the buyer will
require a detailed written proposal from each qualified supplier. The buyer
will eliminate some and invite the remaining suppliers to make formal
presentations.
Thus business marketers must be skilled in researching, writing and
presenting proposals. Their proposals should be marketing documents, not
just
technical
documents.
Their
oral
presentations
should
inspire
confidence. They should position their company’s capabilities and resources
so that they stand but from the competition.
Supplier Selection: Campbell’s program represents the approach that
business customers will increasingly use in selecting suppliers. Marketers
will have to understand and manage this process if they are to succeed in
becoming suppliers to major business customers. The buying center will
specify desired supplier attributes and indicate their relative importance. The
buying centre will rate suppliers against these attributes and identify the
most attractive suppliers.
The buying centre may attempt to negotiate with the preferred suppliers for
better prices and terms before making the final selection. The marketer can
counter the request for a lower price in a number of ways. The marketer can
cite the value of the services the buyer now receives, especially where
these services are superior to those offered by competitors. The marketer
may be able to show that the “life-cycle cost” of using its product is lower
than that of competitors, even if its purchase price is higher. Other more
innovative ways may also be used to counter- intense price pressure.
Buying centers must also decide how many suppliers to use. Many
businesses prefer multiple suppliers so that they will not be totally
dependent on one supplier and also to be able to compare the prices and
performances of competing suppliers. The buyer will normally place most of
the orders with a prime supplier. For example, a buyer may buy 60% from
the prime supplier and 30% and 10% respectively, from two other suppliers.
The prime supplier will make an effort to protect his prime position, while the
secondary suppliers will try to expand their supplier share. In the meantime,
out-suppliers will seek to get their foot in the door by offering an especially
low price and then work hard to increase their share of the customer’s
business.
Order Routine Specification: The buyer now negotiates the final order with
the chosen supplier(s), listing the technical specifications, the quantity
needed, the expected time of delivery, return policies, warranties and so on.
In the case of MRO items (Maintenance, Repair and Operating items),
buyers are increasingly moving towards blanket contracts rather than
periodic purchase orders. Writing a new purchase order each time stock is
needed, is expensive. Nor does the buyer want to write fewer and larger
purchase orders because that means carrying more inventory. A blanket
contract establishes a long-term relationship where the supplier promises to
re-supply the buyer as needed on agreed price terms over a specified
period of time. The stock is held by the seller, hence the name stockless
purchase plan. The buyer’s computer automatically sends an order to the
seller when stock is needed. Blanket contracting leads to more singlesource buying and ordering of more items from that single source. This
locks the supplier with the buyer and makes it difficult for out-suppliers to
break in unless the buyer becomes dissatisfied with the in-supplier’s prices,
quality or service.
Performance Review: In this stage, the buyer reviews the performance of
the particular supplier(s). Three methods are used. The buyer may contact
the end users and ask for their evaluations. Or the buyer may rate the
supplier on several criteria using a weighted score method. Or the buyer
might aggregate the cost of poor performance to come up with adjusted
costs of purchase, including price. The performance review may lead the
buyer to continue, modify or drop the supplier. The supplier should monitor
the same variables that are used by the buyers and end users of the
product.
We have described the buying stages that would operate in a new-task
buying situation. In the modified-rebuy or straight-rebuy situation, some of
these stages would be compressed or bypassed. For example, in a straightrebuy situation, the buyer normally has a favourite supplier or a ranked list
of suppliers. Each stage represents a narrowing of the number of supplier
alternatives. Cardozo has used the buying stages to come up with a mode
to yield the probability that a particular supplier will get the order for a
particular product from a particular buyer.
The eight-stage buy phase model represents the major steps in the
business buying process.
3.13.
Summary
In this unit we have understood what is consumer behaviour,
-
importance of understanding consumer behaviour.
-
factors that influence consumer behaviour such as : psychological,
social, cultural, economic and personal etc.,
-
the role of people play while buying a product.
-
buying behaviour of the customer.
-
Consumer purchase decision process and the phase of purchase
decision process.
-
Finally the business buyers and their buying decision process.
3.14.
Keywords
Consumer Behaviour
Production Policies
Price Policies
Distribution Policies
Sales Promotion Policies
Exploiting Marketing Opportunities
Motivation
Perception
Selective exposure
Selective distortion
Selective retention
Learning
Beliefs & attitudes
Personality
Family
Reference group
Membership groups
Primary groups
Secondary groups
Aspirational groups
Dissociative groups
Culture
Sub-culture
Social class
Personal Income
Family income
Income expectations
Savings
Liquid assets of the Consumer
Consumer credit
Age
Occupation
Income
Life Style
Political Factors
Legal Factors
Technology
Ethical Considerations
Problem Recognition
Information Search
Evaluation of Alternatives
Purchase Decision
Post-Purchase Behaviour
Post-purchase Satisfaction
Post-purchase Actions
Post-purchase Use and Disposal
Straight Rebuy
Modified Rebuy
New Task
Users
Influencers
Deciders
Approvers
Buyers
Gatekeepers
3.15.
Exercise
1. Define consumer behaviour. Explain the characteristic of consumer
behaviour.
2. What are the purpose of learning consumer behaviour?
3. Explain the different factors that influence the consumer behaviour.
4. What are the four types of buying behaviour?
5. Explain the different stages of purchase decision process.
6. What factors influence the business buyer?
7. How do business buyers make their buying decisions?
Unit 4
Buying Motives
Structure:
4.1
Objectives
4.2
Introduction
4.3
Buying Motives
4.4
4.3.1
Product Buying Motives
4.3.2
Patronage Buying Motives
Buyer Behavior Models
4.4.1.
The Economic Model
4.4.2.
The Learning Model
4.4.3.
The Psychoanalytical Model
4.4.4.
The Sociological Model
4.4.5.
The Nicosia Model
4.5
Summary
4.6
Keywords
4.7
Exercises
4.1 Objectives
The major objective of this unit is to make one understand the concept of
buying motive, types of buying motives, and application of buying behaviors
models.
4.2 Introduction
According to W.J. Stanton “A motive can be defined as a drive or an urge for
which an individual seeks satisfaction. It becomes a buying motive when the
individual seeks satisfaction through the purchase of either a product or
service. The primary buying motives include Food and Drink, Comfort, To
attract opposite sex, Welfare of beloved ones, Freedom from fear and
danger, To be superior, Social approval and to live longer. The secondary
motives
could
be
Bargains,
Information,
Cleanliness,
Efficiency,
Convenience, Dependability, quality, Style beauty, Economy, profit, and
Curiosity. Etc. One can understand the buying motives of a customer using
different models explained in this unit.
4.3 Buying Motives
A sale is usually made in the minds of the buyers, but not in the minds of the
salesman. He is motivated or induced by some reason. Therefore it is
essential for the salesman to know what induces the buyer to buy and how
he can be induced.
Meaning: Buying motive is the urge or motive to satisfy a desire that makes
people buy goods or services. Behind every purchase, there is a buying
motive. It refers to the thoughts, feelings, emotions and instincts which
arouse in the buyers a desire to buy an article. A buyer does not buy
because he has been persuaded by the salesman but he buys because of
the desire aroused in him.
Definition: According to Prof. D. J. Duncan, “Buying motives are those
influences or considerations which provide the impulse to buy, induce action
and determine choice in the purchase of goods and services.”
Thus every action of an individual has a motive behind it. Motives are
present in the minds of the buyer but not in the product. The study of buying
motives would help the salesmen to arouse favourable attention of the
consumers and finally sell the product.
Buying motives are broadly divided into product motives and patronage
motives. Further, motives can be sub-divided into (a) emotional buying
motives and
(b) rational buying motives. Similarly, the patronage buying
motives also may be sub-divided into (a) emotional buying motives and
(b) rational buying motives.
4.3.1 Product Buying Motives: Product buying motives refer to those
influences and reasons which prompt (i.e., induce) a buyer to choose a
particular product in preference to other products. They include the physical
attraction of the product (i.e., the design, shape, dimension, size, colour,
package, performance, price, etc., of the product) or the psychological
attraction of the product (i.e., the enhancement of the social prestige or
status of the purchaser through its possession), desire to remove or reduce
the danger or damage to the life or body of the possessor, etc. In short, they
refer to all those characteristics of a product which induce a buyer to buy it
in preference to other products.
Product buying motives may be sub-divided into two groups, viz.,
(1) Emotional product buying motives and (2) Rational product
buying motives.
4.3.1.1 Emotional Product Buying Motives: When a buyer decides to
purchase a product without thinking over the matter logically and carefully
(i.e., without much reasoning), he is said to have been influenced by
emotional product buying motives. Emotional product buying motives
include the following:
1. Pride or Prestige: Pride is the most common and strongest emotional
buying motive. Many buyers are proud of possessing some product (i.e.,
they feel that the possession of the product increases their social
prestige or status). In fact, many products are sold by the sellers by
appealing to the pride or prestige of the buyers. For instance, diamond
merchants sell their products by suggesting to the buyers that the
possession of diamonds increases their prestige or social status.
2. Emulation or Imitation: Emulation, i.e., the desire to imitate others, is
one of the important emotional buying motives. For instance, a
housewife may like to have a silk saree for the simple reason that all the
neighbouring housewives have silk sarees.
3. Affection: Affection or love for others is one of the stronger emotional
buying motives influencing the purchasing decisions of the buyers. Many
goods are purchased by the buyers because of their affection or love for
others. For instance, a husband may buy a costly silk saree for his wife
or a father may buy a costly watch for his son or daughter out of his
affection and love.
4. Comfort or desire for comfort: Desire for comfort (i.e., comfortable
living) is one of the important emotional buying motives. In fact, many
products are bought because of the desire for comfort. For instance
fans, refrigerators, washing machines, cushion beds, etc., are bought by
the people because of their desire for comfort.
5. Sex appeal or sex attraction: Sex appeal is one of the important
emotional buying motives of the buyers. Buyers buy and use certain
things, as they want to be attractive to the members of the opposite sex.
Men and women buy cosmetics, costly dresses, etc., because of this
emotional motive, i.e., sex appeal.
6. Ambition: Ambition is one of the emotional buying motives. Ambition
refers to the desire to achieve a definite goal. It is because of this buying
motive that, sometimes, customers buy certain things. For instance, it is
the ambition that makes many people, who do not have the facilities to
pursue their college education through regular colleges, to pursue the
same through correspondence courses.
7. Desire for distinctiveness or individuality: Desire for distinctiveness,
i.e., desire to be distinct from others, is one of the important emotional
buying motives. Sometimes, customers buy certain things, because they
want to be in possession of things which are not possessed by others.
Purchasing and wearing a particular type of dress by some people is
because of their desire for distinctiveness or individuality.
8. Desire for recreation or pleasure: Desire for recreation or pleasure is
also one of the emotional buying motives. For instance, radios, musical
instruments, etc., are bought by people because of their desire for
recreation or pleasure.
9. Hunger and thirst: Hunger and thirst are also one of the important
emotional buying motives. Food stuffs, drinks, etc., are bought by the
people because of this motive.
10. Habit: Habit is one of the emotional considerations influencing the
purchasing decision of the customers. Many customers buy a particular
thing because of habit, (i.e., because they are used to the consumption
of the product). For instance, many people purchase cigarettes, liquors,
etc., because of sheer habit.
4.3.1.2 Rational Product Buying Motives: When a buyer decides to buy a
certain thing after careful consideration (i. e., after thinking over the matter
consciously and logically), he is said to have been influenced by rational
product buying motives. Rational product buying motives include the
following:
1. Safety or Security: Desire for safety or security is an important rational
buying motive influencing many purchases. For instance, iron safes or
safety lockers are bought by the people because of this motive, i.e.,
because they want to safeguard their cash, jewels, etc., against theft.
Similarly, vitamin tablets, tonics, medicines, etc., are bought by the
people because of this motive, i.e., they want to safeguard their health
and protect themselves against diseases.
2. Economy: Economy, i.e., saving in operating costs, is one of the
important rational buying motives. For instance, Hero Honda bikes are
preferred by the people because of the economy or saving in the
operating cost, i.e., petrol costs.
3. Relatively low price: Relatively low price is one of the rational buying
motives. Most of the buyers compare the prices of competing products
and buy things which are relatively cheaper.
4. Suitability: Suitability of the products for the needs is one of the rational
buying motives. Intelligent buyers consider the suitability of the products
before buying them. For instance, a buyer, who has a small dining room,
naturally, goes in for a small dining table that is suitable, i.e., that fits
well in the small dining room.
5. Utility or versatility: Versatility or the utility of a product refers to that
quality of the product which makes it suitable for a variety of uses. Utility
of the product is one of the important rational buying motives. People
often purchase things which have utility, i.e., which can be put to varied
uses.
6. Durability of the product: Durability of the product is one of the most
important rational buying motives. Many products are bought by the
people only on the basis of their durability. For instance, buyers of
wooden furniture go in for teak or rosewood table, though they are
costlier, as they are more durable than ordinary wooden furniture.
7. Convenience of the product: The convenience of the product (i.e., the
convenience the product offers to the buyers) is one of the important
rational product buying motives. Many products are bought by the
people because they are more convenient to them. For instance,
automatic watches, gas stoves, etc., are bought by the people because
of the convenience provided by them.
4.3.2 Patronage Buying Motives: Patronage buying motives refer to those
considerations or reasons which prompt a buyer to buy the product wanted
by him from a particular shop in preference to other shops. In other words,
they are those considerations or reasons which make a buyer patronise a
particular shop in preference to other shops while buying a product.
Patronage buying motives also may be sub-divided into two groups. They
are:
a) Emotional patronage buying motives.
b) Rational patronage buying motives.
4.3.2.1 Emotional Patronage Buying Motives: When a buyer patronises a
shop (i.e., purchases the things required by him from a particular shop)
without applying his mind or without reasoning, he is said to have been
influenced by emotional patronage buying motives. Emotional patronage
buying motives include the following:
1. Appearance of the shop: Appearance of the shop is one of the
important emotional patronage buying motives. Some people make their
purchases from a particular shop because of good or attractive
appearance of the shop.
2. Display of goods in the shop: Attractive display of goods in the shop
also makes the buyers patronize a particular shop.
3. Recommendation
of
others:
Recommendation
of
others
also
constitutes one of the important emotional patronage buying motives.
Some people purchase their requirements from a particular shop
because that shop has been recommended to them by others, i.e., by
their friends and relatives.
4. Imitation: Imitation also is one of the emotional patronage buying
motives influencing the purchases of buyers. Some people make their
purchases from a particular shop just because other people make their
purchases from that shop.
5. Prestige: Prestige is one of the emotional patronage buying motives of
the buyers. For instance, some people deem it a prestige to drink coffee
in a five-star hotel.
6. Habit: Habit is also one of the important emotional patronage buying
motives. Some people make their purchases from a particular shop for
the simple reason that they have been habitually making their purchases
from that shop.
4.3.2.2 Rational Patronage Buying Motives: When a buyer patronizes a
shop after careful consideration (i.e., after much logical reasoning and
careful thinking), he is said to have been influenced by rational patronage
buying motives. Rational patronage buying motives include the following:
1. Convenience: Convenient location of
a shop is one of
the
considerations influencing the purchases of many buyers from a
particular shop. Many buyers, usually, buy their requirements from a
nearby shop, as it is convenient to them to make their purchases.
Similarly, convenient working hours of the shop also influence the
purchases of good many buyers. For instance, if a shop works for a
longer period of time every day and even on Sundays, it will be very
convenient to the buyers. As such, many buyers may make their
purchases from such a shop.
2. Low price charged by the shop: Price charged by the shop also
influences the buyers to patronize a particular shop. If the price charged
by a shop for a particular product is relatively cheaper, naturally, many
people will make their purchases from that shop.
3. Credit facilities offered: The credit facilities offered by a store also
influence the buying of some people from a particular shop. People who
do not have enough money to make cash purchases every time prefer to
make their purchases from a shop which offers credit facilities.
4. Services offered: The various sales and after-sale services, such as
acceptance of orders through phone, home delivery of goods, repair
service, etc., offered by a shop also induce the buyers to buy their
requirements from that shop. Rational buyers are, often, influenced by
the various services or facilities offered by the shop.
5. Efficiency of salesmen: The efficiency of the salesmen employed by a
shop also influences the people in patronizing a particular shop. If the
employees are efficient and are capable of helping the buyers in making
their purchases, people, naturally, would flock to such a shop.
6. Wide choice: Wide choice of goods offered by a shop is one of the
rational considerations making the buyers patronize a particular shop.
People, generally, prefer to make their purchases from a shop which
offers wide choice (i.e., wide varieties of goods).
7. Treatment: The treatment meted out by a shop to the customers is one
of the rational considerations influencing the buyers to patronize a
particular
shop.
Usually,
people
would
like to purchase their
requirements from a shop where they get courteous treatment.
8. Reputation of the shop: Reputation of the shop for honest dealings is
also one of the rational patronage buying motives. Usually, people would
like to make their purchases from a store having reputation for fair
dealings.
4.4 Buyer Behavior Models
The influence of social sciences on buyer behaviour has prompted
marketing experts to propound certain models for explaining buyer
behaviour. Broadly, they include the economic model, the learning model,
the psychoanalytical model and the sociological model.
4.4.1. The Economic Model: According to the economic model of buyer
behaviour, the buyer is a rational man and his buying decisions are
totally governed by the concept of utility. If he has a certain amount of
purchasing power, a set of needs to be met and a set of products to
choose from, he will allocate the amount over the set of products in a
very rational manner with the intention of maximising the utility or
benefits.
4.4.2. The Learning Model: According to the learning model which takes
its cue from the Pavlovian stimulus response theory, buyer behaviour
can be influenced by manipulating the drives, stimuli and responses of
the buyer. The model rests on man’s ability at learning, forgetting and
discriminating. The stimulus response learning theory states that there
develops a bond between behaviour producing stimulus and a behaviour
response (S. R. Bond) on account of the conditioning of behaviour and
formation of habits. This theory may be traced to Pavlov and his
experiments on salivating dogs. Pavlov’s experiments brought out
associations by conditioning.
In his well known research with dogs, a bell was rung every time food
was served to a dog. Eventually, the dog started salivating each time
upon hearing the bell though no food was served. The dog’s behaviour
is conditioned; it is related to behaviour-producing stimulus (bell ringing)
and behaviour response (salivation). The S.R. bond so established
causes a set pattern of behaviour learnt by the object – dog. In terms of
consumer behaviour, an advertisement would be a stimulus whereas
purchase would be a response.
Learning Process: According to the stimulus-response theory, learning is
dependent on drive, cue (stimulus), response and reinforcement.
Drive: Drive may be defined as any strong stimulus that impels action. It
arouses an individual and keeps him prepared to respond. The drives
may be classified as primary drives and secondary drives. Primary
drives are based upon innate physiological needs such as thirst, hunger,
pain avoidance, and sex. The secondary drives are based upon
learning. They are not innate and are derived from the primary drives.
These include the desire for money, fear, pride, rivalry, etc.
Cue: Cue or stimulus may be defined as any object in the environment
perceived by the individual. The aim of the marketing man is to find out
or create the cue of sufficient importance that it becomes the drive
stimulus or elicits other responses appropriate to his objective. Here, the
objective is to find out those conditions under which a stimulus will
enhance the chances of eliciting a particular kind of response.
Response: Response is an answer to a given drive or cue. When a man
feels thirsty, he attempts to get water at any cost. Here attempt to get
water is a response to the primary drive of thirst. “Response also
includes
attitudes,
familiarity,
perception
and
other
complex
phenomena.”10 Responses may be generalized or discriminatory.
Generalized response refers to a uniform response to similar though not
identical stimuli. Discriminatory response refers to the selective
response to similar stimuli. Undifferentiated products such as cigarettes
and detergents normally elicit generalized consumer responses but by
huge advertising outlays companies try to induce consumers to perceive
differences in brands and to make discriminatory responses.
Reinforcement: Reinforcement or reward means reduction in drive and
stimulus. It has been defined as “environmental events exhibiting the
property of increasing the probability of occurrence of responses they
accompany.” Thus, when consumption of a product or a brand of
product leads to satisfaction of the initiating need (drive/stimulus) there
is reinforcement. If at some later date the same needs are aroused, the
individual will tend to repeat the process of selecting and getting the
same product or brand of product. Each succeeding time that product or
brand brings satisfaction, further reinforcement takes place, thus, further
increasing the possibility that in future also, the same product or brand
will be bought. This type of behavioural change, increasing possibility
that an act will be repeated, is called learning; reinforcement increases
the rapidity and vigour of learning.
4.4.3. The Psychoanalytical Model: The psychoanalytical model draws
from Freudian Psychology. According to this model, the individual
consumer has a complex set of deep-seated motives which drive him
towards certain buying decisions. The buyer has a private world with
all his hidden fears, suppressed desires and totally subjective
longings. His buying action can be influenced by appealing to these
desires and longings. The psychoanalytical theory is attributed to the
work of eminent psychologist Sigmund Freud. Freud introduced
personality as a motivating force in human behaviour. According to
this theory, the mental framework of a human being is composed of
three elements, namely,
1. The id or The instinctive, pleasure-seeking element. It is the
reservoir of the instinctive impulses that a man is born with and
whose processes are entirely subconscious. It includes the
aggressive, destructive and sexual impulses of man.
2. The superego or the internal filter that presents to the individual the
behavioural expectations of society. It develops out of the id,
dominates the ego and represents the inhibitions of instinct which is
characteristic of man. It represents the moral and ethical elements,
the conscience.
3. The ego or the control device that maintains a balance between the
id and the superego. It is the most superficial portion of the id. It is
modified by the influence of the outside world. Its processes are
entirely conscious because it is concerned with the perception of the
outside world.
The basic theme of the theory is the belief that a person is unable to satisfy
all his needs within the bounds of society. Consequently, such unsatisfied
needs create tension within an individual which have to be repressed. Such
repressed tension is always said to exist in the sub-conscious and continues
to influence consumer behaviour.
The above formulations of the psychoanalytical theory may be explained by
an example of consumer behaviour.
A young business executive, Mr. Ghosh, on his way home from office, stops
at a store dealing in readymade garments. He needs a necktie to match his
recently bought shirt. He gets an appropriate match and buys one necktie.
While getting out of the shop, a woolen suit catches his attention. He stops
to examine it.
Mr. Ghosh examines the suit and finds that the colour, style and texture of
the suit matches his needs and tastes. He takes a trial and finds that the suit
fits him perfectly and also makes him look very elegant and impressive. He
believes that the suit would impress his wife, friends and colleagues (the id
is aroused). But at this time, he is reminded that his wife needs a sari and
his son has been asking for a tricycle. Besides, his disposable income is
also limited. His instinct says that the purchase of the suit would deprive his
wife and son of their requirements (superego intervenes). Thus, his
conscience restrains him from buying the suit because in his opinion it is not
the right thing to do.
Here, the id and the superego are in conflict. As such, the ego intervenes
and helps to resolve this conflict and provide the appropriate solution. The
ego may offer two alternative solutions.
One alternative may be to purchase the suit so that he can impress his boss
and be more confident of himself while dealing with people. This may result
in an early promotion or a raise. Moreover, the needs of his wife and son
may still be met by buying their requirements on credit. Alternatively, he may
abstain from purchasing the suit on account of budgetary constraints.
The process of id-superego conflict and ego-conflict resolution as described
above explains human behaviour. Behaviour depends upon the relative
strength of each of the three elements in the personality and the specific
ways in which they combine to produce solutions to consumer problems.
From the theory’s formulations, it is obvious that it is impulse that motivates
people to act or behave in the manner as they do. However, this motivation
is not (only) for the reasons ascribed to it but is attributable to the
subconscious drives that are unknown to people themselves. Some of the
interesting examples of consumer behaviour as motivated by the
subconscious include the following:
1. Many businesses do not fly because of a fear of posthumous guilt – if he
crashed, his wife would think of him as stupid for not taking a train.
2. Men want their cigars to be odoriferous in order to prove that they (the
men) are masculine.
3. A woman is very serious when she bakes a cake because
unconsciously she is going through the symbolic act of giving birth.
4. A man buys a convertible as a substitute mistress.
5. Consumers prefer vegetable shortening because animal fats stimulate a
sense of sin.
6. Men who wear suspenders are reacting to an unresolved castration
complex.
4.4.4. The Sociological Model: According to the sociological model, the
individual buyer is influenced by society by intimate groups as well as
social classes. His buying decisions are not totally governed by utility;
he has a desire to emulate, follow and fit in with his immediate
environment. And several of his buying decisions may be governed
by societal compulsions.
4.4.5. The Nicosia Model: In recent years, some efforts have been made
by marketing scholars to build buyer behaviour models totally from
the marketing man’s standpoint. The Nicosia model and the Howard
and Sheth model are two important models in this category. Both of
them belong to the category called the systems model, where the
human being is analyzed as a system with stimuli as the input to the
system and behaviour as the output of the system.
Francesco Nicosia, an expert in consumer motivation and behaviour put
forward his model of buyer behaviour in 1966. The model tries to
establish the linkages between a firm and its consumer – how the
activities of the firm influence the consumer and result in his decision to
buy. The messages from the firm first influence the pre-disposition of the
consumer towards the product. Depending on the situation, he develops
a certain attitude towards the product. It may lead to a search for the
product or an evaluation of the product. If these steps have a positive
impact on him, it may result in a decision to buy. This is the sum and
substance of the ‘activity explanations’ in the Nicosia Model. The Nicosia
Model groups these activities into four basic fields.
Field one has two sub-fields the firm’s attributes and the consumer’s
attributes. An advertising message from the firm reaches the consumer’s
attributes. Depending on the way the message is received by the
consumer, a certain attribute may develop, and this becomes the input
for Field Two. Field Two is the area of search and evaluation of the
advertised product and other alternatives. If this process results in a
motivation to buy, it becomes the input for Field Three. Field Three
consists of the act of purchase. And Field Four consists of the use of the
purchased item. There is an output from Field Four – feedback of sales
results to the firm.
4.5 Summary

A study of consumer behaviour gives an insight into the various factors
or attributes in a particular product which prompt a consumer to
purchase that product.

A study of consumer behaviour helps the marketers to understand the
consumers' needs, aspirations, expectations, problems etc.

The buying behaviour of consumers is influenced by a number of
internal or psychological factors.
They are: Motivation; Perception;
Learning; Beliefs and Attitudes; Personality.

The
social
factors
influencing
consumer
behaviour
are:
Family;Reference Groups; Roles and Status.

The Cultural factors influencing consumer behaviour are: Culture; Subculture;

Social class.
The various economic factors that influence consumer behaviour are:
1. Personal Income
2. Family income
3. Income expectations
4. Savings
5. Liquid assets of the Consumer
6. Consumer credit

The important personal factors which influence buyer behaviour are:
1. Age
2. Occupation
3. Income
4. Life Style

A consumer’s decision to modify, postpone or avoid a purchase decision
is heavily influenced by perceived risk. Expensive purchases involve
some risk- taking.

Webster and Wind have classified the various influences on business
buyers
into
four
main
groups:
environmental,
organizational,
interpersonal, and individual.
4.6
Keywords
Buying Motives
Emotional product buying motives
Rational product buying motives
Pride or Prestige
Emulation or Imitation
Affection
Comfort or desire for comfort
Sex appeal or sex attraction
Ambition
Desire for distinctiveness or
individuality
Desire for recreation or pleasure
Hunger and thirst
Habit
Safety or Security
Economy
Relatively low price
Suitability
Utility or versatility
Durability of the product
Convenience of the product
Patronage Buying Motives
Emotional Patronage Buying Motives
Rational Patronage Buying Motives
4.7
1)
Exercises
Explain the factors influencing consumer behaviour.
2) Describe the consumer purchase decision process.
3) How do business buyers make their buying decisions?
4) Explain different types of buying behaviour.
5) Write briefly about the following:
a) Buying motives
b) Buying roles
MODULE 2
Unit 1
Product Strategy
Structure:
1.1
Objectives
1.2
Introduction
1.3
Developing Marketing Strategies
1.4
Product Strategy
1.5
Product Mix and Product Line
1.6
Importance of Sound Product
1.7
The Product Life Cycle
1.8
Branding
1.9
1.8.1
Categories of Brand
1.8.2
Branding Strategies
Packaging
1.9.1.
Functions of Packaging
1.9.2
Labeling
1.10
New Product Development
1.11
Determining Pricing Objectives
1.12
Factors to be Considered in the Pricing Decision
1.13
Summary
1.14
Keywords
1.15
Exercise
1.1 Objectives
After studying this unit, you will be able to:

Explain different concepts and classification of a product.

Define product mix and product line.

Explain the product life cycle.

Explain the importance of branding and packaging.

Determine the factors influencing the pricing.

Explain distribution strategy and channels of distribution.

Explain the concept of promotion and promotion mix.
1.2 Introduction
A marketing strategy is a plan for selecting and analyzing a target market
and developing and maintaining a marketing mix that will satisfy target
market. A target market is a group of consumers at whom an organization
directs its marketing efforts. In the previous model 1 unit1 we have
introduced the concept of marketing mix. In this unit we will discuss in detail
about product strategy.
1.3 Developing Marketing Strategies
A marketing strategy involves selecting and analyzing a target market. Once
a firm selects a target market, it must develop a marketing mix that satisfies
the needs of this target. The marketing mix consists of four elements:
product, price, promotion and place.
Marketing mix is the set of marketing tools that the firm uses to pursue its
marketing objectives in the target market.
Marketing Mix
Targe
t
Product
Product variety
Quality
Design
Features
Brand name
Packaging
Sizes
Services
Warranties
Returns
Price
Mark
et
List price
Discounts
Place
Promotion
Sales promotion
Channels
Coverage
Advertising
Assortments
Allowances
Sales force
Locations
Payment
period
Public relations
Inventory
Credit terms
Direct
marketing
Transport
A Product is anything that satisfies a need or want and can be offered in an
exchange. A product can be a good, service or idea.
Price is the value placed on the ‘something of value’ in an exchange.
Consumers exchange something of value normally purchasing power
(money) for the satisfaction or ability they expect a product to provide.
Promotion refers to marketing activities used to communicate positive,
persuasive information about an organization, its products and activities to
directly or indirectly expedite exchanges in a target market.
Place refers to marketing activities that make products available to
consumers at the right time and in a convenient location.
1.4 Product Strategy
Product Classification: Products are generally classified into two broad
categories on the basis of consumers’ intentions.
i) Consumer Product: A product purchased for personal and family
consumption is a consumer product.
ii) Industrial Product: A product bought for use in the production of other
products or in organisational operations is an industrial product.
Both consumers and industrial products are broken down into additional
classifications:
Consumer Products:
a) Convenience Products: A convenience product is a frequently
purchased, inexpensive item that buyers spend little effort to find and
purchase. Bread, milk, newspapers, soft drinks etc. are examples.
Consumers do not spend much time planning the purchase of a
convenience item. A consumer who prefers a specific brand of a
convenience product will willingly accept a substitute if the preferred
brand is not conveniently available.
b) Shopping products: Consumers are willing to spend more effort to plan
for and purchase a shopping product, such as an appliance, furniture,
clothing, a bicycle or a stereo. Buyers spend considerable time
comparing brands and sellers with respect to price, product features,
quality, service and warranty.
c) Speciality products: A speciality product is a product with one or more
unique characteristics that a group of buyers is willing to spend
considerable time and effort to purchase. Consumers carefully plan the
purchase of a speciality product because they know exactly what they
want and will not accept a substitute. Consumers do not evaluate
alternatives when searching for speciality products. They are extremely
brand loyal and are concerned primarily with finding an outlet that has
the pre-selected product availability.
d) Unsought products: An unsought product is purchased as a result of the
sudden occurrence of a problem or in response to aggressive selling
tactics that result in a sale that otherwise would not take place.
Consumers generally do not think of buying unsought products on a
regular basis. Some classic examples of these products include
emergency automobile repairs, replacement appliances etc. Marketers
should stress advertising and personal selling in marketing unsought
products.
b) Industrial Products
a) Raw Materials: A raw material is a basic good that actually becomes
part of a physical product. Examples include minerals, plastics, fabrics,
chemicals and agricultural products.
b) Capital Equipment: Capital equipment refers to the large tools and
machines used in a production process. Capital equipment is normally
expensive and is intended to be used for a long period of time. Examples,
machineries, lathe, cranes etc.
c) Accessory Equipment: Accessory equipment is used in production or
office activities but does not become part of the final physical product
being manufactured. Examples: motors, hand tools, meters, word
processors, calculators etc.
d) Component Parts: A component part is a finished item or an item that
needs little processing before becoming part of the physical product.
Although component parts are used in the manufacture of larger
products, they are easily distinguishable from those products.
e) Process Materials: Like a component part, a process material is used
directly in the production of another product; however, it is not readily
distinguishable from the finished product. Example, a company that
manufactures cosmetics might purchase alcohol for use in make-up or
perfume.
f) Supplies: A supply does not become part of the finished product, but it
does expedite production and operations. Paints, fuses, cleaning
materials, paper, pens and pencils etc. are examples.
g) Industrial Services: An industrial service is an intangible product that
many organisations require in their operations. Financial, legal,
marketing etc., are examples.
1.5 Product Mix and Product Line
Marketers must determine the assortment of products they are going to offer
consumers. Some firms sell a single product; others sell a variety of
products. A product item refers to a unique version of a product that is
distinct from an organization’s other products.
An organization’s product line is a group of closely related products that are
considered a unit because of marketing, technical or end-use considerations.
A product mix is the total group of products offered by a firm or all of its
product lines. Product mix width is the number of product lines offered by a
firm. Product line depth is the number of products offered in a given product
line.
The social aspect of new product opportunities: The pleasing products are
pan masala, cigarettes etc., which give high immediate satisfaction.
However, they cause harm to consumers in the long run.
There are deficient products which have neither immediate appeal nor long
run benefits. Firms are not interested in such products as there is no chance
to make any profit at all.
The salutary products are those which have long run advantages but have no
immediate appeal to consumers. For example, eco-friendly goods, detergents
with low phosphates etc.. Hence, firms are not primarily interested in such
products. But they can be taken as a challenge and they can be made initially
attractive without losing long run consumer benefits.
There are desirable products which have a happy combination of high
immediate satisfaction and high long-run consumer welfare. Tasty,
nutritious, ready-made food products are the examples of such desirable
products. Socially responsible firms would attempt to find opportunities to
produce desirable products.
1.6 Importance of Sound Product
There are two essentials of successful marketing:
1) Product and 2) Market
If marketing can bring together products and markets in such a way that
products and consumer demand are perfectly correlated, there is no reason
why marketing cannot be successful. Both are equally important. If the
product is sound and easily acceptable to the market, if it satisfies reseller’s
needs and consumer preferences and is carefully filled to the needs and
desires of the customers, sales success is assured. A right product is bound to
reduce considerably the problems of pricing, promotion and distribution.
1.7 The Product Life Cycle
A product has a life cycle in much the same way a living organism does. A
new product is introduced to consumers, it grows, and when it loses appeal,
it declines and eventually is taken off the market. Product life cycles can be
modified and extended by marketers.
A product life cycle has four stages: (1) Introduction (2) Growth
(3)
Maturity and (4) Decline. Understanding the typical life cycle pattern helps
business to manage profitable products and to know when it is time to
terminate unprofitable ones. As a product moves through its life cycle, the
strategies for promotion, pricing, distribution and competition must be
regularly evaluated and adjusted. Perceptive marketing managers try to
ensure that the introduction, modification and termination of a product are
timed and executed properly.
Four Stages of Product Life Cycle:
Profits
Sales and
Sales
Profit
Growth
Introduction
Maturity
Decline
Time
Introduction Stage: In the introduction stage of the life cycle, the product is
first presented to consumers. It is marked by a period of slow sales growth.
Profits are non-existent in this stage because of heavy expenses incurred with
product introduction.
In the introduction stage, the company must communicate the products
features, uses, and advantages to potential buyers, often through
advertisements.
Growth Stage: Sales rise rapidly during the growth stage, while profits peak
and then start to decline. Competitors’ reactions to the products success in
this stage will affect its life expectancy. Profits decline late in the growth
stage as other firms enter the market, forcing the company to lower prices
and spend heavily on promotion. At this point, the typical marketing strategy
focuses on encouraging strong brand loyalty and competing with aggressive
imitators of the product. The company tries to develop a competitive niche in
the growth stage by emphasizing the products benefits.
Organizations typically resort the aggressive promotional pricing, including
price reductions, during the growth stage.
Maturity Stage: The sales curve peaks and begins to decline during the
maturity stage, and profits continue to decline. Competition is fierce at this
stage as many brands enter the market. Each competitor highlights
differences and improvements in its versions of the product and weaker firms
are squeezed out or forced to lose interest in the product.
A product in the maturity phase begins to lose its distinctiveness.
Organizations with mature products must therefore develop new promotional
and distribution efforts. A fresh advertising campaign, new packaging or
incentives directed at channel members are often employed.
Decline Stage: Sales fall rapidly during the decline stage. New technology
or new social trends may cause product sales to decline dramatically. At this
time, the producer considers eliminating items from the product line that are
not earning a profit. The business may eliminate distributors with poor sales,
cut promotion efforts and ultimately plan to phase out the product. Most of
the organizations have more than one product in their product mix, the
decline of one product does not cause a company to fail. Various products in
an organisation’s mix are at different stages in the product life cycle. Thus,
as one product declines, other products are in the introduction, growth or
maturity stage. Therefore, business must simultaneously handle new product
introductions and manage existing products in their various life cycle stages.
Product Differentiation: The strategy of market aggregation typically is
accompanied by the strategy of product differentiation in a company’s
marketing programme. Product differentiation occurs when, in the eyes of
customers, one firm distinguishes its product from competitive brands
offered in the same aggregate market. Through differentiation an
organisation creates the perception that its product is better than the
competitor’s brands. A seller differentiates his product either i) by changing
some appearance feature of the product the package or colour or ii) by using
a promotional appeal that features a differentiating claims.
1.8 Branding
Branding refers to decisions about names, including brands, brand names,
brand marks and trademarks. A brand is a name, term, design, symbol or any
other feature that identifies one seller’s good or service as distinct from those
of other sellers. A brand may identify one item, a family of items or all items
of the seller. If used for the firm as a whole, the preferred name is trade
name. A brand name is the part of a brand that can be verbalized; it includes
letters, words and numbers. A brand name is sometimes a product’s only
distinguishing characteristic. It helps a product, develop an identity,
simplifies shopping and connotes quality to consumers.
The brand mark is a symbol, design or other element of a brand that cannot
be spoken.
Reasons for Branding: Branding helps consumers identify the specific
products they like or dislike so that they can purchase the products that
satisfy their needs. Branding also helps consumers evaluate the quality of
products, especially when they cannot judge a product’s characteristics. In
addition, a brand that symbolizes status can provide a psychological reward
to consumers.
Branding also benefits sellers because brands identify their products, which
encourages repeat purchases by consumers. When consumers become loyal
to a specific brand, the producer’s share of that product market achieves a
certain level of stability. Moreover, brands that have some degree of
customer loyalty can command premium prices.
Branding can facilitate the introduction of a new product that carries the
name of an organization’s existing products because buyers are already
familiar with the firm’s existing brands. Finally, branding expedites
promotional efforts because the promotion of each branded product
indirectly promotes all other products with a similar brand name.
Selecting an Effective Brand: Because the brand effects, customers’
perceptions of and attitudes towards a product and sometimes towards the
firm, it ultimately affects purchase decisions. Consequently, selection of an
appropriate brand is a critical decision for organizations.
In selecting a brand name, marketers should consider a number of issues. A
brand name should be easy for consumers to say, spell and remember. This
includes foreign customers if the product is to be marketed in other
countries. A short, one-syllable name such as Ponds, is easy to say, spell and
recall. The brand name should also suggest a product’s uses and special
characteristics in a positive way. A perfume’s name, for example, might
suggest fragrance and magnetism.
An effective brand must be compatible with other products in the line. The
manufacturer of kitchen aid appliances, for example, might have some
doubts about putting the kitchen aid name on a household drill or vacuum
cleaner. Finally, a brand should be designed so that it can be used and
recognized in newspapers, magazines and billboards and a television and
radio.
A brand name should also convey the derived product image. For instance,
‘A-1 Steak Sauce’ suggests a high quality product. Sporting goods made by
‘Everlast’ have an image of strength and durability. On the other hand, a
bank named ‘Fifth Bank’ may convey an image of an unsuccessful bank or a
bank that is not the leader.
1.8.1
Categories of Brand
Brands fall into three categories, manufacturer, private distributor and
generic brands. A manufacturer brand is developed and owned by its
producer, who is usually involved with distribution, promotion and to some
extent pricing decisions for the brand. IBM, Sony, Tata, Bajaj etc. are
manufacturer brands. Manufacturer brands make it possible for consumers to
identify products with their manufacturers at the point of purchase.
A Private Distributor Brand is developed and owned by re-seller, such as
wholesaler or retailer. The manufacturer of a private brand is not identified
on the product. Re-sellers employ private distributor brands to develop more
efficient promotion, generate higher gross margins and improve store image.
A Generic Brand does not list the manufacturer or any other distinguishing
information on its label; only the product type (such as peanut butter,
tomato sauce, cigarettes, papertowel) is identified. Because generic brands
are rarely advertised, many grocery stores sell them at lower prices than
they sell comparable branded items. Much of the growth in generic grocery
brand sales has been at the expense of private distributor brands.
1.8.2
Branding Strategies
(i) Individual branding: Individual branding is a strategy of using a
different brand name for each product. This strategy allows an
organisation to develop products for different segments of the same
product market. Each product is gives a separate, unrelated name
and can be aimed at a specific segment.
(ii) Overall family branding: A strategy of giving all of a company’s
products the same name or part of the name is called overall family
branding. With overall family branding, the promotion of one item
with family brand promotes the firm’s other products.
(iii) Line family branding: Line family branding occurs when an
organisation uses family branding only for products within a
particular line rather than for all its products, that is, the same
brand is used for all products within a line but not for products in
different lines.
(iv) Brand-extension branding: Brand-extension branding is a strategy of
using an existing brand name as part of a brand for an improved or
new product that is usually in the same product category or the
existing brand.
(v) Brand Licensing: A company allows approved manufacturer to use
its trademark on other products for a licensing fee. The licensor –
the company permitting the use of its trademark - generally charges
a royalty fee ranging from 2 to 10% of wholesale revenues.
1.9 Packaging
Packaging is the development of a container and a graphic design for a
product. Packaging can make a product easier to use, safer and more
versatile. It can also affect consumer’s attitudes toward a product, which
in turn affect their purchase decisions.
Because consumers’ impressions of a product are significantly
influenced by its packaging, marketers try to develop innovative
packages that satisfy the needs of the target market.
1.9.1
Functions of Packaging
Packaging serves a number of purposes. First, it protects the product
and maintains its functional form. Another function of packaging is
convenience. The size or shape of a package may affect the products’
storage, convenience of use, or replacement rate. Yet, another function
of packaging is promotion-communicating a product’s features, uses,
benefits and image.
1.9.2
Labeling
Labeling is the display of important information on a product package.
Marketers can use labels to promote other products or to encourage
proper use of products and therefore greater satisfaction with them.
Labeling is an important marketing division for legal reasons as well.
Other product related issues:
i) Product Quality: Quality is becoming an important issue. Without
durability, conformance to customers’ satisfaction and on-time
delivery, a firm cannot survive in today’s environment. The future
focus must be on more and better product features, flexible
factories that can respond quickly to customer preferences,
expanded customer service and new product introductions.
ii) Supportive Services: Supportive product related services such as
warranties, repairs and replacements and credit help fulfill
premises of satisfaction.
1.10 New Product Development
i) Idea Generation: Search for new product ideas from both inside and
outside the firm.
ii) Idea Screening: Select the idea with the greatest potential. Reject
ideas that have limited potential. Analyze the needs and wants of
buyers, the environment and competitors.
iii) Concept Testing: Describe or show product concepts and their
benefits to potential customers to determine their reactions. Identify
and eliminate poor product concepts. Obtain useful information for
product development and marketing personnel.
iv) Business Analysis: Assess the new product’s potential profitability
and
compatibility
with
the
market
place.
Examine
the
organisation’s research, development and production capabilities.
Ensure
that
financial
requirements
for
development
and
commercialization are available. Project economic returns.
v) Product Development: Determine whether it is technically and
economically feasible to produce the product. Convert the product
idea into a working model. Develop and test various elements of the
marketing mix.
vi) Test Marketing: Launch the product in small regions. Determine the
reactions of consumers in the target market. Measure the new
products sales performance. Identify weaknesses in the product or
the marketing mix.
vii) Commercialization: Make the necessary cash outlays for productions
facilities. Manufacture and market the product in the entire target
market. Communicate the products benefits.
1.11 Summary
In this unit we have highlighted the various issues that are associated
with ‘product’ which is one of the market mix element. We have dealt
with type of product like common product and industrial product.
Further we have understood product mix and product line. Product mix
is the total group of products offered by a firm or all of its product lines.
Product line is a group of closely related products that are considered .
In this unit we have discussed product life cycle which includes different
stages. We also have discussed the need for branding, packaging of a
product and branding strategies.
1.12 Keywords
Marketing Strategy
Marketing Mix
Product
Price
Promotion
Place
Consumer Product
Industrial Product
Convenience Products
Shopping Products
Speciality Products
Unsought Products
Raw Materials
Capital Equipment
Accessory Equipment
Component Parts
Process Materials
Supplies
Industrial Services
Product Mix
Product Line
Product Life Cycle
Branding Private Distributor Brand
Packaging
Generic Brand
New Product Development
Labeling
1.13 Exercise
1. Explain different stages of ‘product life cycle’.
2. Define ‘Product’. What do you understand by product strategy.
3. Differentiate product mix and product line.
4. Define branding. Explain the benefits of branding.
5. What are branding strategies?
6. Explain the process of New Product Development.
Unit 2
Place (Distribution Strategy)
Structure:
2.1 Objectives
2.2 Introduction
2.3 The Nature and Structure of Marketing Channels
2.4 Function of Marketing Channels
2.5 Coordinating Marketing Channels
2.6 Managing Channel Relationships
2.7 Physical Distribution
2.8 Summary
2.9 Keywords
2.10 Exercise
2.1 Objectives
The major objectives of this unit is to nature and structure of marketing
channels and how does place influences the buying behaviour.
2.2 Introduction
Place or distribution strategy of marketing mix refers to how an organization
will distribute the product or service they are offering to the end user. The
organization must distribute the product to the user at the right place at the
right time. Efficient and effective distribution is important if the organization
is to meet its overall marketing objectives. If an organization under estimate
a demand and customers cannot purchase products because of it, profitability
will be affected. In this unit we explain the issues associated with
place/distribution strategy of marketing mix.
2.3 The Nature and Structure of Marketing Channels
A marketing channel (sometimes called a channel of distribution) is a group
of inter-related individuals or organisations that direct the flow of products
to consumers. Such a group or organisation is called a marketing
intermediary because it facilitates exchanges between producers, other
intermediaries and the final consumers of products. Because consumers are
the focus of all marketing channel activities, satisfying their needs and
desires is the most important concern of channel members or marketing
intermediaries. Wholesalers and retailers are classified as marketing
intermediaries.
Marketing Intermediaries can be divided into two major classifications:
1) Merchants
2) Agents or brokers
A merchant assumes ownership of products and resells them for a profit.
Agents and brokers do not purchase products outright but instead
negotiate and expedite exchanges between buyers and sellers.
Marketing channel members are critical to the success of any marketing
endeavor because they specialize in facilitating exchanges. Marketing
intermediaries reduce the number of sales contacts required for an
exchange, thereby reducing the cost of distribution.
Because distribution is often the least flexible element of the marketing
mix, marketing channel decisions are a key component of the marketing
mix. In other words, once a marketing channel is established, it is difficult
and costly to change it. Therefore, it is important to recognize the different
types of marketing channels and the number of marketing intermediaries
needed to serve various target markets.
Types of Channels: Products can be distributed directly from producer to
consumer or indirectly through one or more marketing intermediaries.
Factors Influencing the Selection of a Marketing Channel:
Factor
Less Reliance on
intermediaries
More Reliance on
intermediaries
Size of purchase
Large
Small
Location
Concentrated
Spread out
Number
Many
Few
Special needs
Frequent
Infrequent
Extensive
Limited
Perishability
High
Low
Cost or value
High
Low
Physical size
Large
Small
Technology
Complex
Simple
Weak
Strong
Consumer
Producer’s resources
Product
Competition
Alternative channels
None
Many
Laws
Relaxed
Strict
Selection of an appropriate channel depends on the consumer, the producer’s
resources, the product, the competition, the alternative channels available,
and in some cases, the laws governing channel relationships.
Recently, there has been a trend toward a greater presence of
intermediaries in marketing channels. That is, we are seeing fewer direct
channels. Several factors account for this trend. First, the cost of selling
directly to customers has risen very rapidly, making it even more
economical to sell through resellers. For instance, retailers can sell the
product lines of many manufactures and thus reach a large number of
customers more economically than can manufacturers. Second, many
industries have concentrated on lowering inventory carrying costs by
placing inventory when and where it is needed. Intermediaries such as
wholesalers are able to react to demand better than producers can. Third,
large distribution chains have grown in size in many industries, taking
market share from smaller “mom and pop” distributors.
A marketing channel that is used for one product may not be suitable for
another. For example, the same channel which is used to distribute cosmetics
can not be used to distribute televisions. Likewise, one organisation may
select a different channel than the one used by competitors. A number of
different channels are available for consumer and organisational products, as
well as for products marketed in foreign countries.
Channels for Consumer Products: Several typical marketing channels for
consumer products are shown below. In channel 1, the product moves
directly from producer to consumers. Customers who purchase fruits and
vegetables from a farmer’s “truck stand” or pick their own fruits or
vegetables are utilizing a direct marketing channel. Similarly, wineries that
sell their wines directly to consumers (often visitors touring the winery)
provide a direct marketing channel to consumers, although they may sell
their wines through other channels as well. Most services are distributed
through a direct channel because they are produced and consumed at the
same time.
By contrast, channels 2, 3, and 4 represent indirect movement of goods or
services from manufacturer to consumer. In channel 2, the product flows
from the producer to retailers to consumers.
1
2
Producer
Producer
3
Producer
4
Producer
Agents or
Brokers
Wholesalers
Retailers
Retailers
Wholesalers
Retailers
Fig.3.1 The Flow of product from the producer to retailers and then to
consumers.
This channel is often used for automobiles; most consumers do not wish to
go to a factory in Michigan to purchase new Chevrolets; instead, they buy
them from authorized Chevrolet dealers that purchase the automobiles from
General Motors. Using such a channel structure, large retailers like Kmart
and Sears sell many products such as telephones and tires, which they buy
directly from producers.
In channel 3, a product flows from the producer to wholesalers to retailers to
consumers. This channel is used frequently for consumer products that are
sold to large numbers of consumers through many retailers. A producer finds
it easier to deal directly with a limited number of wholesalers rather than
with thousands of retailers. For example, William Grant & Sons distributes
its Scotch whiskey products globally through wholesalers and retailers.
Channel 4-in which the product flows from the producer to agents or brokers
to wholesalers or retailers to consumers – is generally used for products with
mass market distribution. Producers such as Lowa Beef Processors, Inc.,
often sell to wholesalers through agents or brokers. The wholesalers then
supply the beef to retailers (supermarkets or restaurants) that sell the product
to ultimate consumers.
Dual Distribution: Dual distribution is the use of two or more marketing
channels to distribute the same product to the same target market. By using
dual distribution a firm can increase its products’ availability to consumers.
For instance, many companies like Neiman Marcus, General Nutrition Inc.,
Talbots and Sundance sell their products through retail outlets as well as
mail-order catalogues.
International Channels of Distribution: All Products, including those sold
across national boundaries, must be physically moved from the domestic
producer to the consumer or organizational buyer. A firm marketing its
products in other nations may decide to distribute products through existing
marketing channels or to develop new international channels. The decision
depends on the availability of both domestic and foreign channels that satisfy
the distribution requirements. Japan has developed a complex called the Asia
and Pacific Trade Center to facilitate direct access to retailers’ purchasing
agents by foreign suppliers. Retailers go directly to the centre to make
purchases from non-Japanese companies, which reduces costs and makes it
easier for foreign firms to crack the Japanese market.
Distribution Intensity: When selecting a marketing channel, a firm must
also determine the number of intermediaries needed to provide the best target
market coverage. Distribution intensity is the number of marketing
intermediaries at each level of the marketing channel. At the retail level,
distribution intensity refers to the number of outlets that sell a particular
product to consumers. Newspapers can be purchased from street vendors and
at newspaper stands, convenience stores, grocery stores, and other outlets,
but a stereo or computer can be purchased from only a few selected dealers.
The product and the target market served often determine the distribution
intensity. The three major levels of distribution intensity are intensive,
selective and exclusive distribution.
Intensive distribution means that all available outlets are used at each level of
the channel to distribute a product. Convenience products such as bread,
milk, canned goods, chewing gum, soft drinks and newspapers receive
intensive distribution. Some products, such as soft drinks and cigarettes, are
available virtually everywhere through vending machines. Most consumer
packaged products, such as detergents, soaps, and personal-care products,
also rely on intensive distribution. These are generally less expensive
products that are purchased frequently by a large number of consumers and
require little shopping effort.
Selective distribution uses only some available outlets to distribute a product.
Shopping products and durable goods such as automobiles, stereos and large
household appliances usually fall into this category. Because such products
are more expensive than convenience goods, consumers spend more time
visiting several retail outlets to compare prices, designs, styles and other
features.
In exclusive distribution, a product is offered in only one or very few outlets
within a relatively large geographic area. Organizations use exclusive
distribution for products that are purchased rather infrequently, consumed
over a long period of time, or require service or information to fit them to
buyers’ needs. Private and business jets like the Gulfstream and Starship are
sold on an exclusive basis. Some consumer products like luxury cars and
custom-made jewelry are also distributed in this way.
2.4. Functions of Marketing Channels
In our modern economy, we cannot produce everything required to satisfy
our needs. One individual may have a vegetable garden in the back yard, and
another person may make clothes. But unlike in primitive cultures, most of
the things we need are produced by someone else and obtained through
exchanges. As you recall, marketing activities are aimed at facilitating such
exchanges and distribution is critical because it enables firms to match their
production capabilities to the needs of customers.
Sorting is the process through which the supply of goods and services
produced by the manufacturer is matched with the assortment demanded by
the consumer. An assortment is a combination of products created by the
manufacturer or held by the consumer. Sorting is necessary because
manufactures generally produce a large quantity of a narrow assortment of
products, whereas consumers typically demand a limited quantity of a broad
assortment of products.
The sorting function consists of several activities, including sorting out,
accumulation, allocation and assorting. Sorting out involves classifying
heterogeneous supplies into relatively homogeneous groups. Produces are
classified by grade, color or size. This function is especially common for raw
materials and agricultural products. For instance, beef is graded as prime or
choice. Accumulation is combining small groups of similar produces into
large groups of homogenous products. Wholesalers accumulate a stock of
goods for retailers and retailers accumulate a stock of goods for consumers.
Allocation is breaking down large, homogenous stocks into smaller groups.
A truckload of televisions is sold to retailers in smaller lots, who in turn sell
single units to consumers. Assorting is combining products into collections
or assortments that satisfy customer demand. Wholesalers develop product
assortments for retailers and retailers develop product assortments for
consumers.
Marketing channel members perform many other functions: buying, carrying
inventory,
selling,
transporting,
financing,
promoting,
negotiating,
conducting marketing research and servicing. Channels also facilitate the
flow of information and payments from consumers to producers. All of these
functions must be performed through the marketing channel, although all
channel members may not perform each function. For instance, General
Motors may provide transportation, marketing research and national
advertising. Automobile dealers that sell GM cars carry inventory and
perform buying, selling, financing and servicing functions. Marketing
functions are never eliminated, but are shifted backward or forward to reduce
cost and improve efficiency. Veritias is a company that sells life insurance
directly to consumers through the mail or by telephone, thus reducing
distribution costs and eliminating the sales commission. The demand for feeonly life insurance is increasing and has many insurance companies
scrambling to create their own no-commission policies.
Marketing channels play a critical role in total quality programs. Quality
expert Philip Crossly introduced a concept called zero defects, a performance
standard that attempts to build quality into a product and eliminate costly
errors. ‘Zero defects’ cannot be accomplished unless the right products get to
the right customers when they want them. Channels also link firms with the
customer, the key to quality. Close to the Customer explores this link more
closely.
Function of Marketing Channel Members
Function
Description
Buying
Purchasing a broad assortment of goods from
producers or other channel members.
Carrying Inventory
Assuming the risks associated with purchasing and
holding an inventory.
Selling
Performing activities required to sell goods to
consumers or other channel members.
Arranging for the shipment of goods.
Transporting
Financing
Promoting
Providing funds required to cover the cost of
channel activities.
Contributing to national and local advertising and
engaging in personal selling efforts.
Attempting to determine the final price of goods.
Negotiating
Providing information regarding the needs of
customers.
Providing a variety of services, such as credit,
Marketing Research delivery and returns.
Servicing
2.5 Co-ordinating Marketing Channels
The functions and efforts of channel members must be co-ordinated for the
mutual benefit and efficient interaction of all parties involved, including the
customer. This co-ordination is sometimes accomplished through the
consensus of all channel members, in which case they voluntarily agree to
perform those functions that are most beneficial to the entire channel.
However, reaching a consensus of channel members, each with its own set of
goals, is often quite difficult. For this reason, some marketing channels are
organized and controlled by a single channel leader, which may be a
producer, wholesaler or retailer. The channel leader is responsible for
guiding other channel members and co-ordinating their efforts to achieve
channel objectives. The channel leader may establish channel policies and
co-ordinate the development of the marketing mix. General Foods, for
example, is a channel leader for some of the many products that it sells.
Frequently, the channel member with the most financial resources and power
is the channel leader.
Under the management of a channel leader, the various links or stages of the
channel may be integrated either horizontally or vertically. Integration can
stabilize supply, reduce costs and increase co-ordination of channel
members.
Vertical Integration
Vertical integration occurs when one channel member acquires control of
one or more other members of its marketing channel, usually by purchasing
them. For instance, Willamette Industries generates plywood, wood products
and wood chips for its paper mills from the 1.2 million acres of timberland it
owns in Oregon, Tennessee, the Carolinas, Louisiana, Arkansas and Texas.
Recently, movie production companies like Twentieth Century – Fox Film
Corp. began purchasing television stations to gain increased control over the
outlets available for its products, movies and television programs. Vertical
integration eliminates the need for a marketing channel member to act as an
independent organisation.
Total vertical integration occurs when one organisation controls all
marketing channel functions, from manufacturing to providing service to the
final consumer. One company that uses this type of arrangement is Shell Oil,
which owns oil wells, refineries, pipelines, terminals and service stations.
A Marketing channel that is professionally managed and centrally controlled
by a single marketing channel member is a Vertical Marketing System
(VMS). Vertical marketing systems improve distribution efficiency by
combining the efforts of individual channel members. As organisations have
recognised their practicality, vertical marketing systems have gained
popularity.
In a CORPORATE VMS, successive stages of a marketing channel are
united under a single ownership. Singer, for example, owns the retail outlets
that sell its sewing machines and Tandy owns the Radio Shack outlets that
sell its products. Channel members in an ADMINISTERED VMS remain
independent, but informal co-ordination allows for effective interorganizational management. Kellogg Co., Campbell Soup Company and
Kraft General Foods use administered channels. Channel members in a
CONTRACTUAL VMS are also independent, but their inter-organisational
relationships are formalized through contracts or other legal agreements.
Such legal agreements spell out the rights and obligations of each channel
member.
Horizontal Integration
Horizontal integration occurs when a channel member purchases firms at the
same level of the marketing channel or expands the number of units (such as
retail stores) at one level. Horizontal integration allows the combined
organisations to achieve efficiencies and economies of scale in promotion,
marketing research, purchasing and the employment of specialists.
Horizontal integration is not always effective in improving distribution
because organisations sometimes experience difficulty in co-ordinating the
increased number of units. As a result, further marketing research and
planning may be needed to manage large-scale operations. In addition,
horizontal integration decreases organisational flexibility. Finally, the
government has found some of these mergers to be in violation of the
Sherman Act.
2.6. Managing Channel Relationships
Each member of a marketing channel has a position with rights, obligations,
and rewards; and each is subject to penalties for non-conformance.
Moreover, each channel member has certain expectations of every other
channel member. Retailers expect wholesalers to keep sufficient inventories
on hand and to deliver goods on time. Wholesalers expect retailers to abide
by the terms of payment contracts and to keep them informed about
inventory levels. If the marketing channel is to operate effectively, channel
members must co-operate with each other and keep conflict in check.
Channel Co-operation: Channel co-operation occurs when channel
members work together for their mutual benefit. Marketing channels cannot
function without sustained co-operation. Co-operation is necessary if each
channel member is to gain something from other members. The realization of
overall channel objectives and individual member objectives depends on co-
operation. Unless a channel member can be replaced, the misconduct of one
member can destroy the entire channel. Thus it is vital that policies be
developed to ensure the welfare and survival of all indispensable channel
members.
2.7. Physical Distribution
Physical distribution is the set of activities used to manage the flow of
products from manufacturers to consumers and end users. Physical
distribution activities can be conducted by any member of the channel. For
instance, raw materials must be moved from their origin to the production
facility; raw materials, parts, semi-finished products, and finished products
must be moved within the plant or to and from warehouses; and finished
products must be moved to marketing intermediaries and on to the final
consumer.
Physical distribution is becoming increasingly important as firms attempt to
reduce costs and increase service. An organisation can gain a competitive
advantage through a well-designed physical distribution system. By getting
products to the target market on a timely basis and in proper condition, a
company can satisfy its customers and outsell its competitors. Also, a welldesigned physical distribution system can decrease the total cost of
distribution, although trade-offs must be made to ensure efficient use of
resources and customer satisfaction.
Total Distribution Cost: The major objective of physical distribution is to
minimise costs and maximise service. Physical distribution managers attempt
to reduce costs in all areas, including transportation, order processing and
warehousing. However, reducing costs in one area may increase costs in
another. For instance, it is sometimes less expensive to lease warehouse
facilities than to own them. However, leasing could increase the cost of
transportation because products would have to be transported from the
factory to the leased warehouse instead of to an on-site warehouse. Many
manufacturing firms develop partnerships or alliances with organisations that
specialise in some physical distribution activity, such as transportation or
warehousing. These partnerships dramatically improve the quality of
customer service and reduce costs, because each organisation is doing what it
does best and most efficiently.
By using a total cost approach, a firm views the physical distribution system
as a whole, not as a series of unrelated activities. The firm tries to reduce the
total distribution cost through an integrated approach to physical distribution.
Instead of looking for the lowest possible transportation rates or warehousing
costs, the organisation balances the total costs of all activities against the
level of service it wants to offer. The organization then adopts the
combination of physical distribution activities that yields the lowest total cost
but meets its customer service objectives.
Cost Tradeoffs: To provide a specific level of service at the lowest possible
cost, an organization must make cost trade-offs in its distribution system to
resolve conflicts about resource allocation. In other words, the higher costs
of one activity must be offset by lower costs of another. For instance,
catalogue retailers such as Spiegel, Inc. may wish to minimise the amount of
time a customer has to wait to receive an order. This service objective, which
requires carrying a large inventory, may conflict with the objective of
minimizing inventory carrying costs. The company must then decide whether
to trade higher inventory costs for better customer service to gain a
competitive edge.
Physical Distribution Activities : These activities include developing
customer service standards, selecting transportation modes, designing and
operating warehouse facilities, designing an order processing system,
physically handling the products and establishing an inventory management
and control system.
Developing Customer Service Standards: In accordance with the
marketing concept, the design of a physical distribution system begins with
consideration of customer needs. One survey found that improving customer
service is a major priority in the distribution industry. To this end, an
organization must develop a set of service specifications. Each specification,
called a customer service standard, identifies a specific and measurable goal
appropriate to physical distribution. An example is “to process all customer
orders within 72 hours.” These standards influence other physical
distribution activities such as transportation and warehousing. Customer
service standards should be communicated to both customers and employees
and enforced by management. Service standards are critical in attracting and
maintaining satisfied customers and should therefore be tailored to
customers’ needs.
Customers may require many different services before, during and after an
exchange. Before an exchange, a company needs to establish a good climate
for service by offering fair prices and high-quality products. Additionally, a
written statement that outlines the firm’s service policy should be provided
to customers. During the transaction of exchanges, reliable deliveries, sizable
inventories, efficient order-processing and availability of emergency
shipments may be desired by customers seeking a high level of service. After
the transaction, installation, repairs and parts, warranties, answering
customer complaints and product packaging are critical elements of customer
service. Failure to provide services may result in the loss of customers and
possible legal action.
Selecting Transportation Modes: Marketers consider many important
factors in selecting a transportation mode. Obviously, cost is very important.
Transit time (the total time a carrier possesses goods), reliability
(dependability and consistency of service), capability (the ability to move
specific kinds of products) and accessibility (the ability to move goods over a
specific route) are also important. Although a truck can carry a replacement
part for a computer system at a low cost, air freight may provide more
reliable delivery. Other important considerations are security (safety) and
traceability (the case with which a shipment can be located).
Railways: Railways are used to carry relatively low value, bulky items for
long distances. Products typically transported by rail include coal, sand,
lumber, grain and steel. Railways serve a fairly large number of locations at
a reasonable cost and delivery speed is generally adequate for the type of
products that are transported.
Motor Vehicles: Motor vehicles account for nearly one-fourth of all
transportation and continue to gain a greater share of the transportation
market. They are the most flexible of all transportation modes because they
can go nearly anywhere at any time and are fast and dependable. They are
generally used to transport smaller shipments over shorter distances.
Products shipped by motor vehicles include clothing, paper goods, livestock,
food and practically any other item. The major drawbacks of motor vehicles
are that they are somewhat high in cost and low in fuel efficiency and losses
and damages can be significant. Increased hijacking in inner cities has also
a cause of concern. Because of their flexibility, trucks are often used along
with some other mode of transportation such as railways or waterways.
Inland Waterways: They are used to transport low-value, bulky products
like coal, petroleum and grain. Waterways represent the cheapest mode of
transportation, are fuel-efficient and involve low losses and damages.
However, waterways are slow, less dependable than other modes, and
limited in the number of locations served. They are often supplemented with
motor or rail transportation.
Pipelines: Petroleum products and chemicals are most commonly
transported via pipelines. Pipelines are generally owned by the firm or firms
shipping the product. They offer uninterrupted movement at a relatively low
cost, they are dependable and fuel-efficient, and they involve low losses and
damages. Because pipelines are the slowest mode of transportation and very
limited in the number of locations served, their use is limited.
Airways:
Although airways account for less than 1 percent of all
transportation, the importance of this transportation mode is growing.
Perishable products, overnight packages, and emergency parts and supplies
are frequently transported by air. As more and more firms conduct business
in foreign countries, air transportation will be in greater demand. Airways
offer the fastest delivery available (next to FAX) and are relatively
dependable. Some type of pickup by motor vehicle at the airport is usually
required, which reduces the speed of delivery and increases the cost. The
high cost of air transportation will continue to limit the range of products that
can be shipped in this manner.
2.8
Summary
In this unit we have learnt importance of place as one of the facet of
marketing mix. This unit has dealt with marketing channels structure and
nature of marketing channels, functions of marketing channels, marketing
intermediaries like merchants and agents, factors that influence on the
strategies of marketing channel. Further a brief explanation is given about
international channel of distribution. At the end, we have learnt about how to
manage the channel relationship.
2.9
Keywords
Distribution Strategy
Marketing Channel
Dual Distribution
Distribution Intensity
Intensive Distribution
Selective Distribution
Exclusive Distribution
Buying
Carrying Inventory
Selling
Transporting
Financing
Promoting
Negotiating
Vertical Integration
Horizontal Integration
Channel Co-Operation
Physical Distribution
Cost Tradeoffs
2.10 Exercise
1. Explain the functions of Marketing Channels.
2. Explain the nature and structure of marketing channels.
3. What are factors influencing the selection of a Marketing Channels?
Unit 3
Promotion Strategy
Structure:
3.1
Objectives
3.2
Introduction
3.3
The Promotion Mix
3.4
Promotion Mix Elements
3.4.1 Advertising
3.4.2 Personal Selling
3.4.3 Sales Promotion
3.4.4 Publicity
3.5
Factors Affecting the Composition of a Promotion Mix
3.6
Promotional Budget
3.7
Target Market Characteristics
3.8
Cost and Availability of Promotional Methods
3.9
Summary
3.10
Keywords
3.11
Exercises
3.1 Objectives
The major objective of this unit is to discuss about the promotion facet of
marketing mix and the various factors that influence the promotion strategy.
3.2 Introduction
Promotion refers to any communication activity used to inform, persuade,
and remind the target market about an organization, its products and its
activities. Promotion can directly facilitate exchanges by communicating
information about an organization’s goods, services, and ideas to its target
markets. For instance, Associated Air Freight, a mid-sized company that
competes with larger express air services like Federal Express, directly
promotes its services by having sales representatives personally call on
executives of firms that rely on overnight shipping to convince them to give
Associated Air Freight a try. Some companies use a flashier method, such as
hot air balloons shaped like their products, to facilitate exchanges directly.
Car dealers have used videotapes about their brands of cars to deliver
personalized messages to prospects.
Promotion can indirectly facilitate exchanges by communicating information
about company activities and products to interest groups (such as
environmental and consumer groups), current and potential investors,
regulatory agencies, and society in general. Promotional activities can help a
company justify its existence and maintain positive, healthy relationships
with various groups in the marketing environment.
To make promotional efforts effective in communicating with consumers
and the public, a firm must properly plan, implement, co-ordinate and control
all communications. First, the firm must obtain and use information from the
marketing environment. The extent to which an organization can use
promotion to maintain positive relationships with environmental forces
depends largely on the quantity and quality of the information it acquires. To
illustrate, to effectively communicate information to consumers that will
persuade them to buy a particular product, marketers need data about these
consumers and about the types of information they use when making
purchase decisions for that type of product. Thus the collection (through
marketing research) and use of data are critical in successfully
communicating with selected markets.
To ensure effective communications with consumers and other groups,
marketing managers must first understand the communication process.
3.3 The Promotion Mix
Organizations use various promotional methods to communicate with
individuals, groups and organizations. Just as product, price, distribution, and
promotion make up the marketing mix, so four components make up the
promotion mix. The promotion mix is the specific combination of these four
promotional methods –-advertising, personal selling, sales promotion, and
publicity – that an organization uses for a specific product.
The following sections present some general characteristics of each element
of the promotion mix, investigate the primary factors that influence a
company to use the various elements, and examine how promotion must be
adapted for global markets.
Recently, marketing firms have emphasized the need to co-ordinate various
forms of persuasive communications. Integrated marketing communications
is the application of various communication methods including advertising,
sales promotion, public relations, direct marketing, and personal selling, to
accomplish marketing objectives.
3.4
Promotion Mix Elements
The four major elements of the promotion mix are advertising, personal
selling, sales promotion and publicity. All four elements may be used to
promote some products, but only two or three may be used for others.
3.4.1
Advertising:
Advertising is a paid form of non-personal
communication about an organization, its products, or its activities that is
transmitted through a mass medium to a target audience. The mass medium
could be television, radio, newspapers, magazines, direct mail, signs on mass
transit vehicles, outdoor displays, handbills, catalogues or directories.
Advertising gives marketers the flexibility to reach an extremely large target
audience or to focus on a smaller, precisely defined segment of the
population.
Advertising is an extremely cost-efficient promotional method because it can
reach a large number of people at a low cost per person. Advertising enables
the user to transmit a message a number of times. In addition, the visibility
that an organization gains from advertising can be used to enhance its public
image.
Advertising has several drawbacks. Even though the cost per person reached
may be low, the absolute dollar outlay can be extremely high. Organizations
like Procter & Gamble, Coca-Cola, 3M and IBM may spend millions of
dollars to advertise a single product. These high costs can limit, and
sometimes eliminate, advertising as an element of the promotion mix.
Feedback from advertising is generally slow, if it occurs at all, and
measurement of the effect of advertising on sales is difficult. Finally,
advertising normally has less persuasive power over customers than other
forms of promotion, such as personal selling.
3.4.2
Personal Selling: Face-to-face communication with potential buyers
to inform them about and persuade them to buy an organization’s product is
called personal selling. A real estate agent uses personal selling when he or
she shows a house and tries to persuade the prospective home owner to
purchase it. Because of its one-on-one nature, personal-selling can be much
more persuasive than advertising. In addition, personal-selling can be much
more persuasive than advertising. In addition, personal-selling efforts
generate immediate feedback, enabling the salesperson to adjust the message
in response to customers’ needs for information. However, because personal
selling is communication with only one or a few individuals, it costs
considerably more than advertising, which reaches a much larger audience.
Virtually everyone in the organization is involved in varying degrees in
personal selling. From the president of a bank to the tellers, or from the CEO
of a large manufacturing organization to the assembly-line workers,
members of the organization must sell others both inside and outside on the
organization’s mission, people and products. Although a sales person may be
responsible for making the actual calls on customers, other members of the
organization must also be committed to sales.
3.4.3
Sales Promotion: Sales promotion is an activity or material that
offers consumers, salespersons, or resellers a direct inducement for
purchasing a product. This inducement, which adds value to or incentive for
the product, might take the form of a coupon, sweepstakes, refund,
demonstration or display. Some firms even give away free samples as an
inducement to purchase a product. The term sales promotion should not be
confused with promotion; sales promotion is only one aspect of the larger
area of promotion, which also includes advertising, personal selling and
publicity
Sales promotion techniques are gaining popularity among consumers.
Organizations often make use of sales promotions to reinforce the
effectiveness of other ingredients of the promotion mix, especially
advertising and personal selling. Sales promotion can be used as the primary
promotion vehicle, although such use is unusual. In contrast to advertising
and personal selling, which are generally used on a continuous or cyclical
basis, sales promotion devices get more irregular use. Often they are
designed to produce immediate, short-term increases.
3.4.4
Publicity:
Publicity
is
a
non-paid
form
of
non-personal
communication about an organization or its products that is transmitted
through a mass medium in the form of a news story. Examples of publicity
include magazine, newspaper, radio and TV News stories about new retail
stores or products, a firm’s personnel changes or special activities. Publicity
differs from the other elements of the promotion mix in that it does not
directly facilitate exchanges instead, its purpose is to provide information to
the general public and to create and maintain a favourable public image of
the organization.
Although an organization does not pay for the transmission of publicity
messages, publicity should not be viewed as free communication. Companies
spend millions of dollars each year preparing news releases and encouraging
media personnel to broadcast or print them.
3.5. Factors Affecting the Composition of a Promotion Mix
Many factors affect the composition of the promotion mix, including the
organization’s promotional objective and policies, the organization
promotional budget, the characteristics of the target market, the
characteristics of the product and the cost and availability of promotional
methods.
When dividing on the composition of a promotion mix, marketing managers
must also decide whether to use PUSH POLICY or PULL POLICY. With a
Push Policy, the marketer promotes the product only to the next member
down in the marketing channel. In a consumer marketing channel with
wholesalers and retailers, the producer focuses its promotion efforts on the
wholesaler, who is the member below the producer in the marketing channel.
Each channel member, in turn, promotes or pushes the product down through
the marketing channel. Marketers employing a push policy generally focus
on personal-selling efforts, although sales promotion and advertising may be
used in conjunction with personal selling to push the products down through
the channel.
By contrast, a business using a pull policy promotes its product directly to
consumers to stimulate strong consumer demand for the product. When
consumers learn, through promotional activities, about a product that they
believe will satisfy their needs and wants, they ask for the product in retail
stores. To satisfy customers’ demand, retailers in turn try to purchase the
product from the producer or wholesalers. A pull policy is therefore intended
to ‘pull’ products down through the marketing channel by stimulating
demand at the consumer level. To stimulate strong consumer demand, a
marketer focuses promotional efforts on intensive advertising and
sometimes, on sales promotion. Many pharmaceutical companies use a pull
policy, advertising directly to consumers and encouraging them to ask their
doctors about certain prescription drugs.
Some producers attempt to balance push and pull strategies. In other words,
they use promotion to encourage retailers to stock the product (push strategy)
and to induce customers to purchase the product (pull strategy). Today, a
greater proportion of promotional dollars is spent on incentives aimed at
wholesalers and retailers.
3.6
Promotional Budget: The resources available limit how much an
organization can spend on promotion. A company with a very small
promotional budget will probably rely on personal selling because it is easier
to measure a sales person’s contribution to sales than to measure the
contribution of advertising or publicity. To implement regional or national
advertising and sales promotion activities, a business must have a
considerable promotional budget.
Several methods are used to establish the promotional budget. Some firms,
especially small firms with limited resources, simply use all available funds.
This practice often results in an inadequate budget, because firms set the
promotional budget only after meeting all other obligations and the budget is
not related to the firm’s promotional objectives. Many firms use the
percentage of sales method; the promotional budget is based on a percentage
of the previous year’s sales or the next year’s forecast sales. This method is
somewhat rigid and can lead to over-spending when sales are high and
understanding when sales fall.
The competition-matching approach involves following the action of major
competitors in establishing the promotional budget. This approach assumes
that competitors are correct and that their decisions are also good for a firm.
Another method for determining the promotional budget is the objective and
task approach. This involves determining the tasks required to achieve the
promotional objective and allocating the budget needed to perform these
tasks. The objective and task approach is very effective because managers
can accurately identify the tasks needed to accomplish the objectives.
Because the budgeting decision is so difficult, some managers use an
arbitrary approach and spend what they think is needed. However, setting a
budget arbitrarily can be very dangerous, even for experienced managers.
Some organizations, especially having small business, have a limited
promotional budget. There are several inexpensive techniques these
organizations can use and still stay within budget constraints, including
networking with civic, business and trade associations; co-sponsoring a
contest or event with another firm to share promotional costs; showcasing a
business by sponsoring a Chamber of Commerce meeting at the place of
business, such as a restaurant; making an employee who is an expert in a
field write a newspaper column or give talks or organize workshops in his
area of expertise; or, if the business is unique, persuading the local news
media to do a feature story. Even though promotion is expensive, small
organizations as well as larger ones can take advantage of low-cost
promotion activities by being aggressive and creative.
3.7
Target Market Characteristics: Other factors which help to
determine the composition of a promotion mix are the characteristics of an
organization’s target market, such as size, geographic distribution and
demographics. If an organization’s target market is quite small, its promotion
mix will emphasise personal selling because this is an efficient means of
communicating with small numbers of people. Conversely, when a target
market includes millions of consumers, the promotion mix will probably
stress advertising and sales promotion because these methods can reach large
numbers of people at a low cost per person.
When a company’s customers are concentrated in a small area, personal
selling is more practical than when customers are dispersed across a vast
geographic region. In the latter case, advertising may be a more efficient
means of reaching numerous and widely dispersed customers.
Product Characteristics: The characteristics of the product affect the blend
of elements in the promotion mix. Personal selling plays a major role in
promoting organizational products, but advertising is used heavily to
promote consumer goods, consumer convenience products are generally
promoted through national advertising and sales promotion; personal selling
is used extensively for consumer durables such as home appliances
automobiles and houses. Publicity is a component of promotion mix for both
organizational and consumer goods.
Manufacturers of highly seasonal products, such as Toys, Christmas
Thanksgiving and Valentine’s Day cards, Gifts etc. generally rely on
advertising and perhaps, sales promotion because off-season sales of these
products are not sufficient to support an extensive year-round sales force.
Toy producers have sales forces to sell to resellers, yet most depend heavily
on advertisements to promote their products.
Service firms also rely heavily on advertising and personal selling to
promote their products. As we mentioned earlier, personal selling is critical
for services, because many times the sales people represent the service. Sales
promotion is somewhat more difficult to implement for services because of
their intangible nature; however, premiums such as calendars and coffee
mugs can be used to promote service providers like hospitals, dry cleaners,
funeral homes and so on. Service firms often rely more heavily on publicity
than do firms marketing goods. Non-profit organizations also rely heavily on
publicity, as well as on advertising and personal selling and not so much on
sales promotion.
The price of a product also has an impact on the composition of the
promotion mix. High-priced products like automobiles and major appliances
require personal-selling efforts, as well as advertising, because consumers
associate greater risk with the purchase of an expensive product and
therefore expect information and advice from a knowledgeable sales person.
For this reason, most consumers would be reluctant to purchase an expensive
refrigerator from a self-service establishment. On the other hand, advertising
is more practical than personal selling at the retail level for low-priced
convenience goods such as milk, flour, soft drinks and newspapers. The
profit margins on many of these items are too low to justify the use of sales
people and most customers do not need, or even want, advice from sales
personnel when making such routine purchases.
3.8
Cost and Availability of Promotional Methods: The costs of
promotional
methods
are
certainly
important
considerations
when
developing a promotion mix. National advertising and sales promotion
efforts require large expenditure even though the cost per individual reached
may be quite low. Because of budget constraints, many small organizations
restrict their promotion mix to advertising through local newspapers,
magazines, radio and television stations and outdoor displays.
Availability of promotional techniques is another factor that marketers must
explore when formulating a promotion mix. A company may discover that
no available advertising media are effective in reaching a certain market.
Finding an appropriate medium may be especially difficult when marketers
try to advertise in foreign countries. Some media, such as television, are
simply not available or not in widespread use. Other media that are available
may be restricted in the types of advertisements they can run. For example,
in Spain, marketers cannot advertise tobacco and alcohol products (with the
exception of beer and wine) on television; in Germany, marketers are
prohibited from appealing to children in advertisements. In the United States,
some state laws prohibit the use of certain types of sales promotion activities
such as contests.
3.9 Summary

Marketing mix is the set of marketing tools that the firm uses to pursue
its marketing objectives in the target market.

The marketing mix consists of four elements: product, price, promotion
and place.

There are two essentials of successful marketing: Product and Market

A product life cycle has four stages: Introduction; Growth; Maturity;
Decline.

Product differentiation occurs when, in the eyes of customers, one firm
distinguishes its product from competitive brands offered in the same
aggregate market.

Branding refers to decisions about names, including brands, brand
names, brand marks and trademarks.

Packaging is the development of a container and a graphic design for a
product.

Of all the marketing mix variables, price is probably the most flexible.

Organizations can adjust prices much more easily than they can
modify the product, change the promotional program or redesign the
distribution systems.

Marketers must consider a few factors in making their pricing
decision. They are:
1. Buyers’ expectations
2. Marketing mix variables
3. Competitive Structure
4. Costs
3.10
Keywords
Promotion
Promotion Mix
Advertising
Personal-Selling
Sales Promotion
Publicity
Pull Policy
Promotional Budget
3.11 Exercises
1. What do you mean by promotion mix? Explain.
2. What are the factors affecting the composition of a promotion mix?
3. Explain different elements of Promotion Mix.
Unit 4
Pricing Strategy
Unit 4
4.1
Objectives
4.2
Introduction
4.3
Pricing
4.4
The Price/Quality Relationship
4.5
Pricing Strategy
4.6
Factors to be considered in the pricing decision
4.6.1
Buyers’ Expectation
4.6.2
Marketing Mix Variables
4.6.3
Competitive Structure
4.6.7
Costs
4.7
Pricing Policy
4.8
Summary
4.9
Keywords
4.10
Exercise
4.1
Objectives
In this unit we deal with
 Pricing Product Mix Of Marketing Mix
 Marketing Strategy
 Pricing Policy
4.2
Introduction
Pricing is one of the four Ps of the marketing mix. The other three aspects
are product, promotion, and place. It is also a key variable in microeconomic
price allocation theory. Price is the only revenue generating element amongst
the 4ps, the rest being cost centers. Pricing is the manual or automatic
process of applying prices to purchase and sales orders, based on factors
such as: a fixed amount, quantity break, promotion or sales campaign,
specific vendor quote, price prevailing on entry, shipment or invoice date,
combination of multiple orders or lines, and many others. Automated
systems require more setup and maintenance but may prevent pricing errors.
4.3
Pricing
Pricing is the process of determining what a company will receive in
exchange for its products. Pricing factors are manufacturing cost, market
place, competition, market condition, Quality of product. The effective
price is the price the company receives after accounting for discounts,
promotions, and other incentives.
Price lining is the use of a limited number of prices for all your product
offerings. This is a tradition started in the old five and dime stores in which
everything cost either 5 or 10 cents. Its underlying rationale is that these
amounts are seen as suitable price points for a whole range of products by
prospective customers. It has the advantage of ease of administering, but
the disadvantage of inflexibility, particularly in times of inflation or unstable
prices. A loss leader is a product that has a price set below the operating
margin. This results in a loss to the enterprise on that particular item, but
this is done in the hope that it will draw customers into the store and that
some of those customers will buy other, higher margin items. Promotional
pricing refers to an instance where pricing is the key element of the
marketing mix.
4.4
The price/quality relationship refers to the perception by most
consumers that a relatively high price is a sign of good quality. The belief in
this relationship is most important with complex products that are hard to
test, and experiential products that cannot be tested until used (such as
most services). The greater the uncertainty surrounding a product, the
more consumers depend on the price/quality hypothesis and the more of a
premium they are prepared to pay. The classic example of this is the pricing
of the snack cake Twinkies, which were perceived as low quality when the
price was lowered. Note, however, that excessive reliance on the
price/quantity relationship by consumers may lead to the raising of prices
on all products and services, even those of low quality, which in turn causes
the price/quality relationship to no longer apply.
Premium pricing (also called prestige pricing) is the strategy of consistently
pricing at, or near, the high end of the possible price range to help attract
status-conscious consumers. A few examples of companies which partake in
premium pricing in the marketplace include Rolex and Bentley. People will
buy a premium priced product because:
1. They believe the high price is an indication of good quality;
2. They believe it to be a sign of self worth - "They are worth it" - It
authenticates their success and status - It is a signal to others that
they are a member of an exclusive group;
3. They require flawless performance in this application - The cost of
product malfunction is too high to buy anything but the best example: heart pacemaker.
The term Goldilocks pricing is commonly used to describe the practice of
providing a "gold-plated" version of a product at a premium price in order
to make the next-lower priced option look more reasonably priced; for
example, encouraging customers to see business-class airline seats as good
value for money by offering an even higher priced first-class option.
Similarly, third-class railway carriages in Victorian England are said to have
been built without windows, not so much to punish third-class customers
(for which there was no economic incentive), as to motivate those who
could afford second-class seats to pay for them instead of taking the
cheaper option.
This is also known as a potential result of price
discrimination.
The name derives from the Goldilocks story, in which Goldilocks chose
neither the hottest nor the coldest porridge, but instead the one that was
"just right". More technically, this form of pricing exploits the general
cognitive bias of aversion to extremes. This practice is known academically
as "framing". By providing three options (i.e. small, medium, and large; first,
business, and coach classes) you can manipulate the consumer into
choosing the middle choice and thus, the middle choice should yield the
most profit to the seller, since it is the most chosen option.
Demand-based pricing is any pricing method that uses consumer demand based on perceived value - as the central element. These include : price
skimming, price discrimination and yield management, price points,
psychological pricing, bundle pricing, penetration pricing, price lining, valuebased pricing, and premium pricing. Pricing factors are manufacturing cost,
market place, competition, market condition, quality of product.
Multidimensional pricing is the pricing of a product or service using
multiple numbers. In this practice, price no longer consists of a single
monetary amount (e.g., sticker price of a car), but rather consists of various
dimensions (e.g., monthly payments, number of payments, and a
downpayment). Research has shown that this practice can significantly
influence consumers' ability to understand and process price information.
4.5 Pricing Strategy
The meaning and importance of price: From a buyer’s perspective, price is
the something of value that a buyer gives up in an exchange. If the value
received is not worth the value given up, consumers may purchase a
substitute product or decide not to purchase the product at all.
Consumers exchange something of value, normally buying power, for
the satisfaction or ability they expect from a product.
Of all the marketing mix variables, price is probably the most flexible.
Organizations can adjust prices much more easily than they can modify
the product change the promotional program or redesign the
distribution systems. Price is also the marketing mix variable that
relates most directly to revenue. Whereas product, promotion and
distribution efforts require expenditure by a firm, the price of a product
determines how much money comes into an organization. Thus prices
affect organization’s profits, which are vital for long-term survival.
Price versus Non-price Competition:
Price competition: An organization that uses price competition focuses on
price as a means of differentiating its products from others and attempts
to match or beat its competitor’s prices. A company using price
competition must be willing and able to change prices frequently and
should be the low-cost producer of the product. To make this strategy
work, the firm must respond quickly and aggressively to competitors
price changes.
Non-price competition:
Non-price competition occurs when a seller focuses on aspects other
than price-such as distinctive product features, service or product
quality, promotion and packaging, to differentiate its products from
competing brands. When using non-price competition
Determining Pricing Objectives
Before a firm can determine the right price for a product, it must
determine the role of price in the marketing mix. A pricing objective is a
general goal that describes what an organization hopes to achieve
through its pricing activities. Pricing objectives should be measurable so
that they can be evaluated. Since they effect decisions in other functional
areas, such as finance and production, they must be consistent with the
organizational mission and objectives. For example, if an organization
wants to provide the highest quality product in the industry, its pricing
objectives must be consistent with this objective.
Survival is the broadest and most fundamental pricing objective.
Organizations can endure short-run losses, internal restructuring and
other difficulties if they are necessary for survival. Because price is
flexible and relatively easy to adjust, companies sometimes cut prices in
order to increase sales volumes to levels that match the organization’s
expenses. For example, several years ago, Continental Airlines
discounted its airfares to a level lower than competitor’s fares rather
than go out of business.
Beyond the obvious objective of survival, there are three major categories of
pricing objectives: Status quo, project and sales. Some firms use a
combination of these objectives when determining the role of price in the
marketing program. Regardless of the pricing objectives pursued, the
objectives must reflect the overall organizational objectives.
Status quo objectives: Some organizations are satisfied with their current
market position and sales. In such cases, status quo objectives can focus on
several dimensions-meeting, competitor’s prices, achieving price stability or
maintaining a favorable public image.
By pursuing status quo objectives, a firm can help stabilize demand for its
products. This reduces the firm’s risk. Conversely, when status objectives are
not pursued, a climate of price competition can develop in an industry. For
example, when several airlines drastically lowered fares in 1992, other
carriers fares cut focus a step further; most competitors then matched the
lower prices. The lack of price stability resulted in reverse price competition
and lost revenues for all the airlines. Status quo pricing objectives can also
diminish the chances of government intervention because stable prices result
in a more favorable public image.
Profit Objectives:
Many firms establish the profit objective of maximizing profits. The major
problem with this specific objective is that it is difficult to measure whether
profit maximization has been achieved and almost impossible to determine
the maximum possible profit. Because of this difficulty, profit objectives are
generally set at levels that owners and top level decision makers view as
“satisfactory”. Project objectives may be stated in terms of actual amounts or
in terms of the percentage of change relative to the profits of a previous
period.
Another profit objective used by industry leaders is the attainment of a
specific rate of return on the firm’s investment. Because large firms establish
their pricing objectives more independently of competition than do smaller
firms, they are in a better position to set target returns. Most pricing
objectives that are based on return on investment (ROI) are achieved by trial
and error because all cost and revenue data required to forecast the return on
investment may not be available at the time prices are set. A major
disadvantage of ROI objectives is that they do not reflect prices of
competitive products or customer perceptions of price.
Some organizations set prices to recover cash as quickly as possible to keep
cash flouring throughout the organization. Understandably, financial
managers want to quickly recover money spent on product development.
Sales objectives: The pricing objective of some companies is to increase
sales volume. This objective is typically expressed as a percentage of sales
over a specified time period. For example, a firm’s pricing objective might
be to boost sales by 10 percent over a one year period.
Another sales objective relates the market share, which are firm’s sales in
relation to total industry sales. Many organizations establish pricing
objectives to maintain or increase market share.
4.6
Factors to be Considered in the Pricing Decision
Marketers must consider many factors in making their pricing decision. They
are:
4.6.1
Buyers’ expectations: When setting prices, an organisation
should consider consumers’ expectations and concerns. Some
consumers are more concerned about the price of a product than
are other consumers. For most products, consumers have a range
of acceptable prices. In some cases, the range is fairly narrow, but
for other product categories there is a wider range. A marketing
manager should try to determine the acceptable range of prices in
the relevant product category and set prices accordingly.
4.6.2
Marketing mix variables: Because the marketing mix variables
are highly inter-related pricing decisions must be made in
conjunction with product, promotion and distribution decisions.
a)
Product Activities: A products price generally influences
consumer demand for it. A high price for instance, may result in
low sales, which in turn may lead to higher production costs per
unit. Conversely low prices may generate higher demand and result
in lower per unit production costs.
b)
Promotion Activities: Promotion is also affected price.
Advertisements often display bargain prices, where as premium
prices are less likely to appear in advertising messages.
c)
Distribution Activities: The price of a product is also related
to its distribution. Premium priced products are often sold in a
limited number of stores, where as lower-priced products in the
same or similar product categories may be sold in numerous stores.
4.6.3
Competitive
Structure:
The
competitive
structure
that
characterizes a particular industry affects a firm’s flexibility in
selling prices. Knowledge of the competitive structure does not
suggest what price an organization should charge for a product,
but it does provide a feasible range of prices that might be
established. Firms must also recognize that too high a price may
encourage other firms to enter the market.
4.6.4
Costs: Costs are certainly a key concern when establishing prices.
A Company may sell its products below cost for a short period of
time to match competition, to improve cash flow or even to
increase market share, but in the long run no organization can
survive by selling products below cost. Some other factors that
might add value to the pricing factors are:

Determine primary and secondary market segments: This helps you
better understand the offering's value to consumers. Segments are
important for positioning and merchandising the offering to ensure
maximized sales at the established price point.

Assess the product's availability and near substitutes: Under pricing
hurts product as much as overpricing does. If the price is too low,
potential customers will think it can't be that good. This is
particularly true for high-end, prestige brands. One client under
priced its subscription product, yielding depressed response and
lower sales. The firm underestimated the uniqueness of its offering,
the number of close substitutes, and the strength of the consumer's
bond with the product. As a result, the client could increase the
price with only limited risk to its customer base. In fact, the initial
increase resulted in more subscribers as the new price was more in
line with its consumer-perceived value.

Survey the market for competitive and similar products: Consider
whether new products, new uses for existing products or new
technologies can compete with or, worse, leapfrog your offering.
Examine all possible ways consumers can acquire your product. I've
worked with companies that only take into account direct
competitors selling through identical channels. Don't limit your
analysis
to
online
distribution
channels.
Competitors may define your price range. In this case, you can price
higher if consumers perceive your product and/or brand is
significantly better; price on parity if your product has better
features; or price lower if your product has relatively similar features
to existing products. An information client faced this situation with a
premium product. Its direct competitors established the price for a
similar offering. As the third player in this segment, its choices were
price parity with an enhanced offering or a lower price with similar
features.

Examine market pricing and economics: A paid, ad-free site should
generate more revenue than a free ad-supported one, for example.
In considering this option, remember to incorporate the cost of
forgone revenue, especially as advertisers find paying customers
more attractive.

To gain additional insight from this analysis, observe consumers
interacting with your product to better understand their connection
to it. This can yield insights into how to package and promote the
offering that can affect on pricing, features, and incentives.

Calculate the internal cost structure and understand how pricing
interacts with the offering: A content client was recommended to
promote its advertising-supported free e-zones to increase readers
to register. The client believed the e-zones had no value as the
content was repurposed from another product, so it didn't advertise
them. Yet the repurposed content was exactly what readers viewed
as a benefit. By undervaluing its offering, the client missed an
opportunity to increase registrations and, hence, advertising
revenues with a product that effectively had no development costs.

Test different price points if possible: This is important if you enter
a new or untapped market, or enhance an offering with consumeroriented benefits. To determine price, MarketingExperiments.com
tested three different price points for a book. It found the highest
price yielded the greatest product revenue. Interestingly, the middle
price yielded greater revenue over time, as it generated more
customers to whom other related products could be marketed.

Monitor the market and your competition continually to reassess
pricing: Market dynamics and new products can influence and
change consumer needs.
Pricing is tricky, as "The Apprentice" contestants learned. Optimally, one
should test to determine the best price and understand long-term goals.
Determine price based on a number of factors. Most important is what
potential customers are willing to pay and their value to your company over
time. You don't want to hear, "You're fired," when it comes to pricing
policies.
4.7 Pricing policy
Crucial to a good marketing is good pricing policy. For the prices you charge
for your products and services will greatly effect your sales volume, profit
levels and among other things the business image. To establish an effective
pricing policy:
1.
Define the pricing objectives: pricing objectives should be closely
tied in with the overall objective and goals of business and
marketing as a result take into consideration what impact your
prices will have on your sales volume, sales revenue, market
share, competitive position, company image and profitability.
2.
Establish a simple yet effective pricing structure taking into
consideration all the business costs.
3.
Choose a pricing strategy to establish a market presence:
4.
Fine tune and adapt your general pricing policy in response to
trends, industry practices and new innovative pricing strategies
to help solidify your competitive the competitive position within
your market place.
The following figure illustrates the factors that influence pricing and factors
that are influenced by the price.
Keeping the above factors in consideration while making fixing the price for
the product or service would enable the organization to have an effective
pricing policy.
4.7
Summary
In this unit we have discussed the concept of pricing and the factors that
influence the pricing of a product or service, price quality relationship, types
of pricing like premium pricing, demand based pricing, multi-dimensional
pricing, pricing strategies, the factors that need to be considered for
determining the pricing of a product and pricing policy. We have seen that
cost demand, competitions, customer perception, profit goals influence the
price factor and price influence the issues like sales volume and revenue,
market share, competitive position, company image and profitability etc.
4.8
Keywords
Pricing
Price lining
price/quality relationship
Premium pricing
Goldilocks pricing
Demand-based pricing
Multidimensional pricing
Pricing Strategy
Price competition
Non-price competition
Status quo objectives
Buyers’ expectations
Marketing mix variables
Product Activities
Promotion Activities
Distribution Activities
Competitive Structure
Costs
Pricing policy
4.9 Exercise
1. Define Pricing and Explain Price Lining.
2. Differentiate premium pricing and demand based pricing.
3. What is pricing strategy?
4. How you will develop pricing strategy?
5. What are the factors to be considered in the pricing decision?
6. What is a pricing policy? What factors influence pricing policy?
7. What are areas that will be affected by pricing policy?
Module 3
Unit 1
Marketing Strategy
Structure
1.1
Objectives
1.2
Introduction
1.3
Porters five force Model
1.3.1
Rivalry
1.3.2
Threat of Substitutes
1.3.3
Buyer Power
1.3.4
Supplier Power
1.3.5
Barriers to Entry/Threat of Entry
1.3.6
Dynamic Nature of Industry Rivalry
1.4
Generic Strategies to Counter the Five Forces
1.5
Criticisms of the Five Force Model
1.6
Value chain Model
1.6.1
The primary value chain activities
1.7
Differentiation and the Value Chain
1.8
Technology and the Value Chain
1.9
Linkages Between Value Chain Activities
1.10
The Value Chain System
1.11
Implication of FFM and VCM on Marketing Strategy
1.12
Summary
1.13
Keywords
1.14
Exercises
1.1 Objectives
After learning this unit you will be able to understand the following:
- Porter’s five force model and value chain model
- The different force and its impact on framing the market strategy
- Factors that form the five forces
- factors that form the VCM
- GAP analysis
- Strategies to counter the Five Forces
1.2 Introduction
Marketing strategy serves as the foundation of a marketing plan. A
marketing plan contains a list of specific actions required to successfully
implement a specific marketing strategy. An example of marketing strategy
is as follows: "Use a low cost product to attract consumers. Once our
organization, via our low cost product, has established a relationship with
consumers, our organization will sell additional, higher-margin products and
services that enhance the consumer's interaction with the low-cost product or
service."
A strategy is different than a tactic. While it is possible to write a tactical
marketing plan without a sound, well-considered strategy, it is not
recommended. Without a sound marketing strategy, a marketing plan has no
foundation. Marketing strategies serve as the fundamental underpinning of
marketing plans designed to reach marketing objectives. It is important that
these objectives have measurable results. A good marketing strategy should
integrate an organization's marketing goals, policies, and action sequences
(tactics) into a cohesive whole. The objective of a marketing strategy is to
provide a foundation from which a tactical plan is developed. This allows the
organization to carry out its mission effectively and efficiently.
To frame an effective marketing strategy the organization has to analyse the
strength, Weakness, Opportunities and Threat (SWOT ) factors and how it
can add value to the business process. Here we adopt Michel Porter’s Five
Force Model and Value Chain Model to analyse the above factors.
1.3 FIVE FORCE MODEL
Porter's five forces analysis is a framework for the industry analysis and
business strategy development developed by Michael E. Porter of Harvard
Business School in 1979. It uses concepts developed in Industrial
Organization (IO) economics to derive five forces which determine the
competitive intensity and therefore attractiveness of a market. Attractiveness
in this context refers to the overall industry profitability. An "unattractive"
industry is one where the combination of forces acts to drive down overall
profitability. A very unattractive industry would be one approaching "pure
competition".
Porter referred to these forces as the micro environment, to contrast it with
the more general term macro environment. They consist of those forces close
to a company that affect its ability to serve its customers and make a profit.
A change in any of the forces normally requires a company to re-assess the
marketplace. The overall industry attractiveness does not imply that every
firm in the industry will return the same profitability. Firms are able to apply
their core competences, business model or network to achieve a profit above
the industry average. A clear example of this is the airline industry. As an
industry, profitability is low and yet individual companies, by applying
unique business models have been able to make a return in excess of the
industry average.
Porter's five force include three forces from 'horizontal' competition: threat
of substitute products, the threat of established rivals, and the threat of new
entrants; and two forces from 'vertical' competition: the bargaining power of
suppliers, bargaining power of customers.
According to Porter, the five forces model should be used at the industry
level; it is not designed to be used at the industry group or industry sector
level. An industry is defined at a lower, more basic level: a market in which
similar or closely related products and/or services are sold to buyers. Firms
that compete in a single industry should develop, at a minimum, one five
forces analysis for its industry. Porter makes clear that for diversified
companies, the first fundamental issue in corporate strategy is the selection
of industries (lines of business) in which the company should compete; and
each line of business should develop its own, industry-specific, five forces
analysis. The average Global 1,000 company competes in approximately 52
industries (lines of business).
This five forces analysis is just one part of the complete Porter strategic
models. The other elements are the value chain and the generic strategies
The model is presented as below.
1.3.1
Rivalry
In the traditional economic model, competition among rival firms drives
profits to zero. But competition is not perfect and firms are not
unsophisticated passive price takers. Rather, firms strive for a competitive
advantage over their rivals. The intensity of rivalry among firms varies
across industries, and strategic analysts are interested in these differences.
Economists measure rivalry by indicators of industry concentration. The
Concentration Ratio (CR) is one such measure. The Bureau of Census
periodically reports the CR for major Standard Industrial Classifications
(SIC's). The CR indicates the percent of market share held by the four largest
firms (CR's for the largest 8, 25, and 50 firms in an industry also are
available). A high concentration ratio indicates that a high concentration of
market share is held by the largest firms - the industry is concentrated. With
only a few firms holding a large market share, the competitive landscape is
less competitive (closer to a monopoly). A low concentration ratio indicates
that the industry is characterized by many rivals, none of which has a
significant market share. These fragmented markets are said to be
competitive. The concentration ratio is not the only available measure; the
trend is to define industries in terms that convey more information than
distribution of market share.
If rivalry among firms in an industry is low, the industry is considered to be
disciplined. This discipline may result from the industry's history of
competition, the role of a leading firm, or informal compliance with a
generally understood code of conduct. Explicit collusion generally is illegal
and not an option; in low-rivalry industries competitive moves must be
constrained informally. However, a maverick firm seeking a competitive
advantage can displace the otherwise disciplined market.
When a rival acts in a way that elicits a counter-response by other firms,
rivalry intensifies. The intensity of rivalry commonly is referred to as being
cutthroat, intense, moderate, or weak, based on the firms' aggressiveness in
attempting to gain an advantage.
In pursuing an advantage over its rivals, a firm can choose from several
competitive moves:

Changing prices - raising or lowering prices to gain a temporary
advantage.

Improving product differentiation - improving features, implementing
innovations in the manufacturing process and in the product itself.

Creatively using channels of distribution - using vertical integration
or using a distribution channel that is novel to the industry. For
example, with high-end jewelry stores reluctant to carry its watches,
Timex moved into drugstores and other non-traditional outlets and
cornered the low to mid-price watch market.

Exploiting relationships with suppliers - for example, from the 1950's
to the 1970's Sears, Roebuck and Co. dominated the retail household
appliance market. Sears set high quality standards and required
suppliers to meet its demands for product specifications and price.
The intensity of rivalry is influenced by the following industry
characteristics:
1. A larger number of firms increases rivalry because more firms must
compete for the same customers and resources. The rivalry intensifies
if the firms have similar market share, leading to a struggle for
market leadership.
2. Slow market growth causes firms to fight for market share. In a
growing market, firms are able to improve revenues simply because
of the expanding market.
3. High fixed costs result in an economy of scale effect that increases
rivalry. When total costs are mostly fixed costs, the firm must
produce near capacity to attain the lowest unit costs. Since the firm
must sell this large quantity of product, high levels of production lead
to a fight for market share and results in increased rivalry.
4. High storage costs or highly perishable products cause a producer
to sell goods as soon as possible. If other producers are attempting to
unload at the same time, competition for customers intensifies.
5. Low switching costs increases rivalry. When a customer can freely
switch from one product to another there is a greater struggle to
capture customers.
6. Low levels of product differentiation is associated with higher
levels of rivalry. Brand identification, on the other hand, tends to
constrain rivalry.
7. Strategic stakes are high when a firm is losing market position or
has potential for great gains. This intensifies rivalry.
8. High exit barriers place a high cost on abandoning the product. The
firm must compete. High exit barriers cause a firm to remain in an
industry, even when the venture is not profitable. A common exit
barrier is asset specificity. When the plant and equipment required for
manufacturing a product is highly specialized, these assets cannot
easily be sold to other buyers in another industry. Litton Industries'
acquisition of Ingalls Shipbuilding facilities illustrates this concept.
Litton was successful in the 1960's with its contracts to build Navy
ships. But when the Vietnam war ended, defense spending declined
and Litton saw a sudden decline in its earnings. As the firm
restructured, divesting from the shipbuilding plant was not feasible
since such a large and highly specialized investment could not be
sold easily, and Litton was forced to stay in a declining shipbuilding
market.
9. A diversity of rivals with different cultures, histories, and
philosophies make an industry unstable. There is greater possibility
for mavericks and for misjudging rival's moves. Rivalry is volatile
and can be intense. The hospital industry, for example, is populated
by hospitals that historically are community or charitable institutions,
by hospitals that are associated with religious organizations or
universities, and by hospitals that are for-profit enterprises. This mix
of philosophies about mission has lead occasionally to fierce local
struggles by hospitals over who will get expensive diagnostic and
therapeutic services. At other times, local hospitals are highly
cooperative with one another on issues such as community disaster
planning.
10. Industry Shakeout: A growing market and the potential for high
profits induces new firms to enter a market and incumbent firms to
increase production. A point is reached where the industry becomes
crowded with competitors, and demand cannot support the new
entrants and the resulting increased supply. The industry may become
crowded if its growth rate slows and the market becomes saturated,
creating a situation of excess capacity with too many goods chasing
too few buyers. A shakeout ensues, with intense competition, price
wars, and company failures.
BCG founder Bruce Henderson generalized this observation as the
Rule of Three and Four: a stable market will not have more than three
significant competitors, and the largest competitor will have no more
than four times the market share of the smallest. If this rule is true, it
implies that:
o
If there is a larger number of competitors, a shakeout is
inevitable
o
Surviving rivals will have to grow faster than the market
o
Eventual losers will have a negative cash flow if they attempt
to grow
o
All except the two largest rivals will be losers
o
The definition of what constitutes the "market" is
strategically important.
Whatever the merits of this rule for stable markets, it is clear that
market stability and changes in supply and demand affect rivalry.
Cyclical demand tends to create cutthroat competition. This is true in
the disposable diaper industry in which demand fluctuates with birth
rates, and in the greeting card industry in which there are more
predictable business cycles.
1.3.2
Threat Of Substitutes
In Porter's model, substitute products refer to products in other industries. To
the economist, a threat of substitutes exists when a product's demand is
affected by the price change of a substitute product. A product's price
elasticity is affected by substitute products - as more substitutes become
available, the demand becomes more elastic since customers have more
alternatives. A close substitute product constrains the ability of firms in an
industry to raise prices.
The competition engendered by a Threat of Substitute comes from products
outside the industry. The price of aluminum beverage cans is constrained by
the price of glass bottles, steel cans, and plastic containers. These containers
are substitutes, yet they are not rivals in the aluminum can industry. To the
manufacturer of automobile tires, tire retreads are a substitute. Today, new
tires are not so expensive that car owners give much consideration to
rethreading old tires. But in the trucking industry new tires are expensive and
tires must be replaced often. In the truck tire market, retreading remains a
viable substitute industry. In the disposable diaper industry, cloth diapers are
a substitute and their prices constrain the price of disposables.
While the threat of substitutes typically impacts an industry through price
competition, there can be other concerns in assessing the threat of
substitutes. Consider the substitutability of different types of TV
transmission: local station transmission to home TV antennas via the airways
versus transmission via cable, satellite, and telephone lines. The new
technologies available and the changing structure of the entertainment media
are contributing to competition among these substitute means of connecting
the home to entertainment. Except in remote areas it is unlikely that cable
TV could compete with free TV from an aerial without the greater diversity
of entertainment that it affords the customer.
1.3.3
Buyer Power
The power of buyers is the impact that customers have on a producing
industry. In general, when buyer power is strong, the relationship to the
producing industry is near to what an economist terms a monopsony - a
market in which there are many suppliers and one buyer. Under such market
conditions, the buyer sets the price. In reality few pure monopsonies exist,
but frequently there is some asymmetry between a producing industry and
buyers. The following tables outline some factors that determine buyer
power.
Buyers are Powerful if:
Example
Buyers are concentrated - there are
DOD
purchases
from
defense
a few buyers with significant market
contractors
share
Buyers
purchase
a
significant
Circuit City and Sears' large retail
proportion of output - distribution of
market
provides
power
over
purchases or if the product is
appliance manufacturers
standardized
Buyers possess a credible backward
Large auto manufacturers' purchases
integration threat - can threaten to
of tires
buy producing firm or rival
Buyers are Weak if:
Producers
Example
threaten
forward Movie-producing companies have
integration - producer can take over integrated
own distribution/retailing
forward
to
acquire
theaters
Significant buyer switching costs products not standardized and buyer IBM's 360 system strategy in the
cannot easily switch to another 1960's
product
Buyers
are
fragmented
(many,
different) - no buyer has any
Most consumer products
particular influence on product or
price
Producers supply critical portions of Intel's
buyers'
input
-
distribution
relationship
of manufacturers
with
PC
purchases
1.3.4
Supplier Power
A producing industry requires raw materials - labor, components, and other
supplies. This requirement leads to buyer-supplier relationships between the
industry and the firms that provide it the raw materials used to create
products. Suppliers, if powerful, can exert an influence on the producing
industry, such as selling raw materials at a high price to capture some of the
industry's profits. The following tables outline some factors that determine
supplier power.
Suppliers are Powerful if:
Example
Baxter International, manufacturer
Credible forward integration threat of
by suppliers
hospital
American
distributor
supplies,
Hospital
acquired
Supply,
a
Drug
industry's
relationship
to
Suppliers concentrated
hospitals
Microsoft's relationship with PC
Significant cost to switch suppliers
manufacturers
Boycott of grocery stores selling nonCustomers Powerful
union picked grapes
Suppliers are Weak if:
Many
competitive
Example
suppliers
- Tire
industry
relationship
product is standardized
automobile manufacturers
Purchase commodity products
Grocery store brand label products
to
Credible backward integration threat Timber producers relationship to
by purchasers
paper companies
Garment industry relationship to
Concentrated purchasers
major department stores
Customers Weak
1.3.5
Travel agents' relationship to airlines
Barriers to Entry / Threat of Entry
It is not only incumbent rivals that pose a threat to firms in an industry; the
possibility that new firms may enter the industry also affects competition. In
theory, any firm should be able to enter and exit a market, and if free entry
and exit exists, then profits always should be nominal. In reality, however,
industries possess characteristics that protect the high profit levels of firms in
the market and inhibit additional rivals from entering the market. These are
barriers to entry.
Barriers to entry are more than the normal equilibrium adjustments that
markets typically make. For example, when industry profits increase, we
would expect additional firms to enter the market to take advantage of the
high profit levels, over time driving down profits for all firms in the industry.
When profits decrease, we would expect some firms to exit the market thus
restoring a market equilibrium. Falling prices, or the expectation that future
prices will fall, deters rivals from entering a market. Firms also may be
reluctant to enter markets that are extremely uncertain, especially if entering
involves expensive start-up costs. These are normal accommodations to
market conditions. But if firms individually (collective action would be
illegal collusion) keep prices artificially low as a strategy to prevent potential
entrants from entering the market, such entry-deterring pricing establishes
a barrier.
Barriers to entry are unique industry characteristics that define the industry.
Barriers reduce the rate of entry of new firms, thus maintaining a level of
profits for those already in the industry. From a strategic perspective, barriers
can be created or exploited to enhance a firm's competitive advantage.
Barriers to entry arise from several sources:
1. Government creates barriers: Although the principal role of the
government in a market is to preserve competition through anti-trust
actions, government also restricts competition through the granting of
monopolies and through regulation. Industries such as utilities are
considered natural monopolies because it has been more efficient to
have one electric company provide power to a locality than to permit
many electric companies to compete in a local market. To restrain
utilities from exploiting this advantage, government permits a
monopoly, but regulates the industry. Illustrative of this kind of
barrier to entry is the local cable company. The franchise to a cable
provider may be granted by competitive bidding, but once the
franchise is awarded by a community a monopoly is created. Local
governments were not effective in monitoring price gouging by cable
operators, so the federal government has enacted legislation to review
and restrict prices.
The regulatory authority of the government in restricting competition
is historically evident in the banking industry. Until the 1970's, the
markets that banks could enter were limited by state governments. As
a result, most banks were local commercial and retail banking
facilities. Banks competed through strategies that emphasized simple
marketing devices such as awarding toasters to new customers for
opening a checking account. When banks were deregulated, banks
were permitted to cross state boundaries and expand their markets.
Deregulation of banks intensified rivalry and created uncertainty for
banks as they attempted to maintain market share. In the late 1970's,
the strategy of banks shifted from simple marketing tactics to mergers
and geographic expansion as rivals attempted to expand markets.
2. Patents and proprietary knowledge serve to restrict entry into an
industry: Ideas and knowledge that provide competitive advantages
are treated as private property when patented, preventing others from
using the knowledge and thus creating a barrier to entry. Edwin Land
introduced the Polaroid camera in 1947 and held a monopoly in the
instant photography industry. In 1975, Kodak attempted to enter the
instant camera market and sold a comparable camera. Polaroid sued
for patent infringement and won, keeping Kodak out of the instant
camera industry.
3. Asset specificity inhibits entry into an industry: Asset specificity
is the extent to which the firm's assets can be utilized to produce a
different product. When an industry requires highly specialized
technology or plants and equipment, potential entrants are reluctant to
commit to acquiring specialized assets that cannot be sold or
converted into other uses if the venture fails. Asset specificity
provides a barrier to entry for two reasons: First, when firms already
hold specialized assets they fiercely resist efforts by others from
taking their market share. New entrants can anticipate aggressive
rivalry. For example, Kodak had much capital invested in its
photographic equipment business and aggressively resisted efforts by
Fuji to intrude in its market. These assets are both large and industry
specific. The second reason is that potential entrants are reluctant to
make investments in highly specialized assets.
4. Organizational (Internal) Economies of Scale: The most cost
efficient level of production is termed Minimum Efficient Scale
(MES). This is the point at which unit costs for production are at
minimum - i.e., the most cost efficient level of production. If MES
for firms in an industry is known, then we can determine the amount
of market share necessary for low cost entry or cost parity with rivals.
For example, in long distance communications roughly 10% of the
market is necessary for MES. If sales for a long distance operator fail
to reach 10% of the market, the firm is not competitive.
The existence of such an economy of scale creates a barrier to entry.
The greater the difference between industry MES and entry unit
costs, the greater the barrier to entry. So industries with high MES
deter entry of small, start-up businesses. To operate at less than MES
there must be a consideration that permits the firm to sell at a
premium price - such as product differentiation or local monopoly.
Barriers to exit work similarly to barriers to entry. Exit barriers limit the
ability of a firm to leave the market and can exacerbate rivalry - unable to
leave the industry, a firm must compete. Some of an industry's entry and exit
barriers can be summarized as follows:
Easy to Enter if there is:
Difficult to Enter if there is:

Common technology

Little brand franchise

Access
to
distribution
channels


how

Difficulty in brand switching

Restricted
Low scale threshold
distribution
channels

Easy to Exit if there are:
Patented or proprietary know-
High scale threshold
Difficult to Exit if there are:

Salable assets

Specialized assets

Low exit costs

High exit costs

1.3.6
Independent businesses

Interrelated businesses
Dynamic Nature Of Industry Rivalry
Our descriptive and analytic models of industry tend to examine the industry
at a given state. The nature and fascination of business is that it is not static.
While we are prone to generalize, for example, list GM, Ford, and Chrysler
as the "Big 3" and assume their dominance, we also have seen the
automobile
industry
change.
Currently,
the
entertainment
and
communications industries are in flux. Phone companies, computer firms,
and entertainment are merging and forming strategic alliances that re-map
the information terrain. Schumpeter and, more recently, Porter have
attempted to move the understanding of industry competition from a static
economic or industry organization model to an emphasis on the
interdependence of forces as dynamic, or punctuated equilibrium, as Porter
terms it.
In Schumpeter's and Porter's view the dynamism of markets is driven by
innovation. We can envision these forces at work as we examine the
following changes:
1.4 Generic Strategies To Counter The Five Forces
Strategy can be formulated on three levels:

corporate level

business unit level

functional or departmental level.
The business unit level is the primary context of industry rivalry. Michael
Porter identified three generic strategies (cost leadership, differentiation, and
focus) that can be implemented at the business unit level to create a
competitive advantage. The proper generic strategy will position the firm to
leverage its strengths and defend against the adverse effects of the five
forces.
1.5 Criticisms of the 5 Force model
Porter's framework has been challenged by other academics and strategists
such as Stewart Neill, also the likes of Kevin P. Coyne and Somu
Subramanian have stated that three dubious assumptions underlie the five
forces:

That buyers, competitors, and suppliers are unrelated and do not
interact and collude.

That the source of value is structural advantage (creating barriers to
entry).

That uncertainty is low, allowing participants in a market to plan for
and respond to competitive behavior.
1.6 Value Chain Model
To better understand the activities through which a firm develops a
competitive advantage and creates shareholder value, it is useful to separate
the business system into a series of value-generating activities referred to as
the value chain. In his 1985 book Competitive Advantage, Michael Porter
introduced a generic value chain model that comprises a sequence of
activities found to be common to a wide range of firms. Porter identified
primary and support activities as shown in the following diagram:
Porter's Generic Value Chain
M
A
Marketing
Inbound
Outbound
R
> Operations >
> &
> Service >
Logistics
Logistics
G
Sales
I
N
Firm
Infrastructure
HR
Management
Technology
Development
Procurement
The goal of these activities is to offer the customer a level of value that
exceeds the cost of the activities, thereby resulting in a profit margin.
1.6.1 The primary value chain activities are:

Inbound Logistics: the receiving and warehousing of raw materials,
and their distribution to manufacturing as they are required.

Operations: the processes of transforming inputs into finished
products and services.

Outbound Logistics: the warehousing and distribution of finished
goods.

Marketing & Sales: the identification of customer needs and the
generation of sales.

Service: the support of customers after the products and services are
sold to them.
These primary activities are supported by:

The infrastructure of the firm: organizational structure, control
systems, company culture, etc.

Human resource management: employee recruiting, hiring, training,
development, and compensation.

Technology development: technologies to support value-creating
activities.

Procurement: purchasing inputs such as materials, supplies, and
equipment.
The firm's margin or profit then depends on its effectiveness in performing
these activities efficiently, so that the amount that the customer is willing to
pay for the products exceeds the cost of the activities in the value chain. It is
in these activities that a firm has the opportunity to generate superior value.
A competitive advantage may be achieved by reconfiguring the value chain
to provide lower cost or better differentiation.
The value chain model is a useful analysis tool for defining a firm's core
competencies and the activities in which it can pursue a competitive
advantage as follows:

Cost advantage: by better understanding costs and squeezing them
out of the value-adding activities.

Differentiation: by focusing on those activities associated with core
competencies and capabilities in order to perform them better than do
competitors.
Cost Advantage and the Value Chain
A firm may create a cost advantage either by reducing the cost of individual
value chain activities or by reconfiguring the value chain.
Once the value chain is defined, a cost analysis can be performed by
assigning costs to the value chain activities. The costs obtained from the
accounting report may need to be modified in order to allocate them properly
to the value creating activities.
Porter identified 10 cost drivers related to value chain activities:

Economies of scale

Learning

Capacity utilization

Linkages among activities

Interrelationships among business units

Degree of vertical integration

Timing of market entry

Firm's policy of cost or differentiation

Geographic location

Institutional factors (regulation, union activity, taxes, etc.)
A firm develops a cost advantage by controlling these drivers better than do
the competitors.
A cost advantage also can be pursued by reconfiguring the value chain.
Reconfiguration means structural changes such a new production process,
new distribution channels, or a different sales approach. For example, FedEx
structurally redefined express freight service by acquiring its own planes and
implementing a hub and spoke system.
1.7 Differentiation and the Value Chain
A differentiation advantage can arise from any part of the value chain. For
example, procurement of inputs that are unique and not widely available to
competitors can create differentiation, as can distribution channels that offer
high service levels.
Differentiation stems from uniqueness. A differentiation advantage may be
achieved either by changing individual value chain activities to increase
uniqueness in the final product or by reconfiguring the value chain.
Porter identified several drivers of uniqueness:

Policies and decisions

Linkages among activities

Timing

Location

Interrelationships

Learning

Integration

Scale (e.g. better service as a result of large scale)

Institutional factors
Many of these also serve as cost drivers. Differentiation often results in
greater costs, resulting in tradeoffs between cost and differentiation.
There are several ways in which a firm can reconfigure its value chain in
order to create uniqueness. It can forward integrate in order to perform
functions that once were performed by its customers. It can backward
integrate in order to have more control over its inputs. It may implement new
process technologies or utilize new distribution channels. Ultimately, the
firm may need to be creative in order to develop a novel value chain
configuration that increases product differentiation.
1.8 Technology and the Value Chain
Because technology is employed to some degree in every value creating
activity, changes in technology can impact competitive advantage by
incrementally changing the activities themselves or by making possible new
configurations of the value chain.
Various technologies are used in both primary value activities and support
activities:

Inbound Logistics Technologies
o
Transportation
o
Material handling
o
Material storage
o
Communications


o
Testing
o
Information systems
Operations Technologies
o
Process
o
Materials
o
Machine tools
o
Material handling
o
Packaging
o
Maintenance
o
Testing
o
Building design & operation
o
Information systems
Outbound Logistics Technologies
o
Transportation
o
Material handling
o
Packaging
o
Communications
o
Information systems


Marketing & Sales Technologies
o
Media
o
Audio/video
o
Communications
o
Information systems
Service Technologies
o
Testing
o
Communications
o
Information systems
Note that many of these technologies are used across the value chain. For
example, information systems are seen in every activity. Similar
technologies are used in support activities. In addition, technologies related
to training, computer-aided design, and software development frequently are
employed in support activities.
To the extent that these technologies affect cost drivers or uniqueness, they
can lead to a competitive advantage.
1.9 Linkages Between Value Chain Activities
Value chain activities are not isolated from one another. Rather, one value
chain activity often affects the cost or performance of other ones. Linkages
may exist between primary activities and also between primary and support
activities.
Consider the case in which the design of a product is changed in order to
reduce manufacturing costs. Suppose that inadvertently the new product
design results in increased service costs; the cost reduction could be less than
anticipated and even worse, there could be a net cost increase.
Sometimes however, the firm may be able to reduce cost in one activity and
consequently enjoy a cost reduction in another, such as when a design
change simultaneously reduces manufacturing costs and improves reliability
so that the service costs also are reduced. Through such improvements the
firm has the potential to develop a competitive advantage.
Analyzing Business Unit Interrelationships
Interrelationships among business units form the basis for a horizontal
strategy. Such business unit interrelationships can be identified by a value
chain analysis.
Tangible interrelationships offer direct opportunities to create a synergy
among business units. For example, if multiple business units require a
particular raw material, the procurement of that material can be shared
among the business units. This sharing of the procurement activity can result
in cost reduction. Such interrelationships may exist simultaneously in
multiple value chain activities.
Unfortunately, attempts to achieve synergy from the interrelationships
among different business units often fall short of expectations due to
unanticipated drawbacks. The cost of coordination, the cost of reduced
flexibility, and organizational practicalities should be analyzed when
devising a strategy to reap the benefits of the synergies.
Outsourcing Value Chain Activities
A firm may specialize in one or more value chain activities and outsource the
rest. The extent to which a firm performs upstream and downstream
activities is described by its degree of vertical integration.
A thorough value chain analysis can illuminate the business system to
facilitate outsourcing decisions. To decide which activities to outsource,
managers must understand the firm's strengths and weaknesses in each
activity, both in terms of cost and ability to differentiate. Managers may
consider the following when selecting activities to outsource:

Whether the activity can be performed cheaper or better by suppliers.

Whether the activity is one of the firm's core competencies from
which stems a cost advantage or product differentiation.

The risk of performing the activity in-house. If the activity relies on
fast-changing technology or the product is sold in a rapidly-changing
market, it may be advantageous to outsource the activity in order to
maintain flexibility and avoid the risk of investing in specialized
assets.

Whether the outsourcing of an activity can result in business process
improvements such as reduced lead time, higher flexibility, reduced
inventory, etc.
1.10
The Value Chain System
A firm's value chain is part of a larger system that includes the value chains
of upstream suppliers and downstream channels and customers. Porter calls
this series of value chains the value system, shown conceptually below:
The Value System
Supplier
...
>
>
Value Chain
Channel
Firm
>
Value Chain
Buyer
>
Value Chain
Value Chain
Linkages exist not only in a firm's value chain, but also between value
chains. While a firm exhibiting a high degree of vertical integration is poised
to better coordinate upstream and downstream activities, a firm having a
lesser degree of vertical integration nonetheless can forge agreements with
suppliers and channel partners to achieve better coordination. For example,
an auto manufacturer may have its suppliers set up facilities in close
proximity in order to minimize transport costs and reduce parts inventories.
Clearly, a firm's success in developing and sustaining a competitive
advantage depends not only on its own value chain, but on its ability to
manage the value system of which it is a part.
1.11
Implication Of FFM And VCM
Both the models facilitate the organization to analyze its internal and
external business environment and fill the gaps identified to frame the
appropriate strategy. Gap analysis is a very useful tool for helping marketing
managers to decide upon marketing strategies and tactics. Again, the simple
tools are the most effective. The two models helps a manager to know where are we now? and where do we want to be? The difference between
the two is the GAP - this is how you are going to get there. Take a look at
the diagram below. The lower line is where you'll be if you do nothing. The
upper line is where you want to be.
What is Gap Analysis?
The next step is to close the gap. Firstly decide whether you view from a
strategic or an operational/tactical perspective. If you are writing strategy,
you will go on to write tactics - see the lesson on marketing plans. The
diagram below uses Ansoff's matrix to bridge the gap using strategies:
Strategic Gap Analysis.
We can close the gap by using tactical approaches. The marketing mix is
ideal for this. So effectively, you modify the mix so that you get to where
you want to be. That is to say you change price or promotion to move from
where you are today (or in fact any or all of the elements of the marketing
mix). This we have discussed in our earlier modules.
Tactical Gap Analysis.
This is how you close the gap by deciding upon strategies and tactics.
1.12
Summary
In this unit we have made an attempt to highlight the importance of Porter’s
model in faming the strategic marketing plan. We have dealt with five force
model which competitive rivalry, threat of new entrant, threat of substitutes,
buyer power of customer, bargaining power of supplier and strategy one can
adopt to counter the five forces.
The value chain model of Porter’s to provide value added services and
exceed the customer expectation. At the end we have also discussed the
implication of Porter’s Model and how does it helps to fill the Gap called
Gap Analysis.
1.13
Keywords
Rivalry
Threat Of Substitutes
Slow market growth
High fixed costs
High storage costs
Low switching costs
High exit barriers
diversity of rivals
Industry Shakeout
Buyer Power
Gap Analysis
Strategic Gap
Tactical Gap
value chain
Supplier Power
1.14
Exercise
1. Explain the importance of
a. Five Force Model
b. Value Chain Model
2. Explain in details the five forces that influence the market strategy
3. Explain the value chain model and how does it helps to meet the
customer expectation and exceed the customer expectation?
4. What are the implication of FFM and VCM?
5. What is Gap Analysis?
6. How the Porter’s Model helps to fill the Gap?
7. What can create entry barriers? Differentiate entry barriers and
substitute threats.
Unit 2
Market Segmentation
Structure:
2.1
Objectives
2.2
Introduction
2.3
Concept of Market Segmentation
2.4
Benefits of Market Segmentation
2.5
Requisites of Effective Segmentation
2.6
Philosophies of Market Segmentation
2.7
Bases for Segmenting Consumer Markets
2.8
Market Segment Selection
2.9
2.1
2.8.1
Single Segment concentration
2.8.2
Selective Segment Specialisation
2.8.3
Market Specialisation
2.8.4
Product Specialisation
2.8.5
Full Coverage
Market Segmentation Strategies
2.9.1
Undifferentiated Marketing
2.9.2
Differentiated Marketing
2.9.3
Concentrated Marketing
2.9.4
Market Coverage Strategy
2.10
Market Positioning
2.11
Summary
2.12
Keywords
2.13
Exercises
Objectives
After studying this unit, you will be able to:

Explain the concepts of market segmentation.

Mention the requisites of effective segmentation.

Explain the benefits of market segmentation.

Describe the market segmentation strategies and positioning.
2.2
Introduction
Market segmentation is the starting step in applying the marketing strategy.
It helps the marketer to fully understand the needs, behaviour and
expectations of the consumers of different segments so that precise and clear
decisions can be taken. It also helps to discover the habits, tastes, preferences
and nature of consumers of different markets in order to harness marketing
opportunities. On the basis of segmentation, the manufacturer can prepare
and follow different marketing programmes for different segments to ensure
effectiveness. This unit deals with the philosophies of market segmentation
and various segmentation strategies in detail.
2.3
Concept of Market Segmentation
Market Segmentation is the process of dividing a potential market into
distinct sub-markets of consumers with common needs and characteristics.
Once segmentation takes place, the marketer targets the identified customer
groups
with
proper
marketing
mix
so
as
to
position
the
product/brand/company as perceived by the target segments.
Market segments are large identifiable groups like customers interested in
printers – Dot-Matrix, Dot-Matrix with LQ, Ink jets, Desk jets and Laser jets.
It is possible that a market creates a niche. Niche is a narrowly defined group
of customers that have a distinct and complex set of needs. Foe example, in a
cycle industry, there might be segments like cycles designed for regular
users, kids, girls and for the purpose of sports, adventure, racing etc. Niche is
created when cycle is required for physique clubs, physically handicapped
with left and right hand working etc. In the niches, there are few or no
competitors and the product might command a premium price.
2.4
Benefits of Market Segmentation
Market segmentation reflects reality in marketing situation. There may be
different demand curves in different market segments. There may be certain
customer needs which are not met. This analysis can yield profits and
prospects for growth. Segmentation ensures higher customer satisfaction and
improves effectiveness of the marketing programme. It offers the following
specific benefits:
1) Understanding the needs of Consumers: It helps the marketer to fully
understand the needs, behaviour and expectations of the consumers of
different segments so that precise and clear decisions can be taken.
2) Better Position to spot marketing opportunities: It helps the marketer
in knowing the habits, tastes, nature etc. of consumers of different
markets to harness marketing opportunities.
3) Allocation of marketing budget: On the basis of segmentation, the
marketing budget is allocated for a particular region or locality. In
regions where the sales opportunities are limited, a huge budget is of no
use and so, budget allocation will be limited and vice versa.
4) Meeting the competition effectively: It helps the producer to face the
competition of his rivals effectively by making a deep study of the
products, policies and strategies of competitors in all the segments,
which helps in adopting different policies, programmes and strategies for
different markets based on rivals strategies, policies and programmes.
5) Effective marketing programmes: On the basis of segmentation, the
manufacturer can prepare and follow different marketing programmes for
different segments to ensure effectiveness.
6) Choosing of advertising media: Segmentation helps in choosing
different media, message and timings for different segments based on the
characteristics of the segments.
7) Increasing sales volume: Segmentation helps the producer to know the
demand pattern of each segment and satisfy it by preparing desired
products. This leads to an increase in overall sales volume of the product.
8) Benefits to the customers: It benefits the customers as producer
produces and supplies goods which serve customers’ interest and satisfy
their needs and wants.
9) Better utilisation of marketing resources: More resources can be
allocated to segments in which there are more possibilities of selling the
products and fewer resources may be allocated to the segments in which
there are fewer possibilities.
10) Specialised marketing: Marketing can be more specialised when there
is segmentation as the elements of marketing mix are specially designed
to suit the characteristics of particular segments.
11) Minimises aggregation risk: By dividing the market and designing
specific marketing mix to each segment, segmentation reduces the risk of
aggregation i.e. the risk of not being able to satisfy customer needs with
one marketing mix to all segments.
12) Provides opportunities to expand market: By segmenting the market,
a marketer is able to create new markets for their products.
13) Encourages innovations: Marketers get benefits in focussing the
relevant segment more closely and look for changes in the market
requirements.
2.5
Requisites of Effective Segmentation
To be useful, segmentation of market must exhibit some characteristics that
are as follows:
1. Measurable and Obtainable: The size, profile and other relevant
characteristics of the segment must be measurable and obtainable in
terms of data. If the information is not obtainable, no segmentation can
be carried out. For example, customers can be segmented on the basis of
their life styles. Though the information is measurable through AIOD
framework, it might not be obtainable because of time limits or
budgetary constraints.
2. Substantial: The segment should be large enough to be profitable. For
consumer markets, the small segment might disproportionably increase
the cost and hence products might be priced too high. This might make
the segment non-profitable. However, for business markets even a single
customer might mean big business. For example, house construction
takes several months. But due to advancement of Information
Technology, CAD and CAM have made it possible to take on even
smaller segments from consumer markets.
3. Accessible: The segment should be accessible through existing network
of people at a cost that is affordable. For example, targeting rural
population could be through Television, Radio, and by opening outlets
locally. It might not be easy to access hilly terrains for actual distribution
of products.
4. Differentiable: The basis of segmentation should be such that it leads to
different segments. For example, if young and old people would not
behave in almost the same way when tempted to eat chips, Ruffle’s Lays
would not have tried the two targets as one by combining the segments.
5. Actionable: The segments which a company wishes to pursue must be
actionable in the sense that there should be sufficient finance, personnel,
and capability to take them all. Hence, depending upon the reach of the
company, the segments should be selected.
6. General Considerations: Apart from the above requisites, the segment
must have growth potential, be profitable, carry no unusual risk, and has
competitors who do not fight directly with the product or brand.
2.6
Philosophies of Market Segmentation
The marketers adopt several approaches to segmenting a market. Fig.2.1.
gives an overview of the approaches:
Product-Variety Marketing
Micro Marketing
Personalised
Marketing
Mass
Target
Customised
Marketing
Marketing
Marketing
Fig. 2.1 The Two Extremes of Segmentation
Philosophies
Based on their capacity (through SWOT Analysis) to compete in the market
where the company can sell its product, segmentation points out the potential
strengths and opportunities for better understanding of the marketers. Rather
than fight against all the competitors, a company might decide to fight a few
or avoid confrontation by creating niches. Everything depends upon the
philosophies of the marketers.
Table 2.1: Approaches to Marketing
1. Mass Marketing
2. Product-Variety Marketing
3. Target Marketing
4. Micro Marketing
5. Customised Marketing
6. Personalised Marketing.
1. Mass Marketing: Before the onset of the marketing age, there was
wide-spread adoption of mass marketing, mass production, distribution
and promotion. That is, offering the same product and applying the same
marketing-mix to all consumers assuming that there is no significant
difference amongst consumers in terms of their needs and wants. The
marketers felt that the consumer differences in education, income,
experience, life-style, etc. did not call for different treatment of
consumers by offering them standardised product without suitable
modifications. The Coca-Cola Company follows this approach. It designs
its marketing program to appeal to all buyers. The Company feels that no
segmentation is necessary. This is undifferentiated marketing strategy.
But if a toothpaste of standard size is offered to a student (living in a
hostel), a nuclear family (having three-to-four persons) and a joint family
(having more than 4 persons), the offered toothpaste might last many
months for a student, some months for a nuclear family, and about a
month for a joint family. There seems to be a need to demassify the
marketing efforts. This type of marketing is well-suited for fruits,
vegetables, Over-The-Counter (OTC) drugs, chocolates, bakery items,
stationery items etc.
2. Product-Variety Marketing: Once it is learnt that consumers would not
accept standard products, the marketer might try to provide different
sizes, colours, shapes, features and qualities to attract them. The product
variety approach satisfies a customer more than standardized model
products. For example, when Maruti 800 was introduced into Indian
roads, it was a variety product (variety compared to Premier Padmini)
because it used two versions Standard and Deluxe with different colours.
This type of philosophy might satisfy a customer for the moment, soon
the customer discovers that the offered product does not fit into different
needs- for sports, family, commercial purposes, long travel and for drive
in hilly areas. The product-variety approach does not call for proper
segmentation of the market. This is carried by the target marketing.
3. Target Marketing: The modern marketing concept starts with the
definition of target markets. The target marketing has its roots in the
marketing age. Target marketing helps the marketer to correctly identify
the markets – the group of customers for whom the product is designed.
Here two alternative approaches can be followed despite the fact that
different customers have different needs: One, to treat the target market
as a single unit – one aggregate market and draft one marketing-mix for
them. This approach is known as the ‘shotgun’ approach. Today, the
shotgun approach works only if different products satisfying different
needs, so far, are combined into one product. Two, the total market is
viewed as consisting of small segments and the consumer differences
necessitate different marketing-mixes for each of them. Based on the
capabilities of a company, the selection of the segments takes place. This
is known as the ‘rifle’ approach – separate marketing programs with
specific targets.
Thus, there might be no market segmentation or complete-market
segmentation depending upon whether short gun approach or rifle approach
is followed.
(See Fig. 2.2)
…………………………………
…………………………………
…………………………………
…………………………………
...
5 a5
b5
c5
d5
e5
f5
a4
b4
c4
d4
e4
f4
Product
4
a3
b3
c3
d3
e3
f3
Qualities
3 a2
b2
c2
d2
e2
f2
a1
b1
c1
d1
e1
f1
(a)
No Market Segmentation
2
a
1
Need Variety
Complete Market
Segmentation
f
(b)
Fig 2.2: Segmentation or No Segmentation
When there is segmentation, different product qualities are available each
satisfying different segment a1 or c3 or f5. The sizes of the potential targets
might be different. For example, in the small car segment, Maruti 800 is
being focused as a ‘family car’, while Fiat Uno is presented as ‘a compact
and complete car’.
An example of Soft Drinks Market suggests wide variations in the segments:
For Health (Limca, Cola Lite), Youthfulness (Campa Orange, Crush, Thumsup, Pepsi, 7-Up), Refreshness (Coke, Mirinda), Fashionable (Gold Spot,
Campa Cola), Exclusivity (Thums-up, Sprint, Canada Dry). Thirst-Quencher
(Citra, Limca, Teem). The target marketing is being changed to micromarketing.
4. Micro-Marketing: Micro-marketing occurs when target market is
further bifurcated and the needs of the small customer groups are
addressed on a local basis. Thus, even though target customer has been
identified in the target marketing some specific modern styles/features
products are made available at select places on a local basis. For
example, Liberty shoes are available in Delhi Metropolitan Area in
different variety depending upon the type of customer, status, and
economic background. The range, style, colour, and design which are
available in Connaught Place showroom or South Extension showroom
are hardly available in Tilak Nagar or Shahdara areas. Similar is the case
with Shyam Garments, Snow White and Haldiram.
5. Customized Marketing: The focus of the target marketing is further
shifting from local basis to individual customer basis. With the
advancement in manufacturing because of breakthrough in information
technology, for example, use of computer-aided design and computer
aided manufacturing, it has now become possible to manufacture a
product as per the individual customer needs or of a buying organization.
Tailors and drapers (for men), boutiques (for females and child), and
beauty parlours all customize products. The Aircraft Industry, the
Building Construction Industry, the Software Industry, the Book
Publishing Industry, and the administration of departments in Delhi
University mostly use customized marketing by promising customerspecific products. Even specialized institutions have been opened up.
ICSI (Company Secretaries). ICWAI (Cost, Accountants), ICAI
(Auditing and Accounting), ICFAI (Financial Accountants), etc. have
taken a serious look at the marketing of their products on the basis of
customer-specific requirements.
6. Personalized Marketing: Mass production, mass production with
product varieties, and target marketing for segments, which are further
divided into customers on a local basis or on individual customer needs,
the focus of the company is shifting more minutely. In case of
customized marketing even if the requirements for a customer are met by
a custom-made product, the customer might not be willing to retain his
loyalty with the company because of competition. For example, one gets
shirts made from a tailor as per personal fitting. Still, tailors find their
customers shifting their loyalty to others. This is because one is taken as
a customer not as a person-customer. This requires philosophy of onesize-fits-one.
Heil, Parker and Stepens provide ten rules for building relationships
with customers:
i) The average customer does not exist.
ii) Make customer’s experience special. Give customer something to
talk about.
iii) If something goes wrong, fix it quickly.
iv) Guarantee customer satisfaction.
v) Trust customer and customer will trust the company.
vi) Customer’s time is as important as company’s.
vii) Don’t take customer for granted.
viii) The details are important to customer, as they should be to the
company.
ix) Employ people who are ready and willing to serve customer.
x) Customer cares to find out whether company is a responsible
corporate citizen.
The customized marketing is likely to be assigned to computers in the years
to come. It is personalized marketing which would find its way in the
corporate marketing philosophy. Thus, the position can be summarized as
follows (See Fig.2 3).
Mass
Marketing
Product-Variety
Marketing
Target
Marketing
Total Makret Mass Marketing
Serve individual
As one segment
Marketing
Customized
Personalized
Marketing
Marketing
Total Market
Serve
one
Serve the
with product
customer needs
Varieties
Micro
different
segment on
person-
segments local basis
customer
needs
2.7
Bases for Segmenting Consumer Markets
The following figure shows the bases used for segmenting consumer
markets.
Bases for segmenting consumer markets
Consumer characteristics
Geographic
Occasions
Attitude
Consumer response
Demographic
Psychographic
Benefits
Loyal Status
Buyer
readiness
User status
usage
stage
rate
Two broad groups of variables are used to segment consumer markets. They
are consumer characteristics and consumer response or behaviour.
Under consumer characteristics there are three main bases for segmentation.
They are:
1) Geographic: This calls for dividing the market into different
geographical units such as nations, states, regions, countries, cities or
neighborhoods. The company can operate in one or a few Geographic
areas or operate in all but pay attention to local variations.
2) Demographic Segmentation: In demographic segmentation the market
is divided into groups on the basis of variable such as age, family size,
family life-cycle, gender, income, occupation, education, religion, race,
generation, nationality and social class. Demographic variables are the
most popular bases for distinguishing customer groups. One reason is
that consumers’ wants, preferences and usage rates are often associated
with demographic variables. Another is that demographic variables are
easier to measure. Even when the target market is described in nondemographic terms, the link back to demographic characteristics is
needed in order to estimate the size of the target market and the media
that should be used to reach it efficiently. Some of the demographic
variables used are :
a) Age and Life-Cycle Stage: Consumers’ wants and abilities change
with age. On the basis of age, a market can be divided into four parts
viz., children, young, adults and old. For consumers of different age
groups, different types of products are produced. For instance,
different types of ready-made garments are produced for consumers
of different age groups. A successful marketing manager should
understand the age group for which the product would be most suited
and determine his marketing policy, pricing policy, advertising policy
etc., accordingly.
b) Gender: Gender segmentation has long been applied in clothing,
hair-styling, cosmetics and magazines. Occasionally, other marketers
notice an opportunity for gender segmentation.
c) Income: Income segmentation is a long-standing practice in such
product and service categories as automobiles, clothing, cosmetics
and travel. However, income does not always predict the best
customers for a given product.
d) Generation: Many researchers are now turning to generation
segmentation. Each generation is profoundly influenced by the times
in which it grows up – the music, movies, politics and events of that
period.
e) Social Class: It has a strong influence on preference in cars, clothing,
home furnishings, leisure activities, reading habits etc. Many
companies design products and services for specific social classes.
3) Psychographic Segmentation: In Psychographic segmentation, buyers
are classified into different groups on the basis of life-style or personality
and values. People within the same demographic group can exhibit very
different psychographic profiles.
a) Life-style: People exhibit different life-styles and goods they
consume express their life-styles. Many companies seek opportunities
in life-style segmentation. But life-style segmentation does not
always work.
b) Personality: Marketers have used personality variables to segment
markets. They endow their products with brand personality that
corresponds to consumer personalities.
c) Values: Some marketers segment by core values, i.e. belief systems
that underlie consumer attitudes and behaviour. Core values go much
deeper than behaviour or attitude and determine, at a basic level,
people’s choices and desires over the long term. Marketers who
segment by values believe that by appealing to people’s inner selves,
it is possible to influence their outer-selves-their purchase behaviour.
Behavioural Segmentation or Consumer Response Segmentation:
In behavioural segmentation, buyers are divided into groups on the basis of
their knowledge or attitude towards the use of, or response to a product.
Some marketers believe that behavioural variables are the best starting points
for constructing market segments.
a) Occasions: According to the occasions, buyers develop a need, purchase
a product or use a product. It can help firms expand product usage. A
company can consider critical life events to see whether they are
accompanied by certain needs.
b) Benefits: Buyers can be classified according to the benefits they seek.
c) User Status: Markets can be segmented into non-users, potential users,
first time users and regular users of a product. Each market segment
requires a different marketing strategy. The company’s market position
will also influence its focus. Market-share leaders will focus on attracting
potential users, whereas smaller firms will try to attract current users
away from the market leader.
d) Usage Rate: Markets can be segmented into light, medium and heavy
product users. Heavy users are often a small percentage of the market but
account for a high percentage of total consumption. Marketers prefer to
attract one heavy user rather than several light users and they vary their
promotional efforts accordingly.
e) Loyal Status: Consumers have varying degrees of loyalty to specific
brands, stores and other entities. Buyers can be divided into four groups
according to brand loyalty status.
a) Hard-core Loyals: Consumers who buy one brand all the time.
b) Split Loyals: Consumers who are loyal to two or three brands.
c) Shifting Loyals: Consumers who shift from one brand to another.
d) Switchers: Consumers who show no loyalty to any brand.
Each market consists of different number of the four types of buyers.
Companies selling in a Brand Loyal market have a hard time, gaining more
market share, while the companies that enter such a market have a hard time
getting in.
A company can identify its product’s strengths by studying its Hard-core
Loyals. By studying its Split Loyals, the company can pinpoint which brands
are most competitive with its own. By looking at customers who are shifting
away from its brand, the company can learn about its marketing weaknesses
and attempt to correct them.
(f) Buyer-Readiness Stage: A market consists of people in different stages
of readiness to buy a product. Some are unaware of the product, some are
aware, some are informed, some are interested, some desire the product
and some intend to buy. The relative number makes a big difference in
designing a marketing program.
(g) Attitude: Five attitude groups can be found in a market. They are
enthusiastic, positive, indifferent, negative and hostile.
2.8
Market Segment Selection
Once a marketer has evaluated the different segments for their size, growth,
and attractiveness and found that they are compatible with the company’s
objectives and resources, the obvious step is to go far selecting the market
segments. Kotler has suggested five patterns of target market selection as
shown in Fig. 2.4
Product
Product
P1
P2
P3
M1 M2 M3 M1 M2 M3
Market
P1
P2
P3
M1 M2 M3
Market
P1
P1
P2
Product
Market
Product
Market
Product
Market
P3
P2
P3
M1 M2 M3
M1 M2 M3
Single Segment
Concentration
Selective
Market
Product
Full
Specialization Specialization Specialization Coverage
Fig. 2.4: Market Segment Selection
2.8.1.
Single Segment Concentration: The marketer prefers to go for
single segment like Pioneer Publications and Allahabad Law Agency for
law books and BPB publications for Computer books. The company can
have strong market position, greater knowledge about segment-specificneeds, specified reputation and probable leadership position. The
concentrated marketing strategy normally provides higher returns and
therefore it is possible that competitors might be attracted to find their
place in segment. For example, Reebok concentrated itself in the sport
shoes market at the premium and in October 1995, there were Nike,
Poum and Adidas in that segment. Within 15 months of its operations,
Reebok had to go for price-cuts of up to 50%. In January 1997, it
officially and permanently slashed prices of footwear by 25-30%. Thus,
concentrated marketing could not help Reebok to gain the market
because of intense competition in the miniscule segment of Rs. 550
crores out of total sports segment of Rs. 1,200 crores branded shoe
market.
2.8.2. Selective Segment Specialisation: This is known as multistage
coverage because different segments are sought to be captured by the
company. For example, Bata shoes were mostly in the popular segment
until beginning of 1990s. Then, it turned itself into premium segment
while still retaining the appeal of popular segment. The taking of select
segments of shoe market could not help Bata to gain full control of
market. After 1995, it has come back again to the popular segment.
2.8.3. Market Specialisation: Here the company takes up a particular
market segment for supplying all relevant products to the target group. For
example, Dhanpat Rai and Co. publishes and sells books covering all
types of customer needs – competition books and text books for schools,
colleges and universities.
2.8.4. Product Specialisation: Product specialisation occurs when a
company sells certain products to several potential customers wherever
they are located. Thus, Super Precision Components supply small nuts and
screws for use in military, industry and daily use. Bajaj Auto has almost
product specialisation in two-wheeler market – Mopeds, Scooterettes,
Scooters, and Motor Cycles. Product specialisation promises strong
recognition of customer within the product areas.
2.8.5. Full Coverage: It is very difficult to serve all segments of the
market. Big companies can go for full market coverage. For example,
Castrol for lubricants, and Coca-Cola for soft drink market follow full
market coverage approach to their product-market matrix. However, Coca-
Cola follows undifferentiated marketing strategy while Castrol follows
differentiated marketing strategy.
2.9
Market Segmentation Strategies
Depending
upon
the
emerging
patterns
of
market
segmentation,
homogeneous preference (showing no natural segments) as in case of soft
drinks sale by Pepsi and Coca-Cola), diffused preference (showing clear
preferences as in case of automobile market), and clustered preference
(market showing natural segments as in case of occupation having impact on
the types of clothes worn), a company chooses its market segmentation
strategy.
2.9.1.
Undifferentiated Marketing: It is a market coverage strategy in
which the company treats the target market as one and does not consider
that there are market segments that exhibit uncommon needs. The
company focuses on the centre of the target market to get maximum
advantage. The feature of ‘one product-all segments’ calls for presenting
one marketing-mix for the target market. For example, the Coca-Cola
Company sells Coke, Limca, Thums-up etc., and does not distinguish the
target audience.
2.9.2.
Differentiated Marketing: It is a market coverage strategy in
which the company goes for proper market segmentation as depicted by
its analysis of the total market. The company, therefore, goes for several
products or several segment approach which calls for preparing different
marketing mixes for each of the market segment. This strategy is
followed by Hindustan Lever Limited which sells different soaps (Life
Buoy, Lux, Rexona, Liril, Pears etc.) and each of them has its own
market. Thus, the company creates segments in the soap market and not
in toiletries market (including soaps, detergents, toothpaste, etc.)
2.9.3.
Concentrated Marketing: It is a market coverage strategy in
which company follows ‘one product-one segment’ principle. The
company tries to position its product in the middle of the segment to
attract maximum clientele. For example, Ashok Leyland produces large
chassis of machine which can be used for buses and trucks. The
manufacturer gets maximum knowledge about the segment’s needs and
therefore acquires special reputation. This strategy can also help the
small company to stand against a large corporation because the small
company can create niches in its one-product one-segment approach by
providing maximum varieties.
2.9.4.
Choosing a Market Coverage Strategy: An overview of the three
market coverage strategies will help to choose one for a particular
company. Table 2 provides a snap-shot view.
Table 2. 2: Comparison of Market Coverage Strategies
Focus
Undifferentiated
Differentiating
Concentrated
Marketing
Marketing
Marketing
Product
One/Few
Many
One/Few
Segment
All
Many
One/Few
Marketing-Mix
One
Many
One/Few
Given the comparison of different coverage strategies, it is easy to locate the
relevant strategies as shown in Table 2.3
Table 2.3: Choosing a Market Coverage Strategy
Constrained
Undifferentiated
Differentiating
Concentrated
Marketing
Marketing
Marketing
More suitable
Least suitable
Most suitable
Most suitable
More suitable
Least suitable
Least suitable
Most suitable
More suitable
Firm Resources
Common usage
Products
Different need
Satisfying products
Given the above table, the firm’s resources and the product’s requirement in
its present form (by all or few) would decide the choice of a particular
market- coverage strategy. Finally, the competitor’s adaptation of a
particular strategy should be considered for deciding company’s own
strategy. For example, Coca-Cola starts segmenting soft drinks market and
targets family, Pepsi cannot ignore it because it would be suicidal for them
(segmentation would provide differentiation of products more easily).
2.10
Market Positioning
Each firm needs to develop a distinctive positioning for its market offering.
Positioning is the act of designing the company’s offering and image to
occupy a distinctive place in the target market’s mind. The end result of
positioning is the successful creation of a market-focused value proposition,
a cogent reason why the target market should buy the product.
Each company must decide how many differences to promote to its target
customers. Many marketers advocate promoting only one central benefit and
Rosser Reeves called it as “a unique selling proposition”. Number one
positioning includes “best quality”, “best service”, “Lowest price”, “best
value”, “safest”, “more advanced technology” etc. If a company hammers
away at one of these positioning and delivers on it, it will probably be best
known and recalled for this strengths.
Not everyone agrees that single-benefit positioning is always best. Doublebenefit positioning may be necessary if two or more firms claim to be best on
the same attribute. There are even cases of successful triple-benefit
positioning.
As the companies increase the number of claims for their brand, they risk
disbelief and a loss of clear positioning. In general, a company must avoid
four major positioning errors.
1) Under positioning: Some companies discover that buyers have only a
vague idea of the brand. The brand is seen as just another entry in a
crowded marketplace.
2) Over-positioning: Buyers may have too narrow image of the brand.
3) Confused Positioning: Buyers might have a confused image of the
brand resulting from the company’s making too many claims or changing
the brand’s positioning too frequently.
4) Doubtful Positioning: Buyers may find it hard to believe the brand
claims in view of the product’s features, price or manufacturer.
Solving the positioning problem enables the company to solve the
marketing-mix problem. Thus seizing the “high-quality position” requires
the firm to produce high quality products, charge a high price, distribute
through high-class dealers and advertise in high-quality magazines.
The different positioning strategies that are available are:
1) Attribute Positioning: A company positions itself on an attribute such
as size or number of years in existence.
2) Benefit Positioning: The product is positioned as the leader in a certain
benefit.
3) Use or Application Positioning: Positioning the product as best for
some use and application.
4) User Positioning: Positioning the product as best for some user group.
5) Competitor Positioning: The product claims to be better in some way
than a named competitor.
6) Product Category Positioning: The product is positioned as the leader
in a certain product category.
7) Quality or Price Positioning: The product is positioned as offering the
best value.
2.11

Summary
Market Segmentation is the process of dividing a potential market into
distinct sub-markets of consumers with common needs and
characteristics.

The size, profile and other relevant characteristics of the segment must
be measurable and obtainable in terms of data.

Before the onset of the marketing age, there was wide-spread adoption
of mass marketing, mass production, distribution and promotion.

Target marketing helps the marketer to correctly identify the markets –
the group of customers for whom the product is designed.

Micro-marketing occurs when target market is further bifurcated and
the needs of the small customer groups are addressed on a local basis.

Buyers can be classified into four groups based on brand loyalty status:
a) ‘Hard-core Loyals’ are those consumers who buy one brand all the
time.
b) ‘Split Loyals’ are those consumers who are loyal to two or three
brands.
c) ‘Shifting Loyals’ are those consumers who shift from one brand to
another.
d) ‘Switchers’ are those consumers who show no loyalty to any brand.

Positioning is the act of designing the company’s offering and image to
occupy a distinctive place in the target market’s mind.
2.12
Keywords
Market Segmentation
Mass Marketing
Product-Variety Marketing
Target Marketing
Micro-Marketing
Customized Marketing
Personalized Marketing
Geographic
Demographic Segmentation
Age and Life-Cycle Stage
Psychographic Segmentation
Behavioral Segmentation
Selective Segment Specialization
Market Specialization
Product Specialization
Full Coverage
Market Segmentation Strategies
Undifferentiated Marketing
Differentiated Marketing
Concentrated Marketing
Market Coverage Strategy
Market Positioning
Over-positioning
Under positioning
Doubtful Positioning
Confused Positioning
2.13
Exercises
1) What do you mean by segmentation? What are its benefits?
2) Discuss the various bases for segmenting consumer markets.
3) Write briefly about the following:
a) Market Positioning
b) Market segmentation strategies
c) Requisites for segmentation
4)
On What base, the consumer market can be segmented?
5)
Explain the philosophy of ‘one size fits one’.
6)
Explain behavioral segmentation or consumer response segmentation.
7)
How you will choose the market coverage strategy?
Force Management
Unit 3
Sales Force Management
Structure:
3.1 Objectives
3.2 Introduction
3.3 Need for Good Salesmen
3.4 Sales Force Decision
3.5 Sales Force Size
3.6 Recruitment and Selection
3.7 Selection Process
3.8 Training
3.9 Advantages of Training to Salesman
3.10 Training Programme
3.11 Training Methods
3.11.1
Group Training
3.11.2
Individual Training
3.12 Summary
3.13 Keywords
3.14 Exercises
3.1. Objectives
After studying this unit you will be able to:

Justify the need for efficient salesmen.

Mention various kinds of tests commonly used in the selection of
salesmen.

Enumerate the advantages of arranging training facilities for salesmen.

State the types of training required for the salesmen of a company.

Explain the procedure involved in the recruitment and selection of
salesmen.

Explain different methods of training.
3.2. Introduction
The word ‘salesmen’ applies to all persons who are engaged in the field of
selling. Formerly, the job of salesman was confined only to selling of
products. But today, the scope of his functions has been widened.
Development, profitability and prosperity of a company greatly depend
upon the salesmen’s function. A successful salesman can satisfy both the
customers and sales management. It is often said, “A good salesman is
born, but not made.” It may be true to a certain extent. There are some
qualities which are inherent. However, one might become a good salesman
through training and experience.
This unit deals with recruitment, selection and training of salesmen who play
a key in marketing.
3.3. Need for Good Salesmen
Personal selling effort is important in pushing the product manufactured.
There are many ways, by which the goods can be pushed into the hands of
consumers-personal selling, advertising, sales promotions, promotional
tools etc. Of these, personal selling has many advantages in reaching the
desired goal. Personal selling is regarded as a key-man. It is an active
striking power. In the modern corporate world, a salesman has to carry out
the following duties:
1. He must acquire the knowledge of the basic needs to be satisfied
through products or services.
2. Prospecting i.e., searching for customers.
3. He provides information to the producer and consumers.
4. He must hold enough stocks to resell.
5. He must arrange for the display of products.
6. He has to maintain the purchase and sales account.
7. He must prepare sales slips.
8. He takes periodic stock inventories.
9. He assists customers in the selection of products.
10. He handles complaints.
In modern marketing, a new type of salesman has come up. He reflects the
market trend by providing feedback to the producer about the customer’s
choice; and to the customers, about the product or changes made in the
product, in accordance with their need, or the suitability of the product.
Thus, it is the main job of the sales management to recruit effective and
efficient personnel to serve the customers and the firm. A salesman must
be prospect-minded and also sales- minded. A born salesman may not
possess all the qualities, which are expected in the salesman of today.
There are doctors, engineers, actors, musicians etc., who are qualified to
excel in their respective field work only after getting trained. In the same
way, even an ordinary salesman can excel himself by acquiring skills through
training. That is to say, both recruits and born men, will improve further
their performance through appropriate training. For instance, when we
visit shops, we may come across sign boards, such as ‘welcome’, ‘please
visit again, ‘thank you’, etc. Salesman may think he has done his duty by
displaying the sign boards or telling the same words. These words become
effective only when they are expressed in the appropriate time and tone.
Otherwise the meaning will be different. When a buyer leaves the firm, if
the salesman says ‘welcome’, it is meaningless. In the same way, if the
salesman says, “Please come again” when a buyer enters into the firm, it is
foolishness. Therefore, the sales management must choose right persons
to attain the objectives-generating sales volume and developing salesman
power. Carelessness in the process of selection will certainly invite failure.
Sound recruitment policy and procedures are essential for a marvellous
selling efficiency. A selected salesman must have all the qualities through
which a firm can attain all business goals-more turnover and more profit
and the progress of the firm.
The management of sales force is concerned with the following:
1. Sales Force Decision
2. Sales Force Size
3. Recruitment and Selection
4. Training
5. Controlling
6. Compensation
7. Fixing Sales Territories
8. Evaluation
3.4. Sales Force Decision
Sales objectives have to be fixed by the sales manager in respect of total
sales force and for each sales-man, in terms of volume, market share or
profit for the firm. If the objectives are once decided, then the size of sales
force has to be determined and this necessitates the following studies.
Job Analysis: Job analysis is a detailed study of a given job and reveals the
job details, duties, abilities, responsibilities, working conditions, skill and
knowledge needed to perform the job. This will help the sales manager to
recruit the right man for the right job. This is further divided into:
Job Description: It is a brief statement describing the job and not the
worker. It includes:
1. Name of the job
2. Nature of the job
3. Brief summary of the job
4. Duties to be performed
5. Relation to and with other jobs
6. Job responsibility
7. Working conditions for the jobs
8. Machines and tools to be handled
9. Criteria for each job
10. Evaluation standard aimed
Job Specification (Man Specification): The job description is followed by
specification. The job specification indicates the exact requirements in
performing a job. In brief they are:
1. Educational qualification needed.
2. Experience needed.
3. Physical qualities expected.
4. Skill needed to perform the job
5. Attitude needed for the job
6. Self-decision ability
7. Responsibility to firm and customers
8. Emotional characters.
3.5. Sales Force Size
After having fixed the sales force decision, the sales force size has to be
taken into account. More salesmen do not mean more sales. An existing
firm possesses a sales force, and the question is whether to increase the
number of salesman. It is only the sales and profit objectives, both derived
from sales forecast that should establish the optimum size of the sales force.
3.6. Recruitment and Selection
Recruitment is a process of finding out candidates, who are encouraged to
apply. Selection is process of choosing some out of many candidates.
Therefore, we can say that selection is recruitment, but recruitment is not
selection.
Selection is a process of rejection of unfits.
Recruitment
precedes the selection process.
After deciding the number of salesman and the objectives, the sales
manager must select personnel. The usual sources of recruitment may be
either internal or external.
Internal Sources: Many firms feel that the best policy to fill the vacancies of
salesmen is from out of the existing employees of the same organization. It
may also be termed as promotion. This can well be adopted by analyzing
the ability and promising character of the staff on the basis of seniority i.e.,
length of services.
Merits:
1. Much co-operation can be expected.
2. They are loyal.
3. Since it is a promotion, sincere and honest performance can be
expected.
4. They may not need training as there exists familiarity.
5. They may not need high salary.
Demerits:
1.
There is limited scope for selection.
2.
Favoritism plays its role.
3.
The person may not adjust himself to the new job as the nature of
work is different.
Apart from the internal selection, ex-employees of the company can also be
appointed if they are willing to accept a job. This policy is better and can
profitably be adopted.
External Sources: We have the following sources:
1. Employment Exchange
2. Competitors’ organization
3. Salesman of non-competing firms
4. Educational Institutions
5. Recommended cases
6. Advertisement
7. Unsolicited applications etc.
1) Employment Exchange: Private and public employment exchanges are
the best source of personnel. They maintain proper registers with
names and other full details of persons, such as job referred by those
who seek jobs. The sales manager can call persons from exchange, by
giving job specification to the officer concerned. In almost all cases the
candidates may be untrained; and inexperienced hands requiring
further training.
2) Competitors’ Organization: The salesmen employed in other competing
firms can also be chosen. But this method is not morally accepted. He
may be trained and may be developing his firm. Such a person can be
drawn by temptation by giving more facilities and a higher salary. But it
must be verified how far he is able to meet the sales objectives,
considering his sincerity, loyalty, habits etc Such a man, when he gets
some additional benefits from some other firms, will follow the same
tactics i.e., leave the firm.
3) Salesman of Non-competing Firms: Salesman can also be chosen from
non-competing firms. Such persons may have experience in the line, if
not touch with the particular product. They may need training to come
up to the level of aimed sales objectives.
4) Educational Institutions: Advanced countries like America, England etc.,
select students directly from specialized institutions, where theoretical
and practical knowledge is gained by them. The Institutional Heads
maintain complete records of students but as far as India is concerned,
the chances are rare. It has been neglected with the feeling, ‘just from
egg’ i.e., inexperienced.
5) Recommended
cases:
The
employees
of
the
firm-managers,
superintendents, section heads etc., may recommend candidates from
their friend circles. They have a moral responsibility when such persons
are recruited.
The employee who recommends personnel will be
blamed, if the person is found unit.
6) Advertisement: This is a system generally accepted by firms in recruiting
salesmen. Advertisements are displayed in newspapers, trade journals
specifying the job and the required qualifications, experience and skill.
There is the possibility of a wider scope of selection, as the news
spreads over a wide geographical area.
3.7. Selection Process
Selection procedure differs from firm to firm. Each firm has got its own
method in choosing men for employment. The qualities that the recruiters
seek in men to be appointed, depends on the job description. Similarly the
selection method also depends upon the sales management. Generally, the
following steps are followed:
1. Application blank
2. Screening
3. Reference
4. Personal interview
5. Test
6. Medical examination
7. Final interview (appointment)
a) Application Blank: Necessary information about the applicant is
required to be considered for appointment. Generally, the candidates
are asked to apply on company’s application form, sent directly to
applicants against a requisition or an application is known as application
blank given in the advertisement itself. This is with a view to gather
only the necessary details of the applicants. It contains a number of
questions, when filled in, gives a clear idea about the candidate.
Generally, it may contain the name, sex, qualification, age, experience,
health, social activities, references etc.
b) Screening:
All applications will not be considered.
Screening is a
process by which applications are to be screened out (rejected) from
further consideration, on the basis of unsuitability.
The remaining
applications are formally considered for appointment, subject to further
formalities.
By rejecting the applications of unqualified applicants,
much time and energy can be saved in further processing.
c) Reference: Generally, it is a common practice to ask the applicant to
mention the names of two references or referees, to whom the sales
manager can make enquiries about the integrity, general character and
ability of the applicant concerned. The qualities are checked with care
and caution by the sales manager, by contacting the referees. If the
opinions are favourable, the applications pass on to the next stage; and
in case the referee gives unfavourable comment, the application is
rejected at this stage.
Personal contact is necessary and it is better, because people are straight
forward in tongue better than in pen.
This is one-sided, but the
effectiveness of such opinion is doubted, as there may be chances of
telling only the good qualities of applicants. Moreover, only the names
of such favourable persons are mentioned in reference, with preintimation. To overcome this, personal interview is essential.
d) Personal Interview: This is an important step in the process of selection.
Only the screened applications are considered for selection and the firm
sends out interview letters. Personal interview is a must. By this
interview, the sales manager can understand the positive and negative
qualities of the applicant, with reference to the job duties. A good
interviewer must be unbiased, able to discover facts and be a keen
observer of the interviewee.
Interviews are also of two types: (a) Patterned and non-patterned. Under
patterned interview, questions are designed and the same questions are
asked to all, which is easy for comparison purposes.
(b) In non-
patterned interview, no standardized questions are asked. The applicant
is allowed to talk freely. A few direct questions are asked. By this type
of interview, the applicant gets a chance of speaking about his attitude
and interest freely.
The interviewer must be able to make an easy
evaluation of the interview.
e) Tests: Test is an additional tool, with which the applicants are further
tested to determine their suitability to the job. Generally, following are
the important types of psychological tests conducted:
(i) Ability Test: This test is devised to ascertain the capacity to grasp
things, and is a measure to know how well a person performs a
particular task with motivation. This can also be called a mental
ability or intelligence test. Such tests determine the suitability of a
candidate for a particular job.
(ii) Habitual Characteristic Test: A man may be intelligent but may
hesitate to take a decision. This test is aimed to know one’s
aptitude and interest on normal, daily work, irrespective of the
best behaviour occasionally.
(iii) Achievement Test: This test is designed to know what knowledge
a man has gained from his education or training.
By all these psychological tests, the ability and suitability of a
candidate can be verified. One can aim to evaluate the honesty,
cheerfulness, leadership quality, assertiveness, co-operation,
supervision capacity, emotional stability, determination, ability etc.,
of the personnel. The effectiveness and reliability of these tests are
questionable, as the qualities cannot be measured exactly and the
circumstances to be faced by salesman are also different.
f) Medical Examination: The important thing about any person, apart
from all qualities and eligibility, is that he must be physically fit for the
job. Diseases and physical deficiencies of the salesmen will affect the
business.
As such, selected applicants have to undergo medical
examination.
g) Final Interview and Appointment: The selected applicant is probably,
called for a final interview and his suitability is measured through
different tests, physical reports etc. The job must be explained to him
along with all relevant details, which are required to perform the duties
efficiently.
If everything is in favour of the applicant, an agreement must be
executed by him. Generally, the agreement contains duties and
authorities, sales quota, sales territory allotted, salary and conditions
of resigning. It is followed by an appointment order, which contains
designation, jobs to be performed, salary and other financial benefits
etc.
3.8 Training
Training is a continuation of selection. Having selected the salesmen, there
are two options. They can be sent to the field directly with samples, order
books etc., (born salesman) and/or they can be sent for training
programme. Some people think that salesmanship is born in man, but there
are only born salesmen, like born doctors, lawyer, engineers, teachers etc.
However all these people need training to call them qualified, and so also is
the case with salesman. A man may have interest in the profession. The
interest can be fully developed, through proper training.
One attains
perfection, self-development etc., through training.
Training means it is the process of perfecting the salesmen for their work.
Training programme are organized procedure or methods through which
knowledge as well as skill, for a definite purpose, is acquired. By training,
one can increase knowledge in a particular field. The salesmanship is not
born but can be made effective through training.
Significance of Training: The present era of marketing world is full of stiff
and cut-throat competition.
The world is dynamic and not static.
Customers are more benefit-oriented. Producers, in order to meet the
ever-changing demands of the consumers, produce new products, new
devices, products with multiple uses and so on. Thus, training or repeated
training is essential to keep the salesmen, with up-to-date knowledge, in
respect of new or developed goods. Training gives scope for improvement.
Objectives of Training: The objectives are summed up below:
1. To facilitate the salesmen to acquire the technique and principles of
salesmanship, process of sales, canvassing etc.
2. To bring down the labour turnover in the sales force.
3. To facilitate better sales performance.
4. To improve the relations with the customers.
5. To increase the efficiency of sales personnel.
6. To keep the salesman informed of the knowledge of products,
market, competitors etc., to face all situations.
7. To lower the selling expense so as to increase the profits.
8. To maintain sound relation between employer and employee.
9. To develop better knowledge, and the ways and means to resist all
situations.
10. To motivate the consumers more effectively.
3.9 Advantages of Training to Salesman
1)
A trained salesman always wins customers by systematic approach.
2)
Salesman acquires better understanding of the firm, as to its past
history, policies and procedures and this helps the salesman for
effective dealings.
3)
A trained salesman takes less time in concluding a sale-early selling
maturity.
4)
A trained salesman brings increased volume of sales, in turn, more
profit to the firm and himself.
5)
A trained salesman is able to meet consumer’s demand and help in
solving problems.
6)
Increased volume of sales facilitates reduction in cost of production
i.e., sales rise faster than expected. The cost per unit of order or per
prospect can be minimized.
7)
A better relation is created among the customers through reducing
customer’s complaint, increasing brand loyalty etc.
Customer’s
satisfaction is gained.
8)
The ability of the salesman is increased by expert knowledge.
9)
Controlling of salesman becomes easy.
10)
Training facilitates better demonstrations, selling the products which
have high profit margin, better methods of canvassing etc. Sales
training helps to increase the sales volume. Supervision cost is
reduced as trained salesman needs less supervision.
3.10
Training Programme: A firm should chalk out a programme for sales
training. The training is based on the nature of the job and the products to
be sold. A planned training programme should function with the following
ideas or principles, often referred to as ACMEE.
A: Aim of Training
C: Content of Training
D: Method of Training
E: Execution of Training
E: Evaluation.
1. Aim of Training: The whole idea behind the training is to make a recruit
a good salesman. It is true that some of the qualities of a good salesman
may be inherent in him, but not all qualities. It is the training which makes
him to have all qualities required of a salesman. It must aim to make him a
guide to the buyer taking into account his needs, problems etc. and to make
him a salesman of effective power by which an interest in the product may
be aroused and a desire to purchase may be created.
2. Content of Training: No hard and fast rules can be laid down as to the
contents of training. The content of the training programme relates to the
subject-matter of training. A training programme varies from firm to firm,
because of the differences in products, markets, policies of the company,
trainee’s ability etc. In general terms, sales training is the teaching of
salesman and prospective salesmen how to do their jobs better. A good
training programme facilitates the trainee-salesman to learn and
understand the following contents:
(a) The knowledge of his job
(b) The products
(c) The company
(d) The markets and consumers
(e) The competitors
(f) The sales techniques
(g) The routine reports etc.
(a) The Knowledge of his Job: The job of a salesman is not complete, as
soon as the transfer of goods takes place. The salesman of today carries
more weight than the salesman who merely takes orders.
He must
understand what the firm expects of him; what power he possesses and
how to convince the buyers about the company’s product and image. The
company assigns responsibilities and powers, with which he works as a
guide to buyers by projecting the merits of the products and on the other
hand with profit to the firm. He is expected to do services to both the firm
and the customers. He must have concrete plans as to his sales planning,
meeting customers, sales talks, demonstration, presenting the goods,
concluding sales, securing order, collecting dues, handling objections and
complaints etc. Apart from these, he must be a keen observer of market
conditions, competition, consumers’ likes and dislikes etc. He should cooperate with his senior fellows. Thus, he is trained with a purpose, the aim
of his appointment being to know what the firm eagerly expects from him.
(b) The Products: A good understanding of the product is essential. The
firm must give or ensure that the salesman has a thorough knowledge of
the products, to be dealt with. In brief, they are:
1. Raw materials used in the product.
2. Manufacturing methods in brief.
3. Research and development undertaken.
4. Improvement brought out.
5. Its suitability to the consumers.
6. Its trade mark, brand, characteristics.
7. Its colour, weight, packaging, quality control etc.
8. Selling points of the products.
9. Product merits and uses to consumers.
10. Limitation of the product performance.
11. Its price and discounts offered.
12. Service after sales and guarantee period.
13. Demonstration of its actual working.
14. Availability of the products.
15. Cost of operation and maintenance.
16. Comparative study of similar products.
17. Strength and weakness of competitors’ products.
18. The position of the product in the product line.
The above-said knowledge of the products is essential for a salesman so as to
emerge as a creative salesman. When the salesman has a sound knowledge,
he meets the public and converts them as buyers, in a better and more
efficient way.
(c) The Company: A salesman should be well-informed about the following:
1)
Brief history of the firm.
2)
Its marketing policies.
3)
Objectives and purposes of the firm.
4)
Economic and social objectives.
5)
Its position in the market field.
6)
Credit policies, sales policies, personnel policies.
7)
Capacity of the plant.
8)
Personnel of the firm-directors, stock-holders.
9)
Execution and handling of orders, sales accounting and collection
methods.
10)
Salary, commission computation, traveling and daily allowances etc.
and their payment procedures.
11)
Method of exercising control over the salesman.
12)
Allocation of quotas and territories.
13)
Marketing policies, pricing policies.
14)
Handling of complaints and their adjustment. A clear-cut knowledge
about the company is essential to the salesman to enable himself to
work accordingly.
(d) The Markets and Consumers: Information about the market is an
important and essential part of the training programme. The salesman
must have a thorough knowledge of the size of the market, demand for the
products and the area under the competitor’s side. Besides the knowledge
of the market, salesman should know about the type of customers, buying
motives, likes and dislikes of the products. Different types of customers
need different types of approaches. People differ widely from person to
person, sex to sex, age to age, place to place etc. Persons of different types
require specialized way of persuasion. The salesman must adjust himself
according to the nature of the customers. A blanket policy to all classes of
people is not advisable.
(e) The Competition:
Salesman must be given a good knowledge or
comparative study of the selling activities of rivals.
Study relating to
comparison with the rivals as to the merits and demerits of the product is
important i.e., strong as well as weak points. The salesman should know
the rival firm’s policies, method of approaching the customers, how they
are paid, the customers’ opinion, how their product is, how they fulfill their
duties, the area they like or dislike, their selling-points etc.
(f) The Sales Technique: The sales techniques are the essential part in sales
training. After the training, the salesman has to be sent to the field, where
he has to sell the company’s product. He must be given exhaustive training
in “Sales Process”. The selling points must be correlated and sales talk be
applied at the appropriate situation. A born salesman has to be instructed
with the various selling techniques in detail. In short, training on the
following items must be imparted.
(a) Selling process.
(b) Method of gaining interview from consumers.
(c) Method of approach to consumers.
(d) Demonstration and presentation.
(e) Method of handling objections of consumers.
(f) Why salesman fails in the field etc.
(g) Routine Reports: Salesmen should be trained to know their routine
works and submit their reports to the firm. The report may include:
(a) Amount of sales made.
(b) List of new customers.
(c) Credit outstanding of customers.
(d) Collection of Outstanding dues.
(e) Competitor’s position in the market.
(f) Maintenance of Accounts of expenses.
(g) Demonstration and display of products.
(h) Action taken on complaints, grievances etc.
(i) The attitude of market in respect of competitors.
(j) Consumers’ suggestion if any.
The reports may be sent to the firm, daily, weekly or monthly etc. as
directed. The salesmen are eyes and ears of the selling firm. The salesman
must be aware of the method of reporting and its importance.
Training Needs of Salesmen at Different Times:
New Salesmen Need:
1. Facts about the company-history, policies etc.
2. Product details
3. Company’s system and procedures
4. Fundamentals of selling their specific products
5. Moral training
Regular Salesmen need
1. The above five items
2. Changes in policies and procedures
3. Facts about new products
4. Future plans of the company
5. Knowledge to supervise others
6. Know-how to discharge responsibility
7. Attitude or moral training
Supervisors Need:
1. Skill needed by others in discharging duties
2. Ability to train others
3. Ability to organize
4. Ability to analyze and plan
5. Ability to evaluate and follow up
3.11
Training Methods
For imparting training to the salesman, different methods are being used.
Broadly, these methods may be divided into two:
3.11.1 Group Training
(a) Lecture Method: An expert or a lecturer speaks to trainee-salesmen
about the various aspects of selling. It consists of oral talk in a
classroom. This system is widely used. The trainees listen to the
lectures. The instructor invites questions and answers from them. To
make the lecture more interesting, visual aids, demonstration, suitable
examples may be added. This system is more economical, and is the
easiest and quickest in imparting theoretical training to a group of
salesman. But it is difficult to evaluate the effectiveness of lecture
method. This method can be used more effectively in continuing sales
training programme to provide new information or changes in the
policies of the firm. This may include seminars, demonstration etc., by
expert salesmen.
(b) Audio-Visual Method:
In order to supplement the lecturing (telling)
method, training programmes include the use of visual aids, such as
films, slides, posters etc., and are capable of making, them more
interesting.
(c) Discussion Method: This is a good method. Here an actual case or an
imaginary case is given as a problem to be solved, to the different
groups. The case or the problem may be typed or printed. Each group
is asked to understand the problem and draw a conclusion. After this,
the different conclusions or suggestions are analyzed collectively, under
the leadership of the instructor, in drawing generalizations from each
case or problem.
This type of training enables the salesmen in
correcting their own views. It is suitable for a small group. It is slow and
costly.
(d) Conference Method: Sales conferences and sales meeting are a kind of
‘get together’ of all the concerned staff, either weekly, fortnightly or
monthly. The thoughts of various persons are pooled in the conference.
Meetings or conferences have motivating effects as the participants are
given chances for creative thinking and to express their views. To make
the conference more interesting, dramas, demonstrations etc., are
included. Topics like, sales policies, facing competition, publicity ideas,
dealings with complaints etc., are dealt with. And these will facilitate
the participants in broadening their outlook and ideas. But this type of
meetings or conferences is not suitable for new recruits.
(e) Role Playing Method: Role playing is a newly developed method. The
sales trainees are made to act out roles in contrived problems. The
trainer explains the situation of the problem and assigns the role of
salesman and customers of different characters to the sales trainees.
Each one has to act the assigned role. The trainer watches the role
played by each and discusses their weaknesses and strong points. A few
may be selected to act the play, while others may watch it. Thus, the
salesman have chance to see and understand the ideas in different
situations. It is not suitable for new recruits.
(f) Panel Method: Members in the panel group may be permanent. The
members, who are experts in the panel, discuss the problems, and
solutions are passed to the sales-trainee groups, who may have further
discussion. This system is ineffective.
(g) Round Table method: It is similar to the discussion method. It consists
of few members. The salesmen sit around a table along with a good
discussion leader. They deal with the problems of actual cases. Every
participant takes part freely in discussing the problems and solutions.
Exchanges of new ideas take place advantageously.
(h) Brain Storming Method: Under this method, more or less, similar to
round table conference, persons sit around the table.
presents the problems for discussion.
The leader
The sales trainees have to
understand the problems and find the solutions. The solutions are
analyzed by the leader or tested by the panel of experts. This method
practically fetches no value.
3.11.2 Individual Training
(a) On-the-job Training: Under this method, a new salesman is placed
under an experienced or senior salesman who trains him. First the
coach explains the sales techniques under different situations. He also
takes the trainee along with him on his rounds and gives him chances to
observe the dealings with the customers. Doubts of the trainee are also
clarified. Then the coach along with the trainee calls on customers; the
sales trainee is allowed to deal with the customer and the coach
observes the performance. If any weak point or short-coming is found
in the sales trainee, they discuss how to overcome them. After some
time, the sales trainee becomes a trained and independent salesman.
This system is good for traveling salesman.
(b) Sales Manual: It is a complied textbook. It contains details of the firm
and products, job description, sales policies, opinions or reports
required for reference purposes etc.
Generally, it contains many
problems with suggestive solutions. A copy of the book is given to a
salesman to go through it and understand the ideas. It works as a
ready-reckoner.
(c) Initial or Break-in Training:
New recruits are given an orientation
training so as to know about the company and its products. He may be
allowed to work for some time in the firm itself to gain sufficient
information about the products. After that he is sent to work in his
field.
Apart from the above, salesman can also be sent to specialized educational
institutions.
The training cost is borne by the firm.
There are many
institutions in India which impart theoretical training along with practical
work. Doors are open and firms can send their new recruits for training.
Correspondence courses are also available for initial training. In certain
cases, one can undergo training while one is fully employed. This is suitable
for salesmen who are widely scattered. There are many firms which have
permanent training departments like colleges.
It is important to note that even the trained or experienced salesmen need
periodic training, called refresher training or follow up training. This is
because of the changes in products, sales policies, changes in consumers
and market, government policies, new developments, new ideas etc.
Evaluation of Training:
Having trained the salesmen, the marketing
manager must evaluate the usefulness or effectiveness of training,
individually and collectively on the basis of the performance of the sales
personnel. Money, effort and time have been spent on training. Therefore,
it is natural to expect returns. Evaluation can be made on the basis of
performance in terms of sales volume, sales profitability, order-size,
expenses etc., between, before and after training periods.
3.12

Summary
The word ‘salesmen’ applies to all persons who are engaged in the field
of selling.

Sales objectives have to be fixed by the sales manager in respect of total
sales force and for each sales-man, in terms of volume, market share or
profit for the firm.

Job analysis is a detailed study of a given job and reveals the job details,
duties, abilities, responsibilities, working conditions, skill and knowledge
needed to perform the job.

The salesman must have a thorough knowledge of the size of the
market, demand for the products and the area under the competitor’s
side.

Even the trained or experienced salesmen need periodic training, called
refresher training or follow up training. This is because of the changes
in products, sales policies, changes in consumers and market,
government policies, new developments, new ideas etc.

Having trained the salesmen, the marketing manager must evaluate the
usefulness or effectiveness of training, individually and collectively on
the basis of the performance of the sales personnel.
3.13 Keywords
Sales Force Decision
Job Analysis
Job Description
Job Specification
Sales Force Size
Recruitment and Selection
Internal Sources
Employment Exchange
Competitors’ Organization
Selection Process
Training
Group Training
Individual Training
Lecture Method
On-the-job Training
Audio-Visual Method
Sales Manual
Discussion Method
Initial-Break-in Training
Conference Method
Role Playing Method
Panel Method
Round Table Method
Brain Storming Method
3.14 Exercises
1. What are the various kinds of tests commonly used in the selection of
salesmen? What are the advantages of using tests? Are there any
dangers?
2. Enumerate the advantages of arranging training facilities for salesmen
and state the types of training you would recommend for salesmen of a
company manufacturing medicines.
3. Explain the procedure involved in the recruitment and selection of
salesman.
4. What is the necessity of training salesmen? Explain different methods of
training.
5. What are different types of group training?
6. According to you what should form the content of the training program.
7. What criteria can be considered for evaluation of training program?
Unit 4
Services marketing
Structure
4.1
Objectives
4.2
Introduction
4.3
Characteristics of services marketing
4.4
Types of services
4.5
Service marketing mix
4.5.1 People and Service Marketing
4.5.2 Process and Services Marketing
4.5.3 Physical Evidence – Part of the marketing MIX
4.6
Summary
4.7
Keywords
4.8
Exercise
4.1
Objectives
After learning this unit you will be able to understand the following:
-
Service marketing
-
The major Characteristic of service marketing and its types
4.2
-
Service marketing MIX
-
Process and Service Marketing, Physical evidence
Introduction
A service is the action of doing something for someone or something. It is
largely intangible (i.e. not material). A product is tangible (i.e. material)
since you can touch it and own it. A service tends to be an experience that is
consumed at the point where it is purchased, and cannot be owned since is
quickly perishes. A person could go to a café one day and have excellent
service, and then return the next day and have a poor experience. With the
above expectation we can say that service is nothing but making promises to
customers.
4.3
Characteristics Of Service Marketing
Following are the characteristics of service marketing.
Inseparable - from the point where it is consumed, and from the provider of
the service. For example, you cannot take a live theatre performance home
to consume it (a DVD of the same performance would be a product, not a
service).
Intangible - and cannot have a real, physical presence as does a product.
For example, motor insurance may have a certificate, but the financial
service itself cannot be touched i.e. it is intangible.
Perishable - in that once it has occurred it cannot be repeated in exactly the
same way. For example, once a 100 metres Olympic final has been run,
there will be not other for 4 more years, and even then it will be staged in a
different place with many different finalists.
Variability- since the human involvement of service provision means that no
two services will be completely identical. For example, returning to the same
garage time and time again for a service on your car might see different
levels of customer satisfaction, or speediness of work.
Right of ownership - is not taken to the service, since you merely
experience it. For example, an engineer may service your air-conditioning,
but you do not own the service, the engineer or his equipment. You cannot
sell it on once it has been consumed, and do not take ownership of it.
4.4
Service Types
Service Sector in India today accounts for more than half of India's GDP.
According to data for the financial year 2006-2007, the share of services,
industry, and agriculture in India's GDP is 55.1 per cent, 26.4 per cent, and
18.5 per cent respectively. The fact that the service sector now accounts for
more than half the GDP marks a watershed in the evolution of the Indian
economy and takes it closer to the fundamentals of a developed economy.
Services or the "tertiary sector" of the economy covers a wide gamut of
activities like trading, banking & finance, infotainment, real estate,
transportation, security, management & technical consultancy among
several others. The various sectors that combine together to constitute
service industry in India are:

Trade

Hotels and Restaurants

Railways

Other Transport & Storage

Communication (Post, Telecom)

Banking

Insurance

Dwellings,

Real Estate

Business Services

Public Administration;

Defence

Personal Services

Community Services

Other Services
There was marked acceleration in services sector growth in the eighties and
nineties, especially in the nineties. While the share of services in India's GDP
increased by 21 per cent points in the 50 years between 1950 and 2000,
nearly 40 per cent of that increase was concentrated in the nineties. While
almost all service sectors participated in this boom, growth was fastest in
communications, banking, hotels and restaurants, community services,
trade and business services. One of the reasons for the sudden growth in
the services sector in India in the nineties was the liberalization in the
regulatory framework that gave rise to innovation and higher exports from
the
services
sector.
The boom in the services sector has been relatively "jobless". The rise in
services share in GDP has not accompanied by proportionate increase in the
sector's share of national employment. Some economists have also
cautioned that service sector growth must be supported by proportionate
growth of the industrial sector, otherwise the service sector grown will not
be sustainable. In the current economic scenario it looks that the boom in
the services sector is here to stay as India is fast emerging as global services
hub.
4.5
Service Markeing Mix
Western
economies
have
seen
deterioration
in
their
traditional
manufacturing industries, and a growth in their service economies.
Therefore the marketing mix has seen an extension and adaptation into the
extended marketing mix for services, also known as the 7P's - physical
evidence, process and people.
We have discusses four marketing mix factors in our earlier modules.
In the context of services marketing there are three more factors which
form the part of marketing mix. They are people, process and physical
evidence. Here we only discuss about these three factors.
4.6
People and Services Marketing
People are the most important element of any service or experience.
Services tend to be produced and consumed at the same moment, and
aspects of the customer experience are altered to meet the 'individual
needs' of the person consuming it. Most of us can think of a situation where
the personal service offered by individuals has made or tainted a tour,
vacation or restaurant meal. Remember, people buy from people that they
like, so the attitude, skills and appearance of all staff need to be first class.
Here are some ways in which people add value to an experience, as part of
the marketing mix - training, personal selling and customer service.
Training
All customer facing personnel need to be trained and developed to maintain
a high quality of personal service. Training should begin as soon as the
individual starts working for an organization during an induction. The
induction will involve the person in the organization's culture for the first
time, as well as briefing him or her on day-to-day policies and procedures.
At this very early stage the training needs of the individual are identified. A
training and development plan is constructed for the individual which sets
out personal goals that can be linked into future appraisals. In practice most
training is either 'on-the-job' or 'off-the-job.' On-the-job training involves
training whilst the job is being performed e.g. training of bar staff. Off-the-job
training sees learning taking place at a college, training centre or conference
facility. Attention needs to be paid to Continuing Professional Development
(CPD) where employees see their professional learning as a lifelong
process of training and development.
Personal Selling
There are different kinds of salesperson. There is the product delivery
salesperson. His or her main task is to deliver the product, and selling is of
less importance e.g. fast food, or mail. The second type is the order taker,
and these may be either 'internal' or 'external.' The internal sales person
would take an order by telephone, e-mail or over a counter. The external
sales person would be working in the field. In both cases little selling is
done. The next sort of sales person is the missionary.
Here, as with those missionaries that promote faith, the salesperson builds
goodwill with customers with the longer-term aim of generating orders.
Again, actually closing the sale is not of great importance at this early stage.
The forth type is the technical salesperson, e.g. a technical sales engineer.
Their in-depth knowledge supports them as they advise customers on the
best purchase for their needs. Finally, there are creative sellers. Creative
sellers work to persuade buyers to give them an order. This is tough selling,
and tends to o ffer the biggest incentives. The skill is identifying the needs of
a customer and persuading them that they need to satisfy their previously
unidentified need by giving an order.
Customer Service
Many products, services and experiences are supported by customer
services teams. Customer services provided expertise (e.g. on the selection
of financial services), technical support(e.g. offering advice on IT and
software) and coordinate the customer interface (e.g. controlling service
engineers, or communicating with a salesman). The disposition and attitude
of such people is vitally important to a company. The way in which a
complaint is handled can mean the difference between retaining or losing a
customer, or improving or ruining a company's reputation. Today, customer
service can be face-to-face, over the telephone or using the Internet. People
tend to buy from people that they like, and so effective customer service is
vital. Customer services can add value by offering customers technical
support and expertise and advice.
4.6
Process and Services Marketing
Process is another element of the extended marketing mix, or 7P's.There
are a number of perceptions of the concept of process within the business
and marketing literature. Some see processes as a means to achieve an
outcome, for example - to achieve a 30% market share a company
implements a marketing planning process.
Another view is that marketing has a number of processes that integrate
together to create an overall marketing process, for example - telemarketing
and Internet marketing can be integrated. A further view is that marketing
processes are used to control the marketing mix, i.e. processes that
measure
the
achievement
marketing
objectives.
All
views
are
understandable, but not particularly customer focused.
For the purposes of the marketing mix, process is an element of service that
sees the customer experiencing an organisation's offering. It's best viewed
as something that your customer participates in at different points in time.
Here are some examples to help your build a picture of marketing process,
from the customer's point of view.
Going on a cruise - from the moment that you arrive at the dockside, you are
greeted; your baggage is taken to your room. You have two weeks of
services from restaurants and evening entertainment, to casinos and
shopping. Finally, you arrive at your destination, and your baggage is
delivered to you. This is a highly focused marketing process.
Booking a flight on the Internet - the process begins with you visiting an
airline's website. You enter details of your flights and book them. Your
ticket/booking reference arrive by e-mail or post. You catch your flight on
time, and arrive refreshed at your destination. This is all part of the
marketing process.
At each stage of the process, markets:

Deliver value through all elements of the marketing mix. Process,
physical evidence and people enhance services.

Feedback can be taken and the mix can be altered.

Customers are retained, and other serves or products are extended
and marked to them.

The process itself can be tailored to the needs of different
individuals, experiencing a similar service at the same time.
Processes essentially have inputs, throughputs and outputs (or outcomes).
Marketing adds value to each of the stages. Take a look at the lesson on
value chain analysis to consider a series of processes at work.
4.6
Physical Evidence - Part of the Marketing Mix.
Physical evidence is the material part of a service. Strictly speaking there
are no physical attributes to a service, so a consumer tends to rely on
material cues. There are many examples of physical evidence, including
some of the following:

Packaging.

Internet/web pages.

Paperwork (such as invoices, tickets and despatch notes).

Brochures.

Furnishings.

Signage (such as those on aircraft and vehicles).

Uniforms.

Business cards.

The
building
itself
(such
as
prestigious
offices
or
scenic
headquarters).

Mailboxes and many others . . . . . .
A sporting event is packed full of physical evidence. Your tickets have your
team's logos printed on them, and players are wearing uniforms. The
stadium itself could be impressive and have an electrifying atmosphere. You
travelled there and parked quickly nearby, and your seats are comfortable
and close to restrooms and store.
Some organisations depend heavily upon physical evidence as a means of
marketing communications, for example tourism attractions and resorts (e.g.
Disney World), parcel and mail services (e.g. UPS trucks), and large banks
and insurance companies (e.g. Lloyds of London).
4.6
Summary
In this unit we have introduced the concept of services marketing and its
characteristics. Service marketing is different from product marketing. The
major characteristics of service marketing are inseparable, intangible,
perishable, and variable in nature. The service marketing mix includes
seven factors. The common being product, price, place/distribution,
promotion. The new three Ps added in the context of services marketing are
people, process and physical evidence. Today, service marketing has
become a separate domain of study in itself.
4.7 Keywords
Service Marketing
Inseparable
Intangible
Perishable
Variability
Right of ownership
Service Types
Service Markeing Mix
Training
People and Services Marketing
Personal Selling
Physical Evidence
Customer Service
4.8 Exercises
1. Define Service Marketing
2. What are the characteristics of service marketing?
3. How do service marketing different from product marketing?
4. Explain Service Marketing MIX.
MODULE 4
Unit 1
Advertising
Structure:
1.1. Objectives
1.2. Introduction
1.3. Definition
1.4. Issues Of Concern To Advertising
1.5. Categories of Advertising
1.6. Standardization and customization in advertising
1.7. Laws and Regulations on Advertising
1.8. Types of Advertising
1.8.1
Print Advertising – Newspapers, Magazines, Brochures, Fliers
1.8.2
Outdoor Advertising – Billboards, Kiosks, Tradeshows and
Events
1.8.3
Broadcast advertising – Television, Radio and the Internet
1.8.4
Covert Advertising – Advertising in Movies
1.8.5
Surrogate Advertising – Advertising Indirectly
1.8.6
Public Service Advertising – Advertising for Social Causes
1.8.7
Celebrity Advertising
1.8.8
Inserts advertising
1.8.9
Sponsorship
1.8.10
Display advertising
1.9. Direct Marketing
1.10. Relationship Marketing
1.11. Markets as Networks
1.12. International Sales promotions
1.13. Summary
1.14. Keyword
1.15. Exercise
1.1. Objectives
After learning this unit you will able to understand :
-
What is advertising
-
Importance of advertising.
-
Types of advertising
-
Rules that govern advertising
-
Concept of direct marketing
-
Marketing and advertisement at global context
1.2. Introduction to Advertising
Advertising is an important element of the marketing communications mix.
Put simply, advertising directs a message at large numbers of people with a
single communication. It is a mass medium.
Advertising has a number of benefits for the advertiser. The advertiser has
control over the message. The advert and its message, to an extent, would be
designed to the specifications of the advertiser. So the advertiser can focus
its message at a huge number of potential consumers in a single hit, at a
relatively low cost per head. Advertising is quick relative to other elements
of the marketing communications mix (for example personal selling, where
an entire sales force would need to be briefed - or even recruited). Therefore
an advertiser has the opportunity to communicate with all (or many of) its
target audience simultaneously.
1.3. Definition
Business.com defines ADVERTISING as ‘advertising is a paid form of
communicating a message by the use of various media. It is persuasive,
informative, and designed to influence purchasing behavior or thought
patterns’.
Enerpreneur.com defines advertising as ‘To call the public's attention to
your business, usually for the purpose of selling products or services,
through the use of various forms of media, such as print or broadcast
notices”. Advertising provides a direct line of communication to your
existing and prospective customers about your product or service. The
purpose of advertising is to:

Make customers aware of your product or service

Convince customers that your company's product or service is right
for their needs

Create a desire for your product or service

Enhance the image of your company

Announce new products or services

Reinforce salespeople's messages

Make customers take the next step (ask for more information,
request a sample, place an order, and so on); and

Draw customers to your business.
Your advertising goals should be established in your business plan. For
example, you may want to obtain a certain percentage of growth in sales,
generate more inquiries for sales, or build in-store traffic. The desired result
can simply be increasing name recognition or modifying the image you're
projecting. Objectives vary depending on the industry and market you're in.
Dictionary of business defines advertising as a ‘communication that is paid
for by an identified sponsor with the object of promoting ideas, goods, or
services. It is intended to persuade and sometimes to inform. The two basic
aspects of advertising are the message and the medium. The media that carry
advertising range from the press, television, cinema, radio, and posters to
company logos on apparel. Advertising creates awareness of a product,
extensive advertising creates confidence in the product, and good advertising
creates a desire to buy the product. Advertising is a part of an organization's
total marketing communications programme (i.e. its promotion mix).
1.4. Issues Of Concern To Advertising
Advertising agencies and their clients plan for advertising. Any plan should
address the following stages:

Who is the potential TARGET AUDIENCE of the advert?

WHAT do I wish to communicate to this target audience?

Why is this message so IMPORTANT to them?

What is the BEST MEDIUM for this message to take (see some of the
possible media above)?

What would be the most appropriate TIMING?

What RESOURCES will the advertising campaign need?

How do we CONTROL our advertising and monitor success?
1.5. Categories of Advertising
There are two key categories of advertising, namely 'above-the-line' and
'below-the-line.' The definitions owe a lot to the historical development of
advertising agencies and how they charge for their services. In a nutshell,
'above-the-line' is any work done involving media where a commission is
taken by an advertising agency, and 'below-the-line' is work done for a client
where a standard charge replaces commission. So TV advertising is 'abovethe-line' since an agency would book commercial time on behalf of a client,
but placing an advert in a series of local newspapers is 'below-the-line,'
because newspapers tend to apply their own costing approach where no
commission is taken by the agency i.e. instead the agency charges the client
a transparent fee.
1.6. Standardization and customized to advertising
The key issue in advertising is whether the firm should standardise its
advertising messages or adapt them to meet the requirements of particular
foreign markets. Some advertising messages are applicable to several
countries, others are relevant to only one. Much depends on the degree of
homogeneity of target consumers in various countries, their lifestyles,
interests, incomes and tastes.
The advantages of uniformity are that it:

Requires less marketing research in individual countries.

Is relatively cheap and convenient to administer.

Demands less creative time to devise advertisements; a single message
is constructed and used in all markets.
Customization, conversely, might be necessary in consequence of:

Cultural differences between countries and/or market segments.

Translation difficulties between different languages.

Differences in the educational backgrounds of target groups in various
countries.

Non-availability of certain media (specialist magazines, for instance) in
some regions.

Differences in national attitudes towards advertising.
To the extent that alterations are needed, they may take one or more of the
following forms:
(a) Different media, for instance. Listeners to commercial radio in different
countries might typically belong to different socio-economic groups.
(b) Changes in symbols, e.g., using a male rather than a female model as
the dominant figure in an advertisement. This might be necessary if
males are the primary purchasers of the product in one market and
females in another.
(c) Changes in advertisement headlines and body copy.
(d) Changes in the fundamental selling proposition.
For example,
presenting a bicycle as a leisure item in one market, a fashion accessory
in another, and as a commuting vehicle elsewhere.
1.7. Laws and Regulations on Advertising
These vary from country to country. Comparative advertising, for example,
is unlawful in many nations, (Comparative advertising involves the
comparison of an advertised item with competing products and/or mention
of rival firms.) The use of superlatives in advertising copy is allowed in the
UK, Belgium and Italy, but not in Germany or France (at least not on
television). In the Netherlands, superlatives have to be baked up by factual
evidence. There are severe constraints on the use of pornography and/or
sexual innuendo in advertisements in a number of countries: advertising in
foreign languages is sometimes banned. Other legally sensitive areas in the
international advertising field include the use of children as models; the
creative approaches that may be employed (for example, it is illegal in many
countries to instill fear in consumers’ minds in order to advertise products);
the media permitted to carry advertisements; and the amounts of
advertising allowed in each medium (e.g., the number of minutes of
advertising permitted in each hour of television broadcasts).
The
advertising of ‘health’ goods, pharmaceuticals, war toys, alcohol and
tobacco are subject to stringent control in the great majority of nations.
1.8. Types of Advertising
Advertising is the promotion of a company’s products and services carried
out primarily to drive sales of the products and services but also to build a
brand identity and communicate changes or new product /services to the
customers. Advertising has become an essential element of the corporate
world and hence the companies allot a considerable amount of revenues as
their advertising budget. There are several reasons for advertising some of
which are as follows:

Increasing the sales of the product/service

Creating and maintaining a brand identity or brand image.

Communicating a change in the existing product line.

Introduction of a new product or service.

Increasing the buzz-value of the brand or the company.

Thus, several reasons for advertising and similarly there exist various
media which can be effectively used for advertising. Based on these
criteria there can be several branches of advertising. Mentioned
below are the various categories or types of advertising:
1.8.1 Print Advertising – Newspapers, Magazines, Brochures, Fliers
The print media have always been a popular advertising medium.
Advertising products via newspapers or magazines is a common practice. In
addition to this, the print media also offers options like promotional
brochures and fliers for advertising purposes. Often the newspapers and
the magazines sell the advertising space according to the area occupied by
the advertisement, the position of the advertisement (front page/middle
page), as well as the readership of the publications. For instance an
advertisement in a relatively new and less popular newspaper would cost
far less than placing an advertisement in a popular newspaper with a high
readership. The price of print ads also depend on the supplement in which
they appear, for example an advertisement in the glossy supplement costs
way higher than that in the newspaper supplement which uses a mediocre
quality paper.
1.8.2 Outdoor Advertising – Billboards, Kiosks, Tradeshows and Events
Outdoor advertising is also a very popular form of advertising, which
makes use of several tools and techniques to attract the customers
outdoors. The most common examples of outdoor advertising are
billboards, kiosks, and also several events and tradeshows organized by
the company. The billboard advertising is very popular however has to be
really terse and catchy in order to grab the attention of the passers by.
The kiosks not only provide an easy outlet for the company products but
also make for an effective advertising tool to promote the company’s
products. Organizing several events or sponsoring them makes for an
excellent advertising opportunity. The company can organize trade fairs,
or even exhibitions for advertising their products. If not this, the company
can organize several events that are closely associated with their field. For
instance a company that manufactures sports utilities can sponsor a
sports tournament to advertise its products.
1.8.3 Broadcast advertising – Television, Radio and the Internet
Broadcast advertising is a very popular advertising medium that
constitutes of several branches like television, radio or the Internet.
Television advertisements have been very popular ever since they have
been introduced. The cost of television advertising often depends on the
duration of the advertisement, the time of broadcast (prime time/peak
time), and of course the popularity of the television channel on which the
advertisement is going to be broadcasted. The radio might have lost its
charm owing to the new age media however the radio remains to be the
choice of small-scale advertisers. The radio jingles have been very popular
advertising media and have a large impact on the audience, which is
evident in the fact that many people still remember and enjoy the popular
radio jingles.
1.8.4 Covert Advertising – Advertising in Movies
Covert advertising is a unique kind of advertising in which a product or a
particular brand is incorporated in some entertainment and media
channels like movies, television shows or even sports. There is no
commercial in the entertainment but the brand or the product is subtly(
or sometimes evidently) showcased in the entertainment show. Some of
the famous examples for this sort of advertising have to be the
appearance of brand Nokia which is displayed on Tom Cruise’s phone in
the movie Minority Report, or the use of Cadillac cars in the movie Matrix
Reloaded.
1.8.5 Surrogate Advertising – Advertising Indirectly
Surrogate advertising is prominently seen in cases where advertising a
particular product is banned by law. Advertisement for products like
cigarettes or alcohol which are injurious to heath are prohibited by law in
several countries and hence these companies have to come up with
several other products that might have the same brand name and
indirectly remind people of the cigarettes or beer bottles of the same
brand. Common examples include Fosters and Kingfisher beer brands,
which are often seen to promote their brand with the help of surrogate
advertising.
1.8.6 Public Service Advertising – Advertising for Social Causes
Public service advertising is a technique that makes use of advertising as an
effective communication medium to convey socially relevant messaged
about important matters and social welfare causes like AIDS, energy
conservation, political integrity, deforestation, illiteracy, poverty and so on.
David Oglivy who is considered to be one of the pioneers of advertising and
marketing concepts had reportedly encouraged the use of advertising field
for a social cause. Oglivy once said, "Advertising justifies its existence when
used in the public interest - it is much too powerful a tool to use solely for
commercial purposes.". Today public service advertising has been
increasingly used in a non-commercial fashion in several countries across
the world in order to promote various social causes. In USA, the radio and
television stations are granted on the basis of a fixed amount of Public
service advertisements aired by the channel.
1.8.7 Celebrity Advertising
Although the audience is getting smarter and smarter and the modern day
consumer getting immune to the exaggerated claims made in a majority of
advertisements, there exist a section of advertisers that still bank upon
celebrities and their popularity for advertising their products. Using
celebrities for advertising involves signing up celebrities for advertising
campaigns, which consist of all sorts of advertising including, television ads
or even print advertisements.
1.8.8 Inserts advertising
Insert advertising is brand, product or service advertising that, rather than
appearing on the page of the newspaper, takes the form of loose inserts,
bound-in inserts, tip-ons, product inserts such as chocolate bars, or
sponsored polybags containing an onsert such as CD, DVD or special
booklet.
1.8.9 Sponsorship
Sponsorship is advertising that seeks to establish a deeper association and
integration between an advertiser and a publisher. The most common
forms of sponsorship are content sponsorship, such as sponsored
supplements, columns, microsites, and event sponsorship.
1.8.10 Display advertising
Display advertising is brand, product or service advertising that appears in
various sizes and positions throughout all sections of the newspapers and
on all channels of the website.
1.9
Direct Marketing
Direct marketing covers direct mail, telephone selling, catalogues, and ‘offthe-page’ selling via cut-outs in newspaper and magazine advertisements.
Direct marketing is the USA’s third largest advertising medium, after
newspapers and TV.
In Western Europe, direct marketing accounts
(according to the European Commission) for about a quarter of all
commercial communication expenditure.
Direct mail is the dominant force of direct marketing, and is buoyant
throughout the world. It offers a flexible, selective and potentially highly
cost-effective means for reaching foreign consumers. Advertising budgets
may be concentrated on the most promising market segments; and it will
be sometime before competitors realise that the firm has launched a
campaign. Also the size, content, timing and geographical coverage of mail
shots can be varied to suit national circumstances, and there is no media
space or airtime restrictions and no copy or insertion deadlines to be met.
All aspects of the direct mail process are subject to the company’s
immediate control, and it can experiment by varying the approach used in
different countries.
A number of factors have contributed to the increasing use of direct
marketing for international campaigns, as follows:
(a) The widespread availability of free-one telephone facilities in most
nations, so that it is possible to quote an international 0800 free-one
telephone number to enable customers to ring free of charge in
response to direct mail (and other) advertising campaigns.
(b) The growing number of independent households in many countries
resulting from falling birth rates, higher divorce rates and increasing
longevity.
(c) Increasing levels of female employment throughout the world. This has
stimulated the use of direct mail as a primary means of selling to
women who now go to work rather than spend large amounts of time
shopping.
(d) New possibilities for the identification of distinct market segments
among various types of family group.
(e) Vast improvements in availability of mailing lists both for households
and for business-to business customers. Lists can be purchased or
rented from commercial list brokers who now operate in all major
trading nations.
(f) Greater competition among the providers of international mail dispatch
services.
1.10
Relationship Marketing
This is an approach to marketing that seeks to establish long-term
relationships with customers based on trust and mutual co-operation. It
involves the establishment (where possible) of personal contacts and bonds
between the customer and the firm’s representatives; the eventual
emergence of feelings within each party of mutual obligation, of having
common goals, and of involvement with and empathy for the other side;
and the integration of all the firm’s activities (not just those of a marketing
department) concerned with customer care. Relationship marketing (RM)
contracts with conventional ‘transactional’ marketing, which has short time
horizons and focuses on securing a single sale.
With transactional
marketing there is limited customer contact and little emphasis on
customer service. Quality is seen as a matter to be dealt with by the firm’s
production department rather than something that should concern the
entire organization.
Techniques of relationship marketing include the extensive provision of
information
on
the
firm
and
its
products,
personalization
of
communications with customers, free gifts and samples, attractive premium
offers, and the careful monitoring of the relationships formed with
particular customers. More fundamentally, RM is characterized by total
commitment to customer care, openness, genuine concern for the delivery
of high quality goods and services, responsiveness to customer suggestions,
fair dealing, and (crucially) the willingness to sacrifice short-term advantage
for long-term gain. Suppliers attempt to create and strengthen lasting
bonds with their customers; they shift from attempting to maximize profits
on each individual transaction towards the establishment of solid,
dependable and above all, permanent relationships with the people they
serve. Customers are seen as partners in the marketing process, not as
individuals to be influenced simply in order to make a one-time sale. Note
(importantly) how repeat orders from existing clientele are much more
profitable to the firm than new business, because there is no need to spend
money on advertising, visits by sales-people, etc.
The practical
implementation of RM has been greatly facilitated by recent developments
in Information Technology that enable firms to hold large databases
containing extensive personalized details of individual consumers. This had
enabled suppliers to customize and target their promotions more precisely
using differentiated messages based on known individuals in their own
right.
Technological breakthroughs have occurred vis-à-vis database
capacity, interconnectivity, enquiry language and operational efficiency.
Further reasons for the current high level of interest in RM include:

The expansion of the Internet and the possibilities for direct interaction
with geographically remote foreign customers that it provides.

The huge expansion of international direct marketing that has occurred
in recent years.

Higher customer expectations in relation to levels of service.

The example of the successes achieved by large Japanese companies
that place great emphasis on long-term commitment to customers and
suppliers, on total quality management, and which pay meticulous
attention to customer care.

More extensive consumer protection legislation (e.g., on product
liability, unfair contract terms, etc.) throughout the world.
1.7
Markets as Networks
Closer relations between suppliers and customers (especially business
customers, as opposed to end consumers) has led to the proposition that
many marketing situations can be analysed in terms of the theory of
networks. A marketing network comprises a supplying company and other
firms with which it has built solid, reliable, long-term business relationships.
The latter businesses may be customers; further organisations with which it
has established links to provide mutual assistance and support (e.g.,
venture for distributing several firms’ products); the company’s own
suppliers; licensees or sub-contractors; or partners in new product research
and development. Within networks, flows of information occur as well as
exchange of money and goods. Social interactions among the various
parties can also influence outcomes.
1.8
Sales Promotions
Sales promotion covers the issue of coupons, the design of competitions,
special offers, distribution of free samples etc. The objectives of sales
promotion campaign include:

stimulation of impulse purchasing

Encouraging customer loyalty

Attracting customers to the firm’s premises

Penetration of new markets

Increasing the rate at which customers repeat their purchases.
Promotional techniques need to relate to the specified aims of the exercise
(free samples to enter new markets, reduced-price offers to encourage repeat
purchase, money-off coupons to attract customers to the premises, etc).
The use of sales promotions as a marketing weapon has expanded rapidly
throughout the world.
Unfortunately, however, international businesses
wishing to employ sales promotions for cross-border campaigns face a
number of serious practical difficulties, because in many nations the use of
certain sales promotions techniques is regarded as unfair competition, and as
such is subject to stringent legal control. Indeed, conflicting laws sometimes
apply to these matters in various countries. Money-off vouchers example,
are legal in Spain but not in Germany; ‘lower price for the next purchase’
offers are legal in Belgium, illegal in Denmark and could be illegal in Italy
depending on the circumstances of the offer. Cross-product offers (buy one
item and get a big price reduction on something else) are illegal in
Luxembourg; while free draws are illegal in Netherlands. In Germany and
certain other countries free gifts are forbidden if they constitute a genuine
incentive to buy.
The justification for the latter is that the distribution of free gifts can be
interpreted as a form of ‘dumping’, undertaken merely to force rival
companies out of business. Other criticisms of the use of sales promotions
suggested by the governments that severely restrict or ban them are that the
true value of the promoted item is concealed since consumers are improperly
influenced (arguably misled) by the special offer accompanying the sale, and
that consumers cannot meaningfully compare the prices of similar competing
goods because of the distortions and distractions that sales promotions
introduce.
Some governments allege moreover that large firms which
possess the resources necessary to plan and implement extensive sales
promotion campaigns enjoy an inequitable advantage over smaller rivals.
1.9
Summary
In this unit we have introduced the concept of advertising and its importance
in marketing domain. Advertising is an important element of marketing.
Through advertising the organization tries to reach the target audience. The
key issues of adverting are customizing advertising or standardized
advertising.
The different types of advertising range from Print, Outdoor, Broadcast,
Covert, Surrogate, Public Service, Celebrity, Insert, Sponsorship, Display
etc. The two other concept introduced in this unit are relationship marketing
and direct marketing.
1.10
Keywords
Advertising
Print Advertising
Outdoor Advertising
Broadcast advertising
Covert Advertising
Surrogate Advertising
Public Service Advertising
Celebrity Advertising
Inserts advertising
Sponsorship
Display advertising
Direct Marketing
Relationship Marketing
Sales Promotions
Direct marketing
relationship marketing
1.11
Exercise
1. Define advertising . Differentiate definitions provided
by various
sources.
2. What are the types of advertising?
3. Explain the laws and regulation pertaining to advertising.
4. What are the recent trend in advertising?
5. Differentiate the following:
a. Print vs Broadcast advertising
b. Celebrity vs sponsorship
6. Explain the concept of direct marketing in context of advertising.
Unit 2
Branding in Marketing
Structure:
2.1. Objectives
2.2. Introduction
2.3. Nature of Branding
2.4. Choice of Brand Name
2.5. Brand Positioning
2.6. Valuation of Brands
2.7. Country of origin effects
2.8. Determinants of Selling Prices
2.9. Pricing Strategies
2.10. Transfer Pricing
2.11. Summary
2.12. Keywords
2.13. Exercise
2.14. References
2.1. Objectives
After learning this unit you will be able to understand the following
issues related to Branding in marketing.
-
Branding and its importance
-
Nature of branding
-
Brand name and its choice
-
Brand positioning
-
Brand valuation
-
Brand and country
-
Pricing strategies
2.2. Introduction
Branding is a complex process, but its goal is simple: It is the creation and
development of a specific identity for a company, product, commodity,
group, or person. It is carefully designed to present qualities that its
creators believe will be attractive to the public, and it is meant to be
developed and perpetuated for the long haul. An ad campaign launches a
product. Branding, when it’s done right, creates an institution. Branding
brings about so many benefits it reminds me of the saying, “You can count
the number of seeds in an apple, but you can’t count the number of apples
in a seed.”
There’s a difference between Coca-Cola and Pepsi. All of these are
successful brand names, and they each have a distinctive personality, which
may defy definition, but is easily understood by the public at large.
Examine the decades-long competition between Coca-Cola and Pepsi: On
the surface, these two companies’ products seem interchangeable. But
more effort and money have gone into creating differences between the
personalities of the brands than into differences in the products
themselves.
What is Branding?
There are many different definitions of a brand, the most effective
description however, is that a brand is a name or symbol that is commonly
known to identify a company or it’s products and separate them from the
competition.
A well-known brand is generally regarded as one that people will recognize,
often even if they do not know about the company or its products/services.
These are usually the businesses name or the name of a product, although
it can also include the name of a feature or style of a product.
2.3. Nature of Branding
A product is anything a business has to sell, whether this be a physical good
or a service. ‘New’ products could be completely fresh innovations, or
modifications of existing products, or copies of other firms’ products.
Branding a product means giving it a trade name and/or logo and then
seeking via advertising and other sales promotion to associate certain
attractive characteristics with the branded item. Customers then, recognize
the product and, having once been satisfied by it, need not subsequently reevaluate its worth. Thus, little fresh information about the product has to
be provided to the customer after it has been branded. Note that failure to
brand a product convincingly can result in the waste of much of the firm’s
advertising, since advertisements will promote the generic product category
(including competitor’s versions) to which the item belongs rather than the
output of the firm in question.
Brand images encapsulate whole collections of product attributes and special
features. Consumers come to know what the brand represents and may thus
satisfy their requirements without careful thought or research. Also they can
avoid repurchasing unsatisfactory branded items. If the firm sells several
products in the same foreign country it must choose whether to allocate
separate brand names to individual products or establish a generic ‘family’
brand covering all versions of its output. The latter approach can be highly
cost effective, especially if the various products are closely related through
associated usage (toiletries for example) or a common channel or
distribution, a common customer group or similarity of prices.
This is
because the entire product range may then be advertise under a single brand
name, thus cutting the cost of advertising individual brands separately.
Moreover, additions to product lines are introduced easily and inexpensively
since no extra adverting or promotions need be incurred. The new product is
simply incorporated into existing advertising literature – the firm does not
have to establish a completely new individual brand image. Separate brands
are essential, nevertheless, if the firm wishes to appeal to different market
segments (e.g. in consequence of cultural differences) or where products are
markedly dissimilar.
2.4. Choice of brand name
Brand names used in foreign markets need to be internationally acceptable,
distinct and easily recognizable, culture free, legally available and not
subject to local restrictions. A brand name is far more than a device to
identify supplier of a product; it is an advertisement in its own right and a
means for arousing in consumers a set of emotions and mental images
conducive to selling the item.
Short, simple, easily read and easy-to-
pronounce brand names are usually best for foreign markets. Such names
can be used in several countries simultaneously, for family branding, and
may be supported within advertisements by a wide variety of pictorial
illustrations.
2.5. Brand Positioning
Market positioning involves finding out how customers think about firm’s
products in relation to competing products, with a view either to modifying
the product (plus associated advertising and other publicity) to make it fit in
with these perceptions, or to changing the product’s position in consumers’
minds. Positions depend on nature of the product, competing products and
on how consumers see themselves (the lifestyles to which they aspire, role
models, etc.) The essential issue is whether to attempt to position a brand
similarly in all the nations in which the firm wishes to sell is outputs or to
attempt different positions for the item in each country. A number of
factors that influence the decision whether to opt for a single or different
position in various countries are as follows:
(a)
The degree of direct and immediate substitutability between the
advertised output and locally supplied brands (if this is high the appropriate
position for the product should be self-evident).
(b)
The scope of the product’s appeal: Whether it sells to a broad cross-
section of consumers (in relation to their age, sex, income level, lifestyle,
etc.) or only within small market niches.
(c)
The extent to which a product’s selling points are perceived similarly
in different nations.
(d)
Whether the item fulfils the same consumer needs in each market.
(e)
Whether the brand name and/or product features need to be
altered for use in disparate markets.
Positioning a brand in the same location in all foreign markets has a number
of practical advantages, as follows:
(a)
The firm can concentrate all its creative efforts on a handful of
variables equally relevant to all markets.
(b)
Standardization of advertising is facilitated, leading to many cost
savings.
(c)
A similar price can be charged in each market, so that common price
lists, catalogues and other price-sensitive promotional materials can be
printed. Also the firm is not open to accusations of unfairly charging too
high in certain markets.
(d)
Similar demographic and life style variables will be researched in
each country.
Hence, the firm only needs to monitor a few key statistics in the nations in
which the product is sold.
Sound reasons for seeking different brand positions in various countries
include:
a. The existence of numerous possibilities for national stereo-typing (e.g.,
precision and reliability in Germany, flair and elegance in France, style in
Italy and so on).
Stereo typing enables the advertisers instantly (and
cheaply) to associate desirable national images with certain brands.
Consumers’ perceptions of a brand may be significantly influenced by the
image of the country with which it is associated.
b. The availability of extensive creative possibilities when drafting
advertisements with nationalistic themes (windmills in The Netherlands).
c. Local customers’ possible perception that locally produced goods are
superior in quality (Belgian, French and German consumers are known to
exhibit this characteristic for certain products).
2.6. Valuation of Brands
Brand names are valuable assets in their own right. They can be sold,
mortgaged, assigned to others or licensed in return for a royalty or lump
sum payment. Increasingly, firms prefer to acquire local firms that already
possess strong brand images in foreign countries rather than incur the
expense of introducing and developing their own brands in unfamiliar
markets. Also, brand values often appear as intangible assets in company
balance sheets, and the amounts stated have significant implications for the
borrowing powers of the firm. Ultimately, the only way to value a brand is
to sell it to the highest bidder in the open market. Unfortunately, there is
typically no genuine competitive market when a brand comes up for sale:
bilateral haggling between the brand owner and a single possible buyer
normally applies. The vendor will probably begin the negotiation from a
brand valuation based on the worth of the brand when used in the vendor’s
own business, which will depend on factors such as:

The amount that has been spent on introducing and developing the
brand (market research and advertising costs, agency fees, sales
promotions expenses, etc.)

The competitive situation and the risk of new brands entering the
market.

Whether the brand is a market leader or a market follower.

The number of countries in which the brand can be used without
significant adaptation.

Trends in consumer fashion likely to affect brand performance.

An estimate of the difference between the retail price made possible by
selling the firm’s output under the existing brand name and the price at
which it would have to be sold if unbranded.

The long-term stability of demand (and hence of output and the use of
productive capacity) created by consumer loyalty towards the brand.

Relations between the brand image and the firm’s overall corporate
image.
A firm considering purchasing an existing brand, conversely, will be
concerned with:

Fluctuations in annual sales and the expected life of the brand.

The brand’s ability to stand alone and create good profits without having
to rely on the sales of other goods, brands or services.

The brand’s market position.

Consumer brand awareness and brand loyalty, independent of the
company owing the brand.

The magnitude of the flow of income expected to be generated by the
brand in comparison with the return to be had from investing in some
other form of assets.
2.7. Country-of-origin Effects
A consumer’s overall evaluation of a product can be influenced by his/her
stereotypical image of the country from which it came. Hence, for example,
certain consumers may use country of origin (COO) as a surrogate indicator
of product quality, i.e, they assume that just because an item comes from a
certain country it will probably be of a high (or low) standard. This is
especially likely in situations where consumers have no other knowledge
about a product. Whether country-of-origin effects really matter is an issue
that has attracted much controversy. It has been argued that COO is used
when other product information is missing, but that its use decreases as
more information becomes available. Note how stereotyping can result
from lags in consumer awareness of the developments occurring in
particular countries, and may therefore operate unfairly against nations.
The extent to which a consumer is likely to be influenced by a product’s
country of origin may depend on the following:
(a) Whether a person is ethnocentric in outlook. Note that ethnocentrism
has been found to be more prevalent among the less well-educated and
within lower income groups.
(b) The individual consumer’s familiarity with the brand. (Country of origin
will probably not be important if a person is already well-acquainted
with a particular brand or product).
(c) Whether a person has traveled to other countries.
(d) The extent of an individual’s belief that local jobs depend on local
people purchasing locally produced items.
(e) Whether a person pre-assumes that domestic products are innately
superior to imports.
Patriotism and nationalism could also be factors. Such feelings derive from
a sentimental sense of loyalty to a country or other social group and involve
the idea that the country or group will be harmed by buying foreign products.
Research has generally concluded that individuals who are well-educated
are more favourably inclined towards imported items. The reasons for
education level causing people to rate foreign products relatively more
highly may be that:

Better educated people tend to be more open-minded and less
dogmatic.

Education is usually positively correlated with income, and higher
income consumers buy higher priced imports thus creating a connection
between (esteemed) luxury imports and education level.

The well-educated are typically more informed of current affairs in their
countries and hence are more interested in items possessing a foreign
image.

Better educated individuals might be more likely to be status seekers
and purchase foreign goods in order to enhance their social status.
Other (contentious) arguments are that:

The more expensive the purchase the less critical is country of origin.

As consumers become increasingly familiar with a type of product the
less they are influenced by COO considerations.

COO is not important if there is strong local competition in the supply of
the product.
Otherwise the outcomes to research studies have been equivocal. Some
investigations have concluded that women evaluate foreign products more
favourably than men, and that the inclination to buy foreign products
decreases as people get older.
Other research has found that these
variables do not exert any influence.
2.7 Determination of selling prices
The price a firm may charge for its output depends on many factors,
including the following:
(a)
Consumers’ perceptions of the attributes and quality of the product.
(b)
Total demand for the good (which depends on consumer’s income,
size of the market and seasonal and demographic factors).
(c)
The degree of competition in the market.
(d)
Price elasticity of demand for the product (i.e., the extent to which a
price change
leads to an alteration in sales).
(e)
Competitor’s likely reactions to a price cut.
(f)
Consumers knowledge of the availability of substitute products.
(g)
The product’s brand image and the degree of consumer loyalty.
(h)
Costs of production and distribution.
Special problems apply to International (as opposed to purely domestic)
pricing, particularly in relation to lack of information, uncertain consumer
responses, foreign exchange rate influences and the difficulty of estimating
all the extra costs (including overheads) associated with foreign sales.
These extra costs might include translating and interpreting fees, export
packaging and documentation costs, insurance payments, clearing agents’
fees, pre-shipment inspection and wharf age costs, and many other items.
Credit periods are very long in some countries. Government price controls
apply in certain states.
2.8 Pricing strategies
A number of pricing strategies are available:
(a) Penetration pricing – whereby a low price is combined with aggressive
advertising aimed at capturing a large percentage of the market. The
firm hopes that unit production costs will fall as output is expanded.
The strategy will fail, however, if competitors simultaneously reduce
their prices. This long-term strategy intended to build market share.
It is expensive normally involves substantial expenditures on
promoting the product. Pricing at low levels in certain foreign markets
might also be necessary in consequence of lower income levels of
local consumers; intense local competition from rival companies; or
weak demand for the product.
(b) Skimming - which is a high-price policy suitable for top-quality versions
of established products.
The firm must convince high-income
consumers that the expensive model offers distinct improvements
over the standard version. This policy requires the existence in the
local market of significant numbers of high income consumer
prepared to pay top prices. Products should be designed to appeal to
affluent consumers, offering extra features, greater comfort,
versatility or ease of operation. The firm trades off a low market
share against high margin. A foreign image can help a product sustain
a premium price, provided the image involves special qualities or
features not available in home-supplied competing goods.
(c)Cost-plus pricing whereby the supplying firm pre-determines the length
of a production run, adds up all its anticipated costs – fixed and
variable – and divides estimated total cost by planned output. Some
percentage mark-up is then added to get a unit price. Cost-plus
pricing is problematic for firms producing several different products.
Allocations of overheads to various items will be arbitrary to some
extent, so that individual products may be over or under-priced. Also
not all of a production run will necessarily be sold. Some units may
have to be put into stock or scrapped, hence altering the unit
production costs of the remaining items.
And how should an
international firm serving many foreign markets relate its overheads
to particular markets?
For example, what proportion of senior
management time should be assumed to be taken up by the firm’s
foreign operations? Should the business seek to cover all its costs
including overheads (‘full-cost’ pricing) or merely the variable costs of
foreign sales, regarding the latter as a bonus that contributes to total
revenue but need not absorb overhead expenditure.
(d)
Product life-cycle pricing - Here the price is varied according to the
stage in the product’s life cycle. Initially, a high price may be set to cover
development and advertising costs. The price might then be systematically
lowered to broaden the product’s appeal.
2.9 Transfer pricing
Transfer pricing means the determination of the ‘prices’ at which an MNC
moves goods between its subsidiaries in various countries. A crucial feature
of large centralized MNCs is their ability to engage in transfer pricing at
artificially high or low prices. To illustrate, consider an MNC which extracts
raw materials in one country, uses them as production inputs in another,
assembles the partly finished goods in a third, and finishes and sells them in
a fourth. The governments of the extraction, production and assembly
countries will have sales or value added taxes; while the production,
assembly and finished goods countries will impose tariffs on imports of
goods. Suppose the MNC values its goods at zero prior to their final sale at
high prices. The government of the extraction country receives no revenue
from sales taxes because the MNC’s subsidiary in that country is selling its
output to the same MNC’s subsidiary in the production country at a price of
zero. Equally the production country raises no income from import tariffs
on this transaction because the raw materials are imported at zero price!
The only tax the MNC pays is a sales tax in the last country in the chain.
Transfer pricing at unacceptably low values has been a major problem for
many developing nations. Sometimes, therefore, the government of the
country in which an MNC operated the government officially shall decide
the price at which the MNC exports its output, not an employee of the MNC
itself. Thus the government of host country will ensure that it receives an
appropriate amount of sales tax.
Similarly importing countries might
impose quantity-based instead of price-based import duties to ensure
reasonable revenue from taxes on imports of an MNC’s goods.
Tax considerations aside, transfer prices need to be realistic in order that the
profitability of various international operations may be assessed. Possible
criteria for setting the transfer price include:

The price at which the item could be sold on the open market (known as
‘arms length’ transfer pricing).

Cost of production or acquisition.

Acquisition/production cost plus a profit markup (note the problem
here of deciding what constitutes an appropriate profit markup).

Senior management’s perceptions of the value of the item to the overall
international operations.

Political negotiations between the units involved (a high or low transfer
price can drastically affect the observed profitability of a subsidiary).
Note the problems that arise if the ‘buyer’ happens to be the head of
the firm.
Normally the solution adopted is at which (seemingly) maximises profits for
the company taken as a whole and which best facilitates the parent control
over subsidiary operations. Arm’s length pricing is the method generally
preferred by national governments and is recommended in a 1983 Code of
Practice on the subject drafted by the Organisation for Economic Cooperation and Development (OECD). Note how a subsidiary that charges a
high transfer price will accumulate cash, which might be invested more
profitably in the selling country than elsewhere. Problems with setting a
realistic transfer price are as follows:
(a)
Differences in the accounting systems used by subsidiaries in different
countries.
(b)
Executives in operating units deliberately manipulating the transfer
price to enhance the book value of a subsidiary’s profits.
(c)
Disparate tax rates and investment subsidy levels in various countries.
(d)
Possible absence of competition in local markets at various stages in
the supply chain. Thus a ‘market price’ in such an area may be
artificially high in consequences of the lack of local competition.
(e)
There might not be any other product directly comparable to the item
in question, again making it difficult to establish a market price.
(f)
If a price is set at too high a level the ‘selling’ unit will be able to attain
its profit targets too easily (at the expense of the ‘buyer’) and lead
perhaps to idleness and inefficiency in the selling subsidiary.
Special problem arises when goods are being transferred among the partners
of joint venture. Should the various members of the venture be regarded as
subsidiaries or as independent business required to pay the market price?
2.10

Summary
Marketing is the process of planning and executing the conception,
pricing promotion and distribution of ideas, goods and services to create
exchanges that satisfy individual and organizational objectives.

Domestic marketing involves one set of uncontrollable variables derived
from the domestic market. International marketing is much more
complex because a marketer faces two or more sets of uncontrollable
variables originating from various countries.

Differentiated
international
marketing
strategies
involve
the
modification of products and promotional messages to take account of
cultural, linguistic, legal and other national characteristics.

An undifferentiated marketing strategy means the application of an
identical marketing mix in all countries, and is normally cheaper to
implement than the differentiated approach.

Concentrated marketing involves focusing the entire firm’s attention on
a handful of markets and applying a different marketing mix to each
market.
2.11
Keywords
Branding
Nature of Branding
Brand images
Brand Positioning
Valuation of Brands
Pricing strategies
Penetration pricing
Transfer pricing
Skimming
Cost-plus pricing
Product life-cycle pricing
2.12
Exercise
1. Write the importance of Branding?
2. Write briefly about the following:
a. Pricing Strategies
b. Transfer Pricing
3. Why do firms brand their products?
4. List the main pricing strategies available to an international firm.
Unit 3
Marketing Information System
Structure:
3.1
Objectives
3.2
Introduction
3.3
Characteristics of MIS
3.4
Benefits of MIS
3.5
Types of Marketing Information
3.6
Components of MIS
3.6.1 Internal reporting systems
3.6.2 Marketing research systems
3.6.3 Marketing intelligence systems
3.6.4 Marketing Models
3.7
Decision making using IS
3.7.1 Strategic decision making
3.7.2 Management control decisions
3.7.3 Operational control decisions
3.8
Summary
3.9
Keywords
3.10
Exercise
3.1 Objectives
The major objective of this unit is to make the student to understand the
importance of marketing information system in marketing and decision
making in the context of marketing and sales management.
3.2 Introduction
The marketing environment is fast changing. As companies expand their
geographical market coverage, their managers need more information more
quickly. Similarly, as income improves, buyers become more selective in
their choice of goods. To predict buyers’ response to different features, styles
and other attributes of goods, sellers must turn to marketing research. Again,
as sellers increase their reliance on branding, product differentiation,
advertising and sales promotion, they require more information on these
marketing tools and techniques. Given the above-mentioned changes, the
need for marketing information is greater now than it had been at any other
point of time earlier. This unit looks at Marketing Information System from
various angles.
3.3 Characteristics of MIS
Philip Koller defined MIS as “a system that consists of people, equipment
and procedures to gather, sort, analyze, evaluate and distribute needed,
timely and accurate information to marketing decision makers.”
Characteristics of MIS are as follows:
1. MIS is a consciously-developed master plan for information flow. It is an
on- going process. It operates continuously.
2. We have best integration and co-ordination among the functional
departments, executives and specialists such as system analysts,
programmers and computer expert.
3. MIS is future-oriented. It anticipates, prevents and solves marketing
problems. It is a preventative as well as curative process in marketing.
4. Management gets a sturdy flow of information on a regular basis. MIS
provides the right information to the right people at the right time and
cost.
3.4 Benefits of MIS
The various benefits that flow from marketing information are listed below:
1. It helps marketing planning by making available reliable information on
the external environment and the internal realities of the company.
2. It ensures effective tapping of marketing opportunities and provides
effective defense against emerging marketing threats.
3. It helps early spotting of changing trends; it provides market intelligence
to the firm.
4. It facilitates the development of action programmes for achieving goals.
5. It helps the firm adjust its products and services to the needs and tastes of
the customers.
6. It helps the firm in gaining control over its marketing activities.
7. The quality of marketing decisions is decided to a great extent by the
quality of marketing information available to the decision-maker.
3.5 Types of Marketing Information
I. Classification based on end use.
a) Information for marketing planning.
b) Information for marketing operation.
c) Information for key decisions in marketing.
d) Information for marketing control.
II. Classification based on subject matter.
a) Product
b) Consumer
c) Pricing
d) Distribution channels
e) Promotion
f) Sales force
g) Competition
h) Sales methods
i) Internal operations of the firm.
j) External environment of the firm.
3.6 Components of a marketing information system
A marketing information system (MIS) is intended to bring together
disparate items of data into a coherent body of information. An MIS is, as
will shortly be seen, more than raw data or information suitable for the
purposes of decision making. An MIS also provides methods for interpreting
the information the MIS provides. Moreover, as Kotler's1 definition says, an
MIS is more than a system of data collection or a set of information
technologies:
"A marketing information system is a continuing and interacting structure of
people, equipment and procedures to gather, sort, analyse, evaluate, and
distribute pertinent, timely and accurate information for use by marketing
decision makers to improve their marketing planning, implementation, and
control".
The following figure illustrates the major components of an MIS, the
environmental factors monitored by the system and the types of marketing
decision which the MIS seeks to underpin.
Fig 3.1 : The marketing information systems and its subsystems
The explanation of this model of an MIS begins with a description of each of
its four main constituent parts: the internal reporting systems, marketing
research system, marketing intelligence system and marketing models. It is
suggested that whilst the MIS varies in its degree of sophistication - with
many in the industrialised countries being computerised and few in the
developing countries being so - a fully fledged MIS should have these
components, the methods (and technologies) of collection, storing, retrieving
and processing data notwithstanding.
3.6.1
Internal reporting systems: All enterprises which have been in
operation for any period of time nave a wealth of information. However, this
information often remains under-utilized because it is compartmentalized,
either in the form of an individual entrepreneur or in the functional
departments of larger businesses. That is, information is usually categorised
according to its nature so that there are, for example, financial, production,
manpower, marketing, stockholding and logistical data. Often the manager,
or various personnel working in the functional departments holding these
pieces of data, do not see how it could help decision makers in other
functional areas. Similarly, decision makers can fail to appreciate how
information from other functional areas might help them and therefore do not
request it.
The internal records that are of immediate value to marketing decisions are:
orders received, stockholdings and sales invoices. These are but a few of the
internal records that can be used by marketing managers, but even this small
set of records is capable of generating a great deal of information. Below, is
a list of some of the information that can be derived from sales invoices.
-
Product type, size and pack type by territory
-
Product type, size and pack type by type of account
-
Product type, size and pack type by industry
-
Product type, size and pack type by customer
-
Average value and/or volume of sale by territory
-
Average value and/or volume of sale by type of account
-
Average value and/or volume of sale by industry
-
Average value and/or volume of sale by sales person
By comparing orders received with invoices an enterprise can establish the
extent to which it is providing an acceptable level of customer service. In the
same way, comparing stockholding records with orders received helps an
enterprise ascertain whether its stocks are in line with current demand
patterns.
3.6.2
Marketing research systems: The general topic of marketing
research has been the prime ' subject of the textbook and only a little more
needs to be added here. Marketing research is a proactive search for
information. That is, the enterprise which commissions these studies does so
to solve a perceived marketing problem. In many cases, data is collected in a
purposeful way to address a well-defined problem (or a problem which can
be defined and solved within the course of the study). The other form of
marketing research centers not around a specific marketing problem but is an
attempt to continuously monitor the marketing environment. These
monitoring or tracking exercises are continuous marketing research studies,
often involving panels of farmers, consumers or distributors from which the
same data is collected at regular intervals. Whilst the ad hoc study and
continuous marketing research differs in the orientation, yet they are both
proactive.
3.6.3
Marketing intelligence systems: Whereas marketing research is
focused, market intelligence is not. A marketing intelligence system is a set
of procedures and data sources used by marketing managers to sift
information from the environment that they can use in their decision making.
This scanning of the economic and business environment can be undertaken
in a variety of ways, including2
Unfocused The manager, by virtue of what he/she reads, hears and watches
scanning
exposes him/herself to information that may prove useful.
Whilst the behaviour is unfocused and the manager has no
specific purpose in mind, it is not unintentional
Semi-
Again, the manager is not in search of particular pieces of
focused
information that he/she is actively searching but does narrow
scanning
the range of media that is scanned. For instance, the manager
may focus more on economic and business publications,
broadcasts etc. and pay less attention to political, scientific or
technological media.
Informal
This describes the situation where a fairly limited and
search
unstructured attempt is made to obtain information for a
specific purpose. For example, the marketing manager of a firm
considering entering the business of importing frozen fish from
a neighbouring country may make informal inquiries as to
prices and demand levels of frozen and fresh fish. There would
be little structure to this search with the manager making
inquiries with traders he/she happens to encounter as well as
with other ad hoc contacts in ministries, international aid
agencies, with trade associations, importers/exporters etc.
Formal
This is a purposeful search after information in some systematic
search
way. The information will be required to address a specific
issue. Whilst this sort of activity may seem to share the
characteristics of marketing research it is carried out by the
manager him/herself rather than a professional researcher.
Moreover, the scope of the search is likely to be narrow in
scope and far less intensive than marketing research
Marketing intelligence is the province of entrepreneurs and senior managers
within an agribusiness. It involves them in scanning newspaper trade
magazines, business journals and reports, economic forecasts and other
media. In addition it involves management in talking to producers, suppliers
and customers, as well as to competitors. Nonetheless, it is a largely informal
process of observing and conversing.
Some enterprises will approach marketing intelligence gathering in a more
deliberate fashion and will train its sales force, after-sales personnel and
district/area managers to take cognisance of competitors' actions, customer
complaints and requests and distributor problems. Enterprises with vision
will also encourage intermediaries, such as collectors, retailers, traders and
other middlemen to be proactive in conveying market intelligence back to
them.
3.6.4
Marketing models: Within the MIS there has to be the means of
interpreting information in order to give direction to decision. These models
may be computerised or may not. Typical tools are:
-
Time series sales modes
-
Brand switching models
-
Linear programming
-
Elasticity models (price, incomes, demand, supply, etc.)
-
Regression and correlation models
-
Analysis of Variance (ANOVA) models
-
Sensitivity analysis
-
Discounted cash flow
-
Spreadsheet 'what if models
These and similar mathematical, statistical, econometric and financial
models are the analytical subsystem of the MIS. A relatively modest
investment in a desktop computer is enough to allow an enterprise to
automate the analysis of its data. Some of the models used are stochastic, i.e.
those containing a probabilistic element whereas others are deterministic
models where chance plays no part. Brand switching models are stochastic
since these express brand choices in probabilities whereas linear
programming is deterministic in that the relationships between variables are
expressed in exact mathematical terms.
3.7 Decision making using IS
A decision maker in an enterprise is expected to make decision which have a
positive effect on its future. Information systems should support their
activities. Today, databases and web-based resources, accessed through
effective communications, make information about the past rapidly available.
To project the future the decision maker either has to use intuition or employ
other tools, and initialize them with information obtained from an
information system to such tools. An effective information system should
also support forecasting the future. Since choices are to be made, including
the case of not doing anything, such a system must also support the
comparative assessment of the effects of alternate decisions.
Marketing information system enables a marketing manger to take decision
on various aspects of marketing and sales.
Decision making is often seen as the centre of what managers do, something
that engages most of a managers time. It is one of the areas that information
systems have sought most of all to affect (with mixed success). Decision
making can be divided into 3 types: strategic, management control and
operations control.
3.7.1
Strategic decision making: This level of decision making is
concerned with deciding on the objectives, resources and policies of the
organization. A major problem at this level of decision making is predicting
the future of the organization and its environment, and matching the
characteristics of the organization to the environment. This process generally
involves a small group of high-level managers who deal with very complex,
non-routine problems.
For example, some years ago, a medium-sized food manufacturer in an East
African country faced strategic decisions concerning its range of pasta
products. These products constituted a sizeable proportion of the company's
sales turnover. However, the company was suffering recurrent problems with
the poor quality of durum wheat it was able to obtain resulting in a finished
product that was too brittle. Moreover, unit costs were shooting up due to
increasingly frequent breakdowns in the ageing equipment used in pasta
production. The company faced the decision whether to make a very large
investment in new machinery or to accept the offer of another manufacturer
of pasta products, in a neighbouring country, that it should supply the various
pasta products and the local company put its own brand name on the packs.
The decision is strategic since the decision has implications for the resource
base of the enterprise, i.e. its capital equipment, its work force, its
technological base etc. The implications of strategic decisions extend over
many years, often as much as ten to fifteen years.
3.7.2
Management control decisions: Such decisions are concerned with
how efficiently and effectively resources are utilised and how well
operational units are performing. Management control involves close
interaction with those who are carrying out the tasks of the organisation; it
takes place within the context of broad policies and objectives set out by
strategic planners.
An example might be where a transporter of agricultural products observes
that his/her profits are declining due to a decline in the capacity utilisation of
his/her two trucks. The manager (in this case the owner) has to decide
between several alternative courses of action, including: selling of trucks,
increasing promotional activity in an attempt to sell the spare carrying
capacity, increasing unit carrying charges to cover the deficit, or seeking to
switch to carrying products or produce with a higher unit value where the
returns to transport costs may be correspondingly higher. Management
control decisions are more tactical than strategic.
3.7.3
Operational control decisions: These involve making decisions
about carrying out the " specific tasks set forth by strategic planners and
management. Determining which units or individuals in the organisation will
carry out the task, establishing criteria of completion and resource utilisation,
evaluating outputs - all of these tasks involve decisions about operational
control.
The focus here is on how the enterprises should respond to day-to-day
changes in the business environment. In particular, this type of decision
making focuses on adaptation of the marketing mix, e.g. how should the firm
respond to an increase in the size of a competitor's sales force? should the
product line be extended? should distributors who sell below a given sales
volume be serviced through wholesalers rather than directly, and so on.
Within each of these levels, decision making can be classified as either
structured or unstructured. Unstructured decisions are those in which the
decision maker must provide insights into the problem definition. They are
novel, important, and non-routine, and there is no well-understood procedure
for making them. In contrast, structured decisions are repetitive, routine, and
involve a definite procedure for handling them so that they do not have to be
treated each time as if they were new.
Structured and unstructured problem solving occurs at all levels of
management. In the past, most of the success in most information systems
came in dealing with structured, operational, and management control
decisions. However, in more recent times, exciting applications are occurring
in the management and strategic planning areas, where problems are either
semi-structured or are totally unstructured.
Making decisions is not a single event but a series of activities taking place
over time. Suppose, for example, that the Operations Manager for the
National Milling Corporation is faced with a decision as to whether to
establish buying points in rural locations for the grain crop. It soon becomes
apparent that the decisions are likely to be made over a period of time, have
several influences, use many sources of information and have to go through
several stages. It is worth considering the question of how, if at all,
information systems could assist in making such a decision. To arrive at
some answer, it is helpful to break down decision making into its component
parts.
There are four stages in decision making: intelligence, design, choice and
implementation. That is, problems have to be perceived and understood; once
perceived solutions must be designed; once solutions are designed, choices
have to be made about a particular solution; finally, the solution has to be
implemented.
Intelligence involves identifying the problems in the organisation: why and
where they occur with what effects. This broad set of information gathering
activities is required to inform managers how well the organisation is
performing and where problems exist. Management information systems that
deliver a wide variety of detailed information can be useful, especially if
they are designed to report exceptions. For instance, consider a commercial
organisation marketing a large number of different products and product
variations. Management will want to know, at frequent intervals, whether
sales targets are being achieved. Ideally, the information system will report
only those products/product variations which are performing substantially
above or below target.
Designing many possible solutions to the problems is the second phase of
decision making. This phase may require more intelligence to decide if a
particular solution is appropriate. Here, more carefully specified and directed
information activities and capabilities focused on specific designs are
required.
Choosing among alternative solutions is the third step in the decision making
process. Here a manager needs an information system which can estimate the
costs, opportunities and consequences of each alternative problem solution.
The information system required at this stage is likely to be fairly complex,
possibly also fairly large, because of the detailed analytic models required to
calculate the outcomes of the various alternatives. Of course, human beings
are used to making such calculations for themselves, but without the aid of a
formal information system, we rely upon generalisation and/or intuition.
Implementing is the final stage in the decision making process. Here,
managers can install a reporting system that delivers routine reports on the
progress of a specific solution, some of the difficulties that arise, resource
constraints, and possible remedial actions.
In practice, the stages of decision making do not necessarily follow a linear
path from intelligence to design, choice and implementation. Consider again
the problem of balancing the costs and benefits of establishing local buying
points for the National Milling Corporation. At any point in the decision
making process it may be necessary to loop back to a previous stage. For
example, one may have reached stage 3 and all but decided that having
considered the alternatives of setting up no local buying points, local buying
points in all regions, districts or villages, the government decides to increase
the amounts held in the strategic grain reserve. This could cause the decision
maker to return to stage 2 and reassess the alternatives. Another scenario
would be that having implemented a decision one quickly receives feedback
indicating that it is not proving effective. Again, the decision maker may
have to repeat the design and/or choice stage(s). Thus, it can be seen that
information system designers have to take into account the needs of
managers at each stage of the decision making process. Each stage has its
own requirements.
The various models described earlier section helps the manager to make
effective decision at the right time.
3.7.
Summary
In this unit we have explained the importance of marketing information
system and how it does helps the decision maker in decision making. Further
we have made an attempt to illustrate the various phases of decision making
and how a manager can make use of the decision making phases effectively
using the models. This unit also briefs about different marketing models that
can be used in decision making. We have also brought in the concept of
marketing intelligence and how it can be used in decision making.
3.8 Keywords
Internal reporting systems
Marketing research systems
Marketing intelligence systems
Marketing models
Strategic decision making
Management control decisions
Operational control decisions
3.9 Exercise
1. What is marketing information system?
2. Explain the different characteristic of MIS and benefits of MIS.
3. Explain different types of marketing information with an example.
4. What are the components of MIS?
5. Differentiate market research and market intelligence.
6. Name the different marketing models which used in MIS.
7. Differentiate Management control decisions and operational control
decisions.
8. What are the different types of decision making?
Unit 4
Customer Relationship Management
Structure:
4.1 Objectives
4.2 Introduction
4.3 Relationship Marketing vs Relationship Management
4.4 Definitions Customer Relationship Management
4.5 Forms of Relationship Management
4.6 Managing Customer Loyalty and Development
4.7 Reasons behind Losing Customers by Organisations
4.7.1
Price related reasons
4.7.2
Product related reasons
4.7.3
Services related reasons
4.7.4
Benefit related reasons
4.7.5
Competitor related reasons
4.7.6
Personal reasons
4.8 Significance of Customer Relationship Management
4.9 Broadening the concept of Relation
4.10 Integration of Soft and Hard Versions of Relationship Marketing
4.11 Social Actions Affecting Buyer-Seller Relationships
4.12 Summary
4.13 Keywords
4.14 Exercises
4.15 References
4.1 Objectives
The major objectives are to
- explain the meaning, need and relevance of customer relationship
management
-
know the price, product, service etc.
- reasons for losing customers by organizations
- to know the concept of customer loyalty
- other issues affecting CRM
4.2 Introduction
A customer is the most important person in this office…in person or by mail.
A customer is not dependent on us … we are dependent on him. A customer
is not an interruption of our work… he is the purpose of it. We are not doing
him a favour by serving him… he is doing us a favour by giving us the
opportunity to do so. A customer is not someone to argue or match wits
with. Nobody ever won an argument with a customer. A customer is a
person who brings us his wants. It is our job to handle them profitably to
him and to ourselves.
The above lines speak volumes about the value of a customer to an
organization. As we cross the threshold of the new millennium- the age of
“never satisfied” customer, leading enterprises are identifying the need to
change from a product-centric business to a customer-centric one.
Organizations are slowly waking up to the benefits as well as the challenge
of changing processes that are necessary in modern times. Today, the
customer is the sovereign.
If the companies would like to retain their customers, the golden path is to
make the customers loyal to their products/services. This is where CRM
comes into picture. Building loyalty into customers involves understanding
the various ways that they are different and using that knowledge to tailor
appropriate behaviour towards those customers. To do so, the company must
know the details of who the customers are, not just as group or segments of
customers, but each and every individual customer. Details of whether the
customer is profitable, or whether the customer does business with the
competitors etc., should be found out. This understanding will lead to a
successful implementation of CRM.
This unit throws light on the ways of building good customer relationship.
4.3 Relationship Marketing Vs. Relationship Management
The relationship marketing approach considers customers as insiders to the
business and aims at building a long term and never-ending relationship with
them. The focus of relationship marketing approach centers around
developing ‘hard core loyal’ customers with the idea of retaining them
forever. A high degree of customers’ contact, commitment and services are
maintained.
The relationship marketing approach has gradually taken the shape of
customer relationship management. Relationship marketing has a narrow
focus on the customers and focuses only on the marketing function of the
organization concerned. On the other hand, customer relationship
management focuses more widely on customers and on the entire functions
connected with value creation and delivery chain of the organization
concerned. The customer relationship management is a process of acquiring
customers by understanding their requirements, retaining customers by
fulfilling their requirements more than their expectations and attracting new
customers through customer specific strategic marketing approaches. The
process invites total commitment on the part of entire organization in
evolving and implementing relationship strategies that would be rewarding
to all concerned.
Organisations have preferred the usage of the term ‘Customer Relationship
Management’ rather than ‘Customer Relationship Marketing’. However, in
practice, both these terms are used interchangeably.
4.4 Definitions of Customer Relationship Management
Berry defines CRMS as “attracting, maintaining and-- in multi-service
organizations--- enhancing customer relationships.”
Berry and Parasuraman define CRMS as “attracting, developing and
retaining customer relationships.”
In industrial marketing, Jackson defines CRMS as “marketing oriented
toward strong, lasting relationships with individual accounts.”
Doyle and Roth define CRMS as “the goal of relationship selling is to earn
the position of preferred supplier by developing trust in key accounts over a
period of time.”
The sequence of activities for performing relationship marketing would
include developing core services to build customer relationship,
customization of relationship, augmenting core services with extra benefits,
and enhancing customer loyalty and fine-tuning internal marketing to
promote external marketing success.
Christopher considers relationship marketing as “ a tool to turn current and
new customers into regularly purchasing clients and then progressively
moving them through being strong supporters of the company and its
products to finally being active and vocal advocates for the company.”
Relationship marketing is in essence “selling by using psychological rather
than economic inducements to attract and retain customers. It seeks to
personalize and appeal to the hearts, minds and purses of the mass
consumers.”- James J. Lynch
Thus, “Customer Relationship Management is about acquiring, developing
and retaining satisfied loyal customer; achieving profitable growth, and
creating economic value in company’s brand,”
From the above definitions, it could be concluded that Customer
Relationship Management refers to all marketing activities directed towards
establishing, developing, and sustaining long lasting, trusting, win-win,
beneficial and successful relational exchanges between the focal firm and
all its supporting key stakeholders.
CRM is not a new concept but an age-old practice, which is on the rise
because of the benefits it offers, especially in the present marketing
scenario. So, CRM today is a discipline as well as a set of discrete software
and technology which focuses on automating and improving the business
process associated with managing customer relationships in the area of
sales, marketing, customer service and support. CRM helps companies
understand, establish and nurture long-term relationships with clients as
well as help in retaining current customers. The most important step that
an organization has to take in the direction of CRM is to create an
interdisciplinary team to review how the organization interacts with each
customer and determine how to improve and extend the relationship.
4.5 Forms of Relationship Management
An extensive review of literature reveals ten different but interrelated
forms of relationship marketing as mentioned below:
1. The
partnering
involved
in
relational
exchanges
between
manufacturers and their external goods suppliers.
2. Relational exchanges involving service providers, as between
advertising or marketing research agencies and their respective clients.
3. Strategic alliances between firms and their competitors, as in
technology alliances; co-marketing alliances and global strategic
alliance.
4. Alliances between a firm and non-profit organizations, as in publicpurpose partnerships.
5. Partnerships for joint research and development, as between firms and
local, state, or national governments.
6. Long-term exchanges between firms and ultimate customers, as
particularly recommended in the services marketing area.
7. Relational exchanges of working partnerships as in channels of
distribution.
8. Exchanges involving functional departments within a firm.
9. Exchanges between a firm and its employees, as in internal marketing.
10. Within firm relational exchanges involving such business units as
subsidiaries, divisions or strategic business units.
These different forms of relationship marketing both jointly and severally
influence the emergence and growth of enduring long-term dyadic, triadic
network, and web of relationships between the focal firm and its supporting
key stakeholders.
4.6 Managing Customer Loyalty and Development
Managing customer-development process is one of the critical dimensions of
relationship marketing. Basically it involves a twin focus-customer catching,
and customer keeping. ‘Customer catching’ is the process of attracting new
customers (inviting new blood), while the customer keeping aims at the
process of retaining the existing ones (encouraging old blood). The
dynamics of managing customer loyalty and development are shown in the
following figures 4.1.
Customer – Development Process:
Customer catching focus
Customer keeping focus
Zero customer defection
(preventive & proactive)
Suspects
Prospects
(Awareness)
First-time
customer
(Exploration)
Repeat
(Expansion)
Client
Advocate
Partner
Customer
(
Commitment
)
Fig. 4.1 : Customer – Development Process
To understand customer relationship management, we must first examine
the process involved in attracting and keeping the customers. The starting
point is suspects. Suspect is everyone who might conceivably buy the
product or service. The company looks hard at the suspects to determine
who the most likely prospects are. The prospects are those people who
have a strong potential interest in the product and the ability to pay for it.
Disqualified prospects are those whom the company rejects because they
have poor credit or would be unprofitable. The company hopes to convert
many of its qualified prospects into first- time customers, and to then
convert those satisfied first-time customers into repeat customers. Both
first - time and repeat customers may continue to buy from competitors as
well. The company then acts to convert repeat customers into clients.
Clients are those people who buy only from the company in the relevant
product categories. The next challenge is to turn the clients into advocates.
Advocates are those people who praise the company and encourage others
who buy from it. Ultimate challenge is to turn advocates into partners,
where the customer and the company work actively together. At the same
time, it must be recognized that some customers will inevitably become
inactive or drop out for various reasons causing relationships to dissolve.
The company’s challenge is to reactivate the dissatisfied customers through
customer win-back strategies. It is often easier to re-attract ex-customers
than to find new ones. Unfortunately, the traditional marketing approach
with its emphasis on making sales rather than building relationships fails to
achieve this.
4.7 Reasons behind Losing Customers by Organisations
It is said that cost of attracting a new customer is estimated to be five times
the cost of keeping a current customer happy. It requires a great deal of effort
to induce satisfied customers to switch away from their current suppliers.
Unfortunately, most marketing theory and practice center on the art of
attracting new customers rather than retaining existing ones. The emphasis
traditionally has been on making sales rather than building relationships. The
focus has been on pre-selling and selling rather than on caring for the
customer afterwards. Today, however, more companies are recognizing the
importance of satisfying and retaining the current customers.
Today’s companies must pay closer attention to their defection rate and take
steps to reduce it. The possible reasons for customer defection would
include:
4.7.1 Price related reasons: A customer tries to match the price to pay for
acquiring a brand and the value the brand could generate. If the customer perceives
a mismatch between the price and the value, he would opt for a competitor’s brand.
Also, if the price of brand for any reason goes beyond his reach, he would switch
over to a low priced brand. Thus, the role of price in customer retention is very
significant.
4.7.2 Product related reasons: In view of technological advancement, the new
brand which makes market entry would be capable of offering better performance
as compared to the already existing brand. This would induce the customers to
make a brand switch over.
4.7.3 Services related reasons: The customer’s concentration is not only on the
brand, but also on the accompanying services offered at three different stages--presales, during sales and after sales. Any dissatisfaction as regards to services would
cause the customer to move away from the brand.
4.7.4 Benefit related reasons: The customers may be attracted by various
augmented benefits offered by the competitors. Such benefits may be more
appealing and induce customers towards brand changes.
4.7.5 Competitor related reasons: Technological advancement, attractive offers,
value added services, etc., offered by competitors would also draw the attention and
induce customers towards brand switching.
4.7.6 Personal reasons: On the personal front, a customer would become a brand
defector due to the following reasons:

Moved away from the market area where the brand is sold.

Role changes in life cycle and consequently leading changes in brand
preference.

Anger, disgust, distress developed within the process of product delivery.

Sentimental reasons.

Influence of other members of the family.
The organization must periodically analyze the reasons behind losing customers
and accordingly develop a customer retention plan that would serve as the basic
tool towards building a strong and long lasting relationship with customers.
4.8 Significance of Customer Relationship Management

Reduction in customer recruitment cost.

Generation of more and more loyal customers.

Expansion of customer base.

Reduction in advertisement and other sales promotion expenses.

Increase in the number of profitable customers.

Easy introduction of new products.

Easy business expansion possibilities.

Increase in customer partnering.
The customers are also benefited by relationship marketing in terms of
improved service quality, personalized care, reduction of customer stress,
increased value for money, customer empowerment, etc.
In today’s highly competitive business world, CRM is becoming the ultimate
solution for both, customers as well as organizations. Any organization must
have a clear idea as to why it loses its customers. This would help informing
proactive and reactive measures to minimize or avoid the same. This chapter
mainly focuses on the causes responsible for losing customers and deals at
length, the various strategies that can be employed to build and maintain
long term relationship with customers, enabling a reader to consolidate
relevant strategies suitable to his business context.
Traditional Organizational Chart Vs Modern Customer – Oriented Company
Organization Chart
Fig. 4.2 : Traditional Organizational Chart Vs Modern Customer – Oriented
Company Organization Chart
Many managers who believe that the customer is the key to profitability
considered the traditional organization chart as in fig. (a) – a pyramid with
the president at the top, management in the middle, and front-line people
(sales and service people, telephone operators, receptionists) and customers
at the bottom – to be obsolete. Master marketing companies know better;
they invert the chart, as shown in fig. (b) above. At the top of the
organization are the customers. Next in importance are the front-line people
who meet, serve, and satisfy the customers. Under them are the middle
managers, whose job is to support the front-line people so they can serve the
customers well. Finally, at the base is top management whose job is to
support the middle managers. We have added customers along the sides of
Fig. (b) to indicate that all the company’s managers are personally involved
in knowing, meeting, and serving customers.
4.9
Broadening the concept of Relationship Marketing
Companies should realise that there are multiple constituencies important to
organizational success other than customers. The stakeholders of an
organization would include: investors, the financial community, vendors and
suppliers, employees, competitors, the media, neighbours and community
leaders, special interest groups, and government agencies. These
stakeholders can affect and be affected by a company’s marketing
programme. Adopting an integrated view of multiple constituencies has
bottom-line implications. Kotter and Heskett (1992) found that firms that
emphasised the interests of three constituencies--customers, employees and
stakeholders – outperformed those that emphasised only one or two.
Figure Showing Integrated View of Multiple Corporate Constituencies
Employees
Investors and
External goods
suppliers
Financial
Service provider
Community
Ultimate
(ad and marketing
research agencies
Customers
Subsidiaries, divisions,
Functional departments
(interfunctional co-ordination
Strategic business units
(SBU’s)
among production, finance,
marketing, R & D, HRM)
Channel of distribution
FOCAL FIRM
Completions (strategic
aliances: technology, comarketing and global)
(distribution and dealers)
Government
Neighbours and
Community leaders
agencies
Government-local
State, and central
Special interest
Groups in the society
Fig.4.3: Integrated View of Multiple Corporate Constituencies
(joint R & D projects)
4.10
Integration of Soft and Hard Versions of Relationship Marketing
At this juncture, it is necessary to clarify and elaborate the ‘soft’ and ‘hard’
versions of relationship marketing. Soft version of relationship marketing is
more reminiscent of ‘humanistic relationship development’, whereas the
hard version reflects a ‘utilitarian instrumentalism’. The soft version lays
stress on the term ‘relatinoship’, thus conjuring up echoes of the relationship
management. Because it strongly advocates that all management is basically
relationship management and all managers are relationship managers. It
invariably focusses on ‘developmental humanism’ as a foundation to build
and nurture enduring relationships in marketing exchanges. On the other
hand, the hard version puts the stress on the idea of ‘marketing’, that is
something to be used dispassionately and in a formally rational manner.
Various elements constituting both the versions of relationship marketing are
shown in the following table.
Table 1: Integration of soft and hard versions of relationship marketing
Soft version
Hard version
R  Relational exchanges M 
with role clarity and
relationship
E  commitment
Empathy,
A 
Integrated Version
Measure and manage R
economic and service
E
performance.
L
Analysis,
planning,
implementation,
and A
 empowering,
envisioning, ethics &
A 
excellence
T
R 
 Leadership.
I
K

 Accommodating spirit.
L
O
Trust and team spirit.
 Involvement
E

and
inspiration.
N
S
Negotiation
 nurturing spirit.
H


I
Satisfaction
beyond N
expectations.



Reversal of cycle of failure
Kill
a
culture
complacency
arrogance.
External
effectiveness.
O
of
N
and
S
marketing H
Targeting, segmenting, and
P
positioning.
External and interactive
marketing.

M
A
R
Goal attainment.

Integrity.
Pride, purpose
perseverance
I
Networks.
Hopes of becoming G
better.
I
P
and
marketing T
I
T
 Ownership of mistakes
and ideas.
control
of
programmes
and
K
E
T
I
N
G
4.11 Social Actions Affecting Buyer-Seller Relationships
Good Things
Bad Things
Initiate positive phone calls.
Make only callbacks.
Make recommendations.
Make justifications.
Candor in language.
Accommodative language.
Use phone.
Use correspondence.
Show appreciation.
Wait for misunderstandings.
Make service suggestions.
Wait for service requests.
Use “we” problem-solving language. Use “owe-us” legal language.
Get to problems.
Only respond to problems.
Use jargon or shorthand.
Use long-winded communications.
Personality problems aired.
Personality problems hidden.
Talk of “our future together”.
Talk about making good on the past.
Routinize responses.
responsiveness.
Fire drill and emergency
Accept responsibility.
Shift blame.
Plan the future.
Rehash the past.
Source: Thedone Levitt, The Marketing Imagination (New York: Free Press,
1983) p. 119. Reprinted by permission of the Harvard Business Review. An
exhibit from Theodore Levitt, “After the Sale is Over”, Harvard Business
Review (September-October 1983, p. 119). Copyright @ 1983 by the
President and Fellows of Harvard College.
4.12 Summary

The focus of relationship marketing approach centers around
developing ‘hard core loyal’ customers with the idea of retaining them
forever.

The customer relationship management is a process of acquiring
customers by understanding their requirements, retaining customers by
fulfilling their requirements more than their expectations and attracting
new customers through customer specific strategic marketing
approaches.

Customer Relationship Management is about acquiring, developing and
retaining satisfied loyal customer; achieving profitable growth, and
creating economic value in company’s brand,”

CRM is becoming the ultimate solution for both, customers as well as
organizations.
4.13 Keywords
Customer Relationship Management
Forms of Relationship Management
Managing Customer Loyalty and
Customer – Development Process
Development
Soft and Hard Versions of
Relationship
4.14 Exercise
1. Define customer relationship marketing.
2. State the various forms of customer relationship marketing.
3. What are the various reasons for losing customers by organisations?
4. State the significance of customer relationship management.
MODULE 5
Unit 1
Introduction to marketing research
Structure:
3.7
Objectives
3.8
Introduction
3.9
Features of Marketing Research
3.10
Scope of Marketing Research
3.11
Types of Marketing Research
1.5.1 Market Measurement Research
1.5.2 Marketing MIX Research
1.5.3 Researches of Uncontrollable Factors
1.6
Marketing Research Process
1.6.1 Defining the problem
1.6.2 Research Design
1.6.3 Collection of information
1.6.4 Analyze the information
1.6.5 Presentation of Report
1.7
Need and Objectives of Marketing Research
1.8
Importance and Advantages of Marketing Research
1.9
Limitations of Marketing Research
1.10
Summary
1.11
Keywords
1.12
Exercise
1.13
References
1.1 Objectives
In this unit we are able to understand the following :
–
Marketing Research
–
Features of Marketing Research
–
Scope and types of Marketing Research
–
Need and objectives of Marketing Research
–
Importance Advantages and limitations of Marketing Research
1.2 Introduction
The marketing decision process has become complex and needs an effective
marketing information system. This is because:
1) Consumer interest and market considerations are the kingpins of
marketing decisions.
2) The market tends to show both variety and complexity.
3) There are multifarious factors guiding consumer behaviour.
Along with these, the changing character of markets, increasing
environmental impacts, emergence of consumerism, unknown competition,
volatility of international political relationship, changing production function
and development of technology, have created great difficulties in making
efficient marketing decisions. Marketing decision- making is both a problem
and a challenge. To meet this challenge effectively, much information is
needed by the manager. This task of collecting, recording and analysing
relevant data is done by marketing research. As a result, it has emerged as
one of the important components of marketing information system.
Definition:
AMA defines Marketing Research as “systematic gathering, recording and
analysing of data about problems relating to marketing of goods and
services.”
A.G.R. Delens defines MR as “systematic study and evaluation of all factors
bearing on any business operation which involves transfer of goods from a
producer to a consumer.”
1.3
Features of Marketing Research
Search for data: It is a search for data which are relevant to marketing
problems- problems in different functional areas of marketing such as
consumer behaviour, product, sales, distribution channel, pricing,
advertising and physical distribution.
It is systematic: It has to be carried out in a systematic manner rather than
haphazard way. The whole process should be planned with a clear
objective.
It should be objective: Objectivity is more important in any result. It means
that the research is neither carried on to establish an opinion nor is
intentionally slanted towards pre-determined results.
It is a process: It involves various steps for gathering, recording and
analysing of data.
1.4 Scope of Marketing Research
The need for marketing research is felt by the marketing manager for
different purposes which decide the scope of marketing research. It is
undertaken to guide managers in their analysis, planning, implementation
and control of programmes to satisfy consumers and organisational goals.
Therefore the scope of marketing research stretches from the identification of
consumer wants and needs, to evaluation of consumer satisfaction. It
includes.
1) Consumer research
2) Product research
3) Sales research
4) Market research
5) Distribution channel research
6) Advertising research
7) Pricing research
8) Physical distribution research
9) Post transaction research
These researches can be classified as follows:
1.5 Types of Marketing Research
Market Measurement Marketing Mix Competition
Research
Research
Research
Research of
Uncontrollable
Factors
Demand research
Product research
Market performance
Price research
research
Motivation research
Promotion research
Distribution channel research
Policy research
Method and effect research
1.5.1
Market Measurement Research: Carried on to obtain information
on potential demand and market performance.
a) Demand Research: Carried on to find out how much a particular
product can be sold in a given market. It includes:
–
Determination of market potential.
–
Measurement of market potential.
–
Short-run and long-run sales potential.
b) Market Performance Research: Carried on to measure the existing
market. It includes:
–
Study of market size.
–
Study of market profits.
–
Market share analysis.
–
Determining market characteristics.
–
Study on market segments.
–
Sales forecasting and study of trends.
c) Motivation Research: It studies the buyer behaviour and attitude to
expand the market in a particular place. It includes:
–
Study of consumer profile.
–
Study of consumer tastes, preferences and reaction.
–
Study of shifts in consumption pattern.
–
1.5.2
Study of consumer dissatisfaction and sources of dissatisfaction.
Marketing Mix Research: It includes the following:
a) Product Research: Carried on to study new product acceptances and
competitive position. It involves:
–
Studying product line, product quality, features, design and
rationalisation of product lines.
–
Studying the actual uses of a given product.
–
Studying the new uses of a given product.
–
Studying the related products and nature of relationship.
–
Studying about packaging, packing design, material size etc.
–
Study the servicing requirements.
b) Price Research: Carried on to study effective demands at various
prices and corresponding costs of supplying product. It involves:
–
Evaluating the pricing strategy of the firm.
–
Assessing the general pattern of pricing followed by the industry.
–
Measuring price elasticity of demand.
–
Competitors’ reactions to the price strategy of the firm.
c) Promotion Research: Carried on to solve various questions such as
what should be the promotion budget etc. It includes:
–
Advertising research.
–
Advertising cost benefit research.
–
Media research.
–
Advertising effectiveness research.
–
Personal selling research.
–
Efficacy of sales promotion research.
d) Distribution Channel Research: Carried on to reveal the precise
area of weaknesses in the flow of goods and services.
–
Measuring relative effectiveness of different types of distribution
intermediaries.
–
Measuring dealer reactions to company’s price, product and
services.
–
Dealer’s percentage of competitive brand.
–
Measuring the relative effectiveness of different modes of
transportation.
–
Distribution cost analysis.
e) Policy Research: Carried on to decide marketing policy and
inventory policy. It provides necessary data and information to
predict future marketing conditions and decides suitable policies in
every area of marketing management.
f) Method and Effect Research:
–
Testing new sales programmes.
–
Analysing problems of selling.
–
Analysing of salesmen territories.
–
Study on compensation to salesmen.
g) Competition Research:
Carried on to reveal the competitive
position of the company as well as to know the strengths and
weaknesses.
–
Study of competitors’ product improvement.
–
Measuring the impact of competitors’ price, advertising channels
and sales method.
1.5.3
Researches of Uncontrollable Factors: It reveals the parameter
within which manager has to adopt various policies and procedures.
Factors which affect marketing manager are sometimes not under the
control. These factors have to be intensively studied to find out
workable premises to take appropriate marketing decision.
The scope of marketing research indicates the span of research operation,
which the marketing people may be called upon to perform. However, it
is not exhaustive. New problems may be faced which increase the scope
of marketing research. Therefore the actual scope depends upon the
specific needs of the company and compulsions in marketing situation to
which the company is exposed.
1.6 Marketing Research Process
It refers to a set of sequential steps to be followed to complete the task of
research. Each step is independent but is closely related to other steps. It is
independent in the sense that each step has a unique and decisive role. It is
inter-dependent because the result of the preceding step is the basis for the
succeeding step.
The steps involved in most marketing research tasks are as follows:
I. Identifying the Problem:
a) Identifying and defining the problem.
b) Setting up specific research objectives.
II. Developing the Research Plan and Research Design:
a) Decision on the data sources.
b) Decision on research approaches.
c) Decision on research instruments.
d) Decision on sample plan.
e) Decision on contact methods.
III. Collection of Information:
a) Designing data collection forms.
b) Field work.
IV. Analysing the Information:
a) Editing
b) Coding
c) Tabulating
d) Analysing
e) Drawing conclusions
V.
Presenting the Findings:
a) Preparation of report
b) Recommendations and follow up.
1.6.1
Defining the Problem
a) Identifying and defining the problem: Problem well-defined is half
solved. Therefore defining correctly the problem is the most
important part of any marketing research. Researchers have to
identify, define and conceptualise the real problem. Real issues may
not be apparent and apparent issues may be deceptive. Care has to
be taken while defining the problem.
b) Setting up specific research objectives: Once the problem has been
defined, the researcher has to frame the specific research objectives.
They are a broad frame within which research has to be conducted.
To this, the researchers have to address themselves to the ‘why’
aspect of the study.
1.6.2
Research Design
It the blue print of the research project and when implemented must bring
out the information required for solving the identified marketing problem. It
calls for the following decisions.
a) Decision on Data Sources: The researcher has to decide which data
sources to use. There are two data sources available. They are:
i) Primary data or data collected for specific purpose.
ii) Secondary data which are collected for some other purpose.
Secondary data has an advantage over primary data in terms of cost,
availability and time. It has the drawback of relevance to specific
situation. The decision regarding data sources depends upon the
usefulness of the data and its cost.
b) Decision on Research approaches: There are 5 types of research
approaches. They are:
i) Observational research: Fresh data is being collected by
observing the situation and the people in the situation.
ii) Focus group research: Collecting information from few
people who are invited to discuss the matters.
iii) Survey research: Collecting information by conducting
elaborate survey regarding people knowledge, beliefs, tastes
and preferences.
iv) Behavioural research: Information collected by learning the
behaviour of the consumer.
v) Experimental research: Collecting information by conducting
experiment in a controlled environment where one or two
elements are left to operate and other factors are being
controlled.
c) Decision regarding research instruments: There are mainly two
types of research instruments. They are:
i) Questionnaire: A set of questions logically arranged presented
to the respondents to answer.
ii) Mechanical devices: Mechanical devices such as galvanometer
to measure interest and emotions, eye cameras to study eye
movement etc., can be used.
d) Decision on sampling plan: The preparation of the sampling plan
calls for the following decisions:
i) Sampling unit: The researcher has to define the universe in
which he is conducting research. He has to answer who is to be
surveyed.
ii) Sample size: He has to decide what should be the size of the
sample or answer the question how many people need to be
surveyed.
iii) Sampling procedure: Further, he has to decide what should be
the method for selecting the samples. There are two methods of
sampling. They are:
Probability sampling – which is further classified into simple
random sampling, stratified random sampling and cluster
sampling, non-probability sampling – which is further classified
into convenience sampling, quota sampling, judgement sampling.
e) Decision on contact methods: Lastly, the researcher has to take a
decision regarding the contact methods. The respondent can be
contacted personally or through mail, telephone, or on-line
interviews.
1.6.3
Collection of information
a) Designing the form: For eliciting the required information, the
researcher has to prepare the form which contains questions to be
asked to the respondents. The form should be designed in such a
way that the information can be collected with speed and accuracy.
The form of the questionnaire depends upon the nature of the
information sought, the kind of respondents and data collection
methods.
b) Field Work: The researchers have to appoint well-trained people to
collect the information from samples selected for the research. They
must be properly trained, directed and motivated.
1.6.4
Analyze the information
a) Editing: It is done in two stages. The first stage is the field-editing
which is done to detect the glaring omissions and inaccuracies,
immediately after collection because the interviewers have fresh
memory about the lapses and wrong statements. The second stage
editing is office-editing to evaluate completed return. This is done
by a complete thorough scrutiny of the questionnaire.
b) Coding: It consists of assigning symbols and numericals to each
answer. It is a technical procedure for categorizing the data. It
transforms the raw data into symbols and numerals.
c) Tabulation: It is the process of arrangement of data in rows and
columns to identify what is the number of cases in each category.
d) Data analysis: The tabulated data has to be analyzed. Appropriate
technique of analysis should be utilized to analyze the data. It is a
process of converting the data into information which helps in
decision-making by eliminating useless data and making the useful
data comparable.
e) Drawing conclusion: It is converting data into information. This
requires a high interpretation skill. There are two methods of
drawing conclusions. They are:
Induction method- In this method, a statement is drawn from
observed data to specific conclusions. It is from observation.
Deduction method – It starts from general to particular. It is towards
observation.
1.6.5
Presentation of Report
The effectiveness of the report depends upon the methods of
communication and presentation of the research report. A very useful
research, if not presented properly, may not serve the purpose.
a) Preparation of the report: The user of the data is not the researcher
himself. The managers use those findings which are properly
understood. Therefore the report has to be prepared in such a
manner which helps the manger in understanding data and the
conclusions drawn. It should be simple to implement and easy to
understand. It should contain the title page, table of contents,
executive synopsis, methodology, objectives, limitations, findings,
conclusions and recommendations, appendix and bibliography.
b) Recommendations and follow up: Recommendations given in the
report should be practicable and implementable. The efficacy of the
research report can be maintained by follow up activities. The
principal researcher has to take a careful review of the facts found in
the research report. He must try to find out the inefficiencies in the
report and make it a clear report. This process includes control,
quality, appropriateness and acceptability.
1.7 Need and Objectives of Marketing Research
Marketing research may be conducted for different purposes. The main
objectives or purposes of marketing research are:
i) To estimate the potential market for a new product to be introduced in
the market.
ii) To know the reactions of the consumers to a product already existing
in the market.
iii) To find out the general market conditions and tendencies.
iv) To know the reasons for failure of a product already in the market.
v) To find out the better methods of distributing the products to the final
consumers.
vi) To know the types of consumers buying a product and their buying
motives, to know their opinions about the product and to get their
suggestions for the improvement of a product.
vii) To assess the strength and weakness of the competitors.
viii) To know the dimensions of the marketing problems.
ix) To ascertain the distribution methods suited to the product and the
market.
x) To estimate the market share of a firm.
xi) To assess the probable sales volume of a firm.
xii) To assess the reaction of the consumers to the packaging of the firm
and to make packaging as attractive as possible.
1.8 Importance and Advantages of Marketing Research
Marketing research has become a very important tool today. The success of a
business enterprise depends upon the ability of its marketing managers to
make correct and sound marketing decisions and marketing research is the
basis for making sound marketing decisions.
Marketing research has several advantages. They are:
1. Marketing research helps the management of a firm in planning its
product line by providing accurate and up-to-date information about
the customers’ demands, their changing tastes, attitudes, preferences,
buying habits, etc.
2. It helps the manufacturer to adjust his production according to the
conditions of demand.
3. It helps to establish correlative relationship between the product brand
and consumers’ needs and preferences.
4. It helps the manufacturer to secure economies in the distribution of his
products.
5. It makes the marketing of goods efficient and economical by eliminating
all type of wastage.
6. It helps the manufacturer and dealers to find out the best way of
approaching the potential buyers.
7. It helps the manufacturer to find out the defects in the existing product
and take the required corrective steps to improve the product.
8. It helps the manufacturer in finding out the effectiveness of the existing
channels of distribution and in finding out the best way of distributing
the goods to the ultimate consumers.
9. It guides the manufacturer in planning his advertising and sales
promotion efforts.
10. It is helpful in assessing the effectiveness of advertising programmes.
11. It is helpful in evaluating the relative efficiency of the different
advertising media.
12. It is helpful in evaluating selling methods.
13. It reveals the causes of consumer resistance.
14. It minimizes the risks of uncertainties and helps in taking sound
decisions.
15. It reveals the nature of demand for the firm’s product. i.e. it indicates
whether the demand for the product is constant or seasonal.
16. It is helpful in ascertaining the reputation of the firm and its products.
17. It helps the firm in determining the range within which its products are
to be offered to the consumers. That is, it is helpful in determining the
sizes, colours, designs, prices, etc., of the products of the firm.
18. It would help the management to know how patents, licensing
agreements and other legal restrictions affect the manufacture and sale
of the firm’s products.
19. It is helpful to the management in determining the actual prices and the
price ranges.
20. It is helpful to the management in determining the discount rates.
21. It is helpful to the management in ascertaining the price elasticity of
demand for its products.
22. It helps the firm in knowing the marketing and pricing strategies of the
competitors.
23. It is helpful in knowing the general conditions prevailing in the markets.
24. It is helpful to the management in finding out the size of the market for
its products.
25. It helps the firm in knowing its market share over various time periods.
26. It is quite helpful to a firm in launching a new product.
27. It helps the firm in knowing the transportation, storage and supply
requirements of its products.
28. It helps the firm in exploring new uses for its existing products and
thereby increases the demand for its products.
29. It is helpful to a firm in making sales forecasts for its products and
thereby, establishes harmonious adjustment between demand and
supply of its products.
30. It helps the firm in exploring new markets for its products.
1.9 Limitations of Marketing Research
1. It is not a Panacea: Marketing research does not provide solutions to
all marketing problems. But offers accurate information, which can be
used to arrive at suitable decisions to solve problem.
2. Not an exact science: It deals with human behaviour and as such
cannot be examined in a controlled environment. There are various
controllable and uncontrollable factors which influence marketing
forces. This gives scope for wrong conclusions.
3. Limitation of time: Its process is lengthy and needs long time to
complete it. During the period between starting the research and
implementation of decisions, the situation and assumptions may have
changed drastically which reduces the utility of the research report.
Decisions based on such report prove to be obsolete and result in false
conclusions.
4. Erroneous findings: The complicated problems may not have been
comprehensively studied and their impact may not be properly
analyzed by the researcher on account of insufficient fund, time and
technique. This leads to erroneous findings which disappoint the
management.
5. Not an exact tool of forecasting: It cannot be used as a fool-proof tool
of forecasting because there are a number of intervening factors
between the findings of the research and marketing complex. The
forces act, react and interact to give a complex state, which is difficult
to be studied.
6. Inexperienced research staff: It needs great expertise and welltrained and experienced researcher, interviewer and investigator.
7. Narrow Conception of Marketing Research: Marketing research is a
fact-finding exercise. It is not problem-oriented. It is of low and
questionable validity.
8. Involves high cost: It is considered as a luxury for the management as
it involves high cost.
9. Limitations of tools and techniques: The validity of marketing research
is also limited by the limitation of tools and techniques involved.
10. It is passive: Its use and effectiveness largely depends upon the ability
of executives to get the most value out of it.
1.10 Summary

Marketing Research is the systematic gathering, recording and analysing
of data about problems relating to marketing of goods and services.

The changing character of markets, increasing environmental impacts,
emergence of consumerism, unknown competition, volatility of
international political relationship, changing production function and
development of technology, have created great difficulties in making
efficient marketing decisions.

To predict buyers’ response to different features, styles and other
attributes of goods, sellers must turn to Marketing Research.

Internal record system supplies result data whereas marketing
intelligence system supplies happenings data.

Marketing research may be conducted by the employees of the
organisation or companies can hire the services of marketing research
firm.

The task of collecting, recording and analysing relevant data is done by
Marketing Research.

Marketing Research Process refers to a set of sequential steps to be
followed to complete the task of research.

Features of Marketing Research:
 Search for data
 It is systematic
 It should be objective
 It is a process

The scope of marketing research indicates the span of research
operation, which the marketing people may be called upon to perform.

The research report should contain the title page, table of contents,
executive synopsis, methodology, objectives, limitations, findings,
conclusions and recommendations, appendix and bibliography.
1.11 Keywords
Marketing Research
Market Measurement Research
Demand Research
Market Performance Research
Motivation Research
Marketing Mix Research
Product Research
Price Research
Promotion Research
Distribution Channel Research
Policy Research
Method and Effect Research
Competition Research
Marketing Research Process
Research Design
1.12 Exercises
1) Explain the benefits of MIS.
2) Define Marketing Research. Explain its advantages.
3) Explain the process of Marketing Research.
4) What are the different types of Marketing Research?
5) Discuss the scope of Marketing Research.
6) Write a note on limitations of Marketing Research.
Unit 2
Market Research Data Analysis
Structure:
2.1
Objectives
2.2
Introduction
2.3
Tools and techniques Marketing Research
2.3.1 Survey Research Design
2.3.2 Questionnaires
2.3.3 Interviews
2.4
Tabulation and Analysis
2.5
Statistical Tools in data analysis and interpretation
2.6
Types of Data and Levels of Measurement
2.7
Tools of Data Analysis
2.8
Summary
2.9
Keywords
2.10
Exercise
2.1. Objectives
After learning this unit you will be able to understand :
– The different methods of data collection
– Importance of tabulation and collection of data
– Analysis of the data
– Statistical Tools in Research data analysis
2.2. Introduction
In the previous unit we have learnt the concept of market research. In this
unit we shall discuss about the methods one can adopt to collect the
market research data. Data collected by any method is row in nature and
cannot be used for decision making. To make it usable, the data collected
need to be tabulated and then analyzed. In this unit we present the tools,
methods of data collection, tabulation, and analysis of data using statistical
tools.
2.3. Tools and techniques of market research
In market research, generally survey and interview methods are adopted by
the market researchers.
2.3.1 Survey Research Design
The basic idea behind survey methodology is to measure variables by
asking people questions and then to examine relationships among the
variables. In most instances, surveys attempt to capture attitude or patterns of
past behavior. About the only options are whether to ask people questions
once or over time. The most commonly seen survey uses the cross-sectional
design, which asks questions of people at one point in time. These kind of
surveys are highly fallible because the researcher may or may not be able to
analyze the direction of causal relationships. Adding retrospective (past
behavior) and prospective (future propensities) items to a cross-sectional
survey may help, but generally it's more useful to have a longitudinal design,
which asks the same questions at two or more points in time. The three
subtypes of longitudinal design are: the trend study, which is basically a
repeated cross-sectional design, asking the same questions to different
samples of the target population at different points in time; the cohort study,
which is a trend study that tracks changes in cohorts (people belonging to an
organization or location who experience the same life events) over time; and
the panel study, which asks the same questions to the same people time after
time. Trend studies essentially look at how concepts change over time;
cohort studies at how historical periods change over time; and panel studies
at how people change over time.
Surveys vary widely in sample size and sampling design. A distinction can
be made between large-scale, small-scale, and cross-cultural studies. Largescale probability surveys are the ideal, and the target population is a whole
country, like the India. Typical large-scale surveys of a national population
use a sample size of 1500-3000 respondents, but can run much larger. Smallscale surveys sometimes involve non probability sampling, and a typical
sample size of 200-300 respondents, although students on tight budgets often
use smaller samples. Comparative or cross-cultural surveys usually involve
3-6 nations, and sample sizes that typically involve 1000 people per nation.
The term "survey" actually refers to one, or some combination of two,
procedure(s): questionnaires; and interviews. A questionnaire almost always
is self-administered, allowing respondents to fill them out themselves. All
the researcher has to do is arrange delivery and collection. An interview
typically occurs whenever a researcher and respondent are face-to-face or
communicating via some technology like telephone or computer. There are
three subtypes of interviews: unstructured, which allows spontaneous
communication
in
the
course
of
the
interview
or
questionnaire
administration; structured, where the researcher is highly restricted on what
can be said; and semi structured, which restricts certain kinds of
communication but allows freedom on discussion of certain topics.
Survey research design suffers from inherent weaknesses. The greatest
weakness is probably due to the fact that all surveys are basically
exploratory. You can make inferences, but not at the level of cause-and
effect and ruling out rival hypotheses, like you can with experimental or
quasi-experimental research. Other survey weaknesses include:

Reactivity -- respondents tend to give socially desirable responses
that make them look good or seem to be what the researcher is
looking for

Sampling Frame -- it's difficult to access the proper number and type
of people who are needed for a representative sample of the target
population

Non-response Rate -- a lot of people won't participate in surveys, or
drop out

Measurement Error -- surveys are often full of systematic biases,
and/or loaded questions
Either survey or interview, during survey, we use questionnaire as a tool to
collect the data. Questionnaire is a set of questions having both open ended
and closed ended questions on the stated market research and its objectives.
2.3.2 Questionnaires
Researchers who plan to use questionnaires usually start by writing the
questions themselves. After a rough draft is created, the researcher then
analyzes their questions to see which ones are related to their variables list.
The variables list contains the key concepts or theoretical constructs that are
contained in the research question and/or hypotheses. Care is taken to ensure
that questions cover every concept, and there is no duplication or excessive
coverage of any one concept. Terminology is important at this point, and
some researchers try to mix jargon with the operational definitions of their
concepts. Generally, the less intelligent or more highly specialized your
respondents, the more the researcher uses jargon, or plain, everyday
language. A questionnaire, of course, can contain scales and indexes from
the extant literature.
The ways to increase response rate involve timing and remuneration. Timing
is the name for a variety of techniques involving pre-survey phone calls or
postcards telling respondents that a survey is coming their way soon. After
the survey has been mailed or delivered, timing also involves a follow-up
"friendly" reminder to complete the survey. Sometimes, respondents will
admit to things in completing the survey just to make the reminders stop.
Remuneration takes many forms "In the name of science" and "help me out
with my class research project while in college" appeals do not usually tend
to increase response rates. Some respondents also take you up on any offer to
receive a copy of your finished research report, when done. The best
incentive is cash money, attached to the questionnaire, so that respondents
feel guilty about keeping the money and not answering the survey.
Personalization also increases response rate. Handwritten P.S. messages,
along with anything personal about the researcher's qualifications and
previous publications, are the kinds of things that respondents like to read.
Other personal touches include endorsements from prominent individuals.
The order of questions is an important consideration. Although it's
commonplace, demographic information, like age, sex, race, etc. is best
located in the middle or end of the questionnaire. People tire of seeing
surveys asking for basic information up front. You should begin with some
question
that
immediately
captures
public
interest.
You get the idea -- you surround your key question with build-up questions,
fillers, filters, and distracters. The craft of questionnaire design is to do all
this mixing up, and still maintain what looks like a usable and consistent set
of questions. In fact, you ought to provide readers with short, transition
paragraphs when you switch gears, as in "Now you're going to be asked
about a completely different topic...." There's much, much more to the art of
questionnaire design, and you should avail yourself of a complete college
course on the Logic of Survey Design.
2.3.3 Interviews
The general rule for interviewing is to record responses verbatim. This
usually means you should use some type of recording device, or write down
word-for-word what the respondent says. To get at incriminating
information, you can shut down the recording device, and try to write down
what they said later. Structured interviews, of course, use precoded response
categories (SA, A, D, SD) which you can tailor to more sophisticated
responses depending upon feedback from your pretest (Strongly agree, agree,
disagree, strongly disagree). This requires you to be familiar with the
terminology and jargon used in the population.
Unstructured or semi-structured interviews allow you to explore various
issues in depth with respondents. If you start getting into life history, you're
probably doing depth interviewing, which is something completely different.
It is all right, however, for you, the interviewer to talk about how you would
answer a question, as long as this is to clarify the purpose of the question or
set up an instructional pattern. Self-disclosure should be avoided if it seems
like it's leading to interviewer bias. Interviews are wonderful opportunities to
impress the importance of confidentiality on respondents.
A somewhat important issue with interviewing is time of day. Some people
are diurnal and others are nocturnal, which means they talk more during the
day or at night. Many criminal justice populations are nocturnal, so you get
the best information at night. However, safety issues must be kept in mind.
Interviewers should not be overdressed nor underdressed. Some time should
be spent at the beginning to build up a rapport with the respondent.
Be prepared to use probes. Probes, or probing questions are whatever's
necessary when you get responses like "Hmm" or "I guess so", and your
probe should be "What did you mean by that?" Don't be satisfied with
monosyllabic answers. Simple yes or no answers usually call for probing,
unless the protocol suggests otherwise. Always exit the interview
diplomatically. That way, you haven't ruined it for others who might follow
you.
Telephone interviews usually are better than computer interviews, although
neither substitutes for the good observational skills of face-to-face
interviewing. The most common sampling procedure with telephones is
random digit dialing. The most common computer method is a web-based
series of questions allowing for chat or bulletin board posting. Various
software programs exist that can be loaded onto laptops and used to guide
face-to-face interviews. Other technology exists to content analyze keywords
captured by recording or computer devices.
2.4. Tabulation and Analysis
This is the phase where the collected data is coded for the tabulation
purpose. The tabulated data becomes easy to analyze and becomes useful
to apply any statistical tools. Tabulation is the primary function of Data
Analysis. The data is validated and analyzed to generate tables in a
organization-specified format that helps the researcher to interpret the
results of the survey and present it to the organization.
For the purpose of tabulation, Data are often recorded manually on data
sheets. Unless the numbers of observations and variables are small the data
must be analyzed on a computer. The data will then go through three
stages:
Coding: the data are transferred, if necessary to coded sheets.
Typing: the coded data are typed and stored in the application packages that
are used for analysis such as SPSS and MS EXCEL.
Editing: the data are checked by comparing the two independent typed data.
The standard practice for key-entering data from paper questionnaires is to
key in all the data twice. Ideally, the second time should be done by a
different key entry operator whose job specifically includes verifying
mismatches between the original and second entries. It is believed that this
"double-key/verification" method produces a 99.8% accuracy rate for total
keystrokes.
Types of error: Recording error, typing error, transcription error (incorrect
copying), Inversion (e.g., 123.45 is typed as 123.54), Repetition (when a
number is repeated), Deliberate error.
2.5. Statistical Tools in Research data analysis
Developments in the field of statistical data analysis often parallel or follow
advancements in other fields to which statistical methods are fruitfully
applied. Because practitioners of the statistical analysis often address
particular
applied
decision
problems,
methods
developments
is
consequently motivated by the search to a better decision making under
uncertainties.
Decision making process under uncertainty is largely based on application of
statistical data analysis for probabilistic risk assessment of your decision.
Managers need to understand variation for two key reasons.
First, so that they can lead others to apply statistical thinking in day to day
activities and secondly, to apply the concept for the purpose of continuous
improvement. Statistical models are currently used in various fields of
business and science.
2.6. Type of Data and Levels of Measurement
Information can be collected in statistics using qualitative or quantitative
data.
Qualitative data, such as eye color of a group of individuals, is not
computable by arithmetic relations. They are labels that advise in which
category or class an individual, object, or process fall. They are called
categorical variables.
Quantitative data sets consist of measures that take numerical values for
which descriptions such as means and standard deviations are meaningful.
They can be put into an order and further divided into two groups: discrete
data or continuous data. Discrete data are countable data, for example, the
number of defective items produced during a day's production. Continuous
data, when the parameters (variables) are measurable, are expressed on a
continuous scale. For example, measuring the height of a person.
The first activity in statistics is to measure or count. Measurement/counting
theory is concerned with the connection between data and reality. A set of
data is a representation (i.e., a model) of the reality based on a numerical and
measurable scales. Data are called "primary type" data if the analyst has been
involved in collecting the data relevant to his/her investigation. Otherwise, it
is called "secondary type" data.
Data come in the forms of Nominal, Ordinal, Interval and Ratio (remember
the French word NOIR for color black). Data can be either continuous or
discrete. The following table details about the data types.
Table 2.1 : Measurement Scales
Both zero and unit of measurements are arbitrary in the Interval scale. While
the unit of measurement is arbitrary in Ratio scale, its zero point is a natural
attribute. The categorical variable is measured on an ordinal or nominal
scale. Measurement theory is concerned with the connection between data
and reality. Both statistical theory and measurement theory are necessary to
make inferences about reality.
Since statisticians live for precision, they prefer Interval/Ratio levels of
measurement.
2.7. Tools Of Data Analysis
The domain of statistics provides various tools to analyze the data. The tools
include different types of parametric and non parametric tests. The tests
include z test, f test, t test, Chi Square test, variance analysis (single variance
and multi variance), correlation and regression analysis, factor analysis and
ratio analysis etc. The detailed description of this domain is dealt in research
methods and statistics in elective stream.
2.8. Summary
In this unit we have briefly described the methods of market related data
collection, tabulation of collected data and analysis of the same using
various tools. However, we have not discussed the tools used in analysis as
it is out side the purview of the unit.
2.9. Keywords
Survey Research Design
Questionnaires
Interviews
Tabulation and Analysis
2.10. Exercise
1.
What are different types of data? Give example.
2.
Explain the survey of market research method.
3.
Explain the interview method of research.
4.
Differentiate survey and questionnaire method of research
5.
Name some of the statistical tools that the market research
experts use for analysis.
6.
What are types of errors one might encounter in market
research data analysis?
Unit 3
International Marketing
Structure:
3.1 Objectives
3.2 Introduction
3.3 Nature of International Marketing
3.4 Benefits of International Marketing
3.5 The International Marketing concept
3.6 The Marketing MIX
3.7 Approaches to International Marketing
3.8 International Product Policy
3.9 Summary
3.10 Keywords
3.11 Exercise
3.1 Objectives
After studying this unit, you will be able to:

Explain the nature of International Marketing.

Comment on International product policy.

Explain International advertising.
3.2 Introduction
International marketing is the application of marketing orientation and
marketing techniques to international business. The essential principles of
marketing apply to international operations as much as they do to domestic
trade, although a global outlook is required and the problems of
international marketing are more extensive than for internal trade.
International marketing requires multilingual communications. In addition,
numerous cultural factors too have to be taken into account. This unit deals
with the concept of International Marketing in detail.
3.3 Nature of International Marketing
L.S. Walsh defines international marketing as:
(a) The marketing of goods and services across national frontiers; and
(b) The marketing operations of an organisation that sells and/or produces
within a given country when:
(i) That organisation is a part of, or associated with, an enterprise which
also operates in other countries; and
(ii) There is some degree of influence on or control of that
organisation’s marketing activities from outside the country in
which it sells and/or produces.
According to American Marketing Association, international marketing is
the multinational process of planning and executing the conception, pricing
promotion and distribution of ideas, goods and services to create exchanges
that satisfy individual and organizational objectives.
Information on foreign markets will often be in foreign languages; may be
hard to obtain; and is frequently difficult to interpret. Further, problems that
arise in the course of international (as opposed to domestic) marketing are as
follows:
(a) Products and promotional methods may have to be modified to suit the
needs of specific countries.
(b) Foreign market environments might be turbulent and unpredictable.
(c) Distribution channels are sometimes very long and involve many
intermediaries.
(d) International marketing managers require a wide range of marketing
skills.
(e) Diverse national laws on advertising, consumer protection, sales
promotion, direct marketing, etc., need to be taken into consideration.
(f) Pricing decisions have to take account of currency exchange rate
fluctuations.
(g) Market research is more expensive than for domestic marketing, and
can be extremely problematic.
(h) Competitors’ behaviour may be difficult to observe.
(i) Special packaging and labeling might be required.
Domestic Marketing Vs. International Marketing: Domestic marketing
involves one set of uncontrollable variables derived from the domestic
market. International marketing is much more complex because a marketer
faces two or more sets of uncontrollable variables originating from various
countries. The marketers must cope with different cultural, legal, political
and monetary systems.
3.4 Benefits of International Marketing:
1. Survival: Most countries lack market size, resources and opportunities
and hence they must trade with others to survive.
2. Growth of Overseas Markets: Developing countries in spite of economic
and marketing problems are excellent markets. The world market is four
times larger than the US market. Hence many US companies grow by
going international. For example, in case of Amway Corp., a privately
held US manufacturer of cosmetics, soaps and vitamins. Japan
represents a larger market than the United States.
3. Sales and Profits: Foreign markets constitute a larger share of the total
business of many firms that have wisely cultivated markets abroad. IBM
and Compaq sell more computers abroad than at home. In the case of
Coca-Cola, international sales account for more than 80 percent of the
firm’s operating profits.
4. Diversification: Demand for most products is affected by such cyclical
factors as recession and such seasonal factors as climate. The
unfortunate consequence of these variables is sales fluctuations which
can frequently be substantial enough to cause layoffs of personnel. One
way to diversify a company’s risk is to consider foreign markets as a
solution for variable demand.
5. Inflation and Price Moderation: Imports can also be highly beneficial to
a country because they constitute reserve capacity for local economy.
Without imports, there is no incentive for domestic firms to moderate
their prices. The lack of imported product alternatives forces consumers
to pay more resulting in inflation and excessive profits for local firms.
6. Employment: Trade restrictions in US in 1930s contributed significantly
to the great depression and caused wide-spread unemployment.
Unrestricted trade, on the other hand, improves the word’s GNP and
enhances employment generally for all nations.
7. Standard of Living: Trade affords countries and their citizens’ higher
standard of living than otherwise possible. Without trade, products
shortages force people to pay more for less. Trade also makes it easier
for industries to specialize and gain access to raw material, while at the
same time fostering competition and efficiency.
A diffusion of
innovations across national boundaries is a useful by-product of
international trade.
3.5 The International Marketing Concept
The ‘marketing concept’ is the idea that a firm should seek to evaluate
market opportunities before production, assess potential demand for good,
determine the product characteristic desired by consumers, predict the
prices consumers are willing to pay, and then supply goods corresponding
to the needs and wants of target markets. Adherence to marketing concept
means the firm conceives and develops products to satisfy consumer wants.
For international marketing, this means the integration of the international
side of the company’s business with all aspects of its operations, and the
willingness to create new products and adapt existing products to satisfy
the needs of world markets. Products may have to be adapted to suit the
tastes, needs and other characteristics of consumers in specific regions,
rather than it being assumed that an item which sells well in one country
will be equally successful elsewhere.
3.6 The Marketing Mix
Marketing is a collection of activities that includes selling, advertising public
relations, sales promotions, research, new product development, package
design, merchandising, the provision of after-sales service, and exporting.
The term marketing mix describes the combination of marketing elements
used in a given situation. Appropriate mixtures vary depending on the firm
and industry. Major elements of the marketing mix can be listed under four
headings:
(a) Promotion: Including advertising, merchandising, public relations, and
the utilisation of sales people.
(b) Product: Design and quality of output, assessment of consumer needs,
choice of products to be offered for sale and after-sales service.
(c) Price: Choice of pricing strategy and prediction of competitor’s
responses.
(d) Place: Selection of distribution channels and transport arrangements.
A firm’s marketing mix will normally (but not necessarily) have to be
adapted for international (as opposed to purely domestic) marketing in
consequence of the many national differences that exist in relation to stages
of economic development (manifest in income levels and lifestyles), social
systems, technological environments, legal frameworks, competitive
situation, business practices and cultural perspectives. Promotion policy, for
example, has to consider disparate laws and regulations on advertising and
sales promotions, while pricing policies need to take into account wide
variations in norms relating to credit and delivery terms in various states.
3.7 Approaches to International Marketing
Differentiated international marketing strategies involve the modification of
products and promotional messages to take account of cultural, linguistic,
legal and other national characteristics. An undifferentiated marketing
strategy, conversely, means the application of an identical marketing mix in
all countries, and is normally cheaper to implement than the differentiated
approach. Here, the firm offers exactly the same product using identical
promotional images and methods in a wide range of markets. Differences
in market segments are ignored. Products are designed and advertised in
order to appeal to the widest possible range of consumers. Concentrated
marketing involves focusing the entire firm’s attention on a handful of
markets and applying a different marketing mix to each market.
The
markets involved could be particular countries, or types of customer with
common characteristics but resident in several different countries.
3.8 International Product Policy
A fundamental decision that has to be taken by companies operating
internationally is whether to supply to foreign markets the firm’s existing
product, or modify the product to suit the needs of each foreign country.
Product modification is appropriate where there exist:

Significant differences in local consumer taste.

Intense competition in foreign markets (creating the need to
differentiate a firm’s output from that foreign rivals).

Special local requirements in relation to package size, technical
standards, consumer protection laws and customer care facilities.
Differences in local climate, living conditions, literacy and technical skill
level of users, customer buying habits, incomes (buyers in poor
countries might need low quality products), and in the uses to which the
product might be put in various markets.
Hopefully, product modifications will increase worldwide sales of the firm’s
core products through (i) the satisfaction of different customer needs in
various regions, (ii) retention of existing customers by keeping the product
up-to-date, and (iii) matching the product attributes offered by competing
firms. Complementary products might be introduced to stimulate sales of
existing lines, e.g. by improving the usefulness of currently produced items
(gardening tools or DIY power accessories for example). The need for
extensive product modification is a common impetus for firms to establish
local manufacturing or assembly facilities in foreign countries, as it could
well be cheaper to set up a new establishment to produce what is essentially
a new product near to end consumers rather than make major changes to
exiting production lines and procedures at home.
3.9 Summary

International Marketing is the multinational process of planning and
executing the conception, pricing promotion and distribution of ideas,
goods and services to create exchanges that satisfy individual and
organizational objectives.

Domestic marketing involves one set of uncontrollable variables derived
from the domestic market. International marketing is much more
complex because a marketer faces two or more sets of uncontrollable
variables originating from various countries.

Differentiated
international
marketing
strategies
involve
the
modification of products and promotional messages to take account of
cultural, linguistic, legal and other national characteristics.

An undifferentiated marketing strategy means the application of an
identical marketing mix in all countries, and is normally cheaper to
implement than the differentiated approach.

Concentrated marketing involves focusing the entire firm’s attention on
a handful of markets and applying a different marketing mix to each
market.
3.10Keywords
International marketing
Domestic Marketing
marketing concept
Marketing Mix
International Product Policy
3.11 Exercises
1. Define international marketing.
2. Explain the Marketing Mix.
3. What do you mean by international product policy?
Unit 4
Marketing Policy
Structure:
4.1. Objectives
4.2. Introduction
4.3. EXIM Policy
4.4. Objectives and strategy of EXIM Policy
4.5. GATS
4.6. Key features of the GATS
4.7. GATS Commitments
4.8. World Trade Organization
4.9. Principles of Trading System
4.9.1
Most-favoured-nation
4.9.2
National Treatment
4.9.3
Freer trade
4.9.4
Predictability
4.10.
The North American Free Trade Agreement (NAFTA)
4.11.
Summary
4.12.
Keywords
4.13.
Exercise
4.1.
Objectives
After learning this unit you will be able to know:
–
Importance of marketing policy
–
Different policy like WTO, NAFTA, GATS etc that are important from
the point of view marketing at the domestic level and international
level
–
Principles of trading system
4.2.
Introduction
Government policies are very important issues while considering the rate of
economic, industry and business growth that influence marketing activities.
Favourable Government policies may result in increase in FDI, FII, new
competition, merger and acquisitions, private investment and flexible credit
terms by bankers to the business enterprises. It is essential for Government
policymakers to assess and analyse the effect of Government policy and
growth of the economy through enhanced business, hence, marketing
activities. This can be effectively done by constant evaluation of the policies
in terms of how these policies are influencing the marketing function by
analysing various market forces that systematically affect it.
Government policies that impact on the R&D and product development or
innovation, pricing, positioning, promotions, distribution, customer
relationship, labeling, packaging and competition have to be taken into
consideration while designing marketing strategies for the company.
Government of any country can introduce new policies which can
substantially change marketing activities of the company. This book
highlights various Government policies that affect the marketing functions
and allied activities. It points out the specific areas of marketing functions
that are most affected. It suggests for developing a system within the
organization to anticipate these policy implications.
4.3.
EXIM Policy
The Govt. of India, Ministry of Commerce and Industry announces Export
Import Policy every five years. The current policy cover the period 20022007. The Export Import Policy (EXIM Policy) is updated every year on the
31st of March and the modifications, improvements and new schemes are
effective w.e.f. 1st April of every year. Similarly, Govt. of India also release
the Hand Book of Procedures detailing the procedures to be followed in
each of the schemes covered in the Exim Policy. (for detailed information
please visit http://164.100.9.245/exim/2000/policy/plcontents2006.pdf).
4.4. The major objectives and strategy of EXIM policy
OBJECTIVES
Trade is not an end in itself, but a means to economic growth and national
development. The primary purpose is not the mere earning of foreign
exchange, but the stimulation of greater economic activity. The Foreign
Trade Policy is rooted in this belief and built around two major objectives.
These are:
(i) To double our percentage share of global merchandise trade within the
next five years; and
(ii) To act as an effective instrument of economic growth by giving a thrust
to employment generation.
STRATEGY
These objectives are proposed to be achieved by adopting, among others,
the following strategies:
(i) Unshackling of controls and creating an atmosphere of trust and
transparency to unleash the innate entrepreneurship of our businessmen,
industrialists and traders.
(ii) Simplifying procedures and bringing down transaction costs.
(iii) Neutralizing incidence of all levies and duties on inputs used in export
products, based on the fundamental principle that duties and levies should
not be exported.
(iv) Facilitating development of India as a global hub for manufacturing,
trading and services.
(v) Identifying and nurturing special focus areas which would generate
additional employment opportunities, particularly in semi-urban and rural
areas, and developing a series of ‘Initiatives’ for each of these.
(vi) Facilitating technological and infrastructural upgradation of all the
sectors of the Indian economy, especially through import of capital goods
and equipment, thereby increasing value addition and productivity, while
attaining internationally accepted standards of quality.
(vii) Avoiding inverted duty structures and ensuring that our domestic
sectors are not disadvantaged in the Free Trade Agreements/Regional Trade
Agreements/Preferential Trade Agreements that we enter into in order to
enhance our exports.
(viii) Upgrading our infrastructural network, both physical and virtual,
related to the entire Foreign Trade chain, to international standards.
(ix) Revitalising the Board of Trade by redefining its role, giving it due
recognition and inducting experts on Trade Policy.
(x) Activating our Embassies as key players in our export strategy and linking
our Commercial Wings abroad through an electronic platform for real time
trade intelligence and enquiry dissemination.
The new Policy envisages merchant exporters and manufacturer exporters,
business and industry as partners of Government in the achievement of its
stated objectives and goals. Prolonged and unnecessary litigation vitiates
the premise of partnership. In order to obviate the need for litigation and
nurture a constructive and conducive atmosphere, a suitable Grievance
Redressal Mechanism will be established which, it is hoped, would
substantially reduce litigation and further a relationship of partnership. The
dynamics of a liberalized trading system sometimes results in injury caused
to domestic industry on account of dumping. When this happens, effective
measures to redress such injury will be taken.
4.5.
GATS: An Overview
One of the most significant achievements of the Uruguay Round of
negotiations from 1986-1993, was to broaden the scope of world trade
rules to cover services. Services negotiations were conducted on a separate
track from those on goods, under the aegis of the Group for Negotiations
on Services (GNS). The resulting agreement, GATS, establishes multilateral
rules and disciplines to govern international trade and investment in
services.
4.6.
Key features of the GATS
The GATS is a comprehensive legal framework of rules and disciplines
covering 161 service activities across 12 classified sectors. These include
activities as wide ranging as telecommunications, financial, maritime,
energy, business, education, environmental, and distribution services. It
excludes services supplied in the exercise of governmental functions.
The GATS has three main elements. The first is a set of general concepts,
principles, and rules, which are applicable across the board to measures
affecting trade in services. Some of the key provisions include obligations
concerning
transparency,
domestic
regulation,
restrictive
business
practices, behavior of public monopolies, and Most Favoured Nation (MFN)
treatment.
The second element is a set of sector-specific or cross-sectoral
commitments on national treatment and market access which are
applicable to those activities listed in a country’s schedule of commitments.
The third important element TS is a series of attachments including annexes
to the agreement which pertain to sectoral specificities and Ministerial
Declarations regarding GATS’ implementation. This three tier structure
reflects the need to have:
1. General principles applicable to all services to advance overall
liberalization in services;
2. National schedules to enable countries to proceed at their own pace in
liberalizing services; and
3. Sectoral agreements to ensure that trade liberalization in some sectors is
supported by the establishment of compatible regulatory regimes or
modification of existing ones.
The GATS defines services trade as occurring through four modes of supply,
modes as discussed earlier. This modal breakdown addresses the complex
nature of international transactions in services and the diverse forms in
which services are embodied, in consumption, production, and distributionrelated activities and in the form of goods, human capital, and information.
It also brings into the purview of GATS, regulatory issues concerning
investment policies and immigration and labour market legislation, hitherto
outside the domain of the multilateral trading system.
The GATS’ commitment structure and framework is distinct from that of
other WTO agreements. Countries make commitments on market access
and national treatment for specific sectors in sectoral schedules of
commitments and across sectors in horizontal schedules of commitments.
The former are applicable to the particular sector at hand while the latter
relate to all sectors and could compliment, override, or qualify the sectoral
commitments. Countries are free to decide which service sectors they wish
to schedule, i.e., table for negotiations, and thus subject to market access
and national treatment disciplines. The latter has also been termed as a
positive list approach to liberalization. These market access and national
treatment commitments are made for each of the four modes of supply,
i.e., there are in all eight commitments per subsector or
activity in both the sectoral and the horizontal schedules. In addition,
countries also specify in their schedules, the limitations and exceptions they
wish to maintain which violate market access and national treatment, again
by mode of supply. Limitations listed in the horizontal schedules typically
include general laws and policies, which restrict the use of a mode of supply
by foreign suppliers, independent of the sector concerned. Countries may
also choose to inscribe additional limitations or qualifying conditions to
their commitments. Under the market access obligation, a country must
accord treatment to foreign service providers which is no less favourable
than that provided for under the
terms, limitations, and conditions specified in its commitment schedule.
These limitations take the form of restrictions on the number of foreign
service suppliers, the value of transactions or assets, the total quantity of
services output, the number of natural persons who may be employed, the
type of legal entity, and the extent of foreign capital participation.
The national treatment obligation requires a country to accord treatment to
foreign service suppliers which is no less favourable than that accorded to
its domestic service providers, except as specified in its limitations and
conditions under its national treatment commitments. Typical violations of
national treatment include differential treatment of foreign service
providers in the case of subsidies, taxes, government procurement policies,
and provision of various benefits.
An entry of “none” in the above schedule means that a member binds
himself not to have any measures, which violate market access and national
treatment for a specific sector and mode of supply. These are also termed
full commitments. Unbound implies that no commitment is made for a
particular mode of supply. The rest of the entries, which include
specification of some conditions and limitations are known as partial
commitments. Thus, the GATS not only gives countries the discretion to
choose sectors for negotiations but also gives them the flexibility to decide
the degree of liberalization which they wish to commit in these tabled
sectors.
4.7.
GATS Commitments
Liberalization has been limited thus far under the GATS. Given the
discretionary nature of the commitment process, countries have typically
not scheduled the more sensitive and regulated service sectors. More
commitments have been forthcoming in sectors like tourism and software
which are relatively open and unregulated as opposed to services like
education, health, distribution, and transport where there may be equity,
employment, and government monopoly related considerations. Moreover,
even in sectors that have been scheduled, often the coverage of subsectors
and activities is quite limited. Commitments are mostly partial in nature and
tend to bind less than the status quo, especially in the case of developing
country commitments on commercial presence.
Hence, existing policies have often not been locked in through
commitments. Liberalization in mode 1 has also been limited as
commitments in this mode are mostly unbound for reasons of technical
infeasibility, indicating the uncertainty about telecom based delivery of
services and e-commerce at the time of the Uruguay Round. However, the
most strikingly limited liberalization has been in the case of mode 4 where
countries have refrained from making sector specific commitments and
have made broad horizontal commitments for select categories of service
suppliers, namely those associated with commercial presence and at higher
skill and professional levels. Moreover, even these horizontal commitments
have been subject to a large number of restrictions relating to immigration
and labour market policies, recognition requirements, nationality and
residency conditions, and differential treatment in terms of taxes, subsidies,
and procurement policies. Thus, the interest of developing countries in
exporting labour based services, especially through cross border movement
of semi-skilled and unskilled service providers, has been completely unmet.
India has made limited commitments in the Uruguay Round. It did not
schedule major sectors like energy, distribution, accountancy, and legal
services and even in sectors like financial services, which it did schedule, its
commitments did not extend to subsectors like life insurance. India’s
commitments are largely uniform across sectors and are more restrictive
than existing policies, reflecting the fact that India did not try to address
sector-specific interests and concerns and took a conservative approach to
the negotiations.
Overall, India has not used the GATS negotiations to lock in its existing
policies in various service sectors. It has also not benefited from greater
market access in other countries given the limited liberalization in its key
modes of interest
GATS 2000 Negotiations
Talks resumed in GATS 2000 as mandated during the Uruguay Round and
are currently underway. The objective of this round is to deepen the
existing commitments through a request-offer process, to strengthen and
develop various provisions in the GATS, and to establish mechanisms for
better implementation of these provisions.
4.8.
World Trade Organzaition
World Trade Organization (WTO) deals with the rules of trade between
nations at a global or near-global level. But there is more to it than that.
WTO is the only organization that deals with trade related issues between
two countries. WTO was established on 1st Jan 1995.
It’s an organization for liberalizing trade. It’s a forum for governments to
negotiate trade agreements. It’s a place for them to settle trade disputes. It
operates a system of trade rules.
Above all, it’s a negotiating forum …
Essentially, the WTO is a place
where member governments go, to try to sort out the trade problems they
face with each other. The first step is to talk. The WTO was born out of
negotiations, and everything the WTO does is the result of negotiations. The
bulk of the WTO's current work comes from the 1986-94 negotiations called
the Uruguay Round and earlier negotiations under the General Agreement on
Tariffs and Trade (GATT). The WTO is currently the host to new
negotiations, under the “Doha Development Agenda” launched in 2001.
Where countries have faced trade barriers and wanted them lowered, the
negotiations have helped to liberalize trade. But the WTO is not just about
liberalizing trade, and in some circumstances its rules support maintaining
trade barriers — for example to protect consumers or prevent the spread of
disease.
It’s a set of rules …
At its heart are the WTO agreements, negotiated and
signed by the bulk of the world’s trading nations. These documents provide
the legal ground-rules for international commerce. They are essentially
contracts, binding governments to keep their trade policies within agreed
limits. Although negotiated and signed by governments, the goal is to help
producers of goods and services, exporters, and importers conduct their
business, while allowing governments to meet social and environmental
objectives.
The system’s overriding purpose is to help trade flow as freely as possible —
so long as there are no undesirable side-effects — because this is important
for economic development and well-being. That partly means removing
obstacles. It also means ensuring that individuals, companies and
governments know what the trade rules are around the world, and giving
them the confidence that there will be no sudden changes of policy. In other
words, the rules have to be “transparent” and predictable.
And it helps to settle disputes …
This is a third important side to the
WTO’s work. Trade relations often involve conflicting interests.
Agreements, including those painstakingly negotiated in the WTO system,
often need interpreting. The most harmonious way to settle these differences
is through some neutral procedure based on an agreed legal foundation. That
is the purpose behind the dispute settlement process written into the WTO
agreements.
‘Multilateral’ trading system ... WTO is a system operated by the WTO.
Most nations — including almost all the main trading nations — are
members of the system. But some are not, so “multilateral” is used to
describe the system instead of “global” or “world”. In WTO affairs,
“multilateral” also contrasts with actions taken regionally or by other
smaller groups of countries.
4.9.
Principles of the trading system
The WTO agreements are lengthy and complex because they are legal texts
covering a wide range of activities. They deal with: agriculture, textiles and
clothing, banking, telecommunications, government purchases, industrial
standards and product safety, food sanitation regulations, intellectual
property, and much more. But a number of simple, fundamental principles
run throughout all of these documents. These principles are the foundation of
the multilateral trading system.
Trade without discrimination
4.9.1.
Most-favoured-nation (MFN)
Treating other people equally
Under the WTO agreements, countries
cannot normally discriminate between their trading partners. Grant someone
a special favour (such as a lower customs duty rate for one of their products)
and you have to do the same for all other WTO members.
This principle is known as most-favoured-nation (MFN) treatment.. It is so
important that it is the first article of the General Agreement on Tariffs and
Trade (GATT), which governs trade in goods. MFN is also a priority in the
General Agreement on Trade in Services (GATS) (Article 2) and the
Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS) (Article 4), although in each agreement the principle is handled
slightly differently. Together, those three agreements cover all three main
areas of trade handled by the WTO.
Some exceptions are allowed. For example, countries can set up a free trade
agreement that applies only to goods traded within the group —
discriminating against goods from outside. Or they can give developing
countries special access to their markets. Or a country can raise barriers
against products that are considered to be traded unfairly from specific
countries. And in services, countries are allowed, in limited circumstances, to
discriminate. But the agreements only permit these exceptions under strict
conditions. In general, MFN means that every time a country lowers a trade
barrier or opens up a market, it has to do so for the same goods or services
from all its trading partners — whether rich or poor, weak or strong.
4.9.2.
National treatment
Treating foreigners and locals equally
Imported and locally-produced
goods should be treated equally — at least after the foreign goods have
entered the market. The same should apply to foreign and domestic services,
and to foreign and local trademarks, copyrights and patents. This principle of
“national treatment” (giving others the same treatment as one’s own
nationals) is also found in all the three main WTO agreements (Article 3 of
GATT, Article 17 of GATS and Article 3 of TRIPS), although once again
the principle is handled slightly differently in each of these.
National treatment only applies once a product, service or item of intellectual
property has entered the market. Therefore, charging customs duty on an
import is not a violation of national treatment even if locally-produced
products are not charged an equivalent tax.
4.9.3.
Freer trade: gradually, through negotiation
Lowering trade barriers is one of the most obvious means of encouraging
trade. The barriers concerned include customs duties (or tariffs) and
measures such as import bans or quotas that restrict quantities selectively.
From time to time other issues such as red tape and exchange rate policies
have also been discussed.
Since GATT’s creation in 1947-48 there have been eight rounds of trade
negotiations. A ninth round, under the Doha Development Agenda, is now
underway. At first these focused on lowering tariffs (customs duties) on
imported goods. As a result of the negotiations, by the mid-1990s industrial
countries’ tariff rates on industrial goods had fallen steadily to less than 4%.
But by the 1980s, the negotiations had expanded to cover non-tariff barriers
on goods, and to the new areas such as services and intellectual property.
Opening markets can be beneficial, but it also requires adjustment. The
WTO agreements allow countries to introduce changes gradually, through
“progressive liberalization”. Developing countries are usually given longer
to fulfill their obligations.
4.9.4.
Predictability: through binding and transparency
Sometimes, promising not to raise a trade barrier can be as important as
lowering one, because the promise gives businesses a clearer view of their
future opportunities. With stability and predictability, investment is
encouraged, jobs are created and consumers can fully enjoy the benefits of
competition — choice and lower prices. The multilateral trading system is an
attempt by governments to make the business environment stable and
predictable.
The Uruguay Round increased bindings
Percentages of tariffs bound before and after the 1986-94
talks
Before
After
Developed countries
78
99
Developing countries
21
73
Transition economies
73
98
(These are tariff lines, so percentages are not weighted
according to trade volume or value)
In the WTO, when countries agree to open their markets for goods or
services, they “bind” their commitments. For goods, these bindings amount
to ceilings on customs tariff rates. Sometimes countries tax imports at rates
that are lower than the bound rates. Frequently this is the case in developing
countries. In developed countries the rates actually charged and the bound
rates tend to be the same.
A country can change its bindings, but only after negotiating with its trading
partners, which could mean compensating them for loss of trade. One of the
achievements of the Uruguay Round of multilateral trade talks was to
increase the amount of trade under binding commitments (see table). In
agriculture, 100% of products now have bound tariffs. The result of all this: a
substantially higher degree of market security for traders and investors.
The system tries to improve predictability and stability in other ways as well.
One way is to discourage the use of quotas and other measures used to set
limits on quantities of imports — administering quotas can lead to more redtape and accusations of unfair play. Another is to make countries’ trade rules
as clear and public (“transparent”) as possible. Many WTO agreements
require governments to disclose their policies and practices publicly within
the country or by notifying the WTO. The regular surveillance of national
trade policies through the Trade Policy Review Mechanism provides a
further means of encouraging transparency both domestically and at the
multilateral level.
Promoting fair competition
The WTO is sometimes described as a “free trade” institution, but that is not
entirely accurate. The system does allow tariffs and, in limited
circumstances, other forms of protection. More accurately, it is a system of
rules dedicated to open, fair and undistorted competition.
The rules on non-discrimination — MFN and national treatment — are
designed to secure fair conditions of trade. So too are those on dumping
(exporting at below cost to gain market share) and subsidies. The issues are
complex, and the rules try to establish what is fair or unfair, and how
governments can respond, in particular by charging additional import duties
calculated to compensate for damage caused by unfair trade.
Many of the other WTO agreements aim to support fair competition: in
agriculture, intellectual property, services, for example. The agreement on
government procurement (a “plurilateral” agreement because it is signed by
only a few WTO members) extends competition rules to purchases by
thousands of government entities in many countries. And so on.
Encouraging development and economic reform
The WTO system contributes to development. On the other hand, developing
countries need flexibility in the time they take to implement the system’s
agreements. And the agreements themselves inherit the earlier provisions of
GATT that allow for special assistance and trade concessions for developing
countries.
Over three quarters of WTO members are developing countries and countries
in transition to market economies. During the seven and a half years of the
Uruguay Round, over 60 of these countries implemented trade liberalization
programmes autonomously. At the same time, developing countries and
transition economies were much more active and influential in the Uruguay
Round negotiations than in any previous round, and they are even more so in
the current Doha Development Agenda.
At the end of the Uruguay Round, developing countries were prepared to
take on most of the obligations that are required of developed countries. But
the agreements did give them transition periods to adjust to the more
unfamiliar and, perhaps, difficult WTO provisions — particularly so for the
poorest, “least-developed” countries. A ministerial decision adopted at the
end of the round says better-off countries should accelerate implementing
market access commitments on goods exported by the least-developed
countries, and it seeks increased technical assistance for them. More
recently, developed countries have started to allow duty-free and quota-free
imports for almost all products from least-developed countries. On all of this,
the WTO and its members are still going through a learning process. The
current Doha Development Agenda includes developing countries’ concerns
about the difficulties they face in implementing the Uruguay Round
agreements.
The case for open trade
The economic case for an open trading system based on multilaterally agreed
rules is simple enough and rests largely on commercial common sense. But it
is also supported by evidence: the experience of world trade and economic
growth since the Second World War. Tariffs on industrial products have
fallen steeply and now average less than 5% in industrial countries. During
the first 25 years after the war, world economic growth averaged about 5%
per year, a high rate that was partly the result of lower trade barriers. World
trade grew even faster, averaging about 8% during the period.
UNDERSTANDING THE WTO: The Uruguay Round
It took seven and a half years, almost twice the original schedule. By the end,
123 countries were taking part. It covered almost all trade, from toothbrushes
to pleasure boats, from banking to telecommunications, from the genes of
wild rice to AIDS treatments. It was quite simply the largest trade
negotiation ever, and most probably the largest negotiation of any kind in
history.
The WTO agreements cover goods, services and intellectual property. They
spell out the principles of liberalization, and the permitted exceptions. They
include individual countries’ commitments to lower customs tariffs and other
trade barriers, and to open and keep open services markets. They set
procedures for settling disputes. They prescribe special treatment for
developing countries. They require governments to make their trade policies
transparent by notifying the WTO about laws in force and measures adopted,
and through regular reports by the secretariat on countries’ trade policies.
WTO has created tariffs for various types of goods, intellectual property
rights, anti dumping rules etc.
4.10.
North American Free Trade Agreement
(NAFTA)
The North American Free Trade Agreement (NAFTA) is a trade agreement
among the United States, Canada, and Mexico that liberalizes restrictions on
trade among the three countries. Some of the agreement's objectives include:

The elimination of tariff or duty rates (all qualifying products to
Canada are now duty-free, and virtually all qualifying products to
Mexico are now duty-free).

Promoting conditions of free competition, and increasing market
access and investment opportunities within the free trade area.
Since implementation January 1, 1994, trade between the three countries has
increased more than 200 percent.
In order for a product to be eligible for lower tariff rates when entering
Mexico or Canada, the product must be produced in the United States,
entirely of NAFTA component parts, or if foreign components are used, the
foreign component must undergo sufficient processing in the United States to
meet NAFTA requirements. The Department of Commerce's Market Access
and Compliance offices monitor this Agreement to ensure that Canada and
Mexico fully comply with their obligations. If you encounter problems under
the NAFTA, please contact our Agreements Compliance office.
4.11.
Summary
In this unit we have given a brief introduction to international trade related
issues, polices, guidelines and procedures. Knowledge of these will facilitate
a marketing manger to deal with the marketing related issues in a better
way.
4.12.
Keywords
EXIM Policy
Strategy
GATS
World Trade Organization
trading system
National treatment
North American Free Trade
Agreement
4.13.
Exercises
1. What is marketing policy?
2. What are objectives and strategy of EXIM Policy?
3. Explain GATS and its key features.
4. Explain principles of Trading System.