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Chapter Five- Marketing concepts What is marketing? "Marketing is an organizational function and a set of processes for creating, communicating, and delivering value to customers and for managing customer relationships in ways that benefit the organization and its stakeholders." Marketing Intelligence Marketing intelligence is everyday information about developments in the marketing environment that helps managers prepare and adjust marketing plans. The marketing intelligence system determines the intelligence needed, collects it by searching the environment and delivers it to marketing managers who need it. Marketing intelligence comes from many sources. Much intelligence is from the company's personnel - executives, engineers and scientists, purchasing agents and the sales force. But company people are often busy and fail to pass on important information. The company must 'sell' its people on their importance as intelligence gatherers, train them to spot new developments and urge them to report intelligence back to the company. The company must also persuade suppliers, resellers and customers to pass along important intelligence. Some information on competitors comes from what they say about themselves in annual reports, speeches, press releases and advertisements. The company can also learn about competitors from what others say about them in business publications and at trade shows. Or the company can watch what competitors do - buying and analyzing competitors' products, monitoring their sales and checking for new patents. Companies also buy intelligence information from outside suppliers. Dun & Bradstreet is the world's largest research company with branches in 40 countries and a turnover of S1.26 billion. Its largest subsidiary is Nielsen, which sells data on brand shares, retail prices and percentages of stores stocking different brands. Its InfoaAct Workstation offers companies the chance to analyze data from three sources on the PCs: Retail Index, which monitors consumer sales and in-store conditions; Key Account Scantrack, a weekly analysis of sales, price elasticity and promotional effectiveness; and Homesean, a new consumer panel. Alliances between marketing research companies allow access to pan-European research. Marketing intelligence can work not only for, but also against a company. Companies must sometimes take steps to protect themselves from the snooping of competitors. For example, Kellogg's had treated 1 the public to tours of its plants since 1906, but recently dosed its newly upgraded plant to outsiders to prevent competitors from getting intelligence on its high-tech equipment. In Japan corporate intelligence is part of the industrial culture. Everyone from assembly-line workers to top executives considers it their duty to filter intelligence about the competition back to management. Western companies are less active, although most of America's Fortune 500 now have in-house corporate intelligence units. Businesses are becoming increasingly aware of the need both to gather information and to protect what they have. In its Bangkok offices one European organization has a huge poster outside its lavatory saying: 'Wash and hush up! You never know who's listening! Keep our secrets secret.'1" Some companies set up an office to collect and circulate marketing intelligence. The staff scan relevant publications, summarize important news and send news bulletins to marketing managers. They develop a file of intelligence information and help managers evaluate new information. These services greatly improve the quality of information available to marketing managers. The methods used to gather competitive information range from the ridiculous to the illegal. Managers routinely shred documents because wastepaper baskets can be an information source. Other firms have uncovered more sinister devices such as Spycatcher's TFR recording system that 'automatically interrogates telephones and faxes. Also a range of tiny microphones.' 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, including: Unfocused The manager, by virtue of what he/she reads, hears and watches exposes him/herself to scanning 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 information that he/she is focused actively searching but does narrow the range of media that is scanned. For instance, the scanning manager may focus more on economic and business publications, broadcasts etc. and pay less attention to political, scientific or technological media. 2 Informal This describes the situation where a fairly limited and unstructured attempt is made to search obtain information for a specific purpose. For example, the marketing manager of a firm considering entering the business of importing frozen fish from a neighboring 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 way. The information search 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. Marketing Research WHAT IS RESEARCH? Marketing research is a Systematic Design, Collection, Analysis, and Reporting of Data Relevant to a Specific Marketing Situation Facing an Organization. 3 Market research and marketing research are often confused. 'Market' research is simply research into a specific market. It is a very narrow concept. 'Marketing' research is much broader. It not only includes 'market' research, but also areas such as research into new products, or modes of distribution such as via the Internet. Here are a couple of definitions: "Marketing research is the function that links the consumer, customer, and public to the marketer through information - information used to identify and define marketing opportunities and problems; generate, refine, and evaluate marketing actions; monitor marketing performance; and improve understanding of marketing as a process. Marketing research specifies the information required to address these issues, designs the methods for collecting information, manages and implements the data collection process, analyzes, and communicates the findings and their implications." American Marketing association - Official Definition of Marketing Research Obviously, this is a very long and involved definition of marketing research. "Marketing research is about researching the whole of a company's marketing process."Palmer (2000). This explanation is far more straightforward i.e. marketing research into the elements of the marketing mix, competitors, markets, and everything to do with the customers Marketing is a restless, changing, and dynamic business activity. The role of marketing itself has changed dramatically due to various crises—material and energy shortages, inflation, economic recessions, high unemployment, dying industries, dying companies, terrorism and war, and effects due to rapid technological changes in certain industries. Such changes, including the Internet, have forced today’s marketing executive to becoming more market driven in their strategic decision-making, requiring a formalized means of acquiring accurate and timely information about customers, products and the marketplace and the overall environment. The means to help them do this is marketing research. Marketing research assists in the overall management of the marketing function. A marketing manager must prioritize the more important and pressing problems selected for solution, reach the best possible solution based on the information available, implement the solution, modify the solution when additional information so dictates, and establish policy to act as a ready-made solution for any recurrence of the problem. 4 Market research can be defined as a formal organized effort to acquire specific information for a specific purpose. According to Warren J. Reagan “Global Marketing Practise Hall 1995“. Marketing research often focuses on understanding the “Customer” (purchasers, consumers, influencers), the “Company” (product design, promotion, pricing, placement, service, sales), and can also be expanded toward the environment to include “Competitors” (and how their market offerings interact in the market environment). Within this “Company-Customer-Competition” environment, many types of marketing research can be conducted, much of which is focused on using surveys for • Monitoring customers and markets • Measuring awareness, attitudes, and image • Tracking product usage behavior • Diagnosing immediate business problems • Supporting strategy development •Marketing Research, a critical part of Marketing Intelligence helps by providing accurate, relevant and timely (ART) information. 5 What Information? Situation Analysis Strategy Development Marketing Program Development Implementation • • Understand the environment and the market Identify threats and opportunities Assess the competitive position • • • • • • • • • Define the business scope and served market segments Establish competitive advantages Set performance objectives. Product and channel decision Communication decisions Pricing Personal selling decisions Performance monitoring Refining strategies and program Objectives of Marketing Research Marketing research is used to identify and define marketing opportunities and problems: Generate, refine and evaluate marketing actions Monitor marketing performance. Improve understanding of marketing. Marketing Research enables to answer such questions as: a) What are our weak/strong products, divisions, attitudes etc? b) Are there gaps/opportunities we can go for? c) Are there dangers/threats we need protection from? d) Are we strong in the right way to exploit the opportunity where one exists? 6 Market research helps the marketer to anticipate or respond to customer needs. It helps them to know about their current and prospective customer and helps them to know about the success of their own practices. THE RESEARCH PROCESS How is marketing research actually conducted? What are the general steps in completing a research project? These questions are answered in the steps of the research process. While the steps are shown as a linear process, some of the steps may be performed simultaneously, such as selecting data collection techniques and sample design. There are other times when “later” decisions influence decisions that are made early in the research planning process. For example, desired analysis techniques often influence the selection of data collection techniques (e.g., measurement) and sample design. Each step in this research process will now be introduced. STAGE 1: PROBLEM FORMULATION In a very real sense, problem formulation is the heart of the research process. As such, it represents the single most important step to be performed. From the researcher’s point of view, problem formulation means translating the management problem into a research problem. As previously discussed, in order to formulate an appropriate research problem, the researcher must understand the origin and nature of management’s problem and then be able to rephrase it into 7 meaningful terms from an analytical point of view. This involves timely and clear communication between manager and researcher. The end result of problem formulation is a statement of the management problem that is analytically meaningful and that often points the way to alternative solutions. An accurate problem formulation specifies the types of information needed to help solve the management problem. In short, quality thinking about a problem prior to data collection largely determines the quality of data collection, analysis and problem solving. Closely related to problem formulation is the development of a working hypothesis, or an assertion about a state of nature. While hypotheses are crucial for basic research because they tell the researcher what to do, the concept of a hypothesis can also be useful in decisional research to direct the development of the research problem statement. In most cases, the marketing researcher will not explicitly state hypotheses for the research. Kerlinger and Lee (2000, Chapter 2) suggest that research problems and hypotheses meet the following criteria: 1. The problem statement expresses a relationship between two or more variables. 2. The problem is stated clearly and unambiguously in question form. 3. The problem statement implies possibilities of empirical testing. Where properties of good hypotheses include the following: 1. The hypothesis is a statement about the relationship between two or more variables in declarative statement form. 2. The hypothesis carries clear implications for testing the stated relationship (i.e., variables must be measurable or potentially measurable). Problem Formulation Components Problem formulation consists of specific components: 1. Specify the Research Objectives Objectives guide the researcher in developing good, useful research, and they help the client evaluate the completed project. Objectives range from the very general, such as profit maximization, to the highly specific, such as measuring market interest in a new product. It is rare that the objectives are explained fully to the researcher. The researcher will need to take the initiative in developing a clear statement of objectives. Each study should have a very limited and manageable set of objectives. Two or three well targeted objectives is preferable to many that are ill-conceived. Fewer the objectives make it easier to keep 8 track of progress toward the objectives, to ensure that each is properly addressed, and to determine the best methodology. If there are too many objectives separate studies may be appropriate. 2. The Environment or Context of the Problem Consider the problem of deciding whether to introduce a new consumer product. The marketing researcher must work closely with the client in transforming the client’s problem into a workable research problem. The researcher’s efforts should be oriented toward helping the manager decide whether any investigation is justified based on the potential value of the research findings versus their cost. The researcher must be aware of, and assist in, the identification of objectives, courses of action, and environmental variables, insofar as they affect the design of the research investigation. If the research is undertaken and if the resulting findings are to be utilized (i.e., have an influence on the user’s decision making), the manager and researcher must have a productive and trusting relationship that is based on the researcher’s ability to perform and deliver the research as promised. 3. The Nature of the Problem Every research problem may be evaluated on a scale that ranges from very simple to very complex. The degree of complexity depends on the number of variables that influence the problem. Understanding the nature of the problem helps a researcher ensure that the right problem is being investigated and that a marketing plan can be developed to solve the problem. A thorough preliminary investigation using focus groups of consumers, salespeople, managers, or others close to the problem may produce much needed insight. 4. Alternative Courses of Action A course of action specifies a behavioral sequence that occurs over time, such as the adoption of a new package design, or the introduction of a new product. Such a program of action becomes a commitment, made in the present, to follow some behavioral pattern in the future. It is usually desirable to generate as many alternatives as possible during the problem formulation stage and state them in the form of research hypotheses to be examined. A hypothesis often implies a possible course of action with a prediction of the outcome if that course of action is followed. Once the nature of the problem has been agreed upon, the course of action must be specified. This involves: 1. Determining which variables affect the solution to the problem 2. Determining the degree to which each variable can be controlled 9 3. Determining the functional relationships between the variables and which variables are critical to the solution of the problem. 5. The Consequences of Alternative Courses of Action A set of consequences always relate to courses of action and even to the occurrence of events not under the control of the manager. One of the manager’s primary jobs is to anticipate and communicate the possible outcomes of various courses of action that may result from following the research. 6. Degrees of Uncertainty Most marketing problems are characterized by a situation of uncertainty as to which course of action is best. Years of experience may allow the decision-making manager to assign various “likelihoods of occurrence” to the various possible outcomes of specific courses of action. A carefully formulated problem and statement of research purpose is necessary for competent research. The statement of purpose involves a translation of the decision maker’s problem into a research problem and the derivation of a study design from this problem formulation. The research problem provides relevant information concerning recognized (or newly generated) alternative solutions to aid in this choice. STAGE 2: METHOD OF INQUIRY Market researchers look to the scientific method as the source of their investigative methods. Even though this method is not the only one used, it is the standard against which other investigative methods are measured. The scientific method makes great use of existing knowledge both as a starting point for investigation and as a check on the results of the investigations (i.e., a test of validity). Its most distinctive characteristic is its total lack of subjectivity. The scientific method has evolved objective and rigid procedures for verifying hypotheses or evaluating evidence. It is analytical in its processes and is investigator-independent. Thus, the scientific method is for the most part logical and objective, and frequently makes extensive use of mathematical reasoning and complicated experiments (see Exhibit 2.6). The goal of a scientific methodologist, also called an objectivist, is to run a hypothesis test using publicly stated procedures that are investigator-independent. • Formulate a problem • Develop a hypothesis 10 • Make predictions based on the hypothesis • Devise a test of the hypothesis • Conduct the test • Analyze the results Even though the terminology used is that associated with basic research, the process described is analogous to that of decision making. Although the steps are the same, there are differences in the way in which the steps are performed and in the underlying assumptions about behavior. For example, the essential difference between the objectivist and the subjectivist is the latter’s allowance for use of subjective judgments both when collecting data and when analyzing data (Diesing, 1966). The distinction has very practical meaning, particularly when considering the use of outside research suppliers. There are commercial research firms that tend to specialize in one or the other method of inquiry. Objectivist-based research is often called quantitative research, whereas subjectivist-based research is often called qualitative research. STAGE 3: RESEARCH METHOD Whether a particular method of inquiry is appropriate for a research problem depends in large part on the nature of the problem itself and the extent or level of existing knowledge. In addition to selecting a method of inquiry, the research planner must also select a research method. Two broad methodologies can be used to answer any research question–experimental research and non-experimental research. The major advantage of experimental research lies in the ability to control extraneous variables and manipulate one or more variables by the intervention of the investigator. In non-experimental research, there is no intervention beyond that needed for purposes of measurement. STAGE 4: RESEARCH DESIGN Research design is defined as the specific methods and procedures for acquiring the information needed. It is a plan or organizational framework for doing the study and collecting the data. Research designs are unique to a methodology. STAGE 5: DATA COLLECTION TECHNIQUES 11 Research design begins to take on detailed focus as the researcher selects the particular techniques to be used in solving the problem formulated and in carrying out the method selected. A number of techniques available for collecting data can be used. Some techniques are unique to a method of inquiry. For example, many of the qualitative research techniques, such as projective techniques, are used only in subjectivist-type research. In general, data collection uses either communication or observation. Communication involves asking questions and receiving responses. This process can be done in person, by mail, by telephone, by e-mail, and over the Internet. In most instances this constitutes the broad research technique known as the survey. In contrast to this process, data may be obtained by observing present or past behavior. Regarding past behavior, data collection techniques include looking at secondary data such as company records, reviewing studies published by external sources, and examining physical traces such as erosion and accretion. In order to collect data from communication or observation there must be a means of recording responses or behavior. Thus, the process of measurement and the development of measurement instrument are closely connected to the decision of which data collection technique(s) should be used. The relationship is two-way. That is, the structure and content of the measurement instrument can depend on the data collection technique, and measurement Considerations often influence technique selection. STAGE 6: SAMPLE DESIGN Rarely will a marketing research project involve examining the entire population that is relevant to the problem. For the most part, practical considerations (e.g., absolute resources available, cost vs. value, etc.) dictate that one use a sample, or subset of the relevant population. In other instances the use of a sample is derived from consideration of the relevant systematic and variable errors that might arise in a project. In designing the sample, the researcher must specify three things: 1. Where the sample is to be selected 2. The process of selection 3. The size of the sample The sample design must be consistent with the relevant population, which is usually specified in the problem-formulation stage of the research process. This allows the data obtained from the sample to be used in making inferences about the larger population. 12 The process of sample selection may be done by probability or non probability methods. In probability sampling every element in the population has a known nonzero probability (chance) of being selected for inclusion in a study. In contrast, a non probability sample is one selected on the basis of the judgment of the investigator, convenience, or by some other means not involving the use of probabilities. STAGE 7: DATA COLLECTION Data collection begins after the previous six stages of the research process are complete. Data collection, whether by communication or observation, requires the use of data collection personnel which then raises questions regarding managing these people. Because data collection can be costly, firms often utilize outside limited-service research suppliers, particularly when the extent of in-house research activity does not warrant the cost of having permanent data collection personnel. Also, project design may require specialized data collection, which might best be obtained from an outside supplier. The working relationship between the data collection agency (a so-called field service) and the research supplier or client is a major factor affecting the quality of fieldwork and data collection. A study of marketing research firms found that the major barriers to the communication of information from clients to research suppliers to field service firms were insufficient information supplied by the client, the research supplier as an intermediary between client and field service firm, and lack of client interest in data collection (Segal & Newberry, 1983). The major suggestion for improving communication is for clients to provide more information to both suppliers and field service firms. Another way to overcome communication barriers is for the field service to be consulted on such major issues as scheduling, costs, and purpose of the study. Finally, it was suggested that two-way communication with suppliers be established or strengthened. Although this study was conducted more than 20 years ago, these are enduring problems that exist today. Sources of Data - Primary and Secondary There are two main sources of data - primary and secondary. Primary research is conducted from scratch. It is original and collected to solve the problem in hand. Secondary research, also known as desk research, already exists since it has been collected for other purposes. We have given a general introduction to marketing research. Marketing research is a huge topic area and has many processes, procedures, and terminologies that build upon the points above. (See also lesson on market research, primary marketing research and secondary marketing research) 13 Primary - Marketing Research. Primary marketing research is collected for the first time. It is original and collected for a specific purpose, or to solve a specific problem. It is expensive, and time consuming, but is more focused than secondary research. There are many ways to conduct primary research. We consider some of them: 1. Interviews 2. Mystery shopping 3. Focus groups 4. Projective techniques 5. Product tests 6. Diaries 7. Omnibus Studies STAGE 8: ANALYSIS AND INTERPRETATION Data that are obtained and presented in the same form as originally collected are seldom useful to anyone. Data must be analyzed. The data must be edited, coded, and tabulated before performing formal analyses such as statistical tests. The types of analyses that can be properly performed depend upon the sampling procedures, measurement instruments, and data collection techniques used. Consequently, it is imperative that the techniques of analysis, associated descriptive or prescriptive recommendation types, and presentation formats be selected prior to data collection. STAGE 9: THE RESEARCH REPORT The culmination of the research process is the research report. It includes a clear, accurate, and honest description of everything that has been done and the results, conclusions, and— whenever possible— recommendations for courses of action. Two critical attributes of the report are that it provides all the information readers need using language they understand (completeness) and that it contains selective 14 information chosen by the researcher (conciseness). These attributes are often in conflict with each other. Two approaches can be taken to ensure that this conflict is not a problem. One approach involves preparing two reports: (1) a technical report that emphasizes the methods used and underlying assumptions, and presents the findings in a detailed manner; and (2) a popular report that minimizes technical details and emphasizes simplicity. The second approach is concerned with how the report is communicated. Because people vary a great deal in how they are affected by different forms of communication, the ideal reporting process should try to encompass all major forms. Thus, a written report, by itself, may be inadequate and only an invitation to inaction. There are simply a lot of people who, for various reasons, don’t respond to the printed word. There are still more that, although they may respond, will often misunderstand the meaning of what is written. For these reasons, it is vitally necessary to get management to sit down with the research manager, or with the researcher and the outside research firm, in a face-to-face reporting situation. Good Marketing Research: – Is scientific – Is creative – Uses multiple methods – Realizes the interdependence of models & data – Acknowledges the cost & value of information – Maintains “healthy” skepticism – Is ethical Competitive analysis To prepare an effective marketing strategy, a company must consider its competitors as well as its actual and potential customers. It must continuously analyze its competitors and develop competitive marketing strategies that effectively position it against competitors and give it the strongest possible competitive advantage. Competitor analysis first involves identifying the company's main competitors, using both an industry and a market-based analysis. The company then gathers information on competitors' objectives, strategies, strengths and weaknesses, and reaction patterns. With this information to hand, it can select competitors to attack or avoid. Competitive intelligence must be collected, interpreted and distributed 15 continuously. Company marketing managers should be able to obtain full and reliable information about any competitor affecting their decisions. Marketing strategies Which competitive marketing strategy makes the most sense depends on the company's industry position and its objectives, opportunities and resources. The company's competitive marketing strategy depends on whether it is a market leader, challenger, follower or nicher. A market leader faces three challenges: expanding the total market, protecting market share and expanding market share. The market leader wants to find ways to expand the total market because it will benefit most from any increased sales. To expand market size, the leader looks for new users of the product, new uses and more usage. To protect its existing market share, the market leader has several defences: position defence, flanking defence, pre-emptive defence, counteroffensive defence, mobile defence and contraction defence. The most sophisticated leaders cover themselves by doing everything right, leaving no openings for competitive attack. Leaders can also try to increase their market shares. This makes sense if profitability increases at higher market-share levels. A market challenger is a firm that aggressively tries to expand its market share by attacking the leader, other runner-up firms or smaller firms in the industry. The challenger can choose from a variety of attack strategies, including a frontal attack, flanking attack, encirclement attack, bypass attack and guerrilla attack. A market follower is a runner-up firm that chooses not to rock the boat, usually out of fear that it stands to lose more than it might gain. The follower is not without a strategy, however, and seeks to use its particular skills to gain market growth. Some followers enjoy a higher rate of return than the leaders in their industry. A market nicher is a smaller firm that serves some part of the market that is not likely to attract the larger firms. Market nichers often become specialists in some end use, vertical level, customer size, specific customer, geographic area, product or product feature, or service. FRONTAL ATTACK In a full frontal attack, the challenger matches the competitor's product, advertising, price and distribution efforts. It attacks the competitor's strengths rather than its weaknesses. The outcome depends on who has the greater strength and endurance. Even great size and strength may not be enough to challenge a firmly entrenched and resourceful competitor successfully, Unilever has twice 16 the world-wide sales of P & G and five times the sales of Colgate-Palmolive, hut its American subsidiary trails P & G by a wide margin in the United States. Unilever launched a full frontal assault against P & G in the detergent market while Unilever's Wisk was already the leading liquid detergent. In quick succession, it added a barrage of new products - Sunlight dishwashing detergent, Snuggle fabric softener, Surf laundry powder - and hacked them with aggressive promotion and distribution efforts, P & G spent heavily to defend its brands and held on to most of its business. It counterattacked with Liquid Tide, which came from nowhere in just 17 months to run neck-and-neck with Wisk. Unilever did gain market share, but most of it came from smaller competitors. If the market challenger has fewer resources than the competitor, a frontal attack makes little sense. FLANKING ATTACK Rather than attacking head on, the challenger can launch a flanking attack. The competitor often concentrates its resources to protect its strongest positions, but it usually has some weaker flanks. By attacking these weak spot, the challenger can concentrate its strength against the competitor's weakness. Flank attacks make good sense when the company has fewer resources than the competitor. When Airbus Industries started making airliners it was up against Boeing, a company that dominates the industry. Lockheed and McDonnell Douglas had once challenged Boeing as plane makers, but Lockheed had withdrawn from the industry and McDonnell Douglas was reduced to making derivatives of its old aircraft. Airbus's first move was to develop the A300 with range and payload performance different from Boeing's established 727, 737 and 747 range. Another flanking strategy is to find gaps that are not being filled by the industry's products, fill them and develop them into strong segments. European and Japanese car makers do not try to compete with American car makers by producing large, flashy, gas-guzzling contraptions. Instead they recognized an unserved consumer segment that wanted small, fuel-efficient cars and moved to fill this hole. To their satisfaction and Detroit's surprise, the segment grew to be a large part of die market. ENCIRCLEMENT ATTACK An encirclement attack involves attacking from all directions, so that the competitor must protect its front, sides and rear at the same time. The encirclement strategy makes sense when the challenger has superior resources and believes that it can break the competitor's hold on the market quickly. An example is Seiko's attack on the watch market. For several years, Seiko has been gaining distribution in every big watch outlet and overwhelming competitors with its variety of constantly changing 17 models. In most markets Seiko offers about 400 models, but its marketing strength is backed by the 2,300 models it makes and sells worldwide. BYPASS ATTACK A bypass attack is an indirect strategy. The challenger bypasses the competitor and targets easier markets. The bypass can involve diversifying into unrelated products, moving into new geographic markets or leapfrogging into new technologies to replace existing products. Technological leapfrogging is a bypass strategy used often in high-technology industries. Instead of copying the competitor's product and mounting a costly frontal attack, the challenger patiently develops the next technology. When satisfied with its superiority, it launches an attack where it has an advantage. Thus Minolta toppled Canon from die lead in the 35-mm SLR camera market when it introduced its technologically advanced auto-focusing Maxxum camera. Canon's market share dropped towards 20 per cent, while Minolta's zoomed passed 30 per cent. It took Canon three years to introduce a matching technology." GUERRILLA ATTAC K A guerrilla attack is another option available to market challengers, especially smaller or poorly financed ones: When entrepreneur Freddie Laker frontally attacked the established airlines (then BOAC and TWA) by offering cheap transatlantic flights, they fought back and bankrupted him. Now TWA has all but disappeared and British Airways is facing Virgin Atlantic run by a much wilier entrepreneur. Richard Branson. He makes guerrilla attacks on his much larger competitors. In these attacks the agile challenger typically makes small, periodic attacks to harass and demoralize the competitor, hoping eventually to establish permanent footholds. It might use selective price cuts, novel products, executive raids, intense promotional outbursts or assorted legal actions. Virgin has been successful so far and taken 22 per cent of the London to New York market. It is also expanding quickly using franchising, an approach new to the airline industry. Normally, guerrilla actions are by smaller firms against larger ones. The smaller firms need to be aware, however, that continuous guerrilla campaigns can be expensive and must eventually be followed by a stronger attack if the challenger wishes to 'beat' the competitor. Market-Follower Strategics Not all runner-up companies will challenge the market leader. The effort to draw away the leader's customers is never taken lightly by the leader. If the challenger's Finally, the adapter builds on the leader's products and marketing programmes, often improving them. The adapter may choose to sell to 18 different markets to avoid direct confrontation with the leader. Many IBM PC look alikes did this Atnstrad was one of the earliest selling its ready and running machines through conventional electrical goods retailers. Js'ow Dell and dan Technologies combine direct selling with excellent customer support. Often the adapter grows into -A future challenger, as many Japanese firms have done after adapting and improving products developed elsewhere. Market-Nicher Strategies Almost every industry includes firms that specialize in serving market niches. Instead of pursuing the whole market or even large segments of the market, these firms target segments within segments or niches. This is particularly true of smaller firms because of their limited resources. Smaller divisions of larger firms also pursue niching strategies. EG & G is an example of a large company that profitably employs; a niching strategy: EG &G ( is a $1.4 billion industrial equipment and components company consisting of over 175 distinct and independent business units, many with less than $10 million in sales in markets worth $25 million. Many EG & G business units have their own R & D, manufacturing and sales force operations. The company is currently the market or technical leader in 80 per cent of its niche markets. More astonishing, EG & G ranked second in earnings per share and first in profitability in the Fortxine 1000. EG & G illustrates how niche marketing may pay larger dividends than mass marketing. Tlie main point is that firms with low shares of the total market can be highly profitable through clever niching. Why is niching profitable? The main reason is that the market nicher ends up knowing the target customer group so well that it meets their needs better than other firms which casually sell to this niche. As a result, the nicher can charge a substantial mark-up over costs because of the added value. Whereas the mass marketer achieves high volume, the nicher achieves high margins. Nichers try to find one or more market niches that are safe and profitable. An ideal market niche is big enough to be profitable and has growth potential. It is one that the firm can serve effectively. Perhaps most importantly, the niche is of little interest to large competitors. The firm can build the skills and customer goodwill to defend itself against an attacking big competitor as the niche grows ami becomes more attractive. The key idea in nichemanship is specialization. The firm has to specialize along market, customer, product or marketing-mix lines. Here are several specialist roles open to a market nicher: • End-use specialist. The firm specializes in serving one type of end-use customer. For example, Reuters provides financial information and news to professionals and Moss Bros' strength is in clothes 19 hire. Vertical-level specialist The firm specializes at some level of the production-distribution cycle. For example, the Dutch-based Anglo-Italian company, EVC, is Europe's leading manufacturer of polyvhiylchloride (PVC), while Country Homes' niche is as an intermediary between owners of country cottages and people who want to hire them for holidays. Customer-si.se specialist The firm concentrates on selling to cither small, medium or large customers. Many nichers specialize in serving small customers neglected by the large companies, Fuji gained its initial success in the photocopying market by specializing on small firms neglected by Xerox. Many regional advertising agencies also specialize in serving medium-sized clients. Specific -customer specialist The firm limits its selling to one or a few large customers. There are many firms like this in the motor industry: for example, Unipart devotes most of its time to BM\V/Kover. Geographical specialist. The firm sells only in a certain locality, region or area of the world. Most retail banks stay within their national boundaries. Two odd exceptions to this rule are the European HSBC and Standard & Charter, whose main interest is south-east Asia. Product or feature specialist. The firm specializes in producing a certain product, product line or product feature - Rolls-Royce is the only supplier of tilt-thrust jet engines. Quality-price specialist. The firm operates at the low or high end of the market. For example, Hewlett-Packard specializes in the high-quality, high price end of the handcalculator market, while Tring International sells very cheap CDs. Service specialist The firm offers one or more services not available from other firms: for example, NASA's ability to recover and repair satellites. Niching carries a very significant risk, in that the market niche may dry up or he attacked. Porsche was hit by both of these threats when the demand for luxury cars declined in the early 1990s and Honda, Toyota and Mazda attacked the sports car market. On ;j different scale, innovation and intense competition between multinationals and social trends eventually killed off Pollards Cornish Ice Cream./10 Its niche was selling high-fat dairy ice cream - an estimated 100 calories per cone - to the declining number of tourists in the south-west of England. The danger of the disappearing niche is why many companies use multiple moiling. By developing two or more niches, the company increases its chances of survival. Most of the wealth of successful healthcare companies comes from their each having products in a few niches that they dominate. For instance, Sweden's Gambio concentrates on'renal care, cardiovascular surgery, intensive care and anaesthesia, blood compound technology and preventive health services. The need for multiple niching is shown by SmithKline Beecham's Tagamet sales dropping 76 per cent in the quarter that it lost patent cover in the United States. 20 International marketing 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. Only the word multinational has been added. That word implies that marketing activities are undertaken in several countries and that such activities should somehow be coordinated across nation. CHAPTER SIX ORGANIZING AND FINANCING THE NEW VENTURE 6.1. Entrepreneurial team and business formation 6.2. Sources of financing Finance is needed throughout a company’s life. The type and amount of finance required for a business depends on many factors: type of business, success of firm and state of the company. Debt Financing The process of borrowing money from the moneylender at a predetermined interest, which has to be paid within the predetermined time, is called debt financing. Usually, the debt must be secured against the assets of the company and very commonly must also be secured against the assets of the owner of the company, also called a personal guarantee or collateral security, be kept with him (which is usually a fixed asset like land, building, etc.) to ensure that incase of the entrepreneur’s incapacity to repay the debt (incase he become insolvent) he can sell the collateral security to realize the money. There can be additional fees, sometimes referred to as points, for using or being able to borrow the money. Short-term debt (less than a year) is usually used to provide working to finance inventory, accounts receivable, or the operations of the business. The long-term debt (more than a year) are used to purchase assets such as land and building. Merits of debt financing o Allows the owner to retain large portion of ownership o Management and control, and greater return on equity o Preferable when the interest rate is low Equity Financing 21 Equity capital is money given for a share of ownership of the company. Equity can be provided by individual inventors, sometimes known as angles, venture capital companies, joint venture partners and capital contribution of the founders of the company. Equity financing- is the process of obtaining funds for the company in exchange of ownership. Merits of equity financing o Equity providers are more interested in the growth potential of the company. o It does not require collateral security o Offers some form of ownership position in the business venture. Capital structure The composition of borrowed capital i.e. the debt and the ownership capital i.e. the equity in overall capital of an enterprise is called ‘capital structure’. The ratio of debt to equity is capital structure. Capital structure means permanent financing of the enterprise represented primarily by long-term sources of funds i.e. debt and equity. Thus it excludes funds raised from short-term sources. An optimum capital structure bears the following features: o It should involve the minimum cost and the maximum yields. o The adopted capital structure should be flexible enough to fulfill the future requirements of the capital as and when needed. o The use of debts should be within the replaying capacity of the enterprise. In fact, failure to recognize this important aspect is the common cause of financial strain among small enterprise. o The capital structure should ensure proper control over the affairs of the enterprise. The venture capital Venture capital is money provided by professional who invest alongside the management in young, rapid growing companies that have the potential to develop into significant economic contributors. Venture capitalists generally: o Finance new and rapidly growing companies o Purchase equity securities o Assist in the development of new products or services o Add value to the company through active participation. o Take higher risks with the exception of higher rewards; o Have a long-term orientation. 22