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Spring 2009 BUSINESS PLANNING LECTURE 7 & 8 CH 11 & 13 MARKET ANALYSIS Customer needs should be analysed with a view to segmenting the market based on their needs. “From this flows the targeting of particular segments with a segment-specific marketing mix. This positions products in the market, based on an understanding of buyer needs, attitudes and behaviour.” MARKETING PLAN Marketing Plan includes “This chapter covers the most important aspects of market analysis and strategy, which should be sufficient for smaller businesses. Readers who require further information about marketing are advised to consult specialist marketing textbooks.” Qualitative Analysis • Chapter 11 Quantitative Analysis • Chapter 13 MARKETING STRATEGY PROCESS Marketing Mix: (The 4 Ps) •Product •Price •Promotion •Place (Distribution) SELLING VERSUS MARKETING CONCEPT Traditional V.S. Current model MARKETS AND CUSTOMERS To better understand the market and buyer behaviour, marketers should answer the following questions: What market need does the business address? What products serve that need? Who buys the products? Why do customers buy? Who makes the buying decision? Where do customers buy? A MODEL OF BUYER BEHAVIOUR1 a model of buyer behaviour in consumer markets that emphases the stimuli-response mechanism where buyers react to marketing and environmental stimuli. Depending on the personal characteristics of the buyer, the stimuli will result in a particular buying decision. 1.Philip Kotler, professor of international marketing at Kellogg School of Management. PHILIP KOTLER’S BUYER BEHAVIOUR MODEL OF BUYER BEHAVIOUR IN CONSUMER MARKETS The value of the model of buyer behaviour is that it provides an explanation for the demand of a business’s products, not just as a function of price, but also as a result of a host of other factors that are specific to individual consumers or groups of consumers. i.e. In purchasing a cup of coffee, consumers are almost not concerned with price at all and it is the “Buyers’ Characteristics” that points them towards one or another coffee shop. UNDERSTANDING CUSTOMERS ... When selling to businesses or government, the personal characteristics of a buyer are not entirely irrelevant, but rational factors outweigh personal factors. In business-to-business markets, environmental (demand, pest) and organisational factors are far more important. an understanding of customer needs is more easily achieved by establishing a relationship with the decision-makers. MARKET SEGMENTATION Definition: A market segment is defined as a sufficiently large group of buyers with a differentiated set of needs and preferences that can be targeted with a differentiated marketing mix Goal: Fine-tuning the marketing mix to address the segment needs will lead to increased sales / costs Benefit: higher market share in the targeted segment or the ability to charge a higher price. BENEFITS OF MARKET SEGMENTATION,EXAMPLE i.e. market research revealed that customers are prepared to pay a substantial premium in terms of the average per-minute price to have their preferred tariff plan. By offering a range of tariff plans aimed at segments with different preferences, a mobile phone company will not only win more customers but also reap a higher average revenue per minute. i.e. Air travellers MARKET SEGMENTATION’S RED FLAG Discrimination: Any discriminatory action by businesses may cause public opposition and in some cases boycotts of one’s products or services Questionnaires: provide guidelines for market segmentation; They includes the demographics, questions relating to product attributes and their relative importance, brand preferences, usage patterns and willingness to buy, as well as attitudinal and lifestyle questions SEGMENTATION METHODS Geographic segmentation is increasingly used with geo-marketing databases. Detailed information about the type of household in particular postcodes is available to marketers. Often geography is a proxy for a host of other variables (income, ethnicity, household size) because households with common attributes tend to cluster in certain areas. Demographic segmentation includes segmentation based on life-stage analysis, age, gender, income and social class. In saturated consumer markets, such traditional measures are often bad at explaining buyer behaviour because demographics do not necessarily explain needs. Psychographic segmentation is based on lifestyle, personal values and attitudes. It is better at identifying clients’ needs or preferences than, for example, social class, but measurement and tracking are problematic. Behavioural segmentation is based on customers’ knowledge of the product, point of purchase, purchase pattern and frequency, intensity of use, benefits and trade-offs, loyalty and other buyer behaviour factors. MARKET TARGETING In considering which segments to target, the attractiveness of the segment and the resources available to target it must be analysed. In general, if a segment can be served profitably it represents a potential target. An important aspect of market targeting is marketing communication. Messages targeted to a particular segment may not be fit to another segment and can negatively affect one firm’s image MARKET TARGETING - MARKET SHARE A key variable in any business plan is market share. Target marketing could explain convincingly why you hope to achieve a high share in certain segments but obtain hardly any sales in other segments DEVELOPING THE MARKETING MIX All elements of the marketing mix together constitute the “offer”. PRODUCT POSITIONING AND THE VALUE PROPOSITION Goal: To occupy a distinctive place in the market How: by positioning the product in such a way that customers readily perceive it as different. Any element of the marketing mix can be used. DIFFERENTIATION STRATEGY QUALIFICATIONS The difference must be of additional benefit to the customer. A sufficiently large demand must exist for the benefit. The difference must be readily perceived. It must be easy to communicate the difference and the benefits associated with it. The difference must be an improvement compared with existing offers. The incremental cost of producing the difference must be lower than the incremental revenue. DIFFERENTIATION STRATEGY For some products differentiated positioning is everything but the product i.e. Mobile phone companies are selling essentially the same service to all customers. However, tariffs, distribution, bundling and options differ depending on the segment the particular offer is aimed at. Some manufacturers sell exactly the same physical product under two different brands with different packaging, distribution and pricing. PRODUCT POSITIONING MAP(CAR MANUF.) To create the diagram you must carry out a market research survey with a sufficiently large sample PRODUCT POSITIONING MAP(3D) Brand D RESULTING MARKETING STRATEGY FORM PART OF THE MARKETING PLAN The marketing plan therefore contains a detailed description of the marketing mix and guidelines for the implementation of the business’s marketing programs. The product positioning against competitors should be explained. The target market segments should be identified and sized. Product specifications should be included and features should be described in terms of customer needs and benefits. If distribution involves wholesalers and retailers they should be named, and, if possible, there should be confirmation from key wholesalers and retailers that they are willing to carry the product. Retail and wholesale margins and incentives should be detailed. The advertising and promotions budget must be broken down into programmes, and possibly a rudimentary media plan should be included. Customer service, guarantees, order fulfilment and after-sales service must be addressed. The operational plan explains how the business is structured, what resources are required and how these resources are employed to achieve the strategic objectives. It explains how investors’ money is spent. In financial terms, it provides most operational expenditure items and all capital expenditure items as inputs into the business planning model. OP contains: A description of the organisational structure, including an organisation chart, human resources as one of the most important resources of a business, and payroll and related costs account for a large part of operational expenditure. THE OPERATIONAL PLAN CHAPTER 13 Why do we need an O.P: To explain how the business will actually carry out its activity, an operational plan is required. The operational plan drives capital expenditure (capex) and operational expenditure (opex). The business plan modelling of these is discussed in Chapter 14 What does it deliver: OP is central to the allocation of resources. It uses inputs from the marketing plan to scale operations in order to deliver what is set out in the marketing plan, and it includes information about all stages of primary value chain activities as well as support activities. LEGAL FORMS OF BUSINESS One of the first steps is to decide the legal form of the business: sole trader, partnership, limited liability partnership, limited company, or another corporate form that may be available in different jurisdictions. in some countries, such as the UK and the United States, a business can be set up quickly (often in one day) and cheaply, but in others the process can take up to two months FORMALITIES Company formation (registration) Location of registered office Appointment of accountant and auditor Appointment of company secretary (Corporate Secretary) Registration of business in commercial register or chamber of commerce Membership of industry associations Registration with the tax authorities VAT registration (Value Added Tax) Registration of internet domain name Establishment of company bank account and payment facilities Registration of trade marks FORMALITIES Corporate Secretary: The company secretary ensures that an organisation complies with relevant legislation and regulation, and keeps board members informed of their legal responsibilities. Company Secretaries are the company’s named representative on legal documents, and it is their responsibility to ensure that the company and its directors operate within the law. It is also their responsibility to register and communicate with shareholders, to ensure that dividends are paid and to maintain company records, such as lists of directors and shareholders, and annual accounts. ORGANISATIONAL STRUCTURE The organisational structure itself should be consistent with the vision and objectives of the business and can be a source of competitive advantage. Organization Chart: It identifies the departments, lines of reporting, span of control and staff numbers. Departments reflect the specialist skills that are necessary to deliver value to the customer. Reporting lines identify responsibilities, power and information flow. The number of subordinates directly controlled by a manager or supervisor is referred to as span of control ORGANISATIONAL STRUCTURE The organisational structure itself should be consistent with the vision and objectives of the business and can be a source of competitive advantage. The structure of an organisation will depend on size, geographic scope and type of industry. Organization Chart: It identifies the departments, lines of reporting, span of control and staff numbers. Departments reflect the specialist skills that are necessary to deliver value to the customer. ORGANISATIONAL STRUCTURE The organisational structure itself should be consistent with the vision and objectives of the business and can be a source of competitive advantage. The structure of an organisation will depend on size, geographic scope and type of industry. Organization Chart: It identifies the departments, lines of reporting, span of control and staff numbers. Departments reflect the specialist skills that are necessary to deliver value to the customer. FUNCTIONAL STRUCTURE divides the business along the main value chain activities, with each function reporting to the top management. This type of structure is simple and provides clear reporting lines. suitable for small companies because people can communicate easily and are usually aware of what other departments are doing DIVISIONAL STRUCTURE A divisional structure may be particularly appropriate where the SBUs are also physically separate, for example located at different sites or even in different countries. some functions, such as R&D, may still be centralised. DIVISIONAL STRUCTURE The divisions may be strategic business units (SBUs), which can be extremely diverse with very different products and markets. The structure must be tailored to meet the needs of each SBU functions, notably support functions of the value chain such as finance, human resources, and research and development, may be located at head-office level CENTRALIZED V.S. DECENTRALIZED DIVISIONAL STRUCTURE The more decentralised an organisation is, the easier it is to apply a product-portfolio approach to strategy development. The product portfolio approach assigns strategic roles for each Decentralisation may also imply duplication product based on the product’s market growth rate and market share and inabilityThese to exploit cross-divisional relativethe to competitors. individual roles are then integrated into a strategy for the whole portfolio of products, synergies. taking into consideration the product portfolios of the main competitors. The objective is to optimize the performance of the entire portfolio of products, while maintaining cash flow in balance. HOLDING COMPANY STRUCTURE A holding company is a small unit controlling a collection of independent companies which may not even be wholly owned subsidiaries. The holding-company functions are reduced to a few support functions such as finance and overall strategic planning. MATRIX STRUCTURE The matrix structure combines elements of the functional and divisional structure The dichotomy of the product-management, (product portfolio), approach and functional organisation is resolved by adopting a matrix organisational structure. Conflicts can arise if reporting structures or responsibilities are not clear. Therefore effective communication plays a very important role in this model. MATRIX STRUCTURE – CONFLICT i.e. In the case of the telephony company, the quality of service the business product manager (Functional) requires may be different from what the consumer product manager (Divisional) requires, but this cannot be provided because the network is the same. There has to be a final arbiter who is by rank above the product managers, but the responsibility of delivering margin for a product always stays with the product managers FUNCTIONAL STRUCTURE DIVISIONAL STRUCTURE MATRIX STRUCTURE THE MANAGEMENT TEAM AND CORPORATE GOVERNANCE Importance: A new investment is a bet on the future where the odds are substantially improved if the business is run by managers who can not only execute the plan but also respond flexibly to changes in the environment as they arise Board of directors (including non-executive directors), top management and key functional managers must be identified by name. Their CVs should be in the appendix to the business plan. HUMAN RESOURCE MANAGEMENT Includes: staff numbers, recruitment, retention, training and redundancy or layoffs Importance: they are a major driver of operational costs which consist of salary and related costs such as employer’s contribution to insurance, pensions and training, also office space, workstations and other items HUMAN RESOURCE ISSUES TO BE ADDRESSED Human resource issues to be addressed in the business plan include: Appropriate staffing to cover shifts, holidays, illness. Span of control, that is, how many managers per staff. Salary levels. Are trained staff available or do staff have to be trained. Continuing training. Recruitment costs. Staff turnover. Employment legislation (working hours, work environment, health and safety,pensions, redundancy). PHYSICAL INFRASTRUCTURE Importance: Investors want to know what their money is being spent on Consists of: The infrastructure comprises all major assets, new assets that have to be acquired, and their function and physical location. Such assets include office space, production facilities, it and support systems, vehicles and any other facility used by the organisation. CAPITAL AND OPERATIONAL EXPENDITURE The operational plan drives capital expenditure (capex) and operational expenditure(opex). The business plan modelling of these is discussed in Chapter 14 The manner in which opex and capex are modelled should reflect the organisational structure. This will make it easier to understand the link between the financials and operations The linkage between organisational structure and financials makes it possible to identify the cost of particular activities. As a result... CAPITAL AND OPERATIONAL EXPENDITURE ... As a result, the profitability of SBUs or products can be substantiated not just at gross margin level (see Chapter 11) but also at EBIT (earnings before interest and tax) level.