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Chapter 1 Fundamentals of Marketing This chapter covers the basic concepts of marketing, provides details of the main philosophies of a marketer, and discusses the major components of strategic marketing. It aims at equipping the student with a conceptual framework to understand modern marketing. Markets, Marketing and Marketability have gained in importance as the capabilities of mankind in converting raw material into finished goods and services has improved. Led by the technological revolution and helped by revolution in the political, social and economic arena, the entrepreneurs and the organisations that they lead have always aspired to create ever newer products and services as well as design ever newer methods to make these reach those who want them, in the quantities that they want them and at times that they want them. The people and organisations who supply products and services have also found it worthwhile to guide people who buy or use these products and services to find new uses, use occasions or usage methods for the same. The formal discipline of marketing is required because there is physical, mental and social distance between those who produce goods and services and those who consume them. It is because of marketing that those who produce, sell, advertise can establish a connection with the consumers. It is to the credit of marketing that a two-way dialogue is possible instead a conflict of monologues by the sellers. The fact that the buyers and sellers both feel that they will gain form transactions is to a large part due the use of marketing techniques. 1.0 What is Marketing? 1.01 Definitions of Marketing. There are many definitions of marketing. The better definitions are focused upon customer orientation and satisfaction of customer needs. Marketing is the social process by which individuals and groups obtain what they need and want through creating and exchanging products and value with others -Dr. Philip Kotler Marketing is the management process that identifies, anticipates and satisfies customer requirements profitably - The Chartered Institute of Marketing (CIM) 1 The CIM definition looks not only at identifying customer needs, but also satisfying them (short-term) and anticipating them in the future (long-term retention of customers). The right product, in the right place, at the right time, at the right price - Adcock Marketing is essentially about marshalling the resources of an organization so that they meet the changing needs of the customer on whom the organization depends -Palmer This is a more recent and very realistic definition that looks at matching capabilities with needs. Marketing is the process whereby society, to supply its consumption needs, evolves distributive systems composed of participants, who, interacting under constraints technical (economic) and ethical (social) - create the transactions or flows which resolve market separations and result in exchange and consumption - Bartles This definition considers the economic and social aspects of marketing. 1.02 The Philosophy of Marketing and the Marketing Concept. The marketing concept is a philosophy. It makes the customer, and the satisfaction of his or her needs, the focal point of all business activities. It is driven by senior managers, passionate about delighting their customers. Marketing is not only much broader than selling, it is not a specialized activity at all It encompasses the entire business. It is the whole business seen from the point of view of the final result, that is, from the customer's point of view. Concern and responsibility for marketing must therefore permeate all areas of the enterprise. - Dr. Peter F Drucker This customer focused philosophy is known as the 'marketing concept'. The marketing concept is a philosophy, not a system of marketing or an organizational structure. It is founded on the belief that profitable sales and satisfactory returns on investment can only be achieved by identifying, anticipating and satisfying customer needs and desires. - Barwell The achievement of corporate goals through meeting and exceeding customer needs better than the competition. - Jobber Implementation of the marketing concept requires attention to three basic elements of the marketing concept. These are: Customer orientation; an organization to implement a customer orientation; Long-range customer and societal welfare. - Cohen 2 Now that you have been introduced to some definitions of marketing and the marketing concept, remember the important elements contained as follows: 1. Marketing focuses on the satisfaction of customer needs, wants and requirements 2. The philosophy of marketing needs to be owned by everyone from within the organization. 3. Future needs have to be identified and anticipated. 4. There is normally a focus upon profitability, especially in the corporate sector. However, as public sector organizations and not-for-profit organizations adopt the concept of marketing, this need not always be the case. 5. More recent definitions recognize the influence of marketing upon society. 1.1 Marketing Mix. 1.11 What is the marketing mix? The marketing mix is probably the most famous marketing term. Its elements are the basic, tactical components of a marketing plan. Also known as the Four Ps, the marketing mix elements are price, place, product, and promotion. The concept is simple. Think about another common mix – a fertilizer mix (composite/compound fertilizer), all mix of fertilizers will contain Nitrogen, Phosphorus and Potassium along with various micro nutrients. However depending on the crop, the soil condition and the stage of the crop, one can alter the final composition of the mix by altering the amounts of mix elements contained in it. For soils deficient in potassium, add more of potash based fertilizer. 3 It is the same with the marketing mix. The offer you make to you customer can be altered by varying the mix elements. So for a high profile brand, increase the focus on promotion and reduce the weight given to price. Some commentators will increase the marketing mix to the Five Ps, to include people. Others will increase the mix to Seven Ps, to include physical evidence (such as uniforms, facilities, office/branch ambience and printed cheque book, etc.) and process (i.e. the whole customer experience e.g. a visit to the modern retail store). The term was coined by Neil H. Borden in his article The Concept of the Marketing Mix in 1965. 1.111 Price Price acts as a primary cue for the customer. It helps the customer to evaluate the worth of the offer that the marketer is making. There are many ways to price a product depending on the situation faced by the marketer vis-à-vis his customer or the competition. 1.112 Place Another element of Neil H.Borden's Marketing Mix is Place. Place is also known as channel, distribution, or intermediary. It is the mechanism through which goods and/or services are moved from the manufacturer/ service provider to the user or consumer. 1.113 Product For many people, a product simply means the tangible, physical entity that they may be buying or selling. A farmer buys a new tractor and that's the product - simple! In formal marketing, the product may not be as simple as it may appear at first. For example, when a farmer buys a tractor, the product is more complex than he first thought? Like an onion, the ‘Product’ has many levels. A tractor comes bundled with spares and accessories, after-sales service warranty and a network of support and supplementary services. Without all of that, the tractor ownership would be such a difficult task. 1.114 Promotion Another one of the 4Ps is promotion. This includes all of the tools available to the marketer for 'marketing communication'. As with Neil H.Borden's marketing mix, marketing communications has its own 'promotions mix.' Think of it like the mix of fertilizers, the basic ingredients are always the same. However if you vary the amounts of one of the ingredients, the final outcome is different. The different elements of promotion mix are: Advertisement, Sales promotion, Events and Public Relations, Direct Marketing, Personal Selling and Internet marketing. 4 1.115 Physical Evidence Physical Evidence is the tangible (what can be sensed with sensory organs viz. eyes, nose, tongue, ear and skin) part of a service. Strictly speaking there are no physical attributes to a service, so a consumer tends to rely on tangible cues. There are many examples of physical evidence, including some of the following: 1. 2. 3. 4. 5. Interiors and furniture of the waiting area in hospitals and banks Cheque books pre-printed with account holder’s name Uniform of staff in retails outlet/ hotels/ airlines, etc. The posters, banners and other publicity material at the fertilizer and agriinput shop The milko-tester in a dairy cooperative society 1.116 People 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. The ‘Salesman’ of the seeds company, the ‘Mechanic’ of the tractor workshop or ‘Manager’ of the bank are all examples of the ‘people’ component of a service offering. 1.117 Process Process is another element of the extended marketing mix, or 7Ps.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. 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. Let us take the case of Ramlal, a farmer who has decided to purchase a new motorcycle for himself and who goes to the market of the nearest town after seeking due opinion from his friends and relatives. He enters a motor cycle dealer’s showroom. From the moment he enters, the dealer and his sales team come into action. Right from asking him for water to taking him around to let him see different models to letting him test drive to making him aware about the features of different bikes, each step is a part of the process meant to enrich Ramlal’s buying experience. This is all part of the marketing process. 5 Like all processes, the marketing process also has many stages. 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 services or products are extended and marketed 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. In the section on Value Chain Analysis in Chapter 9, we will consider a series of processes at work. 1.2 Marketing Plans Successful performance of organisations, whether in Private or in the Government or Non-Profit sector critically depends on impressing and retaining their target audience (customers or beneficieries, as the case may be) by providing better value than the competing offers or options available to the target audience? The choice of which kind of target audience to serve and how to create value for them in an ever changing environment needs to be ascertained. This involves choice of technologies/methodologies (in a broad sense) and performance (competitive) strategies As the environment changes, the organisations (including business organisations) must adapt to maintain strategic fit between their capabilities and the marketplace. The process by which the organisations (especially business organisations) analyse the environment, decide upon a course of action and implement those decisions is called marketing planning and the document that contains the essence of the marketing planning process is called the marketing plan. Marketing plans are vital to marketing success. They help to focus the mind of companies and marketing teams on the process of marketing i.e. what is going to be achieved and how we intend to do it. There are many approaches to marketing plans. The key stages of the plan are covered under the popular acronym AOSTC. ANALYSIS OBJECTIVES STRATEGIES TACTICS CONTROLS 6 1.21 Stage One - Situation Analysis (and Marketing Audit). Marketing environment Laws and regulations Politics The current state of technology Economic conditions Sociocultural aspects Demand trends Media availability Stakeholder interests Marketing plans and campaigns of competitors Internal factors such as your own experience and resource availability The tools for internal/external audit (covered later in the course): SWOT PEST Porter's Five Forces Marketing Environment 1.22 Stage Two - Set marketing objectives Objectives should seek to answer the question 'Where do we want to go?'. The purposes of objectives include: To enable a company to control its marketing plan. To help to motivate individuals and teams to reach a common goal. To provide an agreed, consistent focus for all functions of an organization. All objectives should be SMART i.e. Specific, Measurable, Achievable, Realistic, and Timed. SMART objectives: Specific - Be precise about what you are going to achieve. Measurable - Quantify you objectives. Achievable - Are you attempting too much? Realistic - Do you have the resource to make the objective happen (men, money, machines, materials, and minutes)? Timed - State when you will achieve the objective (within a month? By February 2010?). 7 If you don't make your objective SMART, it will be too vague and will not be realized. Remember that the rest of the plan hinges on the objective(s). If it is not correct, the plan may fail. Some examples of SMART objectives follow: 1. Profitability Objectives To achieve a 20% return on capital employed by March 2008 2. Market Share Objectives To gain 25% of the market for wrist watches by September 2009 3. Promotional Objectives To increase awareness of the Genetically Modified (GM) Crop in farmers of Gujarat from 12% to 25% by June 2009. To increase trial of Brand X soap from 2% to 5% of our target group by January 2008. 4. Objectives for Survival To survive the current phase of anti-GM crop phase. 5. Objectives for Growth To increase the size of our Indian operation from US$20 billion in 2007 to US$40 billion in 2010. 6. Objectives for Branding To make Coca Cola as the preferred brand of 21-28 year olds in India by February 2008. There are many examples of objectives. Be careful not to confuse objectives with goals and aims. Goals and aims tend to be more vague and focus on the longer-term. They will not be SMART. However, many objectives start off as aims or goals and therefore they are of equal importance. 1.23 Stage Three - Describe your target market Which segment? How will we target the segment? How should we position within the segment? Why this segment and not a different one? (This will focus the mind). 8 Define the segment in terms of demographics and lifestyle. Show how you intend to 'position' your product or service within that segment. Use other tools to assist in strategic marketing decisions such as Boston Matrix, Ansoff's Matrix, Bowman’s Strategy Clock, Porter's Competitive Strategies, etc. 1.24 Stage Four - Marketing Tactics Convert the strategy into the marketing mix (also known as the 4Ps). These are your marketing tactics. 1.25 Price: Will you cost plus, skim, match the competition or penetrate the market? Place: Will you market direct, use agents or distributors, etc? Product: Sold individually, as part of a bundle, in bulk, etc? Promotion: Which media will you use? E.g. sponsorship, radio advertising, sales force, point-of-sale, etc? Think of the mix elements as the ingredients of a 'fertilizer mix'. You have nitrogenous, potassic, phosphoric along with micronutrient based elements. However, if you alter the amount of each ingredient, you will influence the type of mix that you finish with. Stage Five - Marketing Controls Remember that there is no planning without control. Control is vital. Start-up costs Monthly budgets Sales figure Market share data Consider the cycle of control Finally, write a short summary (or synopsis) which is placed at the front of the plan. This will help others to get acquainted with the plan without having to spend time reading it all. Place all supporting information into an appendix at the back of the plan. 1.3 Marketing Audit: How to conduct a marketing audit The marketing audit is a fundamental part of the marketing planning process. It is conducted not only at the beginning of the process, but also at a series of points during the implementation of the plan. The marketing audit considers both internal and external influences on marketing planning, as well as a review of the plan itself. There are a number of tools and audits that can be used, for example SWOT analysis for the internal environment, as well as the external environment. Other examples include PEST and Five Forces Analysis, which focus solely on the external environment. In many ways the marketing audit clarifies opportunities and threats, and allows the marketing manager to make alterations to the plan if necessary. 9 We will cover the basics of the marketing audit, and introduce a marketing audit checklist. The checklist is designed to answer the question, what is the current marketing situation? Let’s consider the marketing audit under three key headings: 1.31 The Internal Marketing Environment The External Marketing Environment A Review of Our Current Marketing Plan The Internal Marketing Environment. What resources do we have at hand? (i.e. The FIVE 'M's): MEN (Labor/Labour) MONEY (Finances) MACHINERY (Equipment) MINUTES (Time) MATERIALS (Factors of Production) How is our marketing team organised? How efficient is our marketing team? How effective is our marketing team? How does our marketing team interface with other organisations and internal functions? How effective are we at Customer Relationship Management (CRM)? What is the state of our marketing planning process? Is our marketing planning information current and accurate? What is the current state of New Product Development? (Product) How profitable is our product portfolio? (Product) Are we pricing in the right way? (Price) How effective and efficient is distribution? (Place) Are we getting our marketing communications right? (Promotion) Do we have the right people facing our customers? (People) How effective are our customer facing processes? (Process) What is the state of our business's physical evidence? (Physical Evidence) 1.32 The External Marketing Environment. As a market orientated organisation, we must start by asking - What is the nature of our 'customer?' Such as: Their needs and how we satisfy them Their buyer decision process and consumer behaviour Their perception of our brand, and loyalty to it The nature of segmentation, targeting and positioning in our markets 10 What customers 'value' and how we provide that 'value?' What is the nature of competition in our target markets? Our competitors' level of profitability Their number/concentration The relative strengths and weaknesses of competition The marketing plans and strategies of our competition What is the cultural nature of the environment(s)? Beliefs and religions. The standards and average levels of education. The evolving lifestyles of our target consumers. The nature of consumerism in our target markets. What is the demography of our consumers? Such as average age, levels of population, gender make up, and so on. How does technology play a part? The level of adoption of mobile and Internet technologies. The way in which goods are manufactured. Information systems. Marketing communications uses of technology and media. What is the economic condition of our markets? Levels of average disposable income. Taxation policy in the target market. Economic indicators such as inflation levels, interest rates, exchange rates and unemployment. Is the political and legal landscape changing in any way? Laws, for example, copyright and patents. Levels of regulation such as quotas or tariffs. Labour/labor laws such as minimum wage legislation. 1.33 A Review of Our Current Marketing Plan What are our current objectives for marketing? What are our current marketing strategies? How do we apply the marketing mix? (Including factors covered above in (a)) Is the marketing process being controlled effectively? Are we achieving our marketing budget? Are we realising our SMART objectives? Is our marketing team implementing the marketing plan effectively? 11 Levels of staffing. Staff training and development. Experience and learning. What is our market share? (Total sales/trends/sales by product or customer or channel) Are we achieving financial targets? (Profit and margins/ liquidity and cash flow/ debt: equity ratio/ using financial ratio analysis) 1.4 Marketing Control Measuring and monitoring the marketing planning process There is no planning without control. Marketing control is the process of monitoring the proposed plans as they proceed and adjusting where necessary. If an objective states where you want to be and the plan sets out a road map to your destination, then control tells you if you are on the right route or if you have arrived at your destination. Figure 1.2: The marketing control process Control involves measurement, evaluation, and monitoring. Resources are scarce and costly so it is important to control marketing plans. Control involves setting standards. The marketing manager will than compare actual progress against the standards. Corrective action (if any) is then taken. If corrective action is taken, an investigation will also need to be undertaken to establish precisely why the difference occurred. There are many approaches to control: Market share analysis Sales analysis 12 Quality controls Budgets Ratio analysis Marketing research Marketing information systems (MkIS) Feedback from customers satisfaction surveys Cash flow statements Customer Relationship Management (CRM) systems Sales per thousand customers, per factory, by segment. Location of buyers and potential buyers Activities of competitors to aspects of your plan Distributor support Performance of any promotional activities Market reaction/acceptance to pricing polices Service levels . . . . And many other methods of monitoring and measurement. 1.5 Internal Marketing Internal marketing is an important 'implementation' tool. It aids communication and helps us to overcome any resistance to change. It informs and involves all staff in new initiatives and strategies. It is simple to construct, especially if you are familiar with traditional principles of marketing. If not, it would be valuable to spend some time considering marketing plans. Internal marketing obeys the same rules as, and has a similar structure to, external marketing. The main differences are that your customers are staff and colleagues from your own organization. Figure 1.3: Internal marketing process 1.51 Managing the implementation of internal marketing 13 You have seen that the process of marketing follows a familiar pattern for which we use the acronym AOSTC - Analysis, Objectives, Strategies, Tactics, and Control. Let's have a look a closer look at the practicalities of internal marketing. Figure 1.3: Detailed Internal marketing process At this stage internal marketing meets traditional 'change management.' Firstly you should identify your internal customers. As with your external customers, they will have their own buyer behavior, or way of 'buying into' the changes which you are charged to implement. The similarities in differing groups of internal customers allow you to segment them. As Jobber (1995) explains, you can target three different segments namely 'supporters,' neutral,' and finally 'opposers.' Each group requires a slightly different internal marketing mix in order that your internal marketing objectives can be achieved. For example, if the change was that a seeds marketing company was to relocate closer to its market, you could target 'supporters within the organisation' with a tailor-made relocation video explaining about the advantages (personal as well as professional) in the new location; 'neutral' internal customers could be targeted with incentives such as pay increases; and 'opposers' could be coerced, or forced to accept the change regardless. 1.52 How do we plan for a change program? Always make sure that you have thought through your approach before starting the implementation. Make sure that you have created a cultural climate that is willing to accept change. Appoint a change agent, or champion for change that will help to ease your changes through. Audit the skills and capabilities of your team. Train and develop as necessary. 14 Your team must be built around you with the objective as the focus for all of you. The change must be correctly marketed to your target audience as per the approach illustrated above. Decide what the change will be. Give it boundaries. Decide upon the plan. Work out a realistic budget and stick to it. Try to anticipate the arguments against change, and decide how to counteract them positively. 15 Chapter 2 The Marketing Environment and Marketing Research 2.0 What is marketing environment? A marketing oriented company has to constantly look outside of itself in order to take advantage of small and big opportunities that keep emerging, in addition, the organisations have to monitor and minimize the likely threats that may spoil its business. The marketing environment surrounds and impacts upon the organization. It consists of various forces that affect the company’s ability to deliver products and services to its customers. The organisation’s environment can affect it in many ways. The company can have the best of technologies, the best set of employees and the best group of suppliers but still it may not succeed because of other factors like exchange rate, government policies, or changing preferences of its customers. On the other hand, a company that does not have too many apparent things going for it can actually succeed because the environmental factors support it. There are three key perspectives on the marketing environment, namely the 'macro-environment,' the 'micro-environment' and the 'internal environment'. 16 2.01 The micro-environment This environment influences the organization directly. It includes suppliers that deal directly or indirectly, consumers and customers, and other local stakeholders. Micro tends to suggest small, but this can be misleading. In this context, micro describes the relationship between firms and the driving forces that control this relationship. It is a more local relationship, and the firm may exercise a degree of influence. For example- A company like Pepsi may decide to offer higher than contracted price for the potatoes it procures from farmers in Punjab. They may do so to prevent the farmers switching over to Reliance retail, its aggressive competitor in the agribusiness space. This may contribute towards shrinkage in short term profits for Pepsi but may be necessary to protect long-term sources of supply and its profits relative to its existing and emerging competition from big-box retailers. 2.02 The macro-environment This includes all factors that can influence an organization, but that are out of their direct control. A company does not generally influence any laws (although it is accepted that they could lobby or be part of a trade organization). It is continuously changing, and the company needs to be flexible to adapt. There may be aggressive competition and rivalry in a market. Globalization means that there is always the threat of substitute products and new entrants. The wider environment is also ever changing, and the marketer needs to compensate for changes in culture, politics, economics and technology. For example :- Exchange rate can become a very important determinant of business performance for a company like ITC Ltd., whose International Business Division relies a lot on international trade of agri-produce. If rupee becomes stronger against foreign currencies, Indian products become costlier in world 17 markets and exports suffer, on the other hand, it becomes cheaper to import leading to flood of imported products. 2.03 The internal environment. All factors that are internal to the organization are known as the 'internal environment'. They are generally audited by applying the 'Five Ms' which are Men, Money, Machinery, Materials and Markets. The internal environment is as important for managing change as the external. As marketers we call the process of managing internal change 'internal marketing.' You may recall that we have discussed this topic in much detail in section 1.5 of Chapter 1. You may also remember that essentially we use marketing approaches to aid communication and change management within organisations. There are special techniques available for auditing the external environment in more detail. Some of these are, PEST Analysis, Michael Porter's Five Forces Analysis, and SWOT Analysis. 2.1 Methods of Analysing an organisation’s environment 2.11 PEST Analysis It is very important that an organization considers its environment before beginning the marketing process. In fact, environmental analysis should be continuous and feed all aspects of planning. The organization's marketing environment is made up of: 1. The internal environment e.g. staff (or internal customers), office technology, wages and finance, etc. 2. The micro-environment e.g. our external customers, agents and distributors, suppliers, our competitors, etc. 18 3. The macro-environment e.g. Political (and legal) forces, Economic forces, Sociocultural forces, and Technological forces. These are known as PEST factors. Political Factors The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses. You must consider issues such as: 1. How stable is the political environment? 2. Will government policy influence laws that regulate agriculture, food processing and agri-business? 3. What is the government's position on practices of seed and agro-chemical companies? 4. What is the government's policy on the employment generation in rural areas? 5. Does the government have a view on cultural and religious issues? 6. Is the government involved in trading agreements such as SAARC, WTO or others? Economic Factors Marketers need to consider the state of a trading economy in the short and long-terms. This is especially true when planning for international marketing. You need to look at: 1. Interest rates on agricultural and non-agricultural loans 2. The level of inflation, employment levels in different countries 3. Long-term prospects for the economy, Gross Domestic Product (GDP) per capita, and so on 19 Sociocultural Factors The social and cultural influences on business vary from country to country. It is very important that such factors are considered. Factors include: 1. What is the dominant religion? 2. What are attitudes to foreign products and services? What are the attitudes towards big businesses? 3. To what extent does the diversity in languages impact upon the diffusion of products in the markets? 4. How much time do consumers have for leisure? What are the leisure activities? 5. What are the roles of men and women within society? 6. What is the life expectancy of the population? How has the situation changed in recent years? Are morbidity rates high? Which illnesses dominate? 7. Do the population have a strong/weak opinion on environmental issues? Technological Factors Technology is vital for competitive advantage, and is a major driver of globalization. Consider the following points: 1. Does technology allow for products and services to be made more cheaply and to a better standard of quality? 2. Do the technologies offer consumers and businesses more innovative products and services such as Internet & ATM banking, new generation mobile telephones, etc.? 3. How is distribution changed by new technologies e.g. the Internet, on-line auctions, modern formats of retailing etc.? 4. Does technology offer companies a new way to communicate with consumers e.g. websites, e-banners, Customer Relationship Management (CRM), etc? 2.12 Five Forces Analysis 2.121 Analyzing the environment - Five Forces Analysis 20 Five Forces Analysis helps the marketer to contrast a competitive environment. It has similarities with other tools for environmental audit, such as PEST analysis, but tends to focus on the single, stand alone, business or SBU (Strategic Business Unit) rather than a single product or range of products. For example, a company like Mahindra & Mahindra would analyse the market for tractors which is one of its SBUs. Five forces analysis looks at five key areas namely the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry. The threat of entry Economies of scale e.g. the benefits associated with bulk purchasing. The high or low cost of entry e.g. how much will it cost for the latest technology? Ease of access to distribution channels e.g. Do our competitors have the distribution channels sewn up? 21 Cost advantages not related to the size of the company e.g. personal contacts or knowledge that larger companies do not own or effects of being there earlier than the competition (learning curve effects). Will competitors retaliate? Government action e.g. will new laws be introduced that will weaken our competitive position? How important is differentiation? e.g. ‘Darjeeling’ Tea or ‘Basmati’ rice cannot be copied in any other part of the world. The power of buyers This is high where there a few, large players in a market e.g. the large grocery chains. If there are a large number of undifferentiated, small suppliers e.g. small farming businesses supplying the large grocery chains? The cost of switching between suppliers is low e.g. from one fleet supplier of trucks to another. The power of suppliers The power of suppliers tends to be a reversal of the power of buyers. The power of suppliers is high when: Where the switching costs are high e.g. switching from one agri-input dealer to another will entail a reworking of informal credit arrangements for the farmer. Power is high where the brand is powerful e.g. Sriram Urea, Ford Tractors, Monsanto Seeds, Amul Butter There is a possibility of the supplier integrating forward e.g. Dairy Farmers Cooperative establishing Dairy Processing Plant and Marketing organisation as in the case of ‘Amul’. Customers are fragmented (not in clusters) so that they have little bargaining power e.g. farmers scattered in remote places. 22 The threat of substitutes Where there is product-for-product substitution e.g. telephone for letters by post or where there is substitution of need e.g. better quality of diesel and engine oil in the farm machinery reduces the need for mechanics. Where there is generic substitution (competing for the currency in your pocket) e.g. Cinema Halls compete with Restaurants? Malls for anyone visiting a city from the village as both of these cater to the need for entertainment. Where we could always do without e.g. bidis (traditional Indian rolled tobacco) and cigarettes. Competitive Rivalry This is most likely to be high where entry is easy, there is the threat of substitute products, and suppliers and buyers in the market attempt to control. This is why it is always seen in the center of the diagram. 2.13 SWOT Analysis Strengths, Weaknesses, Opportunities and Threats (SWOT) SWOT analysis is a tool for auditing an organization and its environment. It is the first stage of planning and helps marketers to focus on key issues. SWOT stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal factors. Opportunities and threats are external factors. 23 In SWOT, strengths and weaknesses are internal factors. For example: strength could be: Your specialist marketing expertise. A new, innovative product or service. Location of your business. Quality processes and procedures. Any other aspect of your business that adds value to your product or service. A weakness could be: Lack of marketing expertise. Undifferentiated products or services (i.e. in relation to your competitors). Location of your business. Poor quality goods or services. Damaged reputation. In SWOT, opportunities and threats are external factors. For example: An opportunity could be: A developing market such as the Internet. Mergers, joint ventures or strategic alliances. Moving into new market segments that offer improved profits. A new international market. A market vacated by an ineffective competitor. A threat could be: A new competitor in your home market. Price wars with competitors. A competitor has a new, innovative product or service. Competitors have superior access to channels of distribution. Taxation is introduced on your product or service. 24 A word of caution, SWOT analysis can be very subjective. Do not rely on SWOT too much. Two people rarely come-up with the same final version of SWOT. TOWS analysis is extremely similar. It simply looks at the negative factors first in order to turn them into positive factors. So use SWOT as guide and not a prescription. Simple rules for successful SWOT analysis Be realistic about the strengths and weaknesses of your organization when conducting SWOT analysis. SWOT analysis should distinguish between where your organization is today, and where it could be in the future. SWOT should always be specific. Avoid grey areas. Always apply SWOT in relation to your competition i.e. better than or worse than your competition. Keep your SWOT short and simple. Avoid complexity and over analysis. SWOT is subjective. Once key issues have been identified with your SWOT analysis, they feed into marketing objectives. SWOT can be used in conjunction with other tools for audit and analysis, such as PEST analysis and Porter's Five-Forces analysis. So SWOT is a very popular tool with marketing students because it is quick and easy to learn. During the SWOT exercise, list factors in the relevant boxes. It's that simple. Do you need a more advanced SWOT Analysis? Some of the problems that you may encounter with SWOT are as a result of one of its key benefits i.e. its flexibility. Since SWOT analysis can be used in a variety of scenarios, it has to be flexible. However this can lead to a number of anomalies. Problems with basic SWOT analysis can be addressed using a more critical POWER SWOT. SWOT Analysis Examples A few SWOT analyses case studies are outlined as follows: 25 Example 1 - Wal-Mart SWOT Analysis. - Strengths - Wal-Mart is a powerful retail brand. It has a reputation for value for money, convenience and a wide range of products all in one store. - Weaknesses - Wal-Mart is the World's largest grocery retailer and control of its empire, despite its IT advantages, could leave it weak in some areas due to the huge span of control. - Opportunities - To take over, merge with, or form strategic alliances with other global retailers, focusing on specific markets such as Europe or the Greater China Region. - Threats - Being number one means that you are the target of competition, locally and globally. Example 2 – ‘GCMMF (Amul)’ SWOT Analysis. - Strengths - Amul is a powerful dairy brand. It has a reputation for value for money, high quality and easy availability of all its products, right from liquid milk to ilk powder to chocolates. - Weaknesses - GCMMF is India’s largest dairy products marketer and is aspiring to make Amul a mega ‘food’ brand. This will require further expansion of its reach and access to expertise and production technology that could make it vulnerable in some areas. - Opportunities - To take over, or form strategic alliances with other players in the food industry, increasing health consciousness prompting people to abandon junk food and colas in favour of healthier choices including those available with milk base. - Threats - Being number one means that you are the target of competition, locally and globally. 2.2 Introduction to Marketing Research 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 26 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. 2.21 The Marketing research Process. Marketing research is gathered using a systematic approach. An example of one follows: 1. Define the problem: Never conduct research for things that you would 'like' to know. Make sure that you really 'need' to know something. The problem then becomes the focus of the research. For example, why are the sales of life insurance products from your company not picking up among the Indian farmers? 27 2. Data Collection: How will you collect the data that you will analyze to solve your problem? Do we conduct a telephone survey, or do we arrange a focus group? The methods of data collection will be discussed in more detail later. 3. Sampling: Select a sampling method. Do we us a random sample, stratified sample, or cluster sample? 4. Data Analysis methods: How will we analyze any data collected? What software will we use? What degree of accuracy is required? 5. Budget and time frame: Decide upon a budget and a timeframe. 6. Agreement with the client department/organisation: Go back and speak to the managers or clients requesting the research. Make sure that you agree on the problem! If you gain approval, then move on to step seven. 7. Execution of research: Go ahead and collect the data. 8. Data Analysis: Conduct the analysis of the data. 9. Error check: Check for errors. It is not uncommon to find errors in sampling, data collection method, or analytical mistakes. 10. Report Writing: Write your final report. This will contain charts, tables, and diagrams that will communicate the results of the research, and hopefully lead to a solution to your problem. Watch out for errors in interpretation. 2.22 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. 2.23 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: 28 1. Interviews 2. Mystery shopping 3. Focus groups 4. Projective techniques 5. Product tests 6. Diaries 7. Omnibus Studies 2.231 Interviews This is the technique most associated with marketing research. Interviews can be telephone, face-to-face, or over the Internet. 2.232 Telephone Interview Telephone ownership is very common in developed countries. It is ideal for collecting data from a geographically dispersed sample. The interviews tend to be very structured and tend to lack depth. Telephone interviews are cheaper to conduct than face-to-face interviews (on a per person basis). Advantages of telephone interviews Can be geographically spread out Can be set up and conducted relatively cheaply Random samples can be selected Cheaper than face-to-face interviews Disadvantages of telephone interviews Respondents can simply hang up Interviews tend to be a lot shorter Visual aids cannot be used Researchers cannot behavior or body language 29 However, in less developed countries, the penetration of telephone services is less than adequate, especially in rural and remote areas This reduces the possibility of relying n telephones for conduct of interviews. 2.233 Face-to-face Interviews Face-to face interviews are conducted between a market researcher and a respondent. Data is collected on a survey. Some surveys are very rigid or 'structured' and use closed questions. Data is easily compared. Other face-to-face interviews are more 'in depth,' and depend upon more open forms of questioning. The research will probe and develop points of interest. Advantages of face-to-face interviews They allow more 'depth' Physical prompts such as products and pictures can be used Body language can emphasize responses Respondents can be 'observed' at the same time Disadvantages of face-to-face interviews Interviews can be expensive It can take a long period of time to arrange and conduct. Some respondents will give biased responses when face-to-face with a researcher. 2.234 The Internet The Internet can be used in a number of ways to collect primary data. Visitors to sites can be asked to complete electronic questionnaires. However responses will increase if an incentive is offered such as a free newsletter, or free membership. Other important data is collected when visitors sign up for membership. Advantages of the Internet Relatively inexpensive Uses graphics and visual aids 30 Random samples can be selected Visitors tend to be loyal to particular sites and are willing to give up time to complete the forms Disadvantages of the Internet Only surveys current, not potential customers. Needs knowledge of software to set up questionnaires and methods of processing data May restrict visitors from your website. 2.235 Mail Survey In many countries, the mail survey is the most appropriate way to gather primary data. Lists are collated, or purchased, and a predesigned questionnaire is mailed to a sample of respondents. Mail surveys do not tend to generate more than a 5-10% response rate. However, a second mailing to prompt or remind respondents tends to improve response rates. Mail surveys are less popular with the advent of technologies such as the Internet and telephones, especially call centers. 2.235 Mystery Shopping Companies will set up mystery shopping campaigns on an organizations behalf. Often used in banking, retailing and many other customer focused organizations, mystery shoppers will enter, posing as real customers. They collect data on customer service and the customer experience. Findings are reported back to the commissioning organization. There are many issues surrounding the ethics of such an approach to research. 2.236 Focus Groups Focus groups are made up from a number of selected respondents based together in the same room. Highly experienced researchers work with the focus group to gather in depth qualitative feedback. Groups tend to be made up from 10 to 18 participants. Discussion, 31 opinion, and beliefs are encouraged, and the research will probe into specific areas that are of interest to the company commissioning the research. Advantages of focus groups Commissioning marketers often observe the group from behind a one-way screen Visual aids and tangible products can be circulated and opinions taken All participants and the research interact Areas of specific interest can be covered in greater depth Disadvantages of focus groups Highly experienced researchers are needed. They are rare. Complex to organize Can be very expensive in comparison to other methods 2.237 Projective techniques Projective techniques are borrowed from the field of psychology. They will generate highly subjective qualitative data. There are many examples of such approaches including: Inkblot tests - look for images in a series of inkblots Cartoons - complete the 'bubbles' on a cartoon series Sentence or story completion Word association - depends on very quick (subconscious) responses to words Psychodrama - Imagine that you are a product and describe what it is like to be operated, warn, or used. 2.238 Product tests Product tests are often completed as part of the 'test' marketing process. Products are displayed in a mall of shopping center. Potential customers are asked to visit the store and their purchase behavior is observed. Observers will contemplate how the product is handled, how the packing is read, how much time the consumer spends with the product, and so on. 32 2.239 Diaries & Omnibus studies Diaries are used by a number of specially recruited consumers. They are asked to complete a diary that lists and records their purchasing behavior of a period of time (weeks, months, or years). It demands a substantial commitment on the part of the respondent. However, by collecting a series of diaries with a number of entries, the researcher has a reasonable picture of purchasing behavior. An omnibus study is where an organisation purchases a single or a few questions on a 'hybrid' interview (either face-to-face or by telephone). The organisation will be one of many that simply want to get a straightforward answer to a simple question. An omnibus survey could include questions from companies in sectors as diverse as health care and tobacco. The research is far cheaper, and commit less time and effort than conducting your own research. 2.24 Secondary - Marketing Research Secondary marketing research, or desk research, already exist in one form or another. It is relatively cheap, and can be conducted quite quickly .However, it tends to have been collected for reasons other than for the problem or objective at hand. So it may be untargeted, and difficult to use to make comparisons (e.g. bank services data gathered for the rural areas of Australia will be different from the data about the same set of banking services in rural areas of India). There are a number of such sources available to the marketer, and the following list is by no means conclusive: Trade associations National and local press Industry magazines National/international governments Websites Informal contacts Trade directories Published company accounts 33 Business libraries Professional institutes and organisations Omnibus surveys Previously gathered marketing research Census data Public records National Sample Survey Countrywide Retail Audit NCAER’s MISH survey etc. 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. 34 Chapter 3 Consumer Behaviour 3.0 Introduction If a marketer can identify consumer buyer behaviour, he or she will be in a better position to target products and services at them. Buyer behaviour is focused upon the needs of individuals, groups and organisations. This chapter explains the model of consumer behaviour, which consists of several variables like marketing offer, environment, buyer characteristics, and purchase process which influence pre-purchase, purchase and cause post-purchase experiences. It also covers the patterns of behaviour exhibited by the buyers as well as the criteria and methods that they use to evaluate purchase and consumption choices. To understand human behaviour and its causes is extremely challenging. The sheer variety of variables and their respective intensities is mind-boggling. The world-views and backgrounds are different and so are the religions and traditions. The nationalities are different and so are the communities. The professions are different and so are the education levels. All these and more contribute towards making the understanding of Once upon a time, four blind man keen to know how an elephant looks like went to a zoo and requested the zoo keeper to take them close to an elephant. They were on different sides of the elephant, each happy in his arrogance that he knew more than the others. By virtue of their location relative to the elephant, each could touch a different part of elephant’s huge body. Then one who was close to the trunk said that elephant must be like a huge snake (just imagine!). Then, there was one who could feel elephant’s legs. He said that elephant must be like a tree (way off...don’t you think), the third one touched elephant’s stomach and said that elephant’s appearance must be like a huge sack. The blind man who touched elephant’s ears was sure that elephant must surely be resembling a fan. behaviour a real uphill task. 35 3.1 Models of Consumer Behaviour The basic model of behaviour that is used for analysing a consumer’s Marketing offer behaviour is as follows: Product, Place, Price, Promotion Environment Socio-cultural, Technological, Economic, Political Stimuli Organism Behaviour Consequences Internal & External Buyer Characteristics Decision making, action Satisfaction or Cognitive Dissonance Understanding the nature of the stimuli the consumer receives from the environment and from the marketers is important. The nature of influence that each of these stimuli exerts on the thinking and decision making process is an important determinant of what he buys? Where from he buys? When he buys? and what he buys? 3.2 The Stimuli The stimuli are of two types, the internal and the external. The origin of internal stimuli is the ‘self’. Hunger, Thirst or to dress up properly, etc are examples of internal stimuli. External Stimuli are caused by the marketing mix or by environment. The marketing mix which acts as a stimulus consists of four Ps: Product, Price, Promotion and Place. A combination of these activates a consumer to search, negotiate or to buy a product or a service. (a) Socio-Cultural factors The socio-cultural factors that affect an individual’s behaviour are: Culture, Social Class, groups, family role, status and sociability i) Culture: The traditions, the customs, the language, the beliefs, and the norms, each one of these affects the way a person behaves. 36 ii) Social Class: The income, the occupation, the education level, the means of leisure, the way of speaking and dressing, each one of these defines the class one belongs to. The class plays an important role in governing the shopping and consumption choices of individuals. iii) Group: Whether it is the primary groups, such as family and kinship groups, the friends circle and the neighbourhood group or it is a secondary group such as office colleagues, political parties or clubs, etc. Each membership or lack of it influences the way a person behaves in a consumption situation. iv) Family: Family is one of the most important and basic economic unit. The structure of the family and the statuses and the roles each member plays in it is a significant determinant of the purchase decisions. v) Role and Status: The rights (Status) and the obligations (roles) affect the way a person perceives oneself. The conduct of each individual is shaped by the Role set and status set that he views as acceptable and identifiable. Purchase behaviour is no exception. A person either identifies with certain brands or aspires for certain brands. In no case will a person like to get associated with something that he perceives as of lower status than him. vi) Sociability: The extent to which the group is bonded together decides the influence that it has on the individuals comprising it. The strength and attractiveness that each group member feels for the group that he belongs to is a major cause of the behaviour of each one of the group members. (b) Economic factors The income and the occupations that one follows makes one behave in certain manner. (c) Political factors The dynamics of the group and the power equations within the groups, the changes happening in the political environment, the forces shaping the political economy all influence the behaviour of the individuals. In rural India, the strengthening of panchayati raj system has placed more money in the hands of villagers due to better 37 utilisation of funds. It has also made the villagers more confident about their decisions. (d) Technological factors Technology has an impact on the lives of rural people. All the occupations including those of agriculture, dairying, poultry and animal husbandry have become more productive. New technology riding n the back of telecom and internet revolution has boosted incomes, increased information availability and contributed towards reduction in wastage of resources. The speed of activities has increased. All these developments have led to change in behaviour making us conclude that the technology that a consumer uses is a firm decider of what he would consume. 3.3 The Consumer’s Characteristics Some of the characteristics of buyers that affect the buying process include: 1. Age 2. Life-Cycle stage 3. Economic Situation 4. Education 5. Occupation 6. Life-style 7. Personality 8. Self-Concept 9. Psychological factors The first eight points mentioned above are self evident. However, the ninth point i.e. Psychological factors needs explanation. The psychological factors that have an important impact on a person’s decisions are: Perception: The process by which people select, organise and interpret information to form meaningful picture of the object. This makes the task of communicating with different sets of people very challenging for a marketer. 38 Cognition: The information gathering and processing style and the way people ‘learn’ is different. Therefore, the marketer has to tailor make his offering including the communication according to the cognitive system prevailing amongst his target audience. Motivation: A motive is defined as the inner urge that propels a person to action. The process of creating motives is called motivation. 3.31 Maslow’s Hierarchy of human needs It is important to understand the relevance of human needs to buyer behaviour (remember, marketing is about satisfying needs). The role of a human being as a consumer is a subset of his behaviour as a human being. It is reasonable to assume that the motives that drive a human being’s conduct in non-shopping, non-buyer role are no different from what guide him when he acts as a buyer. Let's look at human motivations as introduced by Abraham Maslow by his hierarchy of needs: The hierarchy is triangular. This is because as 39 you move up it, fewer and fewer people satisfy higher level needs. We begin at the bottom level. Physiological needs such as food, air, water, heat, and the basic necessities of survival need to be satisfied. At the level of safety, man has a place to live that protects him from the elements and predators. At the third level we meet our social and belongingness needs i.e. we marry, or join groups of friends, etc. The final two levels are esteem and self-actualisation. Fewer people satisfy the higher level needs. Esteem means that you achieve something that makes you recognised and gives personal satisfaction, for example writing a book. Self-actualisation is achieved by few. Here a person is one of a small number to actually do something. For example, Neil Armstrong self-actualised as the first person to reach the Moon. 3.4 Buying decision process There are various models of explaining how a buyer takes a decision. One of the preliminary models is the one shown below: Need recognition Information search Evaluation of alternatives Purchase decision Post-Purchase behaviour 1. Need recognition: When the buyer feels the absence, the lack, the paucity, the scarcity of something, he senses a gap between his desired state and the actual state. This realization of a gap is the trigger for the commencement of buying process. The trigger can be supplied by environment, the marketer or may be internally devised by the buyer. For example, a feeling of hunger while passing through the market triggers the search for an eating joint. 2. Information Search: Depending on the availability of time, of resources and the degree of importance one attaches to the purchase, the amount of 40 information that would be gathered is decided. If adequate time is available and if the purchase is for an important product or service, more and relevant information will be gathered. Opposite is the case for low importance activity or when tie that is available is short. Different sources of information like family, friends, opinion leaders, radio, Television and newspapers etc have different degrees of credibility associated with them. Depending on the buyer’s analysis of his purchase situation, the buyer decides what he must do in the information search stage. The intention of the buyer is to reduce his risk by obtaining correct information. 3. Evaluation of Alternatives: The evaluation of purchase alternatives (to buy or not to buy, to buy immediately or to defer it, to buy brand A or brand B) takes place in various small steps. The buyer has to have certain set of criteria based on which he would assesses the worthiness of each option. The criteria may be economic or social or emotional or even a combination of two or many. The intention is to better one’s situation through the purchase decision the betterment could be in socio-economic domain or in the emotional domain. Once the set of criteria is developed alternative is subjected to these criteria. Depending on the merits of each option, a buyer keeps moving on and taking decisions. 4. Purchase decision: All the existing brands of a product in the market make a total set (e.g. Ford, Massey Ferguson, Eicher, Escorts, PTL and Swaraj would form the total set for tractors). Based on the information search, the consumer becomes aware of the presence of certain brands (e.g. Eicher, Ford and Escorts). They form the Awareness Set. The brands which meet the initial buying criteria. These are considered for further evaluation. They comprise the Consideration Set. By applying all the criteria including the final criteria, the farmer may arrive at all almost equally valid choices. These are called the choice set. Finally only one brand is chosen for purchase. The factors which affect any final choice are: Attitude of others Unanticipated situational factors 41 Perceived Risk The final purchase decision covers the following: 1. Which brand? 2. Which dealer? 3. How much quantity? 4. When purchased? 5. What payment method? 5. Post-Purchase Behaviour: The purchase decision marks a certain event in the life of a buyer. Depending on its seriousness, the buyer develops his feelings and behaviour towards the purchase once it has been made. These can be positive (happy, satisfied, delighted) or can be negative (anxious, disappointed, disgusted, dissatisfied). Typically, a marketer would be interested in the following answers: What are the feelings of the buyer after buying and using the product? What are his reactions when satisfied? When dissatisfied? How does he dispose of the product after use? The satisfaction, delight or otherwise is dependent on whether the expectations are met by the product purchase or not. The marketers would do well to manage the expectations of their customers as well as make sure that once formed, the expectations are exceeded by the marketing offer. There are other buying process models like AIDA (Awareness Intention DesireAction) or the one proposed by Cohen. The model is a little simplistic but introduces the concept of different consumer needs quite well. 42 To understand consumer buyer behaviour is to understand how the person interacts with the marketing mix. As described by Cohen (1991), the marketing mix inputs (or the four Ps of price, place, promotion, and product) are adapted and focused upon the consumer. The psychology of each individual considers the product or service on offer in relation to their own culture, attitude, previous learning, and personal perception. The consumer then decides whether or not to purchase, where to purchase, the brand that he or she prefers, and other choices. Marketers would do well to understand the dynamics of buying process and consumer behaviour. Therein would lie the likelihood of business success. 43 Chapter 4 Segmentation, Targeting and Positioning 4.0 Introduction to segmentation, targeting and positioning The organisations of today and of the future will have to identify, select, attract, nurture and retain their market. They may have to do whatever it takes to keep their target audience/customers hooked on to their offerings. Different pack sizes, different formulations, different colours and perfumes, each aimed at catering to a sharply defined category of people in the market. No longer are the companies depending on the philosophy that consumers are human beings with little or no differences in aspirations, preferences, actions and consequences. In reality they are dividing the markets into attractive segments to reach them efficiently, serve them effectively and achieve results economically. Selecting and attracting markets involves three key decisions viz., segmenting, targeting and positioning. To get a product or service to the right person or company, a marketer would firstly segment the market, then target a single segment or series of segments, and finally position within the segment(s). 4.1 Segmentation Segmentation is essentially the identification of subsets of buyers within a market who share similar needs and who demonstrate similar buyer behavior. The world is made up of billions of buyers with their own sets of needs and behaviour. Segmentation aims to match groups of purchasers with the same set of needs and buyer behaviour. Such a group is known as a 'segment'. Think of your market as an orange, with a series of connected but distinctive segments, each with their own profile. 44 Segmentation is a form of critical evaluation rather than a prescribed process or system, and hence no two markets are defined and segmented in the same way. However there are a number of underpinning criteria that assist us with segmentation: Is the segment viable? Can we make a profit from it? Is the segment accessible? How easy is it for us to get into the segment? Is the segment measurable? Can we obtain realistic data to consider its potential? The are many ways that a segment can be considered. For example, the auto market could be segmented by: driver age, engine size, model type, cost, and so on. However the more general bases include: Geograpical Segmentation: The variables considered while segmenting a market geographically include zones/regions, states, districts, cities/towns/villages by size, density, climate and culture. Demographic Segmentation: In this case the markets are divided based on the variables such as age, life cycle, gender, family size, income, occupation, education, religion and nationality, etc. 45 Psychographic Segmentation: While geographic and demographic basis of segmentation offer an operational view of the markets, the actual dynamics of the purchase can be assessed and marketing offer can be designed only on the basis of psychographics of the people. Social class, lifestyle and personality are the psychographic variables that can be used for segmentation. In many parts of Punjab, the farmers have gone in for their second or even third tractor and that too of large capacity even when their plot sizes warrant an ownership of a single, small capacity tractor. The more than required multiplicity and the bigness of the tractors is due to the tendency of emulating their neighbours or of reading a positive word about their economic stature in the community. A company will evaluate each segment based upon potential business success. Opportunities will depend upon factors such as: the potential growth of the segment the state of competitive rivalry within the segment, how much profit the segment will deliver, how big the segment is, how the segment fits with the current direction of the company and its vision. 4.2 Targeting Targeting is the second stage of the SEGMENT-"Target"-POSITION (STP) process. After the market has been separated into its segments, the marketer will select a segment or series of segments and 'target' it/them. Resources and effort will be targeted at the segment. 4.21 Evaluation of Segments The organisation can use the following criteria for evaluating segments: 1. Profitability The company needs to collect relevant information about sales volume, distribution costs promotion costs, sales revenues and profit margins. This data would help the calculation of profits obtainable from each segment. 46 2. Attractiveness Marketers must know whether there is a need to design skill development programmes for its employees to serve its markets. The most attractive segment for a company is the one having the closest fit with the size and the nature of the organisation. 3. Growth Rate It is not only important to have current profitability for determining attractiveness of a segment but it is also important that the segment has high profit potential and is growing rapidly towards achieving its potential. 4. Company Objectives The segments selected by the company to target must be in close alignment with the objectives of the company. 5. Limitations and Constraints A company must examine the boundaries within which it has to operate especially with reference to the social and cultural norms and mores, the regulatory framework, Government policies, the general quality and quantity of human resources in its location, etc. The segments chosen must be accessible within the given limitations. 4.22 Segment Coverage Organisations can have any of the three alternative strategies to suit their segmentation approaches. 1. Concentrated Strategy This involves catering to a single segment with a single product. In other word, the marketer targets a single product offering at a single segment in a market with many segments. For example, Rolls Royce Car is a high value product 47 aimed specifically at very rich people who also have fine taste and are respected in the society. Concentrated Strategy 2. Undifferentiated Strategy The marketer could ignore the differences in the segments, and choose to aim a single product at all segments i.e. the whole market. This is typical in 'mass marketing' or where differentiation is less important than cost. An example of this is the approach taken by budget airlines such as Air Deccan in India, Air Asia in South East Asia, Easyjet in Europe etc. Undifferentiated Strategy 48 2. Differentiated Strategy Finally, there is a multi-segment approach. Here a marketer will target a variety of different segments with a series of differentiated products. This is typical in the automobile industry. Here there are a variety of products such as diesel, four-wheel-drive, sports saloons, and so on. 4.3 Positioning The third and final part of the SEGMENT - TARGET - POSITION (STP) process is 'positioning.' Positioning is undoubtedly one of the simplest and most useful tools to marketers. After segmenting a market and then targeting a consumer, you would proceed to position a product within that market. Remember this important point. Positioning is all about 'perception'. As perception differs from person to person, so do the results of the positioning map e.g what you perceive as quality, value for money, etc, is different to my perception. However, there will be similarities. Positioning involves three tasks: Identifying the differences of the offer vis-à-vis competitors’ offers. Selecting the differences that have greater competitive advantage Communicating such advantages effectively to the target audience. The marketing offer may be differentiated along the following lines: Product Services People, or Image Products or services are 'mapped' together on a 'positioning map'. This allows them to be compared and contrasted in relation to each other. This is the main 49 strength of this tool. Marketers decide upon a competitive position which enables them to distinguish their own products from the offerings of their competition (hence the term positioning strategy). Take a look at the basic positioning map template below: The marketer would draw out the map and decide upon a label for each axis. They could be price (variable one) and quality (variable two), or Comfort (variable one) and price (variable two). The individual products are then mapped out next to each other. Any gaps could be regarded as possible areas for new products. The term 'positioning' refers to the consumer's perception of a product or service in relation to its competitors. You need to ask yourself, what is the position of the product in the mind of the consumer? Trout and Ries suggest a six-step question framework for successful positioning: 1. What position do you currently own? 2. What position do you want to own? 3. Whom do you have to defeat to own the position you want? 50 4. Do you have the resources to do it? 5. Can you persist until you get there? 6. Are your tactics supporting the positioning objective you set? Look at the example below using the auto market. Product: Skoda Octavia, Hyundai Sonata, Maruti Baleno, Honda City, Hyundai Santro, Maruti Wagon R and Maruti 800. Positioning Map for Cars The seven products are plotted upon the positioning map. It can be concluded that products tend to bunch in the high price/low economy(fast) sector and also in the low price/high economy sector. There is an opportunity in the low price/ low economy (fast) sector. Maybe Hyundai or Maruti could consider 51 introducing a low cost sport saloon. However, remember that it is all down to the perception of the individual. 52 Chapter 5 Product, Brand and Innovation Management 5.0 Introduction to Product Management The most common decisions that Marketing Manager has to take pertain to product strategy. The multi-product firms are faced with challenges and they do exercise choices in the product arena to gain a competitive advantage. It is through continuous re-jigging of product mixes that a company improves its performance in the marketplace. 5.1 Three Levels of a Product For many people, a product is simply the tangible, physical entity that they may be buying or selling. You buy a new tractor and that's the product simple! In marketing, we do not consider it so simple. When one buys a tractor, is the product more complex than one first thought? In order to actively explore the nature of a product further, let’s consider it as three different products - the CORE product, the ACTUAL product, and finally the AUGMENTED product. These are known as the 'Three Levels of a Product.' Let us see what is the difference between the three products, or more precisely 'levels?' 53 The CORE product is NOT the tangible, physical product. You can't touch it. That's because the core product is the BENEFIT of the product that makes it valuable to you. So with the tractor example, the benefit is productivity i.e. the ease with which the farming operations can be performed. Another core benefit is the transportation since you can carry farm produce and construction material around relatively quickly. The ACTUAL product is the tangible, physical product. You can get some use out of it. Again with the tractor example, it is the vehicle that you test drive, buy and then collect. The AUGMENTED product is the non-physical part of the product. It usually consists of lots of added value, for which you may or may not pay a premium. So when you buy a tractor, part of the augmented product would be the 54 warranty, the customer service support offered by the tractor manufacture, and any after-sales service. Another marketing tool for evaluating PRODUCT is the Product Life Cycle (PLC). 5.2 The Product Life Cycle (PLC) The Product Life Cycle (PLC) is based upon the biological life cycle. For example, a seed is planted (introduction); it begins to sprout (growth); it shoots out leaves and puts down roots as it becomes an adult (maturity); after a long period as an adult the plant begins to shrink and die out (decline). In theory it is the same for a product. After a period of development it is introduced or launched into the market; it gains more and more customers as it grows; eventually the market stabilises and the product becomes mature; then after a period of time the product is overtaken by development and the introduction of superior competitors, it goes into decline and is eventually withdrawn. However, most products fail in the introduction phase. Others have very cyclical maturity phases where declines see the product promoted to regain customers. 5.11 Strategies for the differing stages of the Product Life Cycle. 55 Introduction The need for immediate profit is not a pressure. The product is promoted to create awareness. If the product has no or few competitors, a skimming price strategy is employed. Limited numbers of product are available in few channels of distribution. Growth Competitors are attracted into the market with very similar offerings. Products become more profitable and companies form alliances, joint ventures and take each other over. Advertising spend is high and focuses upon building brand. Market share tends to stabilise. Maturity Those products that survive the earlier stages tend to spend longest in this phase. Sales grow at a decreasing rate and then stabilise. Producers attempt to differentiate products and brands are key to this. Price wars and intense competition occur. At this point the market reaches saturation. Producers begin to leave the market due to poor margins. Promotion becomes more widespread and uses a greater variety of media. Decline At this point there is a downturn in the market. For example more innovative products are introduced or consumer tastes have changed. There is intense price-cutting and many more products are withdrawn from the market. Profits can be improved by reducing marketing spend and cost cutting. 5.12 Problems with Product Life Cycle. In reality very few products follow such a prescriptive cycle. The length of each stage varies enormously. The decisions of marketers can change the stage, for example from maturity to decline by price-cutting. Not all products go 56 through each stage. Some go from introduction to decline. It is not easy to tell which stage the product is in. Remember that PLC is like all other tools. Use it to inform your gut feeling. 5.2 Diffusion of Innovation In modern businesses, innovation is the name of the game. Whether it is products or distribution channels or advertising, the field of marketing is agog with innovation. As new products are placed in the market, buyers show different degrees of readiness to adopt them. 5.21 The Adoption Process The Adoption Process (also known as the Diffusion of Innovation) is more than forty years old. It was first described by Bourne (1959), so it has stood the test of time and remained an important marketing tool ever since. It describes the behaviour of consumers as they purchase new products and services. The individual categories of innovator, early adopters, early majority, late majority and laggards are described below. 57 Innovators are the first to adopt and display behaviour that demonstrates that they likely to want to be ahead, and to be the first to own new products, well before the average consumer. They are often not taken seriously by their peers. The often buy products that do not make it through the early stages of the Product Life Cycle (PLC). Early adoptors are also quick to buy new products and services, and so are key opinion leaders with their neighbours and friends as they tend to be amongst the first to get hold of items or services. The early majority looks to the innovators and early majority to see if a new product or idea works and begins to stand the test of time. They stand back and watch the experiences of others. Then there is a surge of mass purchases. The late majority tends to purchase the product later than the average person. They are slower to catch on to the popularity of new products, services, ideas, or solutions. There is still mass consumption, but it begins to end. Finally, laggards tend to very late to take on board new products and include those that never actually adopt at all. Here there is little to be made from these consumers. There are a number of examples of products that have gone through the adoption process. They include wrist watches, chemical fertilisers, chemical pesticides, formal banking, crop insurance, kisan credit card and now modern-day retail format. Initially only a small group of younger or informed, well off people bought into these products. Opinion leaders or the early adoptors then buy the product and tend to be a target for marketing companies wishing to gain an early foot hold. The early majority is slightly ahead of the average, and follow. Then the late majority buys into the product, followed by any laggards. New adoption process or curves begin all the time. Who knows what will happen with solid state technology or Internet purchases of media? 58 5.3 Product Strategy Product strategy helps in achievement of marketing goals by facilitating improved decisions with respect to products, product line and product mix. Product strategy covers within its scope, decisions at three levels: Product Mix Product line and Product item The typologies of decisions that are taken with respect to each level are mentioned as follows: Level Product Mix Product strategy typology Width extension- New Product lines Length extension- New Product items Depth extension- New Product variants Product Line Stretching- Upward, downward, both ways Line pruning, line modernisation Product Item Quality, features, design, brand and package Augmentations 5.4 Introduction to Brands 5.41 Brands and Branding. Branding is a strategy that is used by marketers. ‘Pickton and Broderick’ describe branding as Strategy to differentiate products and companies, and to build economic value for both the consumer and the brand owner. Brand occupies space in the perception of the consumer, and is what results from the totality of what the consumer takes into consideration before making a purchase decision. So branding is a strategy, and brand is what has meaning to the consumer. There are some other terms used in branding. Brand Equity is the addition of the brand's attributes including reputation, symbols, associations and names. 59 Then the financial expression of the elements of brand equity is called Brand Value. There are a number of interpretations of the term brand. They are summarized as follows: A brand is simply a logo e.g. McDonald's Golden Arches. A brand is a legal instrument, existing in a similar way to a patent or copyright. A brand is a company e.g. Coca-Cola. A brand is shorthand - not as straightforward. Here a brand that is perceived as having benefits in the mind of the consumer is recognised and acts as a shortcut to circumvent large chunks of information. So when searching for a product or service in less familiar surroundings you will conduct an information search. A recognised brand will help you reach a decision more conveniently. A brand is a risk reducer. The brand reassures you when in unfamiliar territory. A brand is positioning. It is situated in relation to other brands in the mind of the consumer as better, worse, quicker, slower, etc. A brand is a personality, beyond function e.g. Apple's iPod versus just any MP3 player. A brand is a cluster of values e.g. Google is reliable, ethical, invaluable, innovative and so on. A brand is a vision. Here managers aspire to see a brand with a cluster of values. In this context vision is similar to goal or mission. A brand is added value, where the consumer sees value in a brand over and above its competition e.g. ICICI over Dena Bank, and Maruti over ‘Ambassador’ despite similarities. A brand is an identity that includes all sorts of components; depending on the brand e.g. ‘TATA’ encapsulates ethics, environmentalism and political beliefs. A brand is an image where the consumer perceives a brand as representing a particular reality e.g. MRF Tyres are tough. A brand is a relationship where the consumer reflects upon him or herself through the experience of consuming a product or service. 60 5.42 Four Branding Alternatives 5.421 A Branding Strategy Based upon Brand Franchise Extension A marketing tool that a marketer can employ for branding decision-making is the Four Branding Alternatives (Tauber 1981). Four Branding Alternatives is a strategic marketing communications technique. It is a fun and creative approach for all those who would like to understand brands and how they could be innovatively developed. It is used when an organization considers adding a product to its portfolio and its associated brand name. The two variables for this matrix are Product Category (Existing or New) and Brand Category (Existing or New). New Product - a new product is developed with a series of new brand ideas and meanings to the consumer. Flanker Brand - a new brand is introduced into a category where the organization already has established products. Line Extension - a current brand name is introduced into a category where the organization already has established products. Franchise Extension - a familiar brand is taken to a product category where it is unknown. 61 Here's an example. Firstly let's recall that Four Branding Alternatives is a strategic tool, so you need to base it upon a very large organisation which is likely to own a number of brands. Examples would include car manufacturers, large IT companies, and conglomerates. You get the idea. 5.5 The Loyalty Ladder 5.51 Turning a prospect into an advocate The loyalty ladder is a tool for marketing communicators. The idea is that consumers can be moved along a continuum of loyalty using a number of integrated marketing communications techniques (it is also referred to as a branding ladder). Essentially, consumers become loyal to a brand which has meaning to them in relation to a product, service, solution or experience. As with continuums of behaviour such as UACCA - Unawareness, Awareness, Comprehension, Conviction, Action, or AIDA - Awareness, Interest, Desire, Action, the loyalty ladder begins from a point where the consumer has Not Yet 62 Purchased, then he or she buys the product for the first time (Trialist), if the trial has been a success he or she returns to buy again and again (Repeat Purchaser) and finally the consumer buys no other brand (Brand Insistent). At the Not Yet Purchased Stage the consumer is merely a Prospect. As he or she trials they become a Customer. The Repeat Purchaser is a Client since he or she is becoming loyal. Finally, the consumer becomes an Advocate (i.e. activist or campaigner) since he or she is Brand Insistent. At this point the brand is difficult to dislodge since it has so much meaning to the consumer. Great brands such as M&M, ITC, TATA, Birla, and Phillips are in this highly desirable position. The marketing manager needs to decide or select integrated marketing communications that move the consumer from Not Yet purchased to Brand Insistent (i.e. from Prospect to Advocate). Once at Brand Insistent, the marketing manager should attempt to keep the level of customer loyalty at this point, again by using integrated marketing communications. References Edward M. Tauber, 'Brand Franchise Extension: New Product Benefits from Existing Brand Names,' Business Horizons, vol. 24 (March-April 1981), p37. 63 Chapter 6 Pricing Strategy 6.0 Introduction Price is the most obvious representation of the value that the marketer wants the consumer to perceive. To a significant extent, a high price does convey a ‘premium’ image and a low price does communicate an image of brand for ‘mass consumption’. The significance of pricing has increased with the technology of manufacturing and marketing becoming easily available at almost the same price to the competitors and also, the information of competitors’ offerings becoming easily available to the consumers. The segments becoming more numerous and smaller and markets becoming saturated have all contributed to make the price competition extremely intense. The lack of pace at which new ideas of value-addition are implemented by the marketers has led to heightened degree of price competition. A price can be expressed in monetary and non-monetary terms. Many words are used as surrogates of price: Commission, fee, rate, charges, salary, rent, wages, dividend, and interest. A price contains all the terms of purchase: discounts, packing, handling and shipping charges, credit charges and other forms of interest and late payment penalties. Prices are quantitative, unambiguous and unidimensional, whereas other characteristics like quality, image, customer service, promotion and similar factors are qualitative, ambiguous and multi-dimensional. It provides a basis of not only economic comparison but also social comparison. 6.1 Pricing Objectives (i) Profit as objective Two major types of profit objectives may be observed: 64 1. Profit maximisation, and 2. Target return ‘Maximisation of profit’ as an objective assumes that the breakup of entire cost and revenue details is available to the organisation. This may not be true in most cases. Therefore, most companies settle for the objective of a ‘target rate of return’ for their shareholders. This is mostly represented as target ‘Return on Investment (ROI)’ which actually is indicative of what is considered to be a ‘satisfactory’ profitability rather than maximum profitability. (ii) Sales-objectives The pricing objectives can also be looked at from the perspective of sales. Typically this would be represented as: a. Growth in sales volume/revenue b. Growth in market share- due to growth in market or due to growth in sales of the firm c. Survival-minimum sales necessary to survive d. Maintenance of a sales volume or market share (iii) Competition Objectives Some firms set pricing objectives in relationship to the actions of their competitors. These may be: a. To meet the challenge from competition b. To block the entry of the competition c. To destroy competition When the market has several competitors and their relative strengths are similar, the nature of the market is very close to being a ‘free’ competition. In 65 such cases, the price wars seem to be the order of the day with each competitor trying to outbid the other for getting a higher market share. When there is an oligopoly, the pricing is relatively rigid and joint pricing by the industry is common, e.g. Indian tyre market. When there is one or few major big players and rest a re small competitors, the pricing is such that the big players lead the price-pack with the rest following suit (unwillingly at times). The intention of under-pricing by the large players is to finish off the smaller competition by making their businesses unviable. Such a pricing strategy is called ‘predatory’ pricing. (iv) Market development objectives The markets do have a tendency of getting saturated as the competitors pump in products at lower and lower prices. In such situations, the marketer has to pursue market development objectives. a. Finding new users or increasing usage quantity of the product among the existing users b. Entering new markets. The two strategies available while entering new markets are- ‘Penetration’ (i.e. price low to grab as many new users as is possible) and ‘Skimming’ (i.e. price high to create a premium image among those users who pride themselves as ‘pioneers’ and ‘early adopters’. 6.2 Pricing decision framework The pricing decision requires consideration of at least four factors: 1. Pricing situations- identification of situations that require pricing decisions 2. Influences that govern a pricing decision 3. Choice of the appropriate approach to pricing- cost plus, what the market can bear and competition driven 4. Selecting the method of price determination 66 (i) Pricing Situations a. Product- Stages of Product Life Cycle (PLC) b. Competition levels- high and low c. Stage of evolution of Consumer d. Stage of evolution of Consumer e. Type of customer f. Product portfolio- one, many or few products g. Target location h. Types of channels and profile of channel members (ii) Pricing Influences The internal influences on pricing decision are cost architecture, product portfolio and marketing strategy. The external influences are- demand (price elasticity of demand), competition, channels, politico-legal system. (iii) Pricing Approaches The marketers overcome the pricing dilemmas by relying on cost, competition and demand as the basis for formulation of their pricing approaches. (iv) Pricing Methods Finally, the marketer has to settle for a pricing method from among a. Cost based- Cost plus or Mark Up, Marginal Cost or contribution, Target return, Payback method and/or learning curve b. Demand based- Differential pricing, perceived value pricing, psychological pricing and value based pricing c. Competition based- Leader pricing, Competitive pricing, Follow the leader, Sealed bid pricing. The pricing method finally followed can be a combination of the above. Let's have a look at some of them and try to understand the best policy/strategy in various situations. 67 1. Premium Pricing Use a high price where there is uniqueness about the product or service. This approach is used where a substantial competitive advantage exists. Such high prices are charged for luxuries such as big premium cars, high-end television sets, feature laden mobile handsets or even a pesticide which claims to kill a pest causing widespread destruction in a particular season, the high yielding and disease resistant GM Crop seeds also have premium pricing. 2. Penetration Pricing The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased. This approach is used by many FMCG product marketers like those in the toothpaste, bathing soap, detergent powder/ soaps and shampoo categories. 3. Economy Pricing This is a no frills low price. The cost of marketing and manufacture are kept at a minimum. Departmental Stores and showrooms often have economy brands for soaps, motorcycles, cars, toothpaste, etc. 68 4. Price Skimming One can charge a high price because one has a substantial competitive advantage. However, the advantage is not sustainable. The high price tends to attract new competitors into the market, and the price inevitably falls due to increased supply. Manufacturers of digital watches and computers used a skimming approach in the 1980s. Once other manufacturers were tempted into the market and the watches were produced at a lower unit cost, other marketing strategies and pricing approaches are implemented. 5. Psychological Pricing. This approach is used when the marketer wants the consumer to respond on an emotional, rather than rational basis. For example, 'price point perspective' of the kind, the footwear marketer ‘Bata’ practices wherein the merchandise is priced at X rupees and 95 paise. This gives a feeling that it is cheaper though the difference with respect to next rupee is just five paise. The satchets being priced at Re. 1 or Fast foods joints pricing full meal at Rs. 20, etc.. The intention is to make the price cheaper. 6. Product Line Pricing. Where there is a range of product or services the pricing reflect the benefits of parts of the range. For example, tractor servicing X Rs., Tractor washing Y Rs. and minor repair labour charges Z Rs. However, if the entire package is taken, the customer is charged at a rate less than X+Y+Z Rupees. 7. Optional Product Pricing. Companies will attempt to increase the amount customer spend once they start to buy. Optional 'extras' increase the overall price of the product or service. For example, The accessories that one gets installed in the car or on the motor cycle are charged extra. 69 8. Captive Product Pricing Where products have complements, companies will charge a premium price where the consumer is captured. For example a razor manufacturer will charge a low price and recoup its margin (and more) from the sale of the only design of blades which fit the razor. 9. Product Bundle Pricing. Here sellers combine several products in the same package. This also serves to move old stock. Consumer durable manufacturers have been bundling Television and DVD Players along with DVDs at attractive prices. The food retailers have bundled the related indian spices in one bundle and selling it at an attractive price. Restaurants offer meal combos, which is again a form of bundled pricing. 10. Promotional Pricing. Pricing to promote a product is a very common application. There are many examples of promotional pricing including approaches such as BOGOF (Buy One Get One Free). 11. Geographical Pricing. Geographical pricing is evident where there are variations in price in different parts of the world. For example rarity value, or where shipping costs increase price. The biscuit makers like Britannia and Parle or the Newspaper Publishers like industan Times and Times of India price their offerings according to the place where these are sold. 12. Value Pricing. This approach is used where external factors such as recession or increased competition force companies to provide 'value' products and services to retain sales e.g. Happy Price Menu at McDonalds. 70 6.3 Pricing Sensitivity Price sensitivity of customers determines the extent of freedom that the companies will have in changing the price of its offering. An organization must know the price sensitivity of its customers and the factors that influence the prices. The thumb rules related to the price sensitivity are as follows: 1. A customer’s price sensitivity is high if it is he who is individually bearing the cost. 2. A customer is less price sensitive when he buys on credit/instalment rather than cash payment. 3. A customer is more price sensitive when the item that he is buying consumes a significant percentage of his expenditure/income/available money. 4. A customer is more price sensitive when he has to resell the product in a competitive market. 5. The customer is likely to be more price sensitive if he is knowledgeable about the product category or the brand in question. 6. The customer is likely to be more price sensitive if he can easily shop around and gather information about alternatives and competing brands. 7. The customer is likely to be more price sensitive if he has enough time to make the purchase. 8. The customer is likely to be more price sensitive if he can change brands/ suppliers easily without incurring an additional cost. 6.4 Concluding thoughts Initial prices of any product must be established after analysing the cost structure of the company, gauging the costs of the competitors, and understanding the value propositions desired by the customers in the intended market. Pricing is a dynamic decision and must undergo changes as the business situation changes. Pricing is a strategic decision and can be used to signal many things to the customers and the competitors. However, in real life, the pricing is done by 71 almost anyone, right from accounts clerk in some companies to the CEO in others. Formal pricing department has not emerged for companies cutting across sectors and industries. Each business development has an implication for the pricing strategy of the firm. For example, technological advancement of a product or packaging, promotional expenditure, distribution coverage, etc. impact the final prices at which the products are sold to the consumers. Therefore, the pricing should never be done in an ad-hoc manner but flow from strategic decisions of the company. 72 Chapter 7 Distribution and Retailing 7.0 Introduction The chapter on distribution and retailing covers the approaches followed, the problems faced and the emerging alternatives in the vital area of distribution and retailing. This refers to one of the major Ps of marketing, viz. Place. Product and service distribution and retailing has developed into a highly specialised activity. However, with the changing dynamics of availability of new technologies as well as need to be available timely even in ever new places has resulted in a virtual revolution in distribution channel design and management. 7.1 Place, distribution, channel, or intermediary. A channel of distribution comprises a set of institutions which perform all of the activities utilised to move a product and its title from production to consumption. - Bucklin - Theory of Distribution Channel Structure (1966) Channel, distribution, or intermediary is the mechanism through which goods and/or services are moved from the manufacturer/service provider to the user or consumer. 7.2 Functions of channel intermediaries 1. Satisfying the needs of producers and consumers at the same time: Channel intermediaries perform several specialised functions that enable manufacturers to make their goods available to their consumers at the right place and at the right time. Manufacturers produce a large quantity (for capturing economies of scale) of limited range of products whereas customers usually want only a limited quantity of wide range of goods. Channel members reconcile these conflicting 73 situations. A related function is breaking bulk. A wholesaler buys large quantities from a manufacturer and then sells smaller quantities to retailers. 2. Improve efficiency of the marketing transactions: The channel members improve the efficiency of the entire chain by reducing the number of transactions and by creating a bulk for transportation. 3. Improved Accessibility: The physical distances and the gap between the time of production and time of purchase is bridged by the channel intermediary. 4. Providing Specialist Services: Channel intermediaries have expertise in areas such as selling, servicing and installation. Producers can specialise in manufacturing and allow distributors to these functions. 7.3 Six basic 'channel' decisions 1. Do we use direct or indirect channels? (e.g. 'direct' to a consumer, 'indirect' via a wholesaler)? 2. Do we use Single or multiple channels? 3. What should be the cumulative length of the multiple channels? 4. Which types of intermediary (see later) should we use? 5. What should be the number of intermediaries at each level in a geographical area (e.g. how many retailers in Southern India)? 6. Who should we choose as intermediaries to avoid 'intrachannel conflict' (i.e. infighting between local distributors)? 7.4 Types of Channel Intermediaries There are many types of intermediaries such as wholesalers, agents, retailers, the Internet, overseas distributors, direct marketing (from manufacturer to user without an intermediary), and many others. The main modes of distribution are looked at in more detail in the following paragraphs: 74 1. Wholesalers Wholesalers break down 'bulk' into smaller packages for resale by a retailer. They buy from producers and resell to retailers. They take ownership or 'title' to goods whereas agents do not take the title. They provide storage facilities. For example, mango farmers sell their produce even before it is fully ripe to a wholesaler who stores it, lets it ripen and eventually resells to a retailer. Wholesalers often reduce the physical contact cost between the producer and consumer e.g. customer service costs, or sales force costs. A wholesaler often takes on some of the marketing responsibilities. Many produce their own brochures and use their own telesales operations. 2. Agents Agents are used in international as well as domestic markets. An agent typically secures an order for a producer and takes a commission. They do not tend to take title to the goods. This means that capital is not tied up in goods. However, a 'stockist agent' holds consignment stock (i.e. will store the stock, but the title will remain with the producer. This approach is used where goods need to get into a market soon after the order is placed e.g. foodstuffs). Agents can be very expensive to train. They are difficult to keep control of due to the physical distances involved. They are difficult to motivate. 3. Retailers Retailers have a much stronger personal relationship with the consumer. The retailer will hold several other brands and products. A consumer will expect to be exposed to many products. Retailers will often offer credit to the customer e.g. travel agents, the local grocer, etc. Products and services are promoted and merchandised by the retailer. The retailer will give the final selling price to the product. Retailers often have a strong 'brand' themselves e.g. McDonald and WalMart in the USA, and Big Bazar and Reliance Retail in India. The retailer is a primary point of contact with the end-customer. By virtue of their position in the distribution chain, they are a source of credibility and trust, their views about products and brands are believed to be true by customers especially in markets where product/brand awareness levels are low. Traditionally, the retailers were 75 relationship marketers. He caters to a set of buyers with whom his relationship may extend for several years and even through generations. Retailer is the main source of point of sale information and opinion. He can be used to bring about change in tastes and preferences of the customers. 4. Weekly markets, Bazaars, Haats and Shandies The haats or the weekly markets are the oldest outlets to purchase household goods and for trade. The shopkeepers have pre-assigned places to sell their wares in these markets. A typical markets are usually in a large open space (or on the roadside pavements) with adequate space for product display. These markets offer convenience of a on-stop shopping option. These markets are also attractive whether in Bangalore or in Bangkok in the sense that besides shopping, these also offer entertainment. It is a place to find all kinds of bargains mostly in a vast array of product categories. 5. Melas and Fairs Melas and Fairs offer are mostly associated with religio-cultural occasions and in that sense they have a very long past. Their historical moorings and the consequent familiarity of the customers makes them a happy huning grund for marketers of all kinds. The participation in melas varies from a few thousand to many lakhs of people. The large melas in India, e.g. the Kumbh do actually attract some of the largest number of people n the world at a single place. These melas offer a large number of opportunities to sell, both for manufactured goods as well as agricultural produce. The melas need little prepublicity because their regularity over large number of years has ensured for them a permanent place in the calendar of different places. The timing of most of the fairs is around the time when the target population is in a mood to celebrate and indulge in. It can be Christmas, Diwali, Baisakhi or Pongal. In India, most fairs are held around the harvest time. The mood is festive and the pocket is full, a ripe combination to make a sale. Some of the famous melas and fairs in India are Kumbh (Allahabad, Ujjain, Nasik and Haridwar), Pushkar (near Ajmer), Dussehra (Kullu), Cattle fair (Sonepur-Bihar), Makar 76 Villaku (Kerala), Great Carnival (Goa), etc. According to IMRB, there are more than 800 melas of more than a reasonable size that are held every year in India. The number of melas of smaller size may run into thousands. 6. Unofficial Channels The un-served or under-served areas, certain unofficial channels develop. For example, in the Indian villages, one has seen the mechanics doubling up as retailers for two-wheeler automobiles like motorcycles. The local grocer performing the role of a chemist by stocking and selling certain Over-the-counter drugs. 7. Petrol Pumps and Convenios The petrol, diesel and gas dispensing (petrol pumps or petrol bunks) stations have become multi-purpose outlets. The Kisan Seva Kendras (Indian Oil Corporation Ltd.) or the convenios (of other petrol marketing companies) are serving as outlets for a wide variety of products ranging from packaged food to frozen food to snacks to magazines and books to music and movie CDs to agricultural inputs. This is a new channel and is frequented by people who are passing through the petrol/diesel dispensing station. 8. NGOs NGOs and other civil society organisations have emerged as a possible channels of distribution specially for products or markets that otherwise have certain diffiuties associated with them. NGOs command a certain degree of respect and influence among the target audience and the targeted beneficieries. Companies and NGOs have been able to forge win-win relationships wherein the companies take advantage of the grassroots level infrastructure of the NGOs as well as the positive image that they carry. NGOs on the other hand have been able to make a variety of products reach their targted beneficieries and have also used the expertise as well as exposure to the markets to sell the produce of their beneficieries into distant markets. In this process, employment has got generated for local residents. 77 9. Modern format retailers In the recent years the retailers have grown in size. Growth in retailer size means that it has become economic for manufacturers to supply directly to retailers rather than through wholesalers. Supermarket chains and corporate retailers exercise considerable power over manufacturers because of their enormous buying capabilities. Wal Mart uses its enormous retail sales to pressurize manufacturers to supply products at frequent intervals directly to their store at concessional prices. There are many types of retail formats like discount stores, supermarkets, convenience stores and department stores, etc. These retail store formats vary from each other on the basis of their product assortment (product depth and width), price and location. Retail store formats can be classified on the basis of the number of products sold by the retailer and the range of products in each category. Speciality Stores, Category Killers, Departmental Stores and Hypermarkets are some such divisions. What is common to all the modern store formats is that they emphasize on improving the ‘Total Customer Experience’ and for this the deploy modern methods of customer tracking, supply chain management, merchandise planning, etc. The modern retail formats are challenging the dominance of traditional channels and in many developing countries this conflict has assumed violent proportions. 10. Internet Internet marketing is also referred to as cyber-marketing. It is the latest in the series of direct retailing innovations like catalogue marketing, special-interest mail order, telemarketing and television shopping. Internet is becoming and important channel much faster than any other channel. The Internet has a geographically dispersed market. The main benefit of the Internet is that niche products reach a wider audience. There are low barriers to entry as set up costs are low. Use e-commerce technology (for payment, shopping software, etc). There is a paradigm shift in commerce and consumption which benefits distribution via the Internet. However, certain problems remain in shopping via 78 the internet- the areas of low internet penetration are insulated from any internet marketing effort, there are very few codified rules for shopping in cyberspace-this leads to problems in enforcing commitments, the delivery systems for goods bought over the internet still remains a major issue, logistics have to improve if internet marketing has to dominate, many a times the customers may like to touch, feel and experience a product before buying it, internet marketing presupposes familiarity with working on the computers- it may not be true in certain geographies. However, the world of business seems to believe that internet marketing will keep growing at a rapid rate in the coming years. Rediff shopping, Indiatimes shopping, e-bay, Amazon, etc. are some of the major players in the internet marketing space. 7.5 Channel Integration There is no standard rule for the degree or the extent of integration that is appropriate for a channel. It varies widely, depending on industries and geographies. The manufacturer can own the channel as part of forward integration, e.g. LG’s company showrooms or Bata’s company owned outlets. On the other hand the channel might be comprising of members who are quite independent and totally beyond the control of the manufacturer. 7.51 Conventional Marketing Channels The independence of channel intermediaries means that the manufacturer has little or no control over them. The traditional marketing channels occasionally witness hard bargaining and channel conflicts, e.g. the retailer may want to display brand A on the shop front counter whereas the manufacturer of brand B may want him to display brand B at the same place and with increased prominence. Though the channel intermediary may want to appropriate the role of customer-contact to itself, the manufacturer has to ensure that he stays in touch with customers. The relationship between the manufacturer and the intermediaries is governed by the balance of power between the two parties. A manufacturer who dominates the market through its size and strong brands may exercise considerable power over intermediaries though they are independent. However, with the emergence of retail chains the balance has shifted. Now, retail chains like Big Bazar, 79 Reliance Fresh, Spencer’s, etc. enjoy enormous powers because of their ability to buy in large quantities and to attract large number of customer footfalls. 7.52 Franchising A franchise is a legal contract in which the manufacturer or the producer and the intermediary agree to each member’s rights and obligations. The intermediary receives marketing, managerial, technical and financial services from the producer in return for a fee. Franchise operations give the manufacturer a certain degree of control because the agreement provide for a certain level of formal coordination and integration of marketing and distribution activities between the manufacturer and intermediaries. Franchising occurs at four levels: i. Manufacturer and retailer- Car Showrooms ii. Manufacturer and wholesaler- Coca Cola and Pepsi iii. Wholesaler and retailer- Computer Hardware, Share issues market, insurance iv. Retailer and retailer- Benneton, McDonald’s, Insurance products In franchising, it is important that the profit and responsibility sharing is equitable for a long-term sustainable relationship. 7.53 Channel Ownership Total control over distributor activities comes with channel ownership by the manufacturer or an intermediary. The forward integration by owning the sales outlets lets the channel leader control the purchasing, production and marketing activities of these outlets. In particular, control over purchasing means a captive outlet for your products. However, the advantage of control has to be weighed against the high price of acquisition and the danger that the move into retailing will spread their managerial resources too thinly. 80 7.6 Selection of a distributor Market segment - the distributor must be familiar with your target consumer and segment. Changes during the product life cycle - different channels can be exploited at different points in the Product Life Cycle (PLC). Producer - distributor fit - Is there a match between their policies, strategies, image, and yours? Look for 'synergy'. Qualification assessment - establish the experience and track record of your intermediary. 7.7 How much training and support will your distributor require? Managing Channel Conflict Various members of the distribution channel have different goals. These goals may be at variance with each other and may be divergent. The goal divergence becomes a source of conflict when one member of the distribution channel perceives that some other member is preventing the first member from achieving its goals. The intensity of conflict can vary from minor disagreements to major disputes leading to severance of relationships. The sources of channel conflict can be differences in goals, differences in desired product lines, existence of multiple distribution channels and inadequacies in performance from any quarter. Some methods of avoiding the channel conflicts are- developing a partnership approach, training your staff in effective negotiations and conflict handling, proper division of territories among channel members, occasional coercion and lastly and most importantly, improving individual performance. 81 Chapter 8 Integrated Marketing Communication 8.0 Introduction to Marketing Communication Marketing communications is a subset of the overall subject area known as marketing. Marketing has a marketing mix that is made of price, place, promotion, product (know as the four Ps), that includes people, processes and physical evidence, when marketing services (known as the seven Ps). How does marketing communications fit in? Marketing communications is 'promotion' from the marketing mix. Why are marketing communications 'integrated?' Integrated means combined or amalgamate, or put simply the jigsaw pieces that together make a complete picture. This is so that a single message is conveyed by all marketing communications. Different messages confuse your customers and damage brands. So if a TV advertisement carries a particular logo, images and message, then all newspaper advertisements and point-of-sale materials should carry the same logo, images or message, or one that fits the same theme. Coca-Cola uses its familiar red and white logos and retains themes of togetherness and enjoyment throughout its marketing communications. Marketing communications has a mix. Elements of the mix are blended in different quantities in a campaign. The marketing communications mix includes many different elements, and the following list is by no means conclusive. It is recognised that there is some cross over between individual elements (e.g. Is donating books and school bags to children in a village school, by asking shoppers to purchase a particular brand of detergent, public relations or sales promotion?) 82 Here are the key of the marketing communications mix. 1. Personal Selling 2. Sales Promotion 3. Public Relations (and publicity) 4. Direct Marketing 5. Trade Fairs and Exhibitions 6. Advertising (above and below the line) 7. Sponsorship 8. Packaging 9. Merchandising (and point-of-sale) 10. E-Marketing (and Internet promotions) Integrated marketing communications means that the elements of the communications mix are 'integrated' into a coherent whole. This is known as the marketing communications mix, and forms the basis of a marketing communications campaign. The elements of the marketing communication mix are integrated to form a coherent campaign. As with all forms of communication, the message from the marketer follows 83 the 'communications process' as illustrated above. For example, a radio advertisement is made for a tractor manufacturer. The tractor manufacturer (sender) pays for a specific advertisement which contains a message specific to a target audience (encoding). It is transmitted during a set of commercials from a radio station (Message / media). The message is decoded by a radio (decoding) and the target consumer interprets the message (receiver). He or she might visit a dealership or seek further information from a web site (Response). The consumer might buy a tractor or express an interest or dislike (feedback). This information will inform future elements of an integrated promotional campaign. Perhaps a direct mail campaign would push the consumer to the point of purchase. Noise represents the thousands of marketing communications that a consumer is exposed to everyday, all competing for attention. 8.1 Components of the Promotion (Marketing Communication) Mix Let us look at the individual components of the promotions mix in more detail. Remember all of the elements are 'integrated' to form a specific communications campaign. 8.11 Personal Selling. Personal Selling is an effective way to manage personal customer relationships. The sales person acts on behalf of the organization. They tend to be well trained in the approaches and techniques of personal selling. However sales people are very expensive and should only be used where there is a genuine return on investment. For example, salesmen are often used to sell those models of motorcycles or brand of pesticides where the margin is high. 8.12 Sales Promotion Sales promotion tends to be thought of as being all promotions apart from advertising, personal selling, and public relations. For example, the BOGOF promotion, or ‘Buy One Get One Free’ is very common. Others include couponing, money-off promotions, competitions, free accessories (such as free blades with a new razor), introductory offers 84 (such as buy digital TV and get free installation), and so on. The cost of sales promotion should be carefully estimated and compared with the next best alternative. 8.13 Public Relations (PR) Public Relations is defined as 'the deliberate, planned and sustained effort to establish and maintain mutual understanding between an organization and its publics' (Institute of Public Relations). It is relatively an inexpensive way of reaching out. Successful strategies tend to be long-term and plan for all eventualities. Most companies exploit PR; just watch what happens when there is a controversy regarding their products or business practices. The pre-planned PR machine clicks in very quickly with a very effective rehearsed plan. 8.14 Direct Mail Direct mail is very highly focussed upon targeting consumers based upon a database. As with all marketing, the potential consumer is 'defined' based upon a series of attributes and similarities. Creative agencies work with marketers to design a highly focussed communication in the form of a mailing. The mail is sent out to the potential consumers and responses are carefully monitored. For example, if you are marketing fertilisers, you would use a database of progressive farmers as the basis of your mail shot. 8.15 Trade Fairs and Exhibitions Such approaches are very good for making new contacts and renewing old ones. Companies will seldom sell much at such events. The purpose is to increase awareness and to encourage trial. They offer the opportunity for companies to meet with both the trade and the consumer. Kisan Melas, Gram-Shilp Melas, and even the religious and seasonal fairs have a permanent place in the lives of villagers. These occasions are excellent opportunities for marketers to establish a connection with the target customers in rural areas. 8.16 Advertising There are many advertising 'media' such as newspapers (local, national, free, trade), 85 magazines and journals, television (local, national, terrestrial, satellite) cinema, outdoor advertising (such as posters, bus sides). 8.17 Sponsorship Sponsorship is where an organization pays to be associated with a particular event, cause or image. Companies will sponsor sports events such as local sports competition in villages, Bullock Cart or bicycle race or even Olympics. The attributes of the event are then associated with the sponsoring organization. The elements of the promotional mix are then integrated to form a unique, but coherent campaign 8.18 The fundamentals of 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 advertisement 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. 86 Table 8.1 Advertising Media Outdoor (Posters or transport) Newspapers (Local and National) Radio 8.19 New Media Mobile devices New Media Internet websites and search engines Television Magazines Cinema Others . . . Planning for advertising Advertising agencies and their clients plan for advertising. Any plan should address the following stages: Who is the potential TARGET AUDIENCE of the advertisement? 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? 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 'above-the-line' since an agency would book commercial time on behalf of a client, but placing billboards and hoardings at different locations within the city is 'below-the-line,' 87 because hoarding space owners 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. 8.20 Working of an advertising agency? The Client Agency Relationship An advertising agency handles part or all marketing communications activities on behalf of a client organization. The agencies themselves tend to vary in size from small, perhaps a handful of people, to vast - where many thousands of employees make up the company. A commission is generally taken by the agency which tends to be taken from the media purchases of the client organisation. The agency may also take payment from the media owners (i.e. sometimes take a discount and do not pass it on to the client). More transparent means of payment are becoming more popular, with some agencies being paid-by-results. There are many types of agency, but it is generally accepted that the main ones are include full-service agency, a la carte agency, or specialist agency. A full-service agency will take on the whole project or campaign. An a la carte agency will offer some aspects of a campaign such as media buying, rather like buying items from a menu. A specialist agency tends to be small and more focused on a specific aspect of marketing communications and/or a specific market such as Internet Marketing. A Full-Service Agency will offer: Account management Creative Services Media planning, booking and management Traffic and production related services Account planning Account management Account managers work for an agency with the client (an agency's customers are called 'clients'). Very often they will spend a lot of time with the client working as part of their 88 marketing team. This is one way in which an agency works closely with its client and why the 'chemistry' between a client and its agency needs to be right. The account manager makes sure that the correct information is passed from the client to the other members of the agency. He or she is a co-ordinator and time manager. The account planner will work on a brief that is fed back to the agency team. 8.221 Creative Team The first internal agency team members to see the brief tend to be the creatives and the media planners. The brief contains a 'proposition' that the client wishes to communicate to the target audience. The creative team will transform the proposition into something exciting and attractive to the target audience. The creative team decide upon the 'creative concept.' This will be a motivational idea. The words used to express the creative concept are called 'copy.' The images, pictures and diagrams are created i.e. the 'design' or 'layout.' This is done by 'designers' and 'copywriters.' Beware some creatives! Creatives tend to be artistic and innovative. Hence their advice should be highly regarded and any criticism should be constructive. 8.222 Traffic and Production Team The traffic and media team are in charge of the production of the physical and artistic output, i.e. the marketing communication. In the case of a TV advertisement, they would commission scripts, recruit actors, film crews and supporting activities (such as costumes and catering). All ads are different and so the specifics will vary. In the case of print advertising, the traffic and production team would commission and sign-off all printed advertising material such as direct marketing materials, magazine ads or posters. 8.223 Account Planning Team The account planning team work on the 'customer's' perspective, and take an outward look at the world. They support the creative teams by supplying data and opinion on what I actually occurring in the marketing in which advertising is to be placed. They tend to use secondary data to support decisions, and would rarely commission original research. 89 However, with material supplied my organisations such as IMRB, AC Nielsen, etc. - the account planning team can build an image of segments to help the creatives. 8.224 Media Team The media team will organise the timing and scheduling of the marketing communications campaign. They will look at the range of media to be exploited, and then look at the best slots in which to run advertising. They will help a client to decide upon the duration of and individual slot, and how many of them to run. Here the expense and return to the client are key factors that influence decision-making. The two main skills of the media team are media planning and media buying. Today there is a wealth of data on which media buying can be based. There is software for planning and simulation. 8.30 Fundamentals of Sales Promotion As stated earlier, Sales promotion is any initiative undertaken by an organisation to promote an increase in sales, usage or trial of a product or service (i.e. initiatives that are not covered by the other elements of the marketing communications or promotions mix). Sales promotions are varied. Often they are original and creative, and hence a comprehensive list of all available techniques is virtually impossible (since original sales promotions are launched daily!). Here are some examples of popular sales promotions activities: (a) Buy-One-Get-One-Free (BOGOF) - which is an example of a self-liquidating promotion. For example if a loaf of bread is priced at Rs. 10, and costs Rs. 2 to manufacture, if you sell two for Rs. 10, you are still in profit - especially if there is a corresponding increase in sales. This is known as a PREMIUM sales promotion tactic. (b) Customer Relationship Management (CRM) incentives such as bonus points or money-off coupons. There are many examples of CRM, from banks to petroleum and diesel marketing companies as well as restaurants. (c) New media - Websites and mobile phones that support a sales promotion. 90 (d) Merchandising additions such as dump bins, point-of-sale materials and product demonstrations. (e) Free gifts e.g. many tea companies give a glass or cup-saucers with packets of tea. (f) Discounted prices e.g. Budget airline such as SpiceJet and GoAir, e-mail their customers with the latest low-price deals once new flights are released, or additional destinations are announced. (g) Joint promotions between brands owned by a company, or with another company's brands. For example fast food restaurants like McDonalds often run sales promotions where toys, relating to a specific movie release, are given away with promoted meals. (h) Free samples (also known as sampling) e.g. tasting of food and drink at sampling points in supermarkets. For example, Amul routinely puts up kiosks and stalls to enable the customers to taste their new flavours of flavoured milk, sweets as well as milk beverages like Cold Coffee. (i) Vouchers and coupons, often seen in newspapers and magazines, on packs. (j) Competitions and prize draws, in newspapers, magazines, on the TV and radio, on The Internet, and on packs. (k) Cause-related and fair-trade products that raise money for charities, and the less well off farmers and producers, are becoming more popular. (l) Finance deals - for example, 0% finance over 3 years on selected vehicles. Many of the examples above are focused upon consumers. Don't forget that promotions can be aimed at wholesales and distributors as well. These are known as Trade Sales Promotions. Examples here might include joint promotions between a manufacturer and a distributor, sales promotion leaflets and other materials (such as T-shirts), and incentives for distributor sales people and their retail clients. 8.40 Fundamentals of Direct Marketing Direct marketing is a channel-free approach to distribution and/or marketing communications. So a company may have a strategy of dealing with its customers 'directly,' for example banks (such as State Bank of India) have no channel intermediaries i.e. distributors, retailers or wholesalers. Therefore - 'direct' in the sense that the deal is done directly between the manufacturer/ service provider and the customer. 91 As mentioned above, 'direct' also in the sense that marketing communications are targeted at consumers by the manufacturers. For example, a brand that uses channels of distribution would target marketing communications at wholesalers/distributors, retailers, and consumers, or a blend of all three. On the other hand, a direct marketing company could focus upon communicating directly with its customers. Direct marketing and direct mail are often confused - although direct mail is a direct marketing tool. There are a number of direct marketing media other than direct mail. These include (and are by no means limited to): Inserts in newspapers and magazines Customer care lines (telemarketing) Catalogues Coupons Door drops TV and radio advertisements with free phone numbers or per-minute-charging. . . . and finally - and most importantly - The Internet and New Media. SMS marketing The Internet and New Media (e.g. mobile phones or PDAs) are perfect for direct marketing. Consumers have never had so many sources of supply, and suppliers have never had access to so many markets. There is even room for even niche marketers. Many companies use direct marketing, and a current example of its use, as part of a business model, is the way in which it is used by low-cost airlines. There is no intermediary or agent, customers book tickets directly with the airlines over The Internet. Airlines capture data that can be used for marketing research or a loyalty scheme. Information can be processed quickly, and then categorise it into complex relational databases. Then, for example, special offers or new flights destinations can be communicated directly to customers using e-mail campaigns. Data is not only collected on markets and 92 segments, but also on individuals and their individual buyer behaviour. Companies such as Amazon are wholesalers of books (i.e. they do not write or publish them) - so they use Customer Relationship Management and marketing communications targeted directly at individual customers - which is another, slightly different example of direct marketing. 8.50 Fundamentals of Public Relations(PR) Public Relations (PR) is a single, broad concept that includes any purposeful communications between an organisation and its publics that aim to generate goodwill. Publics, put simply, are its stakeholders. PR is proactive and future orientated, and has the goal of building and maintaining a positive perception of an organisation in the mind of its publics. This is often referred to as goodwill. Even though it is difficult to see the difference between marketing communications and PR since there is a lot of crossover. This makes it a tricky concept to learn. Added to this is the fact that PR is often expensive, and not free, as some definitions would have you believe. PR agencies are not cheap. Below are some of the approaches that are often considered under the PR banner. 1. Interviews and photo-calls It is important that company executives are available to generate goodwill for their organisation. Many undertake training in how to deal with the media, and how to behave 93 in front of a camera. There are many key industrial figures that proactively deal with the media in a positive way for example, Sunil Mittal of Bharati Telecom Group or Anil Ambani of Anil Dhirubhai Ambani group. Interviews with the business or mass media often allow a company to put its own perspective on matters that could be misleading if simply left to dwell untended in the public domain. 2. Speeches, presentations and speech writing Key figures from within an organisation will write speeches to be delivered at corporate events, public awards and industry gatherings. PR company officials in liaison with company managers often write speeches and design corporate presentations. They are part of the planned and coherent strategy to build goodwill with publics. Presentations can be designed and pre-prepared by PR companies, ultimately to be delivered by company executives. 3. Corporate literature e.g. financial reports Corporate literature includes financial reports, in-house magazines, brochures, catalogues, price lists and any other piece of corporate derived literature. They communicate with a variety of publics. For example, financial reports will be of great interest to investors and the stock market, since they give all sorts of indicators of the health of a business. A company Chief Executive Officer CEO will often write the forward to an annual financial report where he or she has the opportunity to put a business case to the reader. This is all part of Public Relations. 8.60 Fundamentals of Personal Selling Personal selling occurs where an individual salesperson sells a product, service or solution to a client. Salespeople match the benefits of their offering to the specific needs of a client. Today, personal selling involves the development of longstanding client relationships. In comparison to other marketing communications tools such as advertising, personal selling tends to: 94 Use fewer resources, pricing is often negotiated. Products tend to be fairly complex (e.g. financial services or new cars). There is some contact between buyer and seller after the sale so that an ongoing relationship is built. Client/prospects need specific information. The purchase tends to involve large sums of money. There are exceptions of course, but most personal selling takes place in this way. Personal selling involves a selling process that is summarised in the following Five Stage Personal Selling Process. The five stages are: 1. Prospecting, 2. Making first contact, 3. The sales call, 4. Objection handling, 5. Closing the sale 8.61 A Five Stage Personal Selling Process. 8.611 Stage One - Prospecting. Prospecting is all about finding potential new customers. Prospects should be 'qualified,' which means that they need to be assessed to see if there is business potential, otherwise you could be wasting your time. In order to qualify your prospects, one needs to: Plan a sales approach focused upon the needs of the customer. Determine which products or services best meet their needs. In order to save time, rank the prospects and leave out those that are least likely to buy. 8.612 Stage Two - Making First Contact. This is the preparation that a salesperson goes through before they meet with the client, for example via e-mail, telephone or letter. Preparation will make a call more focused. 95 Make sure that you are on time. Before meeting with the client, set some objectives for the sales call. What is the purpose of the call? What outcome is desirable before you leave? Make sure that you've done some homework before meeting your prospect. This will show that you are committed in the eyes of your customer. To save time, send some information before you visit. This will wet the prospect's appetite. Keep a set of samples at hand, and make sure that they are in very good condition. Within the first minute or two, state the purpose of your call so that time with the client is maximised, and also to demonstrate to the client that your are not wasting his or her time. Humour is fine, but try to be sincere and friendly. 8.613 Stage Three - The Sales Call (or Sales Presentation) It is best to be enthusiastic about your product or service. If you are not excited about it, don't expect your prospect to be excited. Focus on the real benefits of the product or service to the specific needs of your client, rather than listing endless lists of features. Try to be relaxed during the call, and put your client at ease. Let the client do at least 80% of the talking. This will give you invaluable information on your client's needs. Remember to ask plenty of questions. Use open questions, and avoid closed questions i.e. questions that will only give the answer 'yes' or the answer 'no.' This way you can dictate the direction of the conversation. Never be too afraid to ask for the business straight off. 8.614 Stage Four - Objection Handling. Objection handling is the way in which salespeople tackle obstacles put in their way by clients. Some objections may prove too difficult to handle, and sometimes the client may just take a dislike to you (also known as the hidden objection). Here are some approaches for overcoming objections: 96 Firstly, try to anticipate them before they arise. 'Yes but' technique allows you to accept the objection and then to divert it. For example, a client may say that they do not like a particular colour, to which the salesperson counters 'Yes but X is also available in many other colours.' Ask 'why' the client feels the way that they do. 'Restate' the objection, and put it back into the client's lap. For example, the client may say, 'I don't like the taste of X,' to which the salesperson responds, 'You don't like the taste of X,' generating the response 'since I do not like garlic' from the client. The salesperson could suggest that X is no longer made with garlic to meet the client's needs. The sales person could also tactfully and respectfully contradict the client. 8.615 Stage Five - Closing the Sale. This is a very important stage. Often salespeople will leave without ever successfully closing a deal. Therefore it is vital to learn the skills of closing. Just ask for the business! - 'Please may I take an order?' This really works well. Look for buying signals (i.e. body language or comments made by the client that they want to place an order). For example, asking about availability, asking for details such as discounts, or asking for you to go over something again to clarify. Just stop talking, and let the client say 'yes.' Again, this really works. The 'summary close' allows the salesperson to summarise everything that the client needs, based upon the discussions during the call. For example, 'You need product X in blue, by Friday, packaged accordingly, and delivered to your wife's office.' Then ask for the order. The 'alternative close' does not give the client the opportunity to say no, but forces them towards a yes. For example 'Do you want product X in blue or red?' Cheeky, but effective. So this is the Five Stage Personal Selling Process. 97 Chapter 9 Competitive Marketing Strategy 9.0 Introduction Satisfying customers may not guarantee success. Customer preference will depend on creating more value than competition. This extra value is brought about by establishing a competitive advantage. Corporate performance is a function of how well the customer has been satisfied. How much more value has been created as compared to the competition. By understanding competitors, a firm can better predict their reaction to any marketing initiative that the firm might make and exploit any weakness that they might possess. There are various models to understand and hone competitive strategy. A few of these are described below: 9.1 The Arthur D Little (ADL) Strategic Condition Matrix Although now slightly dated at first glance, The Arthur D Little (ADL) Strategic Condition Matrix offers a different perspective on strategy formulation. ADL has two main dimensions - competitive position and industry maturity. Competitive position is driven by the sectors or segments in which a Strategic Business Unit (SBU) operates. The product or service which it markets, and the accesses it has to a range of geographically dispersed markets that are what makes up an organization's competitive position i.e. product and place. Industry maturity is very similar to the Product Life Cycle (PLC) and could almost be renamed an 'industry life cycle.' Of course not only industries could be considered here but also segments. 98 It is a combination of the two aforementioned dimensions that helps us to use ADL for marketing decision-making. Now let's consider options in more detail. Competitive position has five main categories: 1. Dominant - This is a particularly extraordinary position. Often this is associated with some form of monopoly position or customer lock-in e.g. LIC of India is a dominant player in the Indian life insurance market. 2. Strong - Here companies have a lot of freedom since position in an industry is comparatively powerful e.g. Maruti Suzuki Ltd. is a strong player in the Indian car market. 3. Favourable - Companies with a favourable position tend to have competitive strengths in segments of a fragmented market place. No single global player controls all segments. Here product strengths and geographical advantages come into play. 4. Tenable - Here companies may face erosion by stronger competitors that have a favourable, strong or competitive position. It is difficult for them to compete since they do not have a sustainable competitive advantage. 5. Weak - As the term suggests companies in this undesirable space are in an unenviable position. Of course there are opportunities to change and improve, and therefore to take an organization to a more favourable, strong or even dominant position. 99 From here the strategic position of an organisation can be established. Managers then need to decide upon the best strategic direction for the business. For example they might use a Gap Analysis. According to ADL, there are six generic categories of strategy that could be employed by individual SBUs: Market strategies. Product strategies. Management and systems strategies. Technology strategies. Retrenchment strategies. Operations strategies. 9.2 Ansoff's Matrix - Planning for Growth This well known marketing tool was first published in the Harvard Business Review (1957) in an article called 'Strategies for Diversification'. It is used by marketers who have objectives for growth. Ansoff's matrix offers strategic choices to achieve the objectives. There are four main categories for selection. Ansoff's Product/Market Matrix 9.21 Market Penetration Here we market our existing products to our existing customers. This means increasing our revenue by, for example, promoting the product, repositioning the brand, and so on. However, the product is not altered and we do not seek any new customers. 100 9.22 Market Development Here we market our existing product range in a new market. This means that the product remains the same, but it is marketed to a new audience. Exporting the product, or marketing it in a new region, are examples of market development. 9.23 Product Development This is a new product to be marketed to our existing customers. Here we develop and innovate new product offerings to replace existing ones. Such products are then marketed to our existing customers. This often happens with the auto markets where existing models are updated or replaced and then marketed to existing customers. 9.24 Diversification This is where we market completely new products to new customers. There are two types of diversification, namely related and unrelated diversification. Related diversification means that we remain in a market or industry with which we are familiar. For example, a soup manufacturer diversifies into cake manufacture (i.e. the food industry). Unrelated diversification is where we have no previous industry nor market experience. For example a soup manufacturer invests in the rail b usiness. Ansoff's matrix is one of the most well known frameworks for deciding upon strategies for growth. 9.3 The Boston Consulting Group's Product Portfolio Matrix Like Ansoff's matrix, the Boston Matrix is a well known tool for the marketing manager. It was developed by the large US consulting group and is an approach to product portfolio planning. It has two controlling aspect namely ‘Relative Market Share (meaning relative to your competition)’ and Market Growth’. You would look at each individual product in your range (or portfolio) and place it onto the matrix. You would do this for every product in the range. You can then plot the products of your rivals to give relative market share. 101 This is simplistic in many ways and the matrix has some understandable limitations that will be considered later. Each cell has its own name as follows. 9.31 Dogs. These are products with a low share of a low growth market. These are the canine version of 'real turkeys!'. They do not generate cash for the company, they tend to absorb it. Get rid of these products. 9.32 Cash Cows These are products with a high share of a slow growth market. Cash Cows generate more more than is invested in them. So keep them in your portfolio of products for the time being. 9.33 Problem Children These are products with a low share of a high growth market. They consume resources and generate little in return. They absorb most money as you attempt to increase market share. 9.34 Stars These are products that are in high growth markets with a relatively high share of that market. Stars tend to generate high amounts of income. Keep and build your stars. 102 Look for some kind of balance within your portfolio. Try not to have any Dogs. Cash Cows, Problem Children and Stars need to be kept in a kind of equilibrium. The funds generated by your Cash Cows is used to turn problem children into Stars, which may eventually become Cash Cows. Some of the Problem Children will become Dogs, and this means that you will need a larger contribution from the successful products to compensate for the failures. 9.35 Problems with The Boston Matrix There is an assumption that higher rates of profit are directly related to high rates of market share. This may not always be the case. When TAFE launches a new tractor in India, it may gain a high market share quickly but it still has to cover very high development costs It is normally applied to Strategic Business Units (SBUs). These are areas of the business rather than products. For example, Mahindra’s tractor division is an SBU not a single product. There is another assumption that SBUs will cooperate. This is not always the case. The main problem is that it oversimplifies a complex set of decision. Be careful. Use the Matrix as a planning tool and always rely on your gut feeling. 9.4 The General Electric Business Screen The General Electric Business Screen was originally developed to help marketing managers overcome the problems that are commonly associated with the Boston Matrix (BCG), such as the problems with the lack of credible business information, the fact that BCG deals primarily with commodities not brands or Strategic Business Units (SBU's), and that cashflow if often a more reliable indicator of position as opposed to market growth/share. The GE Business Screen introduces a three by three matrix, which now includes a medium category. It utilizes industry attractiveness as a more inclusive measure than BCG's market growth and substitutes competitive position for the original's market share. 103 So in come Strategic Business Units (SBUs). A large corporation may have many SBU's, which essentially operate under the same strategic umbrella, but are distinctive and individual. A loose example would refer to Mahindra’s tractor division, Teelecom division (MBT), automotive division, Hotels and leisure division, etc. Growth/share are replaced by competitive position and market attractiveness. The point is that successful SBUs will go and do well in attractive markets because they add value that customers will pay for. So weak companies do badly for the opposite reasons. To help break down decision-making further, you then consider a number of sub-criteria: For market attractiveness: Size of market Market rate of growth The nature of competition and its diversity Profit margin Impact of technology, the law, and energy efficiency Environmental impact 104 . . . and for competitive position: Market share Management profile R&D Quality of products and services Branding and promotions success Place (or distribution) Efficiency Cost reduction At this stage the marketing manager adapts the list above to the needs of his strategy. The GE matrix has 5 steps: 1. Identify your products, brands, experiences, solutions, or SBU's. 2. Answer the question, What makes this market so attractive? 3. Decide on the factors that position the business on the GE matrix. 4. Determine the best ways to measure attractiveness and business position. 5. Finally rank each SBU as either low, medium or high for business strength, and low, medium and high in relation to market attractiveness. Now follow the usual words of caution that go with all boxes, models and matrices. Yes the GE matrix is superior to the Boston Matrix since it uses several dimensions, as opposed to BCG's two. However, problems or limitations include: There is no research to prove that there is a relationship between market attractiveness and business position. The interrelationships between SBUs, products, brands, experiences or solutions is not taken into account. This approach does require extensive data gathering. Scoring is personal and subjective. There is no hard and fast rule on how to allocate weights to different elements. 105 The GE matrix offers a broad strategy and does not indicate how best to implement it. Generic Strategies - Michael Porter (1980) Generic strategies were used initially in the early 1980s, and seem to be even more popular today. They outline the three main strategic options open to organization that wish to achieve a sustainable competitive advantage. Each of the three options are considered within the context of two aspects of the competitive environment: Sources of competitive advantage - are the products differentiated in any way, or are they the lowest cost producer in an industry? Competitive scope of the market - does the company target a wide market, or does it focus on a very narrow, niche market? The generic strategies are: 1. Cost leadership, 2. Differentiation, and 3. Focus. 9.51 Cost Leadership The low cost leader in any market gains competitive advantage from being able to many to produce at the lowest cost. Factories are built and maintained; labour is recruited and trained to deliver the lowest possible costs of production. 'cost advantage' is the focus. Costs are shaved off every element of the value chain. Products tend to be 'no frills.' 106 However, low cost does not always lead to low price. Producers could price at competitive parity, exploiting the benefits of a bigger margin than competitors. Some organizations, such as Maruti, are very good not only at producing high quality automobiles at a low price, but have the brand and marketing skills to use a premium pricing policy. 9.52. Differentiation Differentiated goods and services satisfy the needs of customers through a sustainable competitive advantage. This allows companies to desensitize prices and focus on value that generates a comparatively higher price and a better margin. The benefits of differentiation require producers to segment markets in order to target goods and services at specific segments, generating a higher than average price. For example, fertilizer companies differentiate their offerings. The differentiating organization will incur additional costs in creating their competitive advantage. These costs must be offset by the increase in revenue generated by sales. Costs must be recovered. There is also the chance that any differentiation could be copied by competitors. Therefore there is always an incentive to be innovative and continuously improve. 9.53 Focus or Niche strategy The focus strategy is also known as a 'niche' strategy. Where an organization can afford neither a wide scope cost leadership nor a wide scope differentiation strategy, a niche strategy could be more suitable. Here an organization focuses effort and resources on a narrow, defined segment of a market. Competitive advantage is generated specifically for the niche. A niche strategy is often used by smaller firms. A company could use either a cost focus or a differentiation focus. With a cost focus a firm aims at being the lowest cost producer in that niche or segment. With a differentiation focus a firm creates competitive advantage through differentiation within the niche or segment. There are potentially problems with the niche approach. 107 Small, specialist niches could disappear in the long term. Cost focus is unachievable with an industry depending upon economies of scale e.g. telecommunications. The danger of being 'stuck in the middle.' Make sure that you select one generic strategy. It is argued that if you select one or more approaches, and then fail to achieve them, that your organization gets stuck in the middle without a competitive advantage. 9.6 Gap Analysis 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. There is a straightforward structure to follow. The first step is to decide upon how you are going to judge the gap over time. For example, by market share, by profit, by sales and so on. This will help you to write SMART objectives. Then you simply ask two questions –\ 1. where are we now? and 2. 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 diagramme 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? 108 Your 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: You 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 is how you close the gap by deciding upon strategies and tactics - and that's gap analysis. 109 9.7 Balanced Scorecard (Kaplan and Norton, 1992) The Balanced Scorecard is an approach that can be used by strategic marketing managers to control, and keep track of, key performance indicators. In fact the scorecard itself is designed to be wholly strategic since it contains long-term outcomes and drivers of success. There are four zones in a balanced scorecard namely financial, customers, business processes (or simply processes), and learning and growth. Each measure is part of a longer chain of cause and effect, and all of the measures eventually lead to outcomes. So the scorecard is 'balanced' in that outcomes are in balance with each other. The benefit of the scorecard is that it overcomes short-term quick fixes, and gives the strategic marketing manager a straightforward overview of the organisation. In fact, a scorecard should ideally fit onto a single sheet of paper. In fact Kaplan and Norton (1992), the originators of Balanced Scorecard, describe it as the dials in an airplane cockpit. 9.71 Learning and Growth Learning and Growth deals with measures of corporate success in relation to how it learns as it develops over time. So if the company makes mistakes in any way, then it 110 must learn from them and there must be mechanisms in place to make sure that happens. Growth also includes the way in which it generates leaders for the future and equips employees with the necessary skills that will ultimately sustain its business. Examples include skills sets, employee relations and satisfaction, and staff competences. 9.72 Internal Business Processes Internal business processes include all operations within the organisation. The measures would cover whether or not value is being delivered to target segments, and the value chain is tracked. Innovation and new product development would also be measured. Examples of internal business processes include Information Technology, manufacturing, marketing operations such as customer service, procurement and quality processes. 9.73 Customers As marketers we are very concerned with our customers. We need to make sure that they are satisfied with every aspect of their experience with our organisation. We need to make sure that we not only recruit more new customers, but that we also retain them and extend new products and services to them. We also need to make sure that we are meeting the needs of our target segments. So here, examples of customer measures include customer retention and recruitment, their satisfaction and so on. 9.74 Financial Financial measures are vitally important for any business. A note of caution here, since traditional measures of financial success such as Return On Investment (ROI), and made secondary to 'shareholder value.' Shareholder value is the natural measure of success, and so it is prioritised. Information on customers, markets and technology is far more widely available today, so don't bogged down with old fashioned financial measures. Resources, individuals and teams within a business are then aligned with the scorecard objectives, measures, targets and initiatives for each of the four areas of measurement. 111 9.8 Core Competencies A core competence is the result of a specific unique set of skills or production techniques that deliver value to the customer. Such competences give an organization access to a wide variety of markets. Core competencies are interesting from a traditional marketing point of view since it could be argued that they take a product or production orientation rather than a market orientation. If you focus on production techniques and skills then aren't you looking at your business from an internal point of view? The answer is yes. However, the core competences give a business a competitive advantage in a number of markets, markets where customers perceive a benefit from the product. So if needs are being met better than the competition, there is an argument that core competences are indeed marketoriented. There are at least three tests of a core competence. 9.81 Three tests of core competence:- 1. Provides potential access to a wide variety of markets. 2. Should make a significant contribution to the perceived customer benefits of the end product. 3. Should be difficult for competitors to imitate. For example, Bayer has expertise in many agrochemicals. Customers perceive many benefits in relation to different kinds of products from Bayer. For a variety of reasons, including unique skills, it is difficult for competitors to imitate Bayer’s core competencies. 112 When trying to identify a core competence, it is often easy to mistake them for scarce or unique resources i.e. resources rather than skills or production technologies. Also often skills and production technologies do not amount to a core competence or resource because they do not comply with one or more of the three tests. They are the thresholds that the organization must achieve to remain competitive. Threshold competences and scarce resources may not provide access to a variety of markets, may not be so significant to customers and may be less difficult to imitate. In summary there are core competences and scarce resources, and threshold competences and threshold resources. 113 In order to be competitive an organization needs material resources such as premises, a factory or offices - depending on the nature of business of course. Material resources tend to be the most straightforward to achieve. Then an organization needs to achieve the right balance between Human Resources, training and recruitment. This state is more difficult to achieve. Intangible resources, including core competences are the most difficult and challenging to achieve. This is depicted in the diagram above. In fact they drive competitive advantage. 9.9 Value Chain Analysis The value chain is a systematic approach to examining the development of competitive advantage. It was created by M. E. Porter in his book, Competitive Advantage (1980). The chain consists of a series of activities that create and build value. They culminate in the total value delivered by an organisation. The 'margin' depicted in the diagram is the same as added value. The organisation is split into 'primary activities' and 'support activities.' 9.91 Primary Activities 9.911 Inbound Logistics Here goods are received from a company's suppliers. They are stored until they are needed on the production/assembly line. Goods are moved around the organisation. 114 9.912 Operations This is where goods are manufactured or assembled. Individual operations could include room service in an hotel, packing of books/videos/games by an online retailer, or the final tune for a new car's engine. 9.913 Outbound Logistics The goods are now finished, and they need to be sent along the supply chain to wholesalers, retailers or the final consumer. 9.914 Marketing and Sales In true customer orientated fashion, at this stage the organisation prepares the offering to meet the needs of targeted customers. This area focuses strongly upon marketing communications and the promotions mix. 9.915 Service This includes all areas of service such as installation, after-sales service, complaints handling, training and so on. 9.92 Support Activities 9.921 Procurement This function is responsible for all purchasing of goods, services and materials. The aim is to secure the lowest possible price for purchases of the highest possible quality. They will be responsible for outsourcing (components or operations that would normally be done in-house are done by other organisations), and ePurchasing (using IT and webbased technologies to achieve procurement aims). 9.922 Technology Development Technology is an important source of competitive advantage. Companies need to innovate to reduce costs and to protect and sustain competitive advantage. This could include production technology, Internet marketing activities, lean manufacturing, 115 Customer Relationship Management (CRM), and many other technological developments. 9.923 Human Resource Management (HRM) Employees are an expensive and vital resource. An organisation would manage recruitment and selection, training and development, and rewards and remuneration. The mission and objectives of the organisation would be driving force behind the HRM strategy. 9.924 Firm Infrastructure This activity includes and is driven by corporate or strategic planning. It includes the Management Information System (MIS), and other mechanisms for planning and control such as the accounting department. 116 Chapter 10 Special Topics in Marketing 10.0 Introduction Marketing is an evolving field. The sheer dynamism of the discipline makes it fascinating and at the same time ever changing. The practicing mangers have to be constantly updated about emerging areas and concepts as the society and technologies change around them. The marketing practice will be effective only when it takes into account the latest developments in the field and is based on sound theoretical concepts. It is with this in view that this chapter tries to capture the essence of some important topics in marketing which will make the knowledge base of the managers contemporary. 10.1 Services Marketing and the Extended Marketing Mix (7Ps). 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 it quickly perishes. A person could go to a restaurant one day and have excellent service, and then return the next day and have a poor experience. So often marketers talk about the nature of a service as: 1. Inseparable - from the point where it is consumed, and from the provider of the service. For example, you cannot take the live performance of a folk dancer home to consume it (a DVD of the same performance would be a product, not a service). 2. Intangible - and cannot have a real, physical presence as does a product. For example, life insurance policy may have a certificate, but the financial service itself cannot be touched i.e. it is intangible. 117 3. Perishable - in that once it has occured it cannot be repeated in exactly the same way. For example, once an on-farm training programme for farmers has been conducted, there will be not other for some time to come and even then it may be held in a different place. 4. Variability- since the human involvement of service provision means that no two services will be completely identical. For example, returning to the same mechanic time and time again for a service on your tractor might see different levels of customer satisfaction, or speediness of work. 5. Right of ownership - is not taken to the service, since you merely experience it. For example, an engineer may service your agricultural pump set, 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. Service sector is dominating the economies around the world. Therefore the four Ps (born in the manufacturing era) based marketing mix has seen an extension and adaptation into the extended marketing mix for services, also known as the 7Ps - physical evidence, process and people. Lets now look at the remaining 3 Ps: a. People An essential ingredient to any service provision is the use of appropriate staff and people. Recruiting the right staff and training them appropriately in the delivery of their service is essential if the organisation wants to obtain a form of competitive advantage. Consumers make judgements and deliver perceptions of the service based on the employees they interact with. Staff should have the appropriate interpersonal skills, aptitude, and service knowledge to provide the service that consumers are paying for. 118 b. Process Refers to the systems used to assist the organisation in delivering the service. Imagine you walk into a tractor mechanics shop and he takes out the entire history of past repairs on your tractor. What was the process that allowed you to obtain this kind of service delivery? c. Physical Evidence Where is the service being delivered? Physical Evidence is the element of the service mix which allows the consumer again to make judgements on the organisation. If you walk into a restaurant your expectations are of a clean, friendly environment. Physical evidence is an essential ingredient of the service mix, consumers will make perceptions based on their sight of the service provision which will have an impact on the organisations perceptual plan of the service. To certain extent managing services are more complicated then managing products, products can be standardised, to standardise a service is far more difficult as there are more input factors i.e. people, physical evidence, process to manage then with a product. 10.2 Customer Relationship Marketing (CRM) CRM is about the systems (IT and non – IT systems) that are employed that help an organisation manage its relationships with it customers. CRM employed systems can help an organisation in a number of ways: By using simple databases CRM can help the organisation in segmenting their most profitable customers. Help the organisation in targeting specific products at certain customers groups by looking at their past purchase patterns. Help identify light and medium users, and employing strategies to try and convert them into heavy users. 119 CRM can provide employees with all the necessary information that they need to know about the customer they are dealing with, ensuring that the customer is dealt with in an efficient manner and ensuring personlisation for the customer. Customer Relationship Marketing tries to ensure that customer information can be accessed at any point within the organisation. A truly marketing oriented organisation would make sure that this would happen and that this system will put the customer first. 10.3 International Marketing The world is becoming a smaller place because of technology (the internet) and social mobility, that is, people are travelling more and are seeing familiar brands around the world. Competition within the individual national markets are becoming too intense so marketers decide to push sales in overseas markets. 10.31 Entering global markets There are a number of steps that need to be taken before you decide to enter international markets. Analyze the international marketing environment. A PEST/STEP analysis needs to be conducted on the market you enter, to assess whether it is worthwhile or not. Some factors that may influence an international decision are Political factors, Economical Factors, Social Factors and Technological factors. 10.32 Market entry methods Prior to you entering an overseas market there are six factors that need to be considered: 1. Speed – How quickly do you wish to enter your selected market? 2. Costs- What is the cost of entering that market? 3. Flexibility – How easy is it to enter/leave your chosen market? 4. Risk Factor – What is the political risk of entering the market? What are the competitive risk? How competitive is the market? 5. Payback period – When do you wish to obtain a return from entering the market? Are there pressures to break even and return a profit within a certain period? 120 6. Long- term objectives- What does the organisation wish to achieve in the long term by operating in the foreign market? Will they establish a presence in that market and then move onto others? 1. Direct export The organisation produces their product in their home market and then sells them to customers overseas. 2. Indirect export The organizations sells their product to a third party who then sells it on within the foreign market. 3. Licensing Another less risky market entry method is licensing. Here the Licensor will grant an organisation in the foreign market a license to produce the product, use the brand name etc in return that they will receive a royalty payment. 4. Franchising Franchising is another form of licensing. Here the organisation puts together a package of the ‘successful’ ingredients that made them a success in their home market and then franchise this package to overseas investors. The Franchise holder may help out by providing training and marketing the services or product. McDonalds is a popular example of a Franchising option for expanding in international markets. 5. Contracting Another of form on market entry in an overseas market which involves the exchange of ideas is contracting. The manufacturer of the product will contract out the production of the product to another organisation to produce the product on their behalf. Clearly contracting out saves the organisation exporting to the foreign market. 121 6. Manufacturing abroad The ultimate decision to sell abroad is the decision to establish a manufacturing plant in the host country. The government of the host country may give the organisation some form of tax advantage because they wish to attract inward investment to help create employment for their economy. 7. Joint Venture To share the risk of market entry into a foreign market, two organisations may come together to form a company to operate in the host country. The two companies may share knowledge and expertise to assist them in the development of company, of course profits will have to be shared out also. The International Marketing Mix- When launching a product into foreign markets should we standardise or adapt your marketing mix to the foreign market? A company can adopt to use a standardised marketing mix around the world or an adapted marketing mix in each country. International Marketing Strategy decision is mainly between Standardisation Vs Adaption. In international markets ,we have to take into consideration consumers cultural background, buying habits, levels of personal disposable income etc in order to deliver a tailored marketing mix programme to suit their needs. The arguments however for standardisation suggest that if you go through the process of adapting the product to local markets it does little but add to the overall cost of producing the product and weakens the brand on the global scale. In today’s global world, where consumers travel more, watch satellite television, communicate and shop internationally over the internet, the world now is becoming a lot smaller. Because of this there is no need to adapt products to local markets. Brands such as Coca-Cola, MTV, Nike, Levis are all successful global brands where they have a standardised approach to their marketing mix, all these products are targeted at similar groups globally. We can argue that standardisation is better for the organisation because it reduces cost, however many organisations will have to ‘think global, but act local’ if they are to successfully establish them selves in foreign markets. The same applies to International 122 Promotion Strategy, we can either adapt or standardise their promotional strategy and message. The use of certain colours may also need to be thought about. In India red is the colour worn by the bride in weddings, white is the colour for mourning in Japan. The level of media development has to also be taken into account. What is the level of television penetration? How much control does the government have over advertising on TV and radio? Is print media more popular then TV? Pricing on an international scale is difficult. It has to take into account traditional price considerations. The organisation needs to consider the costs of transport, any tariffs or import duties that may be levied on their product(s) when they are sold on the international scale. Also what currency do you expect to be paid in? Will it be home or international currency? Exchange rate fluctuation will also impact profitability and influence pricing decisions. The internet is now making pricing more transparent for consumers. Goods can be purchased online from any overseas organisations at local currency prices. In an overseas market there may well be more intermediaries involved. In your international market, is it dominated by major retailers or is the retail sector made up of small independent retailers? Is internet distribution common for your product. 10.4 eMarketing eMarketing is essentially part of marketing. Therefore eMarketing by its very nature is one aspect of 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. This also helps us to differentiate between eMarketing and E-commerce, since E-Commerce is simply buying and selling online. 10.41 What is the difference between eMarketing and Internet Marketing? There is no real difference between eMarketing and Internet Marketing. However, with the arrival of mobile technologies such as PDA's and 3G mobile phones, as well as 123 Interactive Television, both terms tend to be stretched to include these new media technologies. 10.42 What are the eMarketing tools? The Internet has a number of tools to offer to the marketer. A company can distribute via the Internet e.g. rediffshopping.com. A company can use the Internet as a way of building and maintaining a customer relationship. The money collection part of a transaction could be done online e.g. electricity and telephone bills. Leads can be generated by attracting potential customers to sign-up for short periods of time, before signing up for the long-term. The Internet could be used for advertising e.g. Google. Finally, the web can be used as a way of collecting direct responses e.g. as part of a voting system for a game show. 10.43 Internet Advertising External sources of Internet Advertising Pay-Per-Click Advertising, e.g. Google Adwords.Google Adwords is a cost-perclick (CPC) online advertising programme. Essentially that means that you decide upon a keyword that relates closely to your product or service. Using Google's tools, you price how much it would cost your per-click for your chosen keyword - this could be 10 cents, $1.50 or more, depending on the popularity of the keyword. So the keyword - 'marketing' - would be more expensive than the keyword - 'marketing cheese china' - because of its level of popularity. You then allocate a budget, and pay Google by credit card. You can control the length of your campaign, or end it as soon as the money runs out. Advertisements appear alongside Google search results - so go to Google and search for 'marketing.' The advertisements appearing along side the main 124 search results are CPC. You only pay for advertisements that get clicked not for page views - so you pay nothing if your advert is simply viewed. There is also an opportunity for 'Smart Pricing' whereby you pay more for the advert if a sale is guaranteed. Adwords text ad running on the 'same page,' then clicks on it - and buys from the advertiser. Search Marketing, Overture and Yahoo!- Overture is the Yahoo equivalent of Google's Adwords. Now known as Yahoo! Search Marketing, Overture has a series of sub-products that make up its Internet marketing programme. Here are some examples: (a) Sponsored search - displays your advert at the top of the search engine results. So your potential customers search for a 'keyword' and your advert appears at the top of the results page (this is very similar to Adwords). Again, as with Adwords, the advertisers bid against each other to obtain the position that will generate the most convertible traffic to their site. Popular keywords will cost more - obviously. Local Advertising - gets your business listed in Yahoo's business directory. So if you wish to promote products in specific regions next to specific search keywords, this is a very targeted geographical service. Affiliate Marketing- Affiliate Marketing is where an organization offers and incentive to other web-based organizations to market the products or services that it offers. Put simply - affiliate marketing is a basic agency arrangement. There is rarely any pay-per-click cash, but affiliates tend to take a commission on any goods sold as a result of the click. What does it look like? Affiliate marketing sees a banners advert or a text advert placed upon an affiliate's website. When the advert attracts a click, the visitor is taken through to the site that originated the affiliate programme. No cash changes hands until there is a sale, but affiliate rewards tend to be higher than regular pay-per-click. 125 10.5 Network Marketing or Multi Level Marketing (MLM) Network Marketing is a subset of direct selling and is also known as “multilevel marketing”, “structure marketing” or “multilevel direct selling”. Network marketing can best be described as a direct selling channel that focuses heavily on its compensation plan because the distributors (members of the network) may receive compensation in two fundamental ways. First, sales people (distributor) may earn compensation from their personal sales of goods and services to the consumers (non-member of the network). Second, they may earn compensation from sales to or purchase from those persons whom they have personally sponsored or recruited into the network (down lines), these down lines continue sponsoring or recruiting to the network sharing the benefits with their sponsors or recruiters (up lines). Hence, the network marketing organization can be defined as “those organisations that depend heavily or exclusively on personal selling, and that reward sales agents for (a) buying products, (b) selling products, and (c) finding other agents to buy and sell products”. Network marketing distributors purchase products at wholesale prices, and may either use discounted products themselves or retail the products to others for a profit. Suggested mark up usually ranges from 20% to 50%. In addition, distributors receive a monthly commission for their ‘personal volume’, which is the value of every product they personally buy or sell. Further, the distributors receive a net commission on the sales of those they recruit into the network. The sales developed from network marketing are not developed solely from sales created by retailing, but also developed through recruiting or sponsoring independent distributors. Thus, as distributors continue to recruit or sponsor new distributors to expand their network, the new distributors will contribute new sales to the network and gain commission in return. The multiplying effect on network marketing will expand when these distributors continue their recruiting or sponsoring efforts. This multiplying effect, an important element in the recruiting or sponsoring function, makes the network marketing quite different from other types of direct selling involving paid sales persons. 126 10.6 Experiential Marketing (XM) Experiential marketing defined as "a fusion of non-traditional modern marketing practices integrated to enhance a consumer's personal and emotional association with a brand". "Experiential marketing" is the antonym of "product centric marketing," which makes "customer centric marketing" somewhat synonymous with "experiential marketing." .The idea of experiential marketing reflects a right brain bias because it is about fulfilling consumers’ aspirations to experience certain feelings – comfort and pleasure on one hand, and avoidance of discomfort and displeasure on the other. In contrast, traditional product centric marketing reflects a left brain bias because it generally seeks to persuade consumers by invoking rational factors that position the advertised brand as better than competing brands. Product centric marketing presumes a degree of rationality in consumers’ decision-making that contemporary brain science refutes. Consumers’ decisions are much more influenced by emotionally generated feelings than by their rationally derived thoughts. Some myths of XM: Companies that send instant messages with games or music promoting their brands are doing experiential marketing. Experiential marketing is made up solely of events, mobile tours, and sports or entertainment marketing programmes. Experiential marketing can include advertising copy that is written to connect with the senses. Experiential marketing consists of product sampling, bar and nightclub promotions, street teams, and diversity marketing (not sure why they threw that in there!). It is a mindset. A focus on creating fresh connections between brands and consumers out in the world where things happen. Connections in the form of experiences that are personally relevant, memorable, interactive and emotional. Connections that lead to increased sales and brand loyalty. 127 Experiential marketing is about interacting in person and bringing your brand alive. It's important to point out that simply creating a live encounter between a person and a brand does not mean you've succeeded at being an experiential marketer. Good experiences take time, money, good information and clear objectives to develop. 10.7 Viral Marketing Before we understand the reasons for effectiveness of viral marketing, we have to learn to admire the virus. He has a way of living in secrecy until he is so numerous that he wins by sheer weight of numbers. He piggybacks on other hosts and uses their resources to increase his tribe. And in the right environment, he grows exponentially. A virus don't even have to mate -- he just replicates, again and again with geometrically increasing power, doubling with each iteration: 1 11 1111 11111111 1111111111111111 11111111111111111111111111111111 1111111111111111111111111111111111111111111111111111111111111111 In a few short generations, a virus population can explode. Viral marketing describes any strategy that encourages individuals to pass on a marketing message to others, creating the potential for exponential growth in the message's exposure and influence. Like viruses, such strategies take advantage of rapid multiplication to explode the message to thousands, to millions. Off the Internet, viral marketing has been referred to as "word-of-mouth," "creating a buzz," "leveraging the media," "network marketing." But on the Internet, for better or worse, it's called "viral marketing." 128 The classic example of viral marketing is Hotmail.com, one of the first free Web-based email services. The strategy is simple: 1. Give away free e-mail addresses and services, 2. Attach a simple tag at the bottom of every free message sent out: "Get your private, free email at http://www.hotmail.com" and, 3. Then stand back while people e-mail to their own network of friends and associates, 4. Who see the message, 5. Sign up for their own free e-mail service, and then 6. Propel the message still wider to their own ever-increasing circles of friends and associates. Like tiny waves spreading ever farther from a single pebble dropped into a pond, a carefully designed viral marketing strategy ripples outward extremely rapidly. Some viral marketing strategies work better than others, and few work as well as the simple Hotmail.com strategy. But below are the six basic elements you hope to include in your strategy. A viral marketing strategy need not contain ALL these elements, but the more elements it embraces, the more powerful the results are likely to be. An effective viral marketing strategy: 1. Gives away products or services 2. Provides for effortless transfer to others 3. Scales easily from small to very large 4. Exploits common motivations and behaviors 5. Utilizes existing communication networks 6. Takes advantage of others' resources 10.8 Cause-related Marketing Cause-related marketing is defined as the public association of a for-profit company with a nonprofit organization, intended to promote the company's product or service and to 129 raise money for the nonprofit. Cause-related marketing is generally considered to be distinct from corporate philanthropy because the corporate dollars involved in Cause-related marketing are not outright gifts to a nonprofit organization, hence not tax-deductible. The phrase "cause-related marketing" was first used by American Express in 1983 to describe its campaign to raise money for the restoration of the Statue of Liberty. American Express made a one-cent donation to the Statue of Liberty every time someone used its charge card; the number of new card holders soon grew by 45%, and card usage increased by 28%. In their efforts to diversify and enhance their funding base nonprofits have embraced Cause-related marketing. The practice has evolved to include a wide range of activities from simple agreements to donate a percentage of the purchase price for a particular item or items to a charity for a specific project, to longer, more complex arrangements. Corporations too have been drawn to Cause-related marketing due to the competition of the expanding global marketplace and the need to develop brand loyalty. A number of recent studies have documented that consumers carefully consider a company's reputation when making purchasing decisions and that a company's community involvement boosts employee morale and loyalty. 130