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PESTEL, Globalization, and Importing
Learning Objectives
After reading this section, students should be able to …
1. Know the components of PESTEL analysis.
2. Recognize how PESTEL is related to the dimensions of globalization.
3. Understand why importing might be a stealth form of international entry.
Know the Components of PESTEL Analysis
PESTEL analysis is an important and widely used tool that helps show the big picture of a firm’s external environment, particularly as related to foreign markets. PESTEL is an acronym for the political, economic, sociocultural, technological, environmental, and legal contexts in which a firm operates. A PESTEL analysis helps managers gain a better understanding of the opportunities and threats they face; consequently, the analysis aids in building a better vision of the future business landscape and how the firm might compete profitably. This useful tool analyzes for market growth or decline and, therefore, the position, potential, and direction for a business. When a firm is considering entry into new markets, these factors are of considerable importance. Moreover, PESTEL analysis provides insight into the status of key market flatteners, both in terms of their present state and future trends.
Firms need to understand the macroenvironment to ensure that their strategy is aligned with the powerful forces of change affecting their business landscape. When firms exploit a change in the environment—rather than simply survive or oppose the change—they are more likely to be successful. A solid understanding of PESTEL also helps managers avoid strategies that may be doomed to fail given the circumstances of the environment. JCPenney’s failed entry into Chile is a case in point.
Finally, understanding PESTEL is critical prior to entry into a new country or region. The fact that a strategy is congruent with PESTEL in the home environment gives no assurance that it will also align in other countries. For example, when Lands’ End, the online clothier, sought to expand its operations into Germany, it ran into local laws prohibiting it from offering unconditional guarantees on its products. In the United States, Lands’ End had built a reputation for quality on its no-questions-asked money-back guarantee. However, this was considered illegal under Germany’s regulations governing incentive offers and price discounts. The political skirmish between Lands’ End and the German government finally ended when the regulations banning unconditional guarantees were abolished. While the restrictive regulations didn’t put Lands’ End out of business in Germany, they did inhibit its growth there until the laws were abolished.
There are three steps in the PESTEL analysis. First, consider the relevance of each of the PESTEL factors to your context. Next, identify and categorize the information that applies to these factors. Finally, analyze the data and draw conclusions. Common mistakes in this analysis include stopping at the second step or assuming that the initial analysis and conclusions are correct without testing the assumptions and investigating alternative scenarios.
The framework for PESTEL analysis is presented below. It’s composed of six sections—one for each of the PESTEL headings.1 The framework includes sample questions or prompts, the answers to which can help determine the nature of opportunities and threats in the macroenvironment. These questions are examples of the types of issues that can arise in a PESTEL analysis.
PESTEL Analysis
1. Political
o How stable is the political environment in the prospective country?
o What are the local taxation policies? How do these affect your business?
o Is the government involved in trading agreements, such as the European Union (EU), the North American Free Trade Agreement (NAFTA), or the Association of Southeast Asian Nations (ASEAN)?
o What are the country’s foreign-trade regulations?
o What are the country’s social-welfare policies?
2. Economic
o What are the current and forecast interest rates?
o What is the current level of inflation in the prospective country? What is it forecast to be? How does this affect the possible growth of your market?
o What are local employment levels per capita, and how are they changing?
o What are the long-term prospects for the country’s economy, gross domestic product (GDP) per capita, and other economic factors?
o What are the current exchange rates between critical markets, and how will they affect production and distribution of your goods?
3. Sociocultural
o What are the local lifestyle trends?
o What are the country’s current demographics, and how are they changing?
o What is the level and distribution of education and income?
o What are the dominant local religions, and what influence do they have on consumer attitudes and opinions?
o What is the level of consumerism, and what are the popular attitudes toward it?
o What pending legislation could affect corporate social policies (e.g., domestic-partner benefits or maternity and paternity leave)?
o What are the attitudes toward work and leisure?
4. Technological
o To what level do the local government and industry fund research, and are those levels changing?
o What is the local government’s and industry’s level of interest and focus on technology?
o How mature is the technology?
o What is the status of intellectual property issues in the local environment?
o Are potentially disruptive technologies in adjacent industries creeping in at the edges of the focal industry?
5. Environmental
o What are the local environmental issues?
o Are there any pending ecological or environmental issues relevant to your industry?
o How do the activities of international activist groups (e.g., Greenpeace, Earth First!, and People for the Ethical Treatment of Animals [PETA]) affect your business?
o Are there environmental-protection laws?
o What are the regulations regarding waste disposal and energy consumption?
6. Legal
o What are the local government’s regulations regarding monopolies and private property?
o Does intellectual property have legal protections?
o Are there relevant consumer laws?
o What is the status of employment, health and safety, and product safety laws?
Political Factors
The political environment can have a significant influence on businesses. In addition, political factors affect consumer confidence and consumer and business spending. For instance, how stable is the political environment? This is particularly important for companies entering new markets. Government policies on regulation and taxation can vary from state to state and across national boundaries. Political considerations also encompass trade treaties, such as NAFTA, ASEAN, and EU. Such treaties tend to favor trade among the member countries but impose penalties or less favorable trade terms on nonmembers.
Economic Factors
Managers also need to consider macroeconomic factors that will have near-term and long-term effects on the success of their strategy. Inflation rates, interest rates, tariffs, the growth of the local and foreign national economies, and exchange rates are critical. Unemployment, availability of critical labor, and the local cost of labor also have a strong bearing on strategy, particularly as related to the location of disparate business functions and facilities.
Sociocultural Factors
The social and cultural influences on business vary from country to country. Depending on the type of business, factors such as the local languages, the dominant religions, the cultural views toward leisure time, and the age and lifespan demographics may be critical. Local sociocultural characteristics also include attitudes toward consumerism, environmentalism, and the roles of men and women in society. For example, Coca-Cola and PepsiCo have grown in international markets due to the increasing level of consumerism outside the United States.
Making assumptions about local norms derived from experiences in your home market is a common cause for early failure when entering new markets. However, even home-market norms can change over time, often caused by shifting demographics due to immigration or aging populations.
Technological Factors
The critical role of technology is discussed in more detail later in this section. For now, suffice it to say that technological factors have a major bearing on the threats and opportunities firms encounter. For example, new technology may make it possible for products and services to be made more cheaply and to a better standard of quality. New technology may also provide the opportunity for more innovative products and services, such as online stock trading and remote working. Such changes have the potential to change the face of the business landscape.
Environmental Factors
The environment has long been a factor in firm strategy, primarily from the standpoint of access to raw materials. Increasingly, this factor is best viewed as both a direct and indirect cost for the firm.
Environmental factors are also evaluated on the footprint left by a firm on its respective surroundings. For consumer-product companies like PepsiCo, for instance, this can encompass the waste-management and organic-farming practices used in the countries where raw materials are obtained. Similarly, in consumer markets, it may refer to the degree to which packaging is biodegradable or recyclable.
Legal Factors
Finally, legal factors reflect the laws and regulations relevant to the region and the organization. Legal factors can include whether the rule of law is well established, how easily or quickly laws and regulations may change, and what the costs of regulatory compliance are. For example, Coca-Cola’s market share in Europe is greater than 50 percent; as a result, regulators have asked that the company give shelf space in its coolers to competitive products in order to provide greater consumer choice.2
Many of the PESTEL factors are interrelated. For instance, the legal environment is often related to the political environment, where laws and regulations can only change when they’re consistent with the political will.
PESTEL and Globalization
Over the past decade, new markets have been opened to foreign competitors, whole industries have been deregulated, and state-run enterprises have been privatized. So, globalization has become a fact of life in almost every industry.3 This entails much more than companies simply exporting products to another country. Some industries that aren’t normally considered global do, in fact, have strictly domestic players. But these companies often compete alongside firms with operations in multiple countries; in many cases, both sets of firms are doing equally well. In contrast, in a truly global industry, the core product is standardized, the marketing approach is relatively uniform, and competitive strategies are integrated in different international markets.4 In these industries, competitive advantage clearly belongs to the firms that can compete globally.
A number of factors reveal whether an industry has globalized or is in the process of globalizing. The sidebar below groups globalization factors into four categories: markets, costs, governments, and competition. These dimensions correspond well to Thomas Friedman’s flatteners (as described in his book The World Is Flat), though they are not exhaustive.5
Factors Favoring Industry Globalization
1. Markets
o Homogeneous customer needs
o Global customer needs
o Global channels
o Transferable marketing approaches
2. Costs
o Large-scale and large-scope economies
o Learning and experience
o Sourcing efficiencies
o Favorable logistics
o Arbitrage opportunities
o High research-and-development (R&D) costs
3. Governments
o Favorable trade policies
o Common technological standards
o Common manufacturing and marketing regulations
4. Competition
o Interdependent countries
o Global competitors6
Markets
The more similar markets in different regions are, the greater the pressure for an industry to globalize. Coca-Cola and PepsiCo, for example, are fairly uniform around the world because the demand for soft drinks is largely the same in every country. The airframe-manufacturing industry, dominated by Boeing and Airbus, also has a highly uniform market for its products; airlines all over the world have the same needs when it comes to large commercial jets.
Costs
In both of these industries, costs favor globalization. Coca-Cola and PepsiCo realize economies of scope and scale because they make such huge investments in marketing and promotion. Since they’re promoting coherent images and brands, they can leverage their marketing dollars around the world. Similarly, Boeing and Airbus can invest millions in new-product R&D only because the global market for their products is so large.
Governments and Competition
Obviously, favorable trade policies encourage the globalization of markets and industries. Governments, however, can also play a critical role in globalization by determining and regulating technological standards. Railroad gauge—the distance between the two steel tracks—would seem to favor a simple technological standard. In Spain, however, the gauge is wider than in France. Why? Because back in the 1850s, when Spain and neighboring France were hostile to one another, the Spanish government decided that making Spanish railways incompatible with French railways would hinder any French invasion.
These are a few key drivers of industry change. However, there are particular implications of technological and business-model breakthroughs for both the pace and extent of industry change. The rate of change may vary significantly from one industry to the next; for instance, the computing industry changes much faster than the steel industry. Nevertheless, change in both fields has prompted complete reconfigurations of industry structure and the competitive positions of various players. The idea that all industries change over time and that business environments are in a constant state of flux is relatively intuitive. As a strategic decision maker, you need to ask yourself this question: how accurately does current industry structure (which is relatively easy to identify) predict future industry conditions?
Importing as a Stealth Form of Internationalization
Ironically, the drivers of globalization have also given rise to a greater level of imports. Globalization in this sense is a very strong flattener. Importing involves the sale of products or services in one country that are sourced in another country. In many ways, importing is a stealth form of internationalization. Firms often claim that they have no international operations and yet—directly or indirectly—base their production or services on inputs obtained from outside their home country. Firms that engage in importing must learn about customs requirements, informed compliance with customs regulations, entry of goods, invoices, classification and value, determination and assessment of duty, special requirements, fraud, marketing, trade finance and insurance, and foreign trade zones. Importing can take many forms—from the sourcing of components, machinery, and raw materials to the purchase of finished goods for domestic resale and the outsourcing of production or services to nondomestic providers.
Outsourcing occurs when a company contracts with a third party to do some work on its behalf. The outsourcer may do the work within the same country or may take the work to another country (i.e., offshoring). Offshoring occurs when you take a function out of your country of residence to be performed in another country, generally at a lower cost. International outsourcing, or outsourcing work to a nondomestic third party, has become very visible in business and corporate strategy in recent years. But it’s not a new phenomenon; for decades, Nike has been designing shoes and other apparel that are manufactured abroad. Similarly, Pacific Cycle doesn’t make a single Schwinn or Mongoose bicycle in the United States but instead imports them entirely from manufacturers in Taiwan and China. It may seem as if international outsourcing is new because businesses are now more often outsourcing services, components, and raw materials from countries with developing economies (e.g., China, Brazil, and India).
In addition to factors of production, information technologies (IT)—such as telecommunications and the widespread diffusion of the Internet—have provided the impetus for outsourcing services. Business-process outsourcing (BPO) is the delegation of one or more IT-intensive business processes to an external provider that in turn owns, administers, and manages the selected process on the basis of defined and measurable performance criteria. The firms in service and IT-intensive industries—insurance, banking, pharmaceuticals, telecommunications, automotive, and airlines—are among the early adopters of BPO. Of these, insurance and banking are able to generate the bulk of the savings, purely because of the large proportion of processes that they can outsource (i.e., the processing of claims and loans and providing service through call centers). Among those countries housing BPO operations, India experienced the most dramatic growth in services where language skills and education were important. Research firm Gartner anticipates that the BPO market in India will reach \$1.8 billion by 2013.7
Generally, foreign outsourcing locations tend to be defined by how automated a production process or service can be made and the transportation costs involved. When transportation costs and automation are both high, then the knowledge worker component of the location calculation becomes less important. You can see how you might employ the CAGE framework to evaluate potential outsourcing locations. In some cases, though, firms invest in both plant equipment and the training and development of the local workforce. This becomes important when the broader labor force needs to have a higher level of education to operate complex plant machinery or because a firm’s specific technologies also have a cultural component. Brazil is one case in point; Ford, BMW, Daimler, and Cargill have all made significant investments in the educational infrastructure of this significant, emerging economy.8
Key Takeaways
• A PESTEL analysis examines a target market’s political, economic, social, technological, environmental, and legal dimensions in terms of both its current state and possible trends.
• An understanding of the dimensions of PESTEL helps you better grasp the dimensions on which a target market or industry may be more global or local.
• Importing is a stealth form of international entry, because the factors that favor globalization can also lead to a higher level of imports, and inputs can be sourced from anywhere they have either the lowest cost, highest quality, or some combination of these characteristics.
Source
This chapter was adapted under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License from the book ‘International Business v. 1.0’ published by Saylor Academy, the creator or licensor of this work. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/06%3A_Global_Market_Planning/6.03%3A_Global_Market_Opportunity_Assessment__PESTEL_Analysis.txt |
Learning Objectives
After reading this section, students should be able to …
1. know the components of the CAGE analysis.
2. explain the three strategies for handling institutional voids
CAGE Analysis
Pankaj “Megawatt” Ghemawat is an international strategy guru who developed the CAGE framework to offer businesses a way to evaluate countries in terms of the “distance” between them.1 In this case, distance is defined broadly to include not only the physical geographic distance between countries but also the cultural, administrative (currencies, trade agreements), and economic differences between them. As summarized in Table \(1\): “The CAGE Framework”, the CAGE (cultural, administrative, geographic, and economic) framework offers a broader view of distance and provides another way of thinking about location and the opportunities and concomitant risks associated with global arbitrage.2
Table \(1\): The CAGE Framework
Cultural Distance Administrative Distance Geographic Distance Economic Distance
Attributes Creating Distance
Different languages Absence of colonial ties Physical remoteness Differences in consumer incomes
Different ethnicities; lack of connective ethnic or social networks Absence of shared monetary or political association Lack of a common border Differences in costs and quality of the following:
• Natural resources
• Financial resources
• Human resources
• Infrastructure
• Intermediate inputs
• Information or knowledge
Different religions Political hostility Lack of sea or river access
Different social norms Government policies Size of country
Institutional weakness Weak transportation or communication links
Differences in climates
Industries or Products Affected by Distance
Products have high-linguistic content (TV). Government involvement is high in industries that are
• producers of staple goods (electricity),
• producers of other “entitlements” (drugs),
• large employers (farming),
• large suppliers to government (mass transportation),
• national champions (aerospace),
• vital to national security (telecommunications),
• exploiters of natural resources (oil, mining), and
• subject to high-sunk costs (infrastructure).
Products have a low value-of-weight or bulk ratio (cement). Nature of demand varies with income level (cars).
Products affect cultural or national identity of consumers (foods). Products are fragile or perishable (glass or fruit). Economies of standardization or scale are important (mobile phones).
Product features vary in terms of size (cars), standards (electrical appliances), or packaging. Communications and connectivity are important (financial services). Labor and other factor cost differences are salient (garments).
Products carry country-specific quality associations (wines). Local supervision and operational requirements are high (many services). Distribution or business systems are different (insurance).
Companies need to be responsive and agile (home appliances).
Source: Recreated from Pankaj Ghemawat, “Distance Still Matters,” Harvard Business Review 79, no. 8 (September 2001), accessed February 15, 2011, http://sabanet.unisabana.edu.co/post...%20matters.pdf.
To apply the CAGE framework, identify locations that offer low raw material costs, access to markets or consumers, or other key decision criteria. You might, for instance, determine that you’re interested in markets with strong consumer buying power, so you would use per capita income as your first sorting criterion. As a result, you would likely end up with some type of ranking. Ghemawat provides an example for the fast-food industry, where he shows that on the basis of per capita income, countries like Germany and Japan would be the most attractive markets for the expansion of a North American fast-food company. However, when he adjusts this analysis for distance using the CAGE framework, he shows that Mexico ranks as the second most attractive market for international expansion, far ahead of Germany and Japan.3 Recall though, that any international expansion strategy still needs to be supported by the specific resources and capabilities possessed by the firm, regardless of the picture presented by the CAGE analysis. To understand the usefulness of the CAGE framework, consider Dell and its efforts to compete effectively in China. The vehicles it used to enter China were just as important in its strategy as its choice of geographic arena. For Dell’s corporate clients in China, the CAGE framework would likely have revealed relatively little distance on all four dimensions—even geographic—given the fact that many personal-computer components have been sourced from China. However, for the consumer segment, the distance was rather great, particularly on the dimensions of culture, administration, and economics. For example, Chinese consumers didn’t buy over the Internet, which is the primary way Dell sells its products in the United States. One possible outcome could have been for Dell to avoid the Chinese consumer market altogether. However, Dell opted to choose a strategic alliance with distributors whose knowledge base and capabilities allowed Dell to better bridge the CAGE-framework distances. Thus the CAGE framework can be used to address the question of where (which arena) and how (by which entry vehicle) to expand internationally.
CAGE Analysis and Institutional Voids
While you can apply CAGE to consider some first-order distances (e.g., physical distance between a company’s home market and the new foreign market) or cultural differences (e.g., the differences between home-market and foreign-market customer preferences), you can also apply it to identify institutional differences. Institutional differences include differences in political systems and in financial markets. The greater the distance, the harder it will be to operate in that country. Emerging markets in particular can have greater differences because these countries lack many of the specialized intermediaries that make institutions like financial markets work. Table \(2\): “Specialized Intermediaries within a Country or Other Geographic Arena” lists examples of specialized intermediaries for different institutions. If an institution lacks these specialized intermediaries, there is an institutional void. An institutional void refers to the absence of key specialized intermediaries found in the markets of finance, managerial talent, and products, which otherwise reduce transaction costs.
Table \(2\): Specialized Intermediaries within a Country or Other Geographic Arena
Institution Specialized Intermediary
Financial markets • Venture-capital firms
• Private equity providers
• Mutual funds
• Banks
• Auditors
• Transparent corporate governance
Markets for managerial talent • Management institute or business schools
• Certification agencies
• Headhunting firms
• Relocation agencies
Markets for products • Certification agencies
• Consumer reports
• Regulatory authorities (e.g., the Food and Drug Administration)
• Extrajudicial dispute resolution services
All markets • Legal and judiciary (for property rights protection and enforcement)
Three Strategies for Handling Institutional Voids
When a firm detects an institutional void, it has three choices for how to proceed in regard to the potential target market: (1) adapt its business model, (2) change the institutional context, or (3) stay away.
For example, when McDonald’s tried to enter the Russian market, it found an institutional void: a lack of local suppliers to provide the food products it needs. Rather than abandoning market entry, McDonald’s decided to adapt its business model. Instead of outsourcing supply-chain operations like it does in the United States, McDonald’s worked with a joint-venture partner to fill the voids. It imported cattle from Holland and russet potatoes from the United States, brought in agricultural specialists from Canada and Europe to improve Russian farmers’ management practices, and lent money to farmers so that they could invest in better seeds and equipment. As a result of establishing its own supply-chain and management systems, McDonald’s controlled 80 percent of the Russian fast-food market by 2010. The process, however, took fifteen years and \$250 million in investments.“4
An example of the second approach to dealing with an institutional void—changing the institutional context—is that used by the “Big Four” audit firms (i.e., Ernst & Young, KPMG, Deloitte Touche Tohmatsu, and PricewaterhouseCoopers) when they entered Brazil. At the time, Brazil had a fledgling audit services market. When the four firms set up branches in Brazil, they raised financial reporting and auditing standards across the country, thus bringing a dramatic improvement to the local market.5
Finally, the firm can choose the strategy of staying away from a market with institutional voids. For example, The Home Depot’s value proposition (i.e., low prices, great service, and good quality) requires institutions like reliable transportation networks (to minimize inventory costs) and the practice of employee stock ownership (which motivates workers to provide great service). The Home Depot has decided to avoid countries with weak logistics systems and poorly developed capital markets because the company would not be able to attain the low cost–great service combination that is its hallmark.6
Ethics in Action
Nestlé’s Nespresso division is one of the company’s fastest-growing divisions. The division makes a single-cup espresso machine along with single-serving capsules of coffees from around the world. Nestlé is headquartered in Switzerland, but the coffee it needs to buy is primarily grown in rural Africa and Latin America. Nespresso set up local facilities in these regions that measure the quality of the coffee. Nespresso also helps local farmers improve the quality of their coffee, and then it pays more for coffee beans that are of higher quality. Nespresso has gone even further by advising farmers on farming practices that improve the yield of beans farmers get per hectare. The results have proven beneficial to all parties: farmers earn more money, Nespresso gets getter quality beans, and the negative environmental impact of the farms has diminished.7
Key Takeaways
• CAGE analysis asks you to compare a possible target market to a company’s home market on the dimensions of culture, administration, geography, and economy.
• CAGE analysis yields insights in the key differences between home and target markets and allows companies to assess the desirability of that market.
• CAGE analysis can help you identify institutional voids, which might otherwise frustrate internationalization efforts. Institutional differences are important to the extent that the absence of specialized intermediaries can raise transaction costs just as their presence can reduce them.
Source
This chapter was adapted under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License from the book ‘International Business v. 1.0’ published by Saylor Academy, the creator or licensor of this work. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/06%3A_Global_Market_Planning/6.04%3A_Global_Market_Opportunity_Assessment__CAGE_Analysis.txt |
Scenario Planning and Analysis
Learning Objectives
After reading this section, students should be able to …
1. understand the history and role of scenario planning and analysis.
2. explain the six steps of scenario planning and analysis.
3. map scenarios in a two-by-two matrix.
The History and Role of Scenario Planning and Analysis
Strategic leaders use the information revealed by the application of PESTEL analysis, global dimensions, and CAGE analysis to uncover what the traditional SWOT framework calls opportunities and threats. A SWOT (strengths, weaknesses, opportunities, and threats) assessment is a strategic-management tool that helps you take stock of an organization’s internal characteristics, or its strengths and weaknesses, such that any action plan builds on what it does well while overcoming or working around weaknesses; the SWOT assessment also helps a company assess external environmental conditions, or opportunities and threats, that favor or threaten an organization’s strategy. In particular, you can use it to evaluate the implications of your industry analysis, both for your focal firm specifically and for the industry in general. However, a SWOT assessment works best with one situation or scenario and provides little direction when you’re uncertain about potential changes to critical features of the scenario. Scenario planning can help in these cases.
Scenario Planning
Scenario planning helps leaders develop a detailed, internally consistent picture of a range of plausible outcomes as an industry evolves over time. You can also incorporate the results of scenario planning into your strategy formulation and implementation. Understanding the PESTEL conditions—as well as the level, pace, and drivers of industry globalization and the CAGE framework—will probably equip you with some insight into the outcomes of certain scenarios. The purpose of scenario planning, however, is to provide a bigger picture—one in which you can see specific trends and uncertainties. Developed in the 1950s at the global petroleum giant Shell, the technique is now regarded as a valuable tool for integrating changes and uncertainties in the external context into overall strategy.1 Since September 11, 2001, the use of scenario planning has increased in businesses. Analysis of Bain & Company’s Management Tools and Trends Survey shows that in the post-9/11 period, approximately 70 percent of 8,500 global executives reported that their firms used scenarios, in contrast to a usage rate of less than 50 percent in most of the 1990s.2 In addition, scenarios ranked fifteenth in satisfaction levels among the twenty-five management tools that Bain examined in 1993, while it ranked eighth in 2006.3
Unlike forecasts, scenarios are not straight-line, one-factor projections from present to future. Rather, they are complex, dynamic, interactive stories told from a future perspective. To develop useful scenarios, executives need a rich understanding of their industry along with broad knowledge of the diverse PESTEL and global conditions that are most likely to affect them. The six basic steps in scenario planning are detailed below.
Six Basic Steps of Scenario Planning
• Step 1. Choose the target issue, scope and time frame that the scenario will explore. The scope will depend on your level of analysis (i.e., industry, subindustry, or strategic group), the stage of planning, and the nature and degree of uncertainty and the rate of change. Generally, four scenarios are developed and summarized in a grid. The four scenarios reflect the extremes of possible worlds. To fully capture critical possibilities and contingencies, it may be desirable to develop a series of scenario sets.
• Step 2. Brainstorm a set of key drivers and decision factors that influence the scenario. This could include social unrest, shifts in power, regulatory change, market or competitive change, and technology or infrastructure change. Other significant changes in external contexts, like natural disasters, might also be considered.
• Step 3. Define the two dimensions of greatest uncertainty. These two dimensions form the axes of the scenario framework. These axes should represent two dimensions that provide the greatest uncertainty for the industry. For instance, the example on the global credit-union industry identifies changes in the playing field and technology as the two greatest areas of uncertainty up through the year 2005.
• Step 4. Detail the four quadrants of the scenarios with stories. Describe how the four worlds would look in each scenario. It’s often useful to develop a catchy name for each world as a way to further develop its distinctive character. One of the worlds will likely represent a slightly future version of the status quo, while the others will be significant departures from it. As shown in the credit-union scenarios, Chameleon describes a world in which both the competitive playing field and technology undergo radical change, while Wallet Wars is an environment of intense competition but milder technological change. In contrast, in Technocracy, the radical changes are in technology, whereas in Credit Union Power, credit unions encounter only minor changes on either front.4
• Step 5. Identify indicators that could signal which scenario is unfolding. These can either be trigger points that signal the change is taking place or milestones that mean the change is more likely. An indicator may be a large industry supplier like Microsoft picking up a particular but little-known technological standard.
• Step 6. Assess the strategic implications of each scenario. Microscenarios may be developed to highlight and address business-unit-specific or industry-segment-specific issues. Consider needed variations in strategies, key success factors, and the development of a flexible, robust strategy that might work across several scenarios.
The process of developing scenarios and then conducting business according to the information that the scenarios reveal makes it easier to identify and challenge questionable assumptions. It also exposes areas of vulnerability (e.g., in a country, an industry, or a company), underscores the interplay of environmental factors and the impact of change, allows for robust planning and contingency preparation, and makes it possible to test and compare strategic options. Scenarios also help firms focus their attention on the trends and uncertainties that are likely to have the greatest potential impact on their future.
Once you’ve determined your target issue, scope, and time frame, you can draw up a list of driving forces that is as complete as possible and is organized into relevant categories (e.g., science-technology, political-economic, regulatory, consumer-social, or industry-market). As you proceed, be sure to identify key driving forces—the ones with the greatest potential to affect the industry, subindustry, or strategic group in which you’re interested.
Trends and Uncertainties
Among the driving forces for change, be sure to distinguish between trends and uncertainties. Trends are forces for change whose direction—and sometimes timing—can be predicted. For example, experts can be reasonably confident in projecting the number of consumers in North America, Europe, and Japan who will be over sixty-five years old in the year 2020 because those people are alive now. If your firm targets these consumers, then the impact of this population growth will be significant to you; you may view it as a key trend. For other trends, you may know the direction but not the pace. China and India, for example, are experiencing a trend of economic growth, and many foreign investments depend on the course of infrastructure development and consumer-spending power in this enormous market. Unfortunately, the future pace of these changes is uncertain.
Did You Know?
In his book Africa Rising, Vijay Mahajan documents how trends surrounding the 900 million African consumers may offer businesses more opportunities than they’re currently taking advantage of:
Many tourists come to Africa every year to see the big game there—the elephants, lions, and rhinos. But I came for a different type of big game. I was seeking out the successful enterprises that are identifying and capitalizing on the market opportunities, and seeking lessons from those that are not so successful, too. In Nairobi, Maserame Mouyeme of The Coca-Cola Company told me how important it is ‘to walk the market.’ Then, in Harare, I first heard the term ‘consumer safari’ in a meeting with Unilever executives. This is what they call their initiatives to spend a day with consumers in their homes to understand how they use products. Years after I started on this journey, I now had a term to describe the quest I was on. I was on a consumer safari. The market landscape that is Africa is every bit as marvelous and surprising as its geographic landscape. It presents as big an opportunity as China and India.5
In contrast, uncertainties—forces for change whose direction and pace are largely unknown—are more important for your scenario. European consumers, for example, tend to distrust the biotechnology industry, and given the number of competing forces at work—industries, academia, consumer groups, regulators, and so on—it is difficult to predict whether the consumers will be more or less receptive to biotechnology products in the future. Labeling regulations, for instance, may be either strengthened or relaxed in response to changing consumer opinion.
You might also want to consider the possibility of significant disruptions—that is, steep changes that have an important and unalterable impact on the business environment. A major disaster—such as the September 11 terrorist attacks—can spur regulatory and other legal reforms with major and lasting impact on certain technologies and competitive practices. Table \(3\): “Developing Scenarios for the Global Credit-Union Industry” provides sample scenarios created for the credit-union industry, providing an idea of how you would do this if asked to apply scenario analysis to another industry setting. As you can see, identifying the entry of new competitors and the impact of technology are the two primary sources of uncertainty about the future.
Table \(3\): Developing Scenarios for the Global Credit-Union Industry
CHANGES IN THE PLAYING FIELD
Minor Major
TECHNOLOGICAL CHANGE Gradual Credit Union Power: Both technology and the playing field have changed at a moderate pace, making this the most stable scenario. Even with moderate change in these areas, however, the changing basis of competition, new business models, human resources challenges, and industry dynamics are different enough to pose significant challenges for many financial-services companies.
Radical Technocracy: The wide-scale adoption of the Internet by US consumers has led to massive technological innovation for financial-services companies, increasing the range of distribution channels as well as the products, services, and geographic scope of financial-services organizations. Regulations and other changes in the playing field, however, have been slow to follow.
Note: After considering a PESTEL analysis, experts in the credit-union industry would identify the two most significant macroeconomic factors as (1) regulatory factors affecting both the types of businesses that credit unions can compete in and the entry of new players and consolidation of existing ones, and (2) technological factors, or the speed with which new technologies related to banking are both developed and adopted by consumers. These two dimensions define the major areas of uncertainty facing credit union executives in the next decade. Considering those dimensions and following the six basic steps in scenario planning, you might then develop the following four scenarios.
Source: Adapted from “Scenarios for Credit Unions 2010: An Executive Report,” Credit Union Executives Society, 2004, accessed May 10, 2011, http://www.dsicu.com/pdfs/2010_Scenarios.pdf.
Key Takeaways
• Scenario planning was developed in the 1950s by Shell as a tool for integrating changes and uncertainties in the external context into overall strategy. Today it ranks among the top ten management tools in the world in terms of usage. Scenarios are complex, dynamic, interactive stories told from a future perspective. To develop useful scenarios, you need a rich understanding of your industry along with broad knowledge of the diverse PESTEL and global conditions that are most likely to affect them.
• The six steps in formulating a scenario plan are the following: (1) choose the target issue, scope, and time frame that the scenario will explore; (2) brainstorm a set of key drivers and decision factors that influence the scenario; (3) define the two dimensions of greatest uncertainty; (4) detail the four quadrants of the scenarios with stories about that future; (5) identify indicators that could signal which scenario is unfolding; and (6) assess the strategic implications of each scenario.
• Considering the distillation of issues and drivers, select two dimensions of change that will serve as the two dimensions of your scenario-planning matrix. You must be able to describe the dimensions as high and low at each extreme.
Source
This chapter was adapted under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License from the book ‘International Business v. 1.0’ published by Saylor Academy, the creator or licensor of this work. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/06%3A_Global_Market_Planning/6.05%3A_Global_Market_Opportunity_Assessment__Scenario_Planning_and_Analysis.txt |
Learning Objectives
After reading this section, students should be able to …
1. conduct a preliminary screening to select countries to enter
2. conduct a Country Attractiveness Analysis to select countries to enter
3. make the final selection of countries to enter
In this section, we introduce a new tool, the ‘Country Attractiveness Analysis (CAA)’, which provides in-depth screening models for selecting and entering foreign markets. The process for evaluating foreign markets for potential entry typically consists of three stages – the Preliminary Screening stage, the in-depth screening page and the final selection.
Preliminary Screening
In the Preliminary Screening stage, potential countries are evaluated on macro-level indicators such as political stability, economic development, geographic distance, etc. The preliminary analysis can include one or more of the tools that were presented in the previous sections of this chapter – e.g., the PESTEL Analysis, the CAGE Analysis, and/or the Scenario Planning and Analysis.
Countries that pass through the preliminary screening process are then examined in more detail during the In-depth Screening stage. In the second stage, criteria specific to market success for the industry and product markets are identified, and countries are evaluated on them. The in-depth screening process is the core of country attractiveness analysis, since it brings to bear criteria that management feels are critical to business success. Because criteria must be relevant to industry and product market success factors, in-depth screening must be customized and updated.
Country Attractiveness Analysis
Step 1: The first step in conducting the CAA involves in identifying the criteria that are critical to business success. This will be different for different products. For example, the success factors for a toothpaste category would be Consumer Demand, Consumer Access to Supply, Competition, Distance, and Regulation. The specific criteria related to the ‘Consumer Demand’ of a toothpaste will be population, GDP per capita, GDP growth rate, inflation rate (the lower the better), toothpaste sales growth, toothpaste sales, etc. Similarly, the specific criteria related to the ‘Supply’ of a toothpaste will be sales-force expenses, average expenses (the lower the better), and distribution fixed costs (the lower the better). The specific criteria related to the ‘Competition’ factor for a toothpaste will be # of competitors, total marketing expenditures, # of MNCs, and largest competitor’s share, the lower the better for all these criteria.
Another example: a company whose niche is luxury goods sold through wholesalers to retail stores and on to end users may identify two important factors: level of affluence and distribution network. Criteria used to assess affluence could be disposable income, income growth, and GDP.
Step 2: The next step is to weight the importance of each criterion. Weighting each criterion is necessary since not all criteria are equally important. Obviously, criteria are selected because they meet some minimum threshold level of importance. Yet some criteria are more important than others, and these differences need to be taken into account. A common approach is to allocate 100 points (or 100%) across all of the criteria, where more points (or a higher percentage) are awarded to criteria that are more important. An ideal way to do this is to first assign weights to the factors so that the sum of all weights adds up to 100%, and then divide the weight of each factor among their criteria.
Step 3: Third, each country needs to be rated on each criterion. The rating is designed to determine how well a country performs or is characterized on a particular criterion. A common rating scale ranges from one to ten, where 1 = very poor and 10 = very good.
Step 4: Finally, calculate the ‘Assessment’ score for each country by multiplying the weight of each criteria and its rating.
Table \(1\): Steps in the CAA
• Identify Factors and criteria
• Weight criteria (allocate 100 points or 100% across all criteria, where more points/percentage points are given to more important criteria) (Tip: Weight factors first)
• Use available data to rate each market opportunity on each criterion. A 10-point scale, where 10 = excellent and 1 = poor can be used.
• Multiply the criterion rating times the criterion weight to derive an assessment score for each criterion
• Sum the criterion assessment scores within each factor to derive factor assessments.
• Sum the factor (or criteria) assessment scores to derive an overall assessment for each market opportunity
Final Selection
Based on the assessment scores calculated for each country, one or more countries can be selected for market entry. The results of the in-depth screening illustrate the relative attractiveness of the countries investigated. Before making investment decisions, due diligence analyses will be performed to better forecast costs, revenues, capital (financial, human) requirements, cash flow, expected rate of return, etc. These forecasts will likely differ depending on entry mode. As due diligence analyses are very complex and time consuming, an important contribution of in-depth screening is to narrow down the number of markets for due diligence analysis.
Table \(2\): In-depth screening calculations
Factors/Criteria Weight Country 1 Country 2 Country 3
Rating Assessment Rating Assessment Rating Assessment
Factor #1
Criteria 1.
Criteria 2.
Criteria 3.
Factor #2
Criteria 1.
Criteria 2.
Criteria 3.
Factor #3 :
Criteria 1.
Criteria 2.
Criteria 3.
TOTAL 100% - - | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/06%3A_Global_Market_Planning/6.06%3A_Selecting_the_Countries_to_Enter.txt |
Learning Objectives
After reading this section, students should be able to …
1. outline the ways in which markets are segmented.
2. explain why marketers use some segmentation bases versus others.
Segmentation is an important strategic tool in international marketing because the main difference between calling a firm international and global is based on the scope and bases of segmentation. An international firm has different marketing strategies for different segments of countries, while a global firm views the whole world as a market, and then segments this whole world based on viable segmentation bases. Generally, there are three approaches to segmentation in international marketing: macro-segmentation, micro-segmentation and the hybrid approach.
Macro-segmentation:
Macro-segmentation or country-based segmentation identifies clusters of countries that demand similar products. Macro-segmentation uses geographic, demographic and socioeconomic variables such as location, GNP per capita, population size or family size to group countries intro market segments, and then selects one or more segments to create marketing strategies for each of the selected segments. This strategy enables a company to centralize its operations and save on production, sales, logistics and support functions. However, macro-segmentation doesn’t take into consideration consumer differences within each country and among the country markets that are clustered together, and fails to acknowledge the existence of segments that go beyond the borders of a particular geographic region. Therefore, the company may be leaving money on the table, because the firm may be losing opportunities to solve the need of consumer segments across these country segments. Macro-segmentation leads to misleading national stereotyping, which results in neglect of within-country heterogeneity. Ignoring similarity in needs across country boundaries results in countries losing economies of scale benefits that can be achieved by serving the needs of a wider population across country (macro-segment) boundaries.
Table \(1\):: Macro-segmentation bases
Bases for segmentation Segment(s) name Segment description
GNP, GNP distribution, size Country segments Individual countries, represent separate segments
GNP. GNP, distribution, size.LDC technology level Country grouping or clusters Clusters with similar demographics, cultural patterns
Import demand, segments Two stage analysis of import data that includes factor scores and cluster analysis
Geographic proximity, economic integration, development levels Regional segments World regions (country groupings with similar characteristics for economies of scale
Sourcing and purchasing of materials. components. technology Survey of 135 firms based in 42 countries. Clustering based on sourcing strategics
Cross-cultural patterns Cultural segments Similar cultural values and attributes across countries
Levels of economic development and trade Pro-trade segments Attitudes toward imported products in developed and developing countries
Product adaptation. country variables Specialty products and market segments Product adaptation from one country segment to anothe
Source: Adapted from Hassan, Craft and Kortam (2003)
Micro-segmentation:
Micro-segmentation or consumer-based segmentation involves grouping consumers based on common characteristics using psychographic and/or behavioristic segmentation variables such as cultural preferences, values and attitudes, lifestyle choices. Table \(2\): “Micro-segmentation bases” and Table 6.7 “Common Ways of Segmenting Buyers” show some of the different types of buyer characteristics used for micro-segmentation. Notice that the characteristics fall into one of four segmentation categories: behavioral, demographic, geographic, or psychographic.
Table \(2\): “Micro-segmentation bases”
Bases for segmentation Segments) name Segment description
Lifestyle factors and product benefits Across countries segmentation Psychographic segmentation and benefits analysis
Core value segment A cross-cultural study of terminal values held by different demographic within country segments
Response* to marketing Strategically equivalent segment* Segmentation tag response to a specific marketing mix
Convenience orientation segment* A cross-cultural measure of convenience orientation is used to cluster segments based on time-saving orientation and comfort-orientation
Affinity segment* Segmentation-based on affinity for advertising
Consumer-product segments Segmentation-based on consumer-product relations
Cultural traits Sensory segments Divide consumers by the patterns of sensory characteristics that they like the most about a number of products
Attitudes Attitude clusters Similar consumer attitudes for specific products across countries
Hybrid factors (values, benefits, demographies, etc.) Global segments Profiling of global elites and teenagers
Two-stage segmentation using environmental and behavioral indicators
Macro-level and micro-level diffusion parameters Diffusion-based segments Latent-structure method to accommodate the bass diffusion model
Source: Adapted from Hassan, Craft and Kortam (2003)
We’ll discuss each of these categories in a moment. For now, you can get a rough idea of what the categories consist of by looking at them in terms of how marketing professionals might answer the following questions:
Behavioral segmentation:What benefits do customers want, and how do they use our product?
Demographic segmentation: How do the ages, races, and ethnic backgrounds of our customers affect what they buy?
Geographic segmentation: Where are our customers located, and how can we reach them? What products do they buy based on their locations?
Psychographic segmentation: What do our customers think about and value? How do they live their lives?
Table \(3\): Common Ways of Segmenting Buyers
By Behavior By Demographics By Geography By Psychographics
• Benefits sought from the product
• How often the product is used (usage rate)
• Usage situation (daily use, holiday use, etc.)
• Buyer’s status and loyalty to product (nonuser, potential user, first-time users, regular user)
• Age/generation
• Income
• Gender
• Family life cycle
• Ethnicity
• Family
size
• Occupation
• Education
• Nationality
• Religion
• Social class
• Region (continent, country, state, neighborhood)
• Size of city or town
• Population density
• Climate
• Activities
• Interests
• Opinions
• Values
• Attitudes
• Lifestyles
Segmenting by Behavior
Behavioral segmentation divides people and organization into groups according to how they behave with or act toward products. Benefits segmentation—segmenting buyers by the benefits they want from products—is very common. Take toothpaste, for example. Which benefit is most important to you when you buy a toothpaste: The toothpaste’s price, ability to whiten your teeth, fight tooth decay, freshen your breath, or something else? Perhaps it’s a combination of two or more benefits. If marketing professionals know what those benefits are, they can then tailor different toothpaste offerings to you (and other people like you).
Another way in which businesses segment buyers is by their usage rates—that is, how often, if ever, they use certain products. Companies are interested in frequent users because they want to reach other people like them. They are also keenly interested in nonusers and how they can be persuaded to use products. The way in which people use products can also be a basis for segmentation.
Segmenting by Demographics
Segmenting buyers by personal characteristics such as age, income, ethnicity and nationality, education, occupation, religion, social class, and family size is called demographic segmentation. Demographics are commonly utilized to segment markets because demographic information is publicly available in databases around the world.
Age
At this point in your life, you are probably more likely to buy a car than a funeral plot. Marketing professionals know this. That’s why they try to segment consumers by their ages. You’re probably familiar with some of the age groups most commonly segmented (see Table \(4\): “U.S. Generations and Characteristics”) in the United States. Into which category do you fall?
Table \(4\): U.S. Generations and Characteristics
Characteristics
Seniors “The Silent Generation,” “Matures,”
“Veterans,” and “Traditionalists”
1945 and
prior
• Experienced very limited credit growing up
• Tend to live within their means
• Spend more on health care than any other age group
• Internet usage rates increasing faster than any other group
Baby
Boomers
1946–1964 • Second-largest generation in the United States
• Grew up in prosperous times before the widespread use of credit
• Account for 50 percent of U.S. consumer spending
• Willing to use new technologies as they see fit
Generation
X
1965–1979 • Comfortable but cautious about borrowing
• Buying habits characterized by their life stages
• Embrace technology and multitasking
Generation
Y
“Millennials,” “Echo Boomers,” includes
“Tweens” (preteens)
1980–2000 • Largest U.S. generation
• Grew up with credit cards
• Adept at multitasking; technology use is innate
• Ignore irrelevant media
Note: Not all demographers agree on the cutoff dates between the generations.
Today’s college-age students (Generation Y) compose the largest generation. The baby boomer generation is the second largest, and over the course of the last thirty years or so, has been a very attractive market for sellers. Retro brands—old brands or products that companies “bring back” for a period of time—were aimed at baby boomers during the recent economic downturn. Pepsi Throwback and Mountain Dew Throwback, which are made with cane sugar—like they were “back in the good old days”—instead of corn syrup, are examples (Schlacter, 2009). Marketing professionals believe they appealed to baby boomers because they reminded them of better times—times when they didn’t have to worry about being laid off, about losing their homes, or about their retirement funds and pensions drying up.
So which group or groups should your firm target? Although it’s hard to be all things to all people, many companies try to broaden their customer bases by appealing to multiple generations so they don’t lose market share when demographics change. Several companies have introduced lower-cost brands targeting Generation Xers, who have less spending power than boomers. For example, kitchenware and home-furnishings company Williams- Sonoma opened the Elm Street chain, a less-pricey version of the Pottery Barn franchise. The Starwood hotel chain’s W hotels, which feature contemporary designs and hip bars, are aimed at Generation Xers (Miller, 2009).
The video game market is very proud of the fact that along with Generation X and Generation Y, many older Americans still play video games. (You probably know some baby boomers who own a Nintendo Wii.) Products and services in the spa market used to be aimed squarely at adults, but not anymore. Parents are now paying for their tweens to get facials, pedicures, and other pampering in numbers no one in years past could have imagined.
As early as the 1970s, U.S. automakers found themselves in trouble because of changing demographic trends. Many of the companies’ buyers were older Americans inclined to “buy American.” These people hadn’t forgotten that Japan bombed Pearl Harbor during World War II and weren’t about to buy Japanese vehicles, but younger Americans were. Plus, Japanese cars had developed a better reputation. Despite the challenges U.S. automakers face today, they have taken great pains to cater to the “younger” generation—today’s baby boomers who don’t think of themselves as being old. If you are a car buff, you perhaps have noticed that the once-stodgy Cadillac now has a sportier look and stiffer suspension. Likewise, the Chrysler 300 looks more like a muscle car than the old Chrysler Fifth Avenue your great-grandpa might have driven.
Automakers have begun reaching out to Generations X and Y, too. General Motors (GM) has sought to revamp the century-old company by hiring a new younger group of managers—managers who understand how Generation X and Y consumers are wired and what they want. “If you’re going to appeal to my daughter, you’re going to have to be in the digital world,” explained one GM vice president (Cox, 2009).
Income
Tweens might appear to be a very attractive market when you consider they will be buying products for years to come. But would you change your mind if you knew that baby boomers account for 50 percent of all consumer spending in the United States? Americans over sixty-five now control nearly three-quarters of the net worth of U.S. households; this group spends \$200 billion a year on major “discretionary” (optional) purchases such as luxury cars, alcohol, vacations, and financial products (Reisenwitz, 2007).
Income is used as a segmentation variable because it indicates a group’s buying power and may partially reflect their education levels, occupation, and social classes. Higher education levels usually result in higher paying jobs and greater social status. The makers of upscale products such as Rolexes and Lamborghinis aim their products at high-income groups. However, a growing number of firms today are aiming their products at lower-income consumers. The fastest-growing product in the financial services sector is prepaid debit cards, most of which are being bought and used by people who don’t have bank accounts. Firms are finding that this group is a large, untapped pool of customers who tend to be more brand loyal than most. If you capture enough of them, you can earn a profit (von Hoffman, 2006). Based on the targeted market, businesses can determine the location and type of stores where they want to sell their products.
Gender
Gender is another way to segment consumers. Men and women have different needs and also shop differently. Consequently, the two groups are often, but not always, segmented and targeted differently. Marketing professionals don’t stop there, though. For example, because women make many of the purchases for their households, market researchers sometimes try to further divide them into subsegments. (Men are also often subsegmented.) For women, those segments might include stay-at-home housewives, plan-to-work housewives, just-a-job working women, and career-oriented working women. Research has found that women who are solely homemakers tend to spend more money, perhaps because they have more time.
Family Life Cycle
Family life cycle refers to the stages families go through over time and how it affects people’s buying behavior. For example, if you have no children, your demand for pediatric services (medical care for children) is likely to be slim to none, but if you have children, your demand might be very high because children frequently get sick. You may be part of the target market not only for pediatric services but also for a host of other products, such as diapers, daycare, children’s clothing, entertainment services, and educational products. A secondary segment of interested consumers might be grandparents who are likely to spend less on day-to-day childcare items but more on special-occasion gifts for children. Many markets are segmented based on the special events in people’s lives. Think about brides (and want-to-be brides) and all the products targeted at them, including Web sites and television shows such as Say Yes to the Dress, My Fair Wedding, Platinum Weddings, and Bridezillas.
Resorts also segment vacationers depending on where they are in their family life cycles. When you think of family vacations, you probably think of Disney resorts. Some vacation properties, such as Sandals, exclude children from some of their resorts. Perhaps they do so because some studies show that the market segment with greatest financial potential is married couples without children (Hill, et. al., 1990).
Keep in mind that although you might be able to isolate a segment in the marketplace, including one based on family life cycle, you can’t make assumptions about what the people in it will want. Just like people’s demographics change, so do their tastes. For example, over the past few decades U.S. families have been getting smaller. Households with a single occupant are more commonplace than ever, but until recently, that hasn’t stopped people from demanding bigger cars (and more of them) as well as larger houses, or what some people jokingly refer to as “McMansions.”
The trends toward larger cars and larger houses appear to be reversing. High energy costs, the credit crunch, and concern for the environment are leading people to demand smaller houses. To attract people such as these, D. R. Horton, the nation’s leading homebuilder, and other construction firms are now building smaller homes.
Ethnicity
People’s ethnic backgrounds have a big impact on what they buy. If you’ve visited a grocery store that caters to a different ethnic group than your own, you were probably surprised to see the types of products sold there. It’s no secret that the United States is becoming—and will continue to become—more diverse. Hispanic Americans are the largest and the fastest-growing minority in the United States. Companies are going to great lengths to court this once overlooked group. In California, the health care provider Kaiser Permanente runs television ads letting members of this segment know that they can request Spanish-speaking physicians and that Spanish-speaking nurses, telephone operators, and translators are available at all of its clinics (Berkowitz, 2006).
As you can guess, even within various ethnic groups there are many differences in terms of the goods and services buyers choose. Consequently, painting each group with a broad brush would leave you with an incomplete picture of your buyers. For example, although the common ancestral language among the Hispanic segment is Spanish, Hispanics trace their lineages to different countries. Nearly 70 percent of Hispanics in the United States trace their lineage to Mexico; others trace theirs to Central America, South America, and the Caribbean.
Segmenting by Geography
Suppose your great new product or service idea involves opening a local store. Before you open the store, you will probably want to do some research to determine which geographical areas have the best potential. For instance, if your business is a high-end restaurant, should it be located near the local college or country club? If you sell ski equipment, you probably will want to locate your shop somewhere in the vicinity of a mountain range where there is skiing. You might see a snowboard shop in the same area but probably not a surfboard shop. By contrast, a surfboard shop is likely to be located along the coast, but you probably would not find a snowboard shop on the beach.
Geographic segmentation divides the market into areas based on location and explains why the checkout clerks at stores sometimes ask for your zip code. It’s also why businesses print codes on coupons that correspond to zip codes. When the coupons are redeemed, the store can find out where its customers are located—or not located. Geocoding is a process that takes data such as this and plots it on a map. Geocoding can help businesses see where prospective customers might be clustered and target them with various ad campaigns, including direct mail. One of the most popular geocoding software programs is PRIZM NE, which is produced by a company called Claritas. PRIZM NE uses zip codes and demographic information to classify the American population into segments. The idea behind PRIZM is that “you are where you live.” Combining both demographic and geographic information is referred to as geodemographics or neighborhood geography. The idea is that housing areas in different zip codes typically attract certain types of buyers with certain income levels.
To see how geodemographics works, visit the following page on Claritas’ Web site: http://www.claritas.com/MyBestSegments/Default.jsp?ID=20.
Type in your zip code, and you will see customer profiles of the types of buyers who live in your area. Table \(5\): “An Example of Geodemographic Segmentation for 76137 (Fort Worth, TX)” shows the profiles of buyers who can be found the zip code 76137—the “Brite Lites, Li’l City” bunch, and “Home Sweet Home” set. Click on the profiles on the Claritas site to see which one most resembles you.
Table \(5\): An Example of Geodemographic Segmentation for 76137 (Fort Worth, TX)
Number Profile Name
12 Brite Lites, Li’l City
19 Home Sweet Home
24 Up-and-Comers
13 Upward Bound
34 White Picket Fences
The tourism bureau for the state of Michigan was able to identify and target different customer profiles using PRIZM. Michigan’s biggest travel segment are Chicagoans in certain zip codes consisting of upper-middle-class households with children—or the “kids in cul-de-sacs” group, as Claritas puts it. The bureau was also able to identify segments significantly different from the Chicago segment, including blue-collar adults in the Cleveland area who vacation without their children. The organization then created significantly different marketing campaigns to appeal to each group.
In addition to figuring out where to locate stores and advertise to customers in that area, geographic segmentation helps firms tailor their products. Chances are you won’t be able to find the same heavy winter coat you see at a Walmart in Montana at a Walmart in Florida because of the climate differences between the two places. Market researchers also look at migration patterns to evaluate opportunities. TexMex restaurants are more commonly found in the southwestern United States. However, northern states are now seeing more of them as more people of Hispanic descent move northward.
Segmenting by Psychographics
If your offering fulfills the needs of a specific demographic group, then the demographic can be an important basis for identifying groups of consumers interested in your product. What if your product crosses several market segments? For example, the group of potential consumers for cereal could be “almost” everyone although groups of people may have different needs with regard to their cereal. Some consumers might be interested in the fiber, some consumers (especially children) may be interested in the prize that comes in the box, other consumers may be interested in the added vitamins, and still other consumers may be interested in the type of grains. Associating these specific needs with consumers in a particular demographic group could be difficult. Marketing professionals want to know why consumers behave the way they do, what is of high priority to them, or how they rank the importance of specific buying criteria. Think about some of your friends who seem a lot like you. Have you ever gone to their homes and been shocked by their lifestyles and how vastly different they are from yours? Why are their families so much different from yours?
Psychographic segmentation can help fill in some of the blanks. Psychographic information is frequently gathered via extensive surveys that ask people about their activities, interests, opinion, attitudes, values, and lifestyles. One of the most well-known psychographic surveys is VALS (which originally stood for “Values, Attitudes, and Lifestyles”) and was developed by a company called SRI International in the late 1980s. SRI asked thousands of Americans the extent to which they agreed or disagreed with questions similar to the following: “My idea of fun at a national park would be to stay at an expensive lodge and dress up for dinner” and “I could stand to skin a dead animal” (Donnelly, 2002).
Hybrid Segmentation
Hybrid or Universal segmentation looks for similarities across world markets. This strategy solves the disadvantages of using macro- and micro-segmentation bases to segment international markets, as they tend to ignore similarities and highlight only the differences. Certain segments identified in a micro-segmentation strategy may have the same characteristics present on a global scale. One such segment is the Global Teen segment – young people between the ages of 12 and 19. It is likely that a group of teenagers randomly chosen from different parts of the world share many of the same tastes. Another such global segment is the Global Elite segment, comprising affluent consumers who have the money to spend on prestigious products with an image of exclusivity. The global elite segment can be associated with older individuals who have accumulated wealth over the course of a long career, including movie stars, musicians, athletes, and people who have achieved financial success at a relatively young age.
Hybrid segmentation involves looking for similarities across micro–segments identified in the countries selected in the final step of the CAA procedure. Under this process, country borders are honorary, as the segmentation process considers the countries selected in the final step of the CAA procedure as one market and searches for similar segments across these countries.
Footnotes
(1) “Generation Y Lacking Savings,” Fort Worth Star-Telegram, September 13, 2009, 2D.
(2) “Telecommunications Marketing Opportunities to Ethnic Groups: Segmenting Consumer Markets by Ethnicity, Age, Income and Household Buying Patterns, 1998–2003,” The Insight Research Corporation, 2003, http://www.insight-corp.com/reports/ethnic.asp (accessed December 2, 2009).
(3) “Bluetooth Proximity Marketing,” April 24, 2007, http://bluetomorrow.com/bluetooth-ar...marketing.html (accessed December 2, 2009).
(4) “U.S. Framework and VALS™ Type,” Strategic Business Insights, http://www.strategicbusinessinsights.../ustypes.shtml (accessed December 2, 2009).
Source
6.6 Global Market Segmentation is adapted from the chapter ‘Chapter 5: Market Segmenting, Targeting, and Positioning’ from the textbook ‘Principles of Marketing,’ authored by University of Minnesota Libraries Publishing edition, 2015 – this book was adapted from a work originally produced in 2010 by a publisher who has requested that it not receive attribution.
The following changes were made to the most recent edition: Created new title for Figure 6.3: Market segmentation; Created new title for Figure 6.4: Multiple uses; Created new title for Figure 6.5: Segmentation variables; Created new title for Figure 6.6: Marital-status as segmentation; Created new title for Figure 6.7: Family life cycle segmentation; Created new title for Figure 6.8: Proximity marketing; Added learning objectives. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/06%3A_Global_Market_Planning/6.07%3A_Global_Market_Segmentation.txt |
Learning Objectives
After reading this section, students should be able to …
1. list the demographic variables to consider for global marketing
2. identify the problems in demographic profiling in global markets
Whether marketing to domestic or international markets, demographic information can provide important insights about a target market and how to address consumer needs. As discussed during this our discussion of consumer behavior, demographics refer to statistical information about the characteristics of a population.
Marketers typically combine several variables to create a demographic profile of a target market. A demographic profile (often shortened to a “demographic”) is a term used in marketing and broadcasting to describe a demographic grouping or a market segment. Common demographic variables to consider for global and domestic marketing purposes include the following:
• Age: Age bands, such as 18–24, 25–34, etc., are great predictors of interest in some types of products. For example, few teenagers wish to purchase denture cream.
• Social class: Social-class bands such as wealthy, middle, and lower classes. The rich, for instance, may want different products than middle and lower classes, and may be willing to pay more.
• Gender: Males and females have different physical attributes that require different hygiene and clothing products. They also tend to have distinctive male/female mindsets and roles in the family and household decision making.
• Religious affiliations: Religion is linked to individual values as well as holiday celebrations, often tied to consumer preferences and spending patterns.
• Income brackets: Indicating level of wealth, disposable income, and quality of life.
• Education: Level of education is often tied to consumer preferences, as well as income.
• Geography: Area of residence, urban vs. rural, and population density can all be important inputs into marketing strategy and decisions about where and how to target advertising and other elements of the promotion mix.
Demographic research may include a variety of other characteristics used to separate a country’s population into groups that fit a company’s target customer profile. A demographic profile also provides enough information about the typical member of this group to create a mental picture of this hypothetical aggregate. For example, a marketer might speak of the single, female, middle-class, aged 18–24, college-educated demographic.
Researchers examining demographics typically have two objectives in mind: first, to segment the market by determining which subgroups exist in the overall population; and second, to create a clear and complete picture of the characteristics displayed by typical members of each segment. Once these profiles are constructed, marketers can use them to develop the targeting strategy and accompanying marketing strategy and marketing plan.
With demographic profiles about target segments in hand, marketers evaluate the marketing mix. They make recommendations about whether to change, decrease, or increase the goods or services offered. Based on demographic data, marketers may adjust product features, distribution strategy, or other factors in order to reach a market segment that has the most potential.
A demographic profile can be very useful in determining the promotional mix and how to achieve maximum results. Advertising is usually part of the promotional mix, especially when businesses are still in the early stages of entering a global market and launching products that are new to that market. Advertisers want to get the most results for their money, and so in global markets as in domestic markets, careful media research is conducted to match the demographic profile of the target market to the demographic profile of the advertising medium.
Cautions About Demographic Profiling in Global Markets
Demographic profiling is essentially an exercise in making generalizations about groups of people. As with all such generalizations, many individuals within these groups will not conform to the profile. Demographic information is aggregate and offers probabilistic data about groups—not specific individuals. Critics of demographic profiling argue that such broad-brush generalizations can only offer limited insight.
Marketers must also be careful to avoid interpreting demographic information using the the mindset of their own “home” cultures. For example, the generalizations that apply to “tweens” (9–12-year-olds) in the U.S. may not apply at all to children in this same age range in other geographies. Similarly, assumptions about how social class affects consumer preferences may be very different in a socially mobile society versus one with very rigid separation between groups from different social classes. Marketing research should seek to understand a complete picture of how demographic characteristics tend to influence consumer behavior in a given market, rather than simply applying stereotypes from elsewhere.
Source
The above content was adapted from textbook content provided by: Lumen Learning. License: CC BY-SA: Attribution-ShareAlike
CC LICENSED CONTENT, SHARED PREVIOUSLY
The Global Marketing Environment: Demographic Factors. Provided by: Lumen Learning. Located at: https://courses.candelalearning.com/...aphic-factors/. License: CC BY-SA: Attribution-ShareAlike | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/06%3A_Global_Market_Planning/6.08%3A_Using_Demographics_to_Guide_Global_Marketing_Strategy.txt |
Learning Objectives
After reading this section, students should be able to …
1. explain the principles behind target market selection
2. list the options available for target selection in global markets
Few companies can afford to enter all markets open to them. Even the world’s largest companies such as General Electric or Nestlé must exercise strategic discipline in choosing the markets they serve. They must also decide when to enter them and weigh the relative advantages of a direct or indirect presence in different regions of the world. Small and midsized companies are often constrained to an indirect presence; for them, the key to gaining a global competitive advantage is often creating a worldwide resource network through alliances with suppliers, customers, and, sometimes, competitors. What is a good strategy for one company, however, might have little chance of succeeding for another.
The track record shows that picking the most attractive foreign markets, determining the best time to enter them, and selecting the right partners and level of investment has proven difficult for many companies, especially when it involves large emerging markets such as China. For example, it is now generally recognized that Western carmakers entered China far too early and overinvested, believing a “first-mover advantage” would produce superior returns. Reality was very different. Most companies lost large amounts of money, had trouble working with local partners, and saw their technological advantage erode due to “leakage.” None achieved the sales volume needed to justify their investment.
Even highly successful global companies often first sustain substantial losses on their overseas ventures, and occasionally have to trim back their foreign operations or even abandon entire countries or regions in the face of ill-timed strategic moves or fast-changing competitive circumstances. Not all of Wal-Mart’s global moves have been successful, for example—a continuing source of frustration to investors. In 1999, the company spent \$10.8 billion to buy British grocery chain Asda. Not only was Asda healthy and profitable, but it was already positioned as “Wal-Mart lite.” Today, Asda is lagging well behind its number-one rival, Tesco. Even though Wal-Mart’s UK operations are profitable, sales growth has been down in recent years, and Asda has missed profit targets for several quarters running and is in danger of slipping further in the UK market.
This result comes on top of Wal-Mart’s costly exit from the German market. In 2005, it sold its 85 stores there to rival Metro at a loss of \$1 billion. Eight years after buying into the highly competitive German market, Wal-Mart executives, accustomed to using Wal-Mart’s massive market muscle to squeeze suppliers, admitted they had been unable to attain the economies of scale it needed in Germany to beat rivals’ prices, prompting an early and expensive exit.
What makes global market selection and entry so difficult? Research shows there is a pervasive the-grass-is-always-greener effect that infects global strategic decision making in many, especially globally inexperienced, companies and causes them to overestimate the attractiveness of foreign markets. Ghemawat (2001). “Distance,” broadly defined, unless well-understood and compensated for, can be a major impediment to global success: cultural differences can lead companies to overestimate the appeal of their products or the strength of their brands; administrative differences can slow expansion plans, reduce the ability to attract the right talent, and increase the cost of doing business; geographic distance impacts the effectiveness of communication and coordination; and economic distance directly influences revenues and costs.
A related issue is that developing a global presence takes time and requires substantial resources. Ideally, the pace of international expansion is dictated by customer demand. Sometimes it is necessary, however, to expand ahead of direct opportunity in order to secure a long-term competitive advantage. But as many companies that entered China in anticipation of its membership in the World Trade Organization have learned, early commitment to even the most promising long-term market makes earning a satisfactory return on invested capital difficult. As a result, an increasing number of firms, particularly smaller and midsized ones, favor global expansion strategies that minimize direct investment. Strategic alliances have made vertical or horizontal integration less important to profitability and shareholder value in many industries. Alliances boost contribution to fixed cost while expanding a company’s global reach. At the same time, they can be powerful windows on technology and greatly expand opportunities to create the core competencies needed to effectively compete on a worldwide basis.
Finally, a complicating factor is that a global evaluation of market opportunities requires a multidimensional perspective. In many industries, we can distinguish between “must” markets—markets in which a company must compete in order to realize its global ambitions—and “nice-to-be-in” markets—markets in which participation is desirable but not critical. “Must” markets include those that are critical from a volume perspective, markets that define technological leadership, and markets in which key competitive battles are played out. In the cell phone industry, for example, Motorola looks to Europe as a primary competitive battleground, but it derives much of its technology from Japan and sales volume from the United States.
Source
The above content was adapted from “Target Market Selection”, section 5.1 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/06%3A_Global_Market_Planning/6.09%3A_Target_Market_Selection.txt |
Learning Objectives
After reading this section, students should be able to …
1. identify the options for positioning in global markets
2. effectively approach the challenges in global posituioning
Johnson & Johnson (J&J) will not sacrifice premium pricing for its well-known brands. It believes that its popular Band-Aid adhesive bandages are superior to competitors’ products, and a premium price is a way to signal that. But even in this dimension of its marketing strategy, J&J must allow for some improvisation as it expands around the world and pushes deeper into less-developed countries. Specifically, the company accepts lower margins in a developing market and sometimes delivers a smaller quantity of a product to make it more affordable. For instance, it might sell a four-pack of Band-Aids instead of the larger box it markets in the developed world or a sample-sized bottle of baby shampoo instead of a full-sized one.
Carefully adhering to a particular positioning is both aggregation and adaptation; this creates uniformity in different world markets, but it also serves to define target segments as the company enters new countries or regions. Consider the decision by Diageo, the British beer-and-spirits company, to stick to premium pricing wherever it does business, even when it enters a new market. By projecting a premium positioning for brands such as Johnnie Walker Black, Smirnoff vodka, Captain Morgan rum, Tanqueray gin, and Guinness stout, and foregoing price cutting to grow volume, it identifies loyal consumers who will pay for its well-known products. Rather than sell its products’ functional benefits, Diageo successfully markets its drinks as either sophisticated, as it does with Tanqueray, or cool, as it does with Captain Morgan in its recent “Got a Little Captain in You?” ad campaign, Brand managers’ high-wire act (2007, October 31).
Mini Case: Global Positioning of Master Card, http://www.leadingglobalbrands.com/
Back in 1997, the MasterCard “brand” did not stand for any one thing. The parent company—MasterCard International—had run through five different advertising campaigns in 10 years and was losing market share at home and abroad. Fixing the brand was a key element of the turnaround. Working with McCann-Erikson, the company developed the highly successful “priceless” campaign. The positioning created by “priceless” allowed MasterCard to integrate all its other campaigns and marketing practices within the United States, and this became a marketing platform that formed the basis for many globalization decisions.
Up until that time, every country used a different agency, a different campaign, and a different strategy. The success of “priceless” as a platform in the United States helped the company persuade other countries to adopt one, single approach, which, over time, produced a consistent global positioning. The “priceless” campaign now appears in more than 100 countries and more than 50 languages and informs all brand communications.
Starting with a locally developed positioning and then successfully expanding it globally is one way to approach the global branding and positioning challenge. More typically, companies start by identifying a unique consumer insight that is globally applicable in order to create a global positioning platform. No matter which route is selected, successful global branding and positioning requires (a) identifying a globally “robust” positioning platform—MasterCard’s new positioning was readily accepted across all markets because of the quality of the insight and its instant recognition across cultural boundaries—and (b) clarity about roles and responsibilities for decision making locally and globally. There was a shared understanding of how the primary customer insight should be used at every stage in the process and which aspects of the branding platform were nonnegotiable; expectations for performance were clearly defined and communicated on a global basis; and a strategic partnership with a single advertising agency allowed for consistent, seamless execution around the world.
By providing a single, unifying consumer insight that “defines” the brand’s positioning, MasterCard has created economies of scale and scope and, hence, benefited from aggregation principles. The company uses adaptation and arbitrage strategies in its approach to implementation. It empowers local teams by inviting them to create content for their own markets within a proven, globally robust positioning framework. Additional, ongoing research generates insights that allow local marketers to create a campaign that they truly feel has local resonance while at the same time maintaining the core brand positioning.
Source
The above content was adapted from “Global Branding Versus Global Positioning”, section 7.1 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/06%3A_Global_Market_Planning/6.10%3A_Global_Positioning.txt |
Learning Objectives
After reading this section, students should be able to …
1. explain why positioning is an important element when it comes to targeting consumers.
2. describe how a product can be positioned and mapped.
3. explain what repositioning is designed is to do.
Why should buyers purchase your offering versus another? If your product faces competition, you will need to think about how to “position” it in the marketplace relative to competing products. After all you don’t want the product to be just another “face in the crowd” in the minds of consumers. Positioning is how consumers perceive a product relative to the competition. Companies want to have a distinctive image and offering that stands out from the competition in the minds of consumers.
One way to position your product is to plot customer survey data on a perceptual map. A perceptual map is a two-dimensional graph that visually shows where your product stands, or should stand, relative to your competitors, based on criteria important to buyers. The criteria can involve any number of characteristics—price, quality, level of customer service associated with the product, and so on. An example of a perceptual map is shown in Figure 6.1 “An Example of a Perceptual Map”. To avoid head-to-head competition with your competitors, you want to position your product somewhere on the map where your competitors aren’t clustered.
Many companies use taglines in their advertising to try to position their products in the minds of the buyer—where they want them, of course. A tagline is a catchphrase designed to sum up the essence of a product. You perhaps have heard Wendy’s tagline “It’s better than fast food.” The tagline is designed to set Wendy’s apart from restaurants like McDonald’s and Burger King—to plant the idea in consumers’ heads that Wendy’s offerings are less “fast foodish,” given the bad rap fast food gets these days.
Sometimes firms find it advantageous to reposition their products—especially if they want the product to begin appealing to different market segments. Repositioning is an effort to “move” a product to a different place in the minds of consumers. The i-house, a prefab house built by Clayton Homes, a mobile home manufacturer, is an example. According to the magazine Popular Mechanics, the i-house “looks like a house you’d order from IKEA, sounds like something designed by Apple, and consists of amenities—solar panels, tankless water heaters and rainwater collectors—that one would expect to come from an offbeat green company out of California selling to a high-end market” (Schwartz, 2009). A Clayton Homes spokesperson says, “Are we repositioning to go after a new market? I would think we are maintaining our value to our existing market and expanding the market to include other buyers that previously wouldn’t have considered our housing product (1).”
Recently, Porsche unveiled its new line of Panamera vehicles at a Shanghai car show. The car is a global model, but unlike Porsche’s other cars, it’s longer. Why? Because rich car buyers in China prefer to be driven by chauffeurs (Gapper, 2009). How do you think Porsche is trying to reposition itself for the future?
Audio Clip : Interview with Apurva Ghelani
Listen to Ghelani’s advice to students interested in working in his area of marketing.
Key Takeaway
• If a product faces competition, its producer will need to think about how to “position” it in the marketplace relative to competing products.
• Positioning is how consumers view a product relative to the competition.
• A perceptual map is a two-dimensional graph that visually shows where a product stands, or should stand, relative to its competitors, based on criteria important to buyers. Sometimes firms find it advantageous to reposition their products.
• Repositioning is an effort to “move” a product to a different place in the minds of consumers.
Footnotes
(1) “Clayton ‘i-house’ Is Giant Leap from Trailer Park,” Knoxvillebiz.com, May 6, 2009, http://www.knoxnews.com/ news/2009/may/06/clayton-i-house-giant-leap-trailer-park/ (accessed April 13, 2012).
Source
Section 6.9 Basics of Positioning is adpated from the chapter ‘Chapter 5: Market Segmenting, Targeting, and Positioning’ from the textbook ‘Principles of Marketing,’ authored by University of Minnesota Libraries Publishing edition, 2015 – this book was adapted from a work originally produced in 2010 by a publisher who has requested that it not receive attribution.
The following changes were made to the most recent edition: Created new title for Figure 6.1: Mass marketing; Created new title for Figure 6.2: Targeted Marketing; Created new title for Figure 6.3: Market segmentation; Created new title for Figure 6.4: Multiple uses; Created new title for Figure 6.5: Segmentation variables; Created new title for Figure 6.6: Marital-status as segmentation; Created new title for Figure 6.7: Family life cycle segmentation; Created new title for Figure 6.8: Proximity marketing; Added learning objectives. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/06%3A_Global_Market_Planning/6.11%3A_Basics_of_Positioning.txt |
Summary
Companies that wish to move beyond exporting and importing can avail themselves of a wide range of alternative market entry strategies. Each alternative has distinct advantages and disadvantages associated with it; the alternatives can be ranked on a continuum representing increasing levels of investment, commitment, and risk. Licensing can generate revenue flow with little new investment; it can be a good choice for a company that possesses advanced technology, a strong brand image, or valuable intellectual property. Contract manufacturing and franchising are two specialized forms of licensing that are widely used in global marketing.
A higher level of involvement outside the home country may involve foreign direct investment. This can take many forms. Joint ventures offer two or more companies the opportunity to share risk and combine value chain strengths. Companies considering joint ventures must plan carefully and communicate with partners to avoid “divorce.” Foreign direct investment can also be used to establish company operations outside the home country through greenfield investment, acquisition of a minority or majority equity stake in a foreign business, or taking full ownership of an existing business entity through merger or outright acquisition.
Cooperative alliances known as strategic alliances, strategic international alliances, and global strategic partnerships (GSPs) represent an important market entry strategy in the twenty-first century. GSPs are ambitious, reciprocal, cross-border alliances that may involve business partners in a number of different country markets. GSPs are particularly well suited to emerging markets in Central and Eastern Europe, Asia, and Latin America. Western businesspeople should also be aware of two special forms of cooperation found in Asia, namely Japan’s keiretsu and South Korea’s chaebol.
Source
This page is licensed under a Creative Commons Attribution Non-Commercial Share-Alike License (Links to an external site) Links to an external site and contains content from a variety of sources published under a variety of open licenses, including:
• The course note from the ‘Global Marketing’ course published online by Centre for Teaching and Learning (CTL) of Universiti Teknologi Malaysia (UTM). ‘The Economic and Political environment’ is Copyright (c) by Dr. Inda Sukati and made available under a Attribution-Noncommercial-Share Alike 3.0 license.
7.02: International Entry Modes
Learning Objectives
After reading this section, students should be able to …
1. describe the five common international-expansion entry modes.
2. know the advantages and disadvantages of each entry mode.
3. understand the dynamics among the choice of different entry modes.
The Five Common International-Expansion Entry Modes
What is the best way to enter a new market? Should a company first establish an export base or license its products to gain experience in a newly targeted country or region? Or does the potential associated with first-mover status justify a bolder move such as entering an alliance, making an acquisition, or even starting a new subsidiary? Many companies move from exporting to licensing to a higher investment strategy, in effect treating these choices as a learning curve. Each has distinct advantages and disadvantages. In this section, we will explore the traditional international-expansion entry modes. Beyond importing, international expansion is achieved through exporting, licensing arrangements, partnering and strategic alliances, acquisitions, and establishing new, wholly owned subsidiaries, also known as greenfield ventures. These modes of entering international markets and their characteristics are shown in Table \(1\): “International-Expansion Entry Modes”.1 Each mode of market entry has advantages and disadvantages. Firms need to evaluate their options to choose the entry mode that best suits their strategy and goals.
Table \(1\): International-Expansion Entry Modes
Type of Entry Advantages Disadvantages
Exporting Fast entry, low risk Low control, low local knowledge, potential negative environmental impact of transportation
Licensing and Franchising Fast entry, low cost, low risk Less control, licensee may become a competitor, legal and regulatory environment (IP and contract law) must be sound
Partnering and Strategic Alliance Shared costs reduce investment needed, reduced risk, seen as local entity Higher cost than exporting, licensing, or franchising; integration problems between two corporate cultures
Acquisition Fast entry; known, established operations High cost, integration issues with home office
Greenfield Venture (Launch of a new, wholly owned subsidiary) Gain local market knowledge; can be seen as insider who employs locals; maximum control High cost, high risk due to unknowns, slow entry due to setup time
Exporting
Exporting is the marketing and direct sale of domestically produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since it does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses.
While relatively low risk, exporting entails substantial costs and limited control. Exporters typically have little control over the marketing and distribution of their products, face high transportation charges and possible tariffs, and must pay distributors for a variety of services. What is more, exporting does not give a company firsthand experience in staking out a competitive position abroad, and it makes it difficult to customize products and services to local tastes and preferences.
Exporting is a typically the easiest way to enter an international market, and therefore most firms begin their international expansion using this model of entry. Exporting is the sale of products and services in foreign countries that are sourced from the home country. The advantage of this mode of entry is that firms avoid the expense of establishing operations in the new country. Firms must, however, have a way to distribute and market their products in the new country, which they typically do through contractual agreements with a local company or distributor. When exporting, the firm must give thought to labeling, packaging, and pricing the offering appropriately for the market. In terms of marketing and promotion, the firm will need to let potential buyers know of its offerings, be it through advertising, trade shows, or a local sales force.
Amusing Anecdotes
One common factor in exporting is the need to translate something about a product or service into the language of the target country. This requirement may be driven by local regulations or by the company’s wish to market the product or service in a locally friendly fashion. While this may seem to be a simple task, it’s often a source of embarrassment for the company and humor for competitors. David Ricks’s book on international business blunders relates the following anecdote for US companies doing business in the neighboring French-speaking Canadian province of Quebec. A company boasted of lait frais usage, which translates to “used fresh milk,” when it meant to brag of lait frais employé, or “fresh milk used.” The “terrific” pens sold by another company were instead promoted as terrifiantes, or terrifying. In another example, a company intending to say that its appliance could use “any kind of electrical current,” actually stated that the appliance “wore out any kind of liquid.” And imagine how one company felt when its product to “reduce heartburn” was advertised as one that reduced “the warmth of heart”!2
Among the disadvantages of exporting are the costs of transporting goods to the country, which can be high and can have a negative impact on the environment. In addition, some countries impose tariffs on incoming goods, which will impact the firm’s profits. In addition, firms that market and distribute products through a contractual agreement have less control over those operations and, naturally, must pay their distribution partner a fee for those services.
Ethics in Action
Companies are starting to consider the environmental impact of where they locate their manufacturing facilities. For example, Olam International, a cashew producer, originally shipped nuts grown in Africa to Asia for processing. Now, however, Olam has opened processing plants in Tanzania, Mozambique, and Nigeria. These locations are close to where the nuts are grown. The result? Olam has lowered its processing and shipping costs by 25 percent while greatly reducing carbon emissions.3
Likewise, when Walmart enters a new market, it seeks to source produce for its food sections from local farms that are near its warehouses. Walmart has learned that the savings it gets from lower transportation costs and the benefit of being able to restock in smaller quantities more than offset the lower prices it was getting from industrial farms located farther away. This practice is also a win-win for locals, who have the opportunity to sell to Walmart, which can increase their profits and let them grow and hire more people and pay better wages. This, in turn, helps all the businesses in the local community.4
Firms export mostly to countries that are close to their facilities because of the lower transportation costs and the often greater similarity between geographic neighbors. For example, Mexico accounts for 40 percent of the goods exported from Texas.5 The Internet has also made exporting easier. Even small firms can access critical information about foreign markets, examine a target market, research the competition, and create lists of potential customers. Even applying for export and import licenses is becoming easier as more governments use the Internet to facilitate these processes.
Because the cost of exporting is lower than that of the other entry modes, entrepreneurs and small businesses are most likely to use exporting as a way to get their products into markets around the globe. Even with exporting, firms still face the challenges of currency exchange rates. While larger firms have specialists that manage the exchange rates, small businesses rarely have this expertise. One factor that has helped reduce the number of currencies that firms must deal with was the formation of the European Union (EU) and the move to a single currency, the euro, for the first time. As of 2011, seventeen of the twenty-seven EU members use the euro, giving businesses access to 331 million people with that single currency.6
Licensing and Franchising
A company that wants to get into an international market quickly while taking only limited financial and legal risks might consider licensing agreements with foreign companies. An international licensing agreement allows a foreign company (the licensee) to sell the products of a producer (the licensor) or to use its intellectual property (such as patents, trademarks, copyrights) in exchange for royalty fees. Here’s how it works: You own a company in the United States that sells coffee-flavored popcorn. You’re sure that your product would be a big hit in Japan, but you don’t have the resources to set up a factory or sales office in that country. You can’t make the popcorn here and ship it to Japan because it would get stale. So you enter into a licensing agreement with a Japanese company that allows your licensee to manufacture coffee-flavored popcorn using your special process and to sell it in Japan under your brand name. In exchange, the Japanese licensee would pay you a royalty fee.
Licensing essentially permits a company in the target country to use the property of the licensor. Such property is usually intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance as well.
Because little investment on the part of the licensor is required, licensing has the potential to provide a very large return on investment. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost. Thus, licensing reduces cost and involves limited risk. However, it does not mitigate the substantial disadvantages associated with operating from a distance. As a rule, licensing strategies inhibit control and produce only moderate returns.
Another popular way to expand overseas is to sell franchises. Under an international franchise agreement, a company (the franchiser) grants a foreign company (the franchisee) the right to use its brand name and to sell its products or services. The franchisee is responsible for all operations but agrees to operate according to a business model established by the franchiser. In turn, the franchiser usually provides advertising, training, and new-product assistance. Franchising is a natural form of global expansion for companies that operate domestically according to a franchise model, including restaurant chains, such as McDonald’s and Kentucky Fried Chicken, and hotel chains, such as Holiday Inn and Best Western.
Contract Manufacturing and Outsourcing
Because of high domestic labor costs, many U.S. companies manufacture their products in countries where labor costs are lower. This arrangement is called international contract manufacturing or outsourcing. A U.S. company might contract with a local company in a foreign country to manufacture one of its products. It will, however, retain control of product design and development and put its own label on the finished product. Contract manufacturing is quite common in the U.S. apparel business, with most American brands being made in a number of Asian countries, including China, Vietnam, Indonesia, and India.[4]
Thanks to twenty-first-century information technology, nonmanufacturing functions can also be outsourced to nations with lower labor costs. U.S. companies increasingly draw on a vast supply of relatively inexpensive skilled labor to perform various business services, such as software development, accounting, and claims processing. For years, American insurance companies have processed much of their claims-related paperwork in Ireland. With a large, well-educated population with English language skills, India has become a center for software development and customer-call centers for American companies. In the case of India, as you can see in Table \(2\): “Selected Hourly Wages, United States and India” , the attraction is not only a large pool of knowledge workers but also significantly lower wages.
Table \(2\): Selected Hourly Wages, United States and India
Occupation U.S. Wage per Hour (per year) Indian Wage per Hour (per year)
Middle-level manager \$29.40 per hour (\$60,000 per year) \$6.30 per hour (\$13,000 per year)
Information technology specialist \$35.10 per hour (\$72,000 per year) \$7.50 per hour (\$15,000 per year)
Manual worker \$13.00 per hour (\$27,000 per year) \$2.20 per hour (\$5,000 per year)
Source: Data obtained from “Huge Wage Gaps for the Same Work Between Countries – June 2011,” WageIndicator.com, http://www.wageindicator.org/main/Wa...ries-June-2011 (Links to an external site.)Links to an external site.(accessed September 20, 2011).
Partnerships and Strategic Alliances
Another way to enter a new market is through a strategic alliance with a local partner. A strategic alliance involves a contractual agreement between two or more enterprises stipulating that the involved parties will cooperate in a certain way for a certain time to achieve a common purpose. To determine if the alliance approach is suitable for the firm, the firm must decide what value the partner could bring to the venture in terms of both tangible and intangible aspects. The advantages of partnering with a local firm are that the local firm likely understands the local culture, market, and ways of doing business better than an outside firm. Partners are especially valuable if they have a recognized, reputable brand name in the country or have existing relationships with customers that the firm might want to access. For example, Cisco formed a strategic alliance with Fujitsu to develop routers for Japan. In the alliance, Cisco decided to co-brand with the Fujitsu name so that it could leverage Fujitsu’s reputation in Japan for IT equipment and solutions while still retaining the Cisco name to benefit from Cisco’s global reputation for switches and routers.7 Similarly, Xerox launched signed strategic alliances to grow sales in emerging markets such as Central and Eastern Europe, India, and Brazil.8
Strategic alliances and joint ventures have become increasingly popular in recent years. They allow companies to share the risks and resources required to enter international markets. And although returns also may have to be shared, they give a company a degree of flexibility not afforded by going it alone through direct investment.
There are several motivations for companies to consider a partnership as they expand globally, including (a) facilitating market entry, (b) risk and reward sharing, (c) technology sharing, (d) joint product development, and (e) conforming to government regulations. Other benefits include political connections and distribution channel access that may depend on relationships.
Such alliances often are favorable when (a) the partners’ strategic goals converge while their competitive goals diverge; (b) the partners’ size, market power, and resources are small compared to the industry leaders; and (c) partners are able to learn from one another while limiting access to their own proprietary skills.
What if a company wants to do business in a foreign country but lacks the expertise or resources? Or what if the target nation’s government doesn’t allow foreign companies to operate within its borders unless it has a local partner? In these cases, a firm might enter into a strategic alliance with a local company or even with the government itself. A strategic alliance is an agreement between two companies (or a company and a nation) to pool resources in order to achieve business goals that benefit both partners. For example, Viacom (a leading global media company) has a strategic alliance with Beijing Television to produce Chinese-language music and entertainment programming.[5]
An alliance can serve a number of purposes:
• Enhancing marketing efforts
• Building sales and market share
• Improving products
• Reducing production and distribution costs
• Sharing technology
Alliances range in scope from informal cooperative agreements to joint ventures—alliances in which the partners fund a separate entity (perhaps a partnership or a corporation) to manage their joint operation. Magazine publisher Hearst, for example, has joint ventures with companies in several countries. So, young women in Israel can read Cosmo Israel in Hebrew, and Russian women can pick up a Russian-language version of Cosmo that meets their needs. The U.S. edition serves as a starting point to which nationally appropriate material is added in each different nation. This approach allows Hearst to sell the magazine in more than fifty countries.[6]
Strategic alliances are also advantageous for small entrepreneurial firms that may be too small to make the needed investments to enter the new market themselves. In addition, some countries require foreign-owned companies to partner with a local firm if they want to enter the market. For example, in Saudi Arabia, non-Saudi companies looking to do business in the country are required by law to have a Saudi partner. This requirement is common in many Middle Eastern countries. Even without this type of regulation, a local partner often helps foreign firms bridge the differences that otherwise make doing business locally impossible. Walmart, for example, failed several times over nearly a decade to effectively grow its business in Mexico, until it found a strong domestic partner with similar business values.
The disadvantages of partnering, on the other hand, are lack of direct control and the possibility that the partner’s goals differ from the firm’s goals. David Ricks, who has written a book on blunders in international business, describes the case of a US company eager to enter the Indian market: “It quickly negotiated terms and completed arrangements with its local partners. Certain required documents, however, such as the industrial license, foreign collaboration agreements, capital issues permit, import licenses for machinery and equipment, etc., were slow in being issued. Trying to expedite governmental approval of these items, the US firm agreed to accept a lower royalty fee than originally stipulated. Despite all of this extra effort, the project was not greatly expedited, and the lower royalty fee reduced the firm’s profit by approximately half a million dollars over the life of the agreement.”9 Failing to consider the values or reliability of a potential partner can be costly, if not disastrous.
To avoid these missteps, Cisco created one globally integrated team to oversee its alliances in emerging markets. Having a dedicated team allows Cisco to invest in training the managers how to manage the complex relationships involved in alliances. The team follows a consistent model, using and sharing best practices for the benefit of all its alliances.10
Did You Know?
Partnerships in emerging markets can be used for social good as well. For example, pharmaceutical company Novartis crafted multiple partnerships with suppliers and manufacturers to develop, test, and produce antimalaria medicine on a nonprofit basis. The partners included several Chinese suppliers and manufacturing partners as well as a farm in Kenya that grows the medication’s key raw ingredient. To date, the partnership, called the Novartis Malaria Initiative, has saved an estimated 750,000 lives through the delivery of 300 million doses of the medication.11
The key issues to consider in a joint venture are ownership, control, length of agreement, pricing, technology transfer, local firm capabilities and resources, and government intentions. Potential problems include (a) conflict over asymmetric new investments, (b) mistrust over proprietary knowledge, (c) performance ambiguity, that is, how to “split the pie,” (d) lack of parent firm support, (e) cultural clashes, and (f) if, how, and when to terminate the relationship.
Ultimately, most companies will aim at building their own presence through company-owned facilities in important international markets. Acquisitions or greenfield start-ups represent this ultimate commitment. Acquisition is faster, but starting a new, wholly owned subsidiary might be the preferred option if no suitable acquisition candidates can be found.
Acquisitions
An acquisition is a transaction in which a firm gains control of another firm by purchasing its stock, exchanging the stock for its own, or, in the case of a private firm, paying the owners a purchase price. In our increasingly flat world, cross-border acquisitions have risen dramatically. In recent years, cross-border acquisitions have made up over 60 percent of all acquisitions completed worldwide. Acquisitions are appealing because they give the company quick, established access to a new market. However, they are expensive, which in the past had put them out of reach as a strategy for companies in the undeveloped world to pursue. What has changed over the years is the strength of different currencies. The higher interest rates in developing nations has strengthened their currencies relative to the dollar or euro. If the acquiring firm is in a country with a strong currency, the acquisition is comparatively cheaper to make. As Wharton professor Lawrence G. Hrebiniak explains, “Mergers fail because people pay too much of a premium. If your currency is strong, you can get a bargain.”12
When deciding whether to pursue an acquisition strategy, firms examine the laws in the target country. China has many restrictions on foreign ownership, for example, but even a developed-world country like the United States has laws addressing acquisitions. For example, you must be an American citizen to own a TV station in the United States. Likewise, a foreign firm is not allowed to own more than 25 percent of a US airline.13
Acquisition is a good entry strategy to choose when scale is needed, which is particularly the case in certain industries (e.g., wireless telecommunications). Acquisition is also a good strategy when an industry is consolidating. Nonetheless, acquisitions are risky. Many studies have shown that between 40 percent and 60 percent of all acquisitions fail to increase the market value of the acquired company by more than the amount invested.14
Foreign Direct Investment and Subsidiaries
Many of the approaches to global expansion that we’ve discussed so far allow companies to participate in international markets without investing in foreign plants and facilities. As markets expand, however, a firm might decide to enhance its competitive advantage by making a direct investment in operations conducted in another country.
Also known as foreign direct investment (FDI), acquisitions and greenfield start-ups involve the direct ownership of facilities in the target country and, therefore, the transfer of resources including capital, technology, and personnel. Direct ownership provides a high degree of control in the operations and the ability to better know the consumers and competitive environment. However, it requires a high level of resources and a high degree of commitment.
Foreign direct investment refers to the formal establishment of business operations on foreign soil—the building of factories, sales offices, and distribution networks to serve local markets in a nation other than the company’s home country. On the other hand offshoring occurs when the facilities set up in the foreign country replace U.S. manufacturing facilities and are used to produce goods that will be sent back to the United States for sale. Shifting production to low-wage countries is often criticized as it results in the loss of jobs for U.S. workers.[7]
FDI is generally the most expensive commitment that a firm can make to an overseas market, and it’s typically driven by the size and attractiveness of the target market. For example, German and Japanese automakers, such as BMW, Mercedes, Toyota, and Honda, have made serious commitments to the U.S. market: most of the cars and trucks that they build in plants in the South and Midwest are destined for sale in the United States.
A common form of FDI is the foreign subsidiary: an independent company owned by a foreign firm (called the parent). This approach to going international not only gives the parent company full access to local markets but also exempts it from any laws or regulations that may hamper the activities of foreign firms. The parent company has tight control over the operations of a subsidiary, but while senior managers from the parent company often oversee operations, many managers and employees are citizens of the host country. Not surprisingly, most very large firms have foreign subsidiaries. IBM and Coca-Cola, for example, have both had success in the Japanese market through their foreign subsidiaries (IBM-Japan and Coca-Cola–Japan). FDI goes in the other direction, too, and many companies operating in the United States are in fact subsidiaries of foreign firms. Gerber Products, for example, is a subsidiary of the Swiss company Novartis, while Stop & Shop and Giant Food Stores belong to the Dutch company Royal Ahold.
Where does most FDI capital end up? Figure \(1\): “Where FDI Goes” provides an overview of amounts, destinations (developed or developing countries), and trends.
All these strategies have been successful in the arena of global business. But success in international business involves more than merely finding the best way to reach international markets. Doing global business is a complex, risky endeavor. As many companies have learned the hard way, people and organizations don’t do things the same way abroad as they do at home. What differences make global business so tricky? That’s the question that we’ll turn to next.
Wholly Owned Subsidiaries
Firms may want to have a direct operating presence in the foreign country, completely under their control. To achieve this, the company can establish a new, wholly owned subsidiary (i.e., a greenfield venture) from scratch, or it can purchase an existing company in that country. Some companies purchase their resellers or early partners (as Vitrac Egypt did when it bought out the shares that its partner, Vitrac, owned in the equity joint venture). Other companies may purchase a local supplier for direct control of the supply. This is known as vertical integration.
Establishing or purchasing a wholly owned subsidiary requires the highest commitment on the part of the international firm, because the firm must assume all of the risk—financial, currency, economic, and political.
The process of establishing of a new, wholly owned subsidiary is often complex and potentially costly, but it affords the firm maximum control and has the most potential to provide above-average returns. The costs and risks are high given the costs of establishing a new business operation in a new country. The firm may have to acquire the knowledge and expertise of the existing market by hiring either host-country nationals—possibly from competitive firms—or costly consultants. An advantage is that the firm retains control of all its operations.
Did You Know: McDonald’s International
McDonald’s has a plant in Italy that supplies all the buns for McDonald’s restaurants in Italy, Greece, and Malta. International sales has accounted for as much as 60 percent of McDonald’s annual revenue.15
Cautions When Purchasing an Existing Foreign Enterprise
As we’ve seen, some companies opt to purchase an existing company in the foreign country outright as a way to get into a foreign market quickly. When making an acquisition, due diligence is important—not only on the financial side but also on the side of the country’s culture and business practices. The annual disposable income in Russia, for example, exceeds that of all the other BRIC countries (i.e., Brazil, India, and China). For many major companies, Russia is too big and too rich to ignore as a market. However, Russia also has a reputation for corruption and red tape that even its highest-ranking officials admit. In a BusinessWeek article, presidential economic advisor Arkady Dvorkovich (whose office in the Kremlin was once occupied by Soviet leader Leonid Brezhnev), for example, advises, “Investors should choose wisely” which regions of Russia they locate their business in, warning that some areas are more corrupt than others. Corruption makes the world less flat precisely because it undermines the viability of legal vehicles, such as licensing, which otherwise lead to a flatter world.
The culture of corruption is even embedded into some Russian company structures. In the 1990s, laws inadvertently encouraged Russian firms to establish legal headquarters in offshore tax havens, like Cyprus. A tax haven is a country that has very advantageous (low) corporate income taxes.
Businesses registered in these offshore tax havens to avoid certain Russian taxes. Even though companies could obtain a refund on these taxes from the Russian government, “the procedure is so complicated you never actually get a refund,” said Andrey Pozdnyakov, cofounder of Siberian-based Elecard, in the same BusinessWeek article.
This offshore registration, unfortunately, is a danger sign to potential investors like Intel. “We can’t invest in companies that have even a slight shadow,” said Intel’s Moscow-based regional director Dmitry Konash about the complex structure predicament. 16
Did You Know: Business Collaborations in China
Some foreign companies believe that owning their own operations in China is an easier option than having to deal with a Chinese partner. For example, many foreign companies still fear that their Chinese partners will learn too much from them and become competitors. However, in most cases, the Chinese partner knows the local culture—both that of the customers and workers—and is better equipped to deal with Chinese bureaucracy and regulations. In addition, even wholly owned subsidiaries can’t be totally independent of Chinese firms, on whom they might have to rely for raw materials and shipping as well as maintenance of government contracts and distribution channels.
Collaborations offer different kinds of opportunities and challenges than self-handling Chinese operations. For most companies, the local nuances of the Chinese market make some form of collaboration desirable. The companies that opt to self-handle their Chinese operations tend to be very large and/or have a proprietary technology base, such as high-tech or aerospace companies—for example, Boeing or Microsoft. Even then, these companies tend to hire senior Chinese managers and consultants to facilitate their market entry and then help manage their expansion. Nevertheless, navigating the local Chinese bureaucracy is tough, even for the most-experienced companies.
Let’s take a deeper look at one company’s entry path and its wholly owned subsidiary in China. Embraer is the largest aircraft maker in Brazil and one of the largest in the world. Embraer chose to enter China as its first foreign market, using the joint-venture entry mode. In 2003, Embraer and the Aviation Industry Corporation of China jointly started the Harbin Embraer Aircraft Industry. A year later, Harbin Embraer began manufacturing aircraft.
In 2010, Embraer announced the opening of its first subsidiary in China. The subsidiary, called Embraer China Aircraft Technical Services Co. Ltd., will provide logistics and spare-parts sales, as well as consulting services regarding technical issues and flight operations, for Embraer aircraft in China (both for existing aircraft and those on order). Embraer will invest \$18 million into the subsidiary with a goal of strengthening its local customer support, given the steady growth of its business in China.
Guan Dongyuan, president of Embraer China and CEO of the subsidiary, said the establishment of Embraer China Aircraft Technical Services demonstrates the company’s “long-term commitment and confidence in the growing Chinese aviation market.”17
Building Long-Term Relationships
Developing a good relationship with regulators in target countries helps with the long-term entry strategy. Building these relationships may include keeping people in the countries long enough to form good ties, since a deal negotiated with one person may fall apart if that person returns too quickly to headquarters.
Did You Know: Guanxi
One of the most important cultural factors in China is guanxi (pronounced guan shi), which is loosely defined as a connection based on reciprocity. Even when just meeting a new company or potential partner, it’s best to have an introduction from a common business partner, vendor, or supplier—someone the Chinese will respect. China is a relationship-based society. Relationships extend well beyond the personal side and can drive business as well. With guanxi, a person invests with relationships much like one would invest with capital. In a sense, it’s akin to the Western phrase “You owe me one.”
Guanxi can potentially be beneficial or harmful. At its best, it can help foster strong, harmonious relationships with corporate and government contacts. At its worst, it can encourage bribery and corruption. Whatever the case, companies without guanxi won’t accomplish much in the Chinese market. Many companies address this need by entering into the Chinese market in a collaborative arrangement with a local Chinese company. This entry option has also been a useful way to circumvent regulations governing bribery and corruption, but it can raise ethical questions, particularly for American and Western companies that have a different cultural perspective on gift giving and bribery.
Mini Case: Coca-Cola and Illy Caffé18
In March 2008, the Coca-Cola company and Illy Caffé Spa finalized a joint venture and launched a premium ready-to-drink espresso-based coffee beverage. The joint venture, Ilko Coffee International, was created to bring three ready-to-drink coffee products—Caffè, an Italian chilled espresso-based coffee; Cappuccino, an intense espresso, blended with milk and dark cacao; and Latte Macchiato, a smooth espresso, swirled with milk—to consumers in 10 European countries. The products will be available in stylish, premium cans (150 ml for Caffè and 200 ml for the milk variants). All three offerings will be available in 10 European Coca-Cola Hellenic markets including Austria, Croatia, Greece, and Ukraine. Additional countries in Europe, Asia, North America, Eurasia, and the Pacific were slated for expansion into 2009.
The Coca-Cola Company is the world’s largest beverage company. Along with Coca-Cola, recognized as the world’s most valuable brand, the company markets four of the world’s top five nonalcoholic sparkling brands, including Diet Coke, Fanta, Sprite, and a wide range of other beverages, including diet and light beverages, waters, juices and juice drinks, teas, coffees, and energy and sports drinks. Through the world’s largest beverage distribution system, consumers in more than 200 countries enjoy the company’s beverages at a rate of 1.5 billion servings each day.
Based in Trieste, Italy, Illy Caffé produces and markets a unique blend of espresso coffee under a single brand leader in quality. Over 6 million cups of Illy espresso coffee are enjoyed every day. Illy is sold in over 140 countries around the world and is available in more than 50,000 of the best restaurants and coffee bars. Illy buys green coffee directly from the growers of the highest quality Arabica through partnerships based on the mutual creation of value. The Trieste-based company fosters long-term collaborations with the world’s best coffee growers—in Brazil, Central America, India, and Africa—providing know-how and technology and offering above-market prices.
In summary, when deciding which mode of entry to choose, companies should ask themselves two key questions:
1. How much of our resources are we willing to commit? The fewer the resources (i.e., money, time, and expertise) the company wants (or can afford) to devote, the better it is for the company to enter the foreign market on a contractual basis—through licensing, franchising, management contracts, or turnkey projects.
2. How much control do we wish to retain? The more control a company wants, the better off it is establishing or buying a wholly owned subsidiary or, at least, entering via a joint venture with carefully delineated responsibilities and accountabilities between the partner companies.
Regardless of which entry strategy a company chooses, several factors are always important.
• Cultural and linguistic differences. These affect all relationships and interactions inside the company, with customers, and with the government. Understanding the local business culture is critical to success.
• Quality and training of local contacts and/or employees. Evaluating skill sets and then determining if the local staff is qualified is a key factor for success.
• Political and economic issues. Policy can change frequently, and companies need to determine what level of investment they’re willing to make, what’s required to make this investment, and how much of their earnings they can repatriate.
• Experience of the partner company. Assessing the experience of the partner company in the market—with the product and in dealing with foreign companies—is essential in selecting the right local partner.
Companies seeking to enter a foreign market need to do the following:
• Research the foreign market thoroughly and learn about the country and its culture.
• Understand the unique business and regulatory relationships that impact their industry.
• Use the Internet to identify and communicate with appropriate foreign trade corporations in the country or with their own government’s embassy in that country. Each embassy has its own trade and commercial desk. For example, the US Embassy has a foreign commercial desk with officers who assist US companies on how best to enter the local market. These resources are best for smaller companies. Larger companies, with more money and resources, usually hire top consultants to do this for them. They’re also able to have a dedicated team assigned to the foreign country that can travel the country frequently for the later-stage entry strategies that involve investment.
Once a company has decided to enter the foreign market, it needs to spend some time learning about the local business culture and how to operate within it.
Entrepreneurship and Strategy
The Chinese have a “Why not me?” attitude. As Edward Tse, author of The China Strategy: Harnessing the Power of the World’s Fastest-Growing Economy, explains, this means that “in all corners of China, there will be people asking, ‘If Li Ka-shing [the chairman of Cheung Kong Holdings] can be so wealthy, if Bill Gates or Warren Buffett can be so successful, why not me?’ This cuts across China’s demographic profiles: from people in big cities to people in smaller cities or rural areas, from older to younger people. There is a huge dynamism among them.”19 Tse sees entrepreneurial China as “entrepreneurial people at the grassroots level who are very independent-minded. They’re very quick on their feet. They’re prone to fearless experimentation: imitating other companies here and there, trying new ideas, and then, if they fail, rapidly adapting and moving on.” As a result, he sees China becoming not only a very large consumer market but also a strong innovator. Therefore, he advises US firms to enter China sooner rather than later so that they can take advantage of the opportunities there. Tse says, “Companies are coming to realize that they need to integrate more and more of their value chains into China and India. They need to be close to these markets, because of their size. They need the ability to understand the needs of their customers in emerging markets, and turn them into product and service offerings quickly.”20
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Learning Objectives
After reading this section, students should be able to …
1. explain why companies export products
2. state the benefits of exporting
3. state the risks of exporting
Exporting is defined as the sale of products and services in foreign countries that are sourced or made in the home country. Importing is the flipside of exporting. Importing refers to buying goods and services from foreign sources and bringing them back into the home country. Importing is also known as global sourcing.
An Entrepreneur’s Import Success Story
Selena Cuffe started her wine import company, Heritage Link Brands, in 2005. Importing wine isn’t new, but Cuffe did it with a twist: she focused on importing wine produced by black South Africans. Cuffe got the idea after attending a wine festival in Soweto, where she saw more than five hundred wines from eighty-six producers showcased. Cuffe did some market research and learned of the \$3 billion wine industry in Africa. She also saw a gap in the existing market related to wine produced by indigenous African vintners and decided to fill it. She started her company with \$70,000, financed through her savings and credit cards. In the first year, sales were only \$100,000 but then jumped to \$1 million in the second year, when Cuffe sold to more than one thousand restaurants, retailers, and grocery stores. Even better, American Airlines began carrying Cuffe’s imported wines on flights, thus providing a steady flow of business amid the more uncertain restaurant market. Cuffe has attributed her success to passion as well as to patience for meeting the multiple regulations required when running an import business.
Exporting is an effective entry strategy for companies that are just beginning to enter a new foreign market. It’s a low-cost, low-risk option compared to the other strategies. These same reasons make exporting a good strategy for small and midsize companies that can’t or won’t make significant financial investment in the international market.
Companies can sell into a foreign country either through a local distributor or through their own salespeople. Many government export-trade offices can help a company find a local distributor. Increasingly, the Internet has provided a more efficient way for foreign companies to find local distributors and enter into commercial transactions.
Distributors are export intermediaries who represent the company in the foreign market. Often, distributors represent many companies, acting as the “face” of the company in that country, selling products, providing customer service, and receiving payments. In many cases, the distributors take title to the goods and then resell them. Companies use distributors because distributors know the local market and are a cost-effective way to enter that market.
However, using distributors to help with export can have its own challenges. For example, some companies find that if they have a dedicated salesperson who travels frequently to the country, they’re likely to get more sales than by relying solely on the distributor. Often, that’s because distributors sell multiple products and sometimes even competing ones. Making sure that the distributor favors one firm’s product over another product can be hard to monitor. In countries like China, some companies find that—culturally—Chinese consumers may be more likely to buy a product from a foreign company than from a local distributor, particularly in the case of a complicated, high-tech product. Simply put, the Chinese are more likely to trust that the overseas salesperson knows their product better.
Why Do Companies Export?
Companies export because it’s the easiest way to participate in global trade, it’s a less costly investment than the other entry strategies, and it’s much easier to simply stop exporting than it is to extricate oneself from the other entry modes. An export partner in the form of either a distributor or an export management company can facilitate this process. An export management company (EMC) is an independent company that performs the duties that a firm’s own export department would execute. The EMC handles the necessary documentation, finds buyers for the export, and takes title of the goods for direct export. In return, the EMC charges a fee or commission for its services. Because an EMC performs all the functions that a firm’s export department would, the firm doesn’t have to develop these internal capabilities. Most of all, exporting gives a company quick access to new markets.
Benefits of Exporting: Vitrac
Egyptian company Vitrac was founded by Mounir Fakhry Abdel Nour to take advantage of Egypt’s surplus fruit products. At its inception, Vitrac sourced local fruit, made it into jam, and exported it worldwide. Vitrac has acquired money, market, and manufacturing advantages from exporting.
• Market.The company has access to a new market, which has brought added revenues.
• Money.Not only has Vitrac earned more revenue, but it has also gained access to foreign currency, which benefits companies located in certain regions of the world, such as in Vitrac’s home country of Egypt.
• Manufacturing.The cost to manufacture a given unit decreased because Vitrac has been able to manufacture at higher volumes and buy source materials in higher volumes, thus benefitting from volume discounts.
Risks of Exporting
There are risks in relying on the export option. If you merely export to a country, the distributor or buyer might switch to or at least threaten to switch to a cheaper supplier in order to get a better price. Or someone might start making the product locally and take the market from you. Also, local buyers sometimes believe that a company which only exports to them isn’t very committed to providing long-term service and support once a sale is complete. Thus, they may prefer to buy from someone who’s producing directly within the country. At this point, many companies begin to reconsider having a local presence, which moves them toward one of the other entry options.
Ethics in Action: Different Countries, Different Food and Drug Rules
Particular products, especially foods and drugs, are often subject to local laws regarding safety, purity, packaging, labeling, and so on. Companies that want to make a product that can be sold in multiple countries must comply with the highest common denominator of all the laws of all the target markets. Complying with the highest standard could increase the overall cost of the product. As a result, some companies opt to stay out of markets where compliance with the regulation would be more costly. Is it ethical to be selling a product in one country that another country deems substandard?
Exporting is a easy way to enter an international market. In addition to exporting, companies can choose to pursue more specialized modes of entry—namely, contracutal modes or investment modes. Contractual modes involve the use of contracts rather than investment. Let’s look at the two main contractual entry modes, licensing and franchising.
Source
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Learning Objectives
After reading this section, students should be able to …
1. define licensing
2. explain the advantages and disadvantages of international licensing
Licensing gives a licensee certain rights or resources to manufacture and/or market a certain product in a host country.
Licensing
Licensing is a business arrangement in which one company gives another company permission to manufacture its product for a specified payment. Licensing is defined as the granting of permission by the licenser to the licensee to use intellectual property rights, such as trademarks, patents, brand names, or technology, under defined conditions. The possibility of licensing makes for a flatter world, because it creates a legal vehicle for taking a product or service delivered in one country and providing a nearly identical version of that product or service in another country. Under a licensing agreement, the multinational firm grants rights on its intangible property to a foreign company for a specified period of time. The licenser is normally paid a royalty on each unit produced and sold. Although the multinational firm usually has no ownership interests, it often provides ongoing support and advice. Most companies consider this market-entry option of licensing to be a low-risk option because there’s typically no up-front investment.
For a multinational firm, the advantage of licensing is that the company’s products will be manufactured and made available for sale in the foreign country (or countries) where the product or service is licensed. The multinational firm doesn’t have to expend its own resources to manufacture, market, or distribute the goods. This low cost, of course, is coupled with lower potential returns, because the revenues are shared between the parties.
Licensing generally involves allowing another company to use patents, trademarks, copyrights, designs, and other intellectual in exchange for a percentage of revenue or a fee. It’s a fast way to generate income and grow a business, as there is no manufacturing or sales involved. Instead, licensing usually means taking advantage of an existing company’s pipeline and infrastructure in exchange for a small percentage of revenue.
An international licensing agreement allows foreign firms, either exclusively or non-exclusively, to manufacture a proprietor’s product for a fixed term in a specific market.
To summarize, in this foreign market entry mode, a licensor in the home country makes limited rights or resources available to the licensee in the host country. The rights or resources may include patents, trademarks, managerial skills, technology, and others that can make it possible for the licensee to manufacture and sell in the host country a similar product to the one the licensor has already been producing and selling in the home country without requiring the licensor to open a new operation overseas. The licensor’s earnings usually take the form of one-time payments, technical fees, and royalty payments, usually calculated as a percentage of sales.
Batman
The Batman character has been licensed to many companies, such as Lego.
As in this mode of entry the transference of knowledge between the parental company and the licensee is strongly present, the decision of making an international license agreement depend on the respect the host government shows for intellectual property and on the ability of the licensor to choose the right partners and avoid having them compete in each other’s market. Licensing is a relatively flexible work agreement that can be customized to fit the needs and interests of both licensor and licensee. The following are the main advantages and reasons to use international licensing for expanding internationally:
• Obtain extra income for technical know-how and services.
• Reach new markets not accessible by export from existing facilities.
• Quickly expand without much risk and large capital investment.
• Pave the way for future investments in the market.
• Retain established markets closed by trade restrictions.
• Political risk is minimized as the licensee is usually 100% locally owned.
This is highly attractive for companies that are new in international business. On the other hand, international licensing is a foreign market entry mode that presents some disadvantages and reasons why companies should not use it because there is:
• Lower income than in other entry modes
• Loss of control of the licensee manufacture and marketing operations and practices leading to loss of quality
• Risk of having the trademark and reputation ruined by an incompetent partner
• The foreign partner also can become a competitor by selling its products in places where the parental company has a presence
KEY POINTS
• Licensing is a business agreement involving two companies: one gives the other special permissions, such as using patents or copyrights, in exchange for payment.
• An international business licensing agreement involves two firms from different countries, with the licensee receiving the rights or resources to manufacture in the foreign country.
• Rights or resources may include patents, copyrights, technology, managerial skills, or other factors necessary to manufacture the good.
• Advantages of expanding internationally using international licensing include: the ability to reach new markets that may be closed by trade restrictions and the ability to expand without too much risk or capital investment.
• Disadvantages include the risk of an incompetent foreign partner firm and lower income compared to other modes of international expansion.
Terms
• Licensing: A business arrangement in which one company gives another company permission to manufacture its product for a specified payment.
• License: The legal terms under which a person is allowed to use a product.
Examples
• Suppose Company A, a manufacturer and seller of Baubles, was based in the US and wanted to expand to the Chinese market with an international business license. They can enter the agreement with a Chinese firm, allowing them to use their product patent and giving other resources, in return for a payment. The Chinese firm can then manufacture and sell Baubles in China.
Source
The above content was adapted from Boundless Business. Authored by: Boundless. Provided by: Boundless. Located at: https://www.boundless.com/business/. License: CC BY-SA: Attribution-ShareAlike under a Creative Commons Attribution-NonCommercial-ShareAlike License and from International Business. Authored by: anonymous. Provided by: Lardbucket. Located at: . License: CC BY-NC-SA: Attribution-NonCommercial-ShareAlike
Image of Lego Batman. Authored by: Vanessa Oshiro. Located at: https://www.flickr.com/photos/vosh/2...-iPxU5r-bjpvre. License: CC BY-NC-SA: Attribution-NonCommercial-ShareAlike | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/07%3A_Global_Market_Entry_Modes/7.04%3A_Licensing.txt |
Learning Objectives
After reading this section, students should be able to …
1. define franchising
2. explain the advantages and disadvantages of international franchising
Franchising is the practice of licensing another firm’s business model as an operator.
Franchising is the practice of using another firm’s successful business model. For the franchiser, the franchise is an alternative to building “chain stores” to distribute goods that avoids the investments and liability of a chain. The franchiser’s success depends on the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business. Essentially, and in terms of distribution, the franchiser is a supplier who allows an operator, or a franchisee, to use the supplier’s trademark and distribute the supplier’s goods. In return, the operator pays the supplier a fee.
Similar to a licensing agreement, under a franchising agreement, the multinational firm grants rights on its intangible property, like technology or a brand name, to a foreign company for a specified period of time and receives a royalty in return. The difference is that the franchiser provides a bundle of services and products to the franchisee. For example, McDonald’s expands overseas through franchises. Each franchise pays McDonald’s a franchisee fee and a percentage of its sales and is required to purchase certain products from the franchiser. In return, the franchisee gets access to all of McDonald’s products, systems, services, and management expertise.
In short, in terms of distribution, the franchiser is a supplier who allows an operator, or a franchisee, to use the supplier’s trademark and distribute the supplier’s goods. In return, the operator pays the supplier a fee.
Each party to a franchise has several interests to protect. The franchiser is involved in securing protection for the trademark, controlling the business concept, and securing know how. The franchisee is obligated to carry out the services for which the trademark has been made prominent or famous. There is a great deal of standardization required. The place of service has to bear the franchiser’s signs, logos, and trademark in a prominent place. The uniforms worn by the staff of the franchisee have to be of a particular design and color. The service has to be in accordance with the pattern followed by the franchiser in the successful franchise operations. Thus, franchisees are not in full control of the business, as they would be in retailing.
A service can be successful if equipment and supplies are purchased at a fair price from the franchiser or sources recommended by the franchiser. A coffee brew, for example, can be readily identified by the trademark if its raw materials come from a particular supplier. If the franchiser requires purchase from his stores, it may come under anti-trust legislation or equivalent laws of other countries. So too the purchase of uniforms of personnel, signs, etc., as well as the franchise sites, if they are owned or controlled by the franchiser.
Franchise agreements carry no guarantees or warranties, and the franchisee has little or no recourse to legal intervention in the event of a dispute. Franchise contracts tend to be unilateral contracts in favor of the franchiser, who is generally protected from lawsuits from their franchisees because of the non-negotiable contracts that require franchisees to acknowledge, in effect, that they are buying the franchise knowing that there is risk, and that they have not been promised success or profits by the franchiser. Contracts are renewable at the sole option of the franchiser. Most franchisers require franchisees to sign agreements that mandate where and under what law any dispute would be litigated.
KEY POINTS
• Essentially, and in terms of distribution, the franchiser is a supplier who allows an operator, or a franchisee, to use the supplier’s trademark and distribute the supplier’s goods. In return, the operator pays the supplier a fee.
• Thirty three countries, including the United States, China, and Australia, have laws that explicitly regulate franchising, with the majority of all other countries having laws which have a direct or indirect impact on franchising.
• Franchise agreements carry no guarantees or warranties, and the franchisee has little or no recourse to legal intervention in the event of a dispute.
Terms
• Franchisee: A holder of a franchise; a person who is granted a franchise.
• Franchising: The establishment, granting, or use of a franchise.
• Franchise: The authorization granted by a company to sell or distribute its goods or services in a certain area.
• Franchiser: A franchisor, a company which or person who grants franchises.
Source
The above content was adapted from Boundless Business. Authored by: Boundless. Provided by: Boundless. Located at: https://www.boundless.com/business/. License: CC BY-SA: Attribution-ShareAlike under a Creative Commons Attribution-NonCommercial-ShareAlike License and from International Business. Authored by: anonymous. Provided by: Lardbucket. Located at: . License: CC BY-NC-SA: Attribution-NonCommercial-ShareAlike
Image of Subway in Russia. Authored by: Dgbouma. Located at: http://en.Wikipedia.org/wiki/Subway_...Russia2011.JPG. License: CC BY-SA: Attribution-ShareAlike | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/07%3A_Global_Market_Entry_Modes/7.05%3A_Franchising.txt |
Learning Objectives
After reading this section, students should be able to …
1. define contract manufacturing
2. explain the advantages and disadvantages of contract manufacturing
In contract manufacturing, a hiring firm makes an agreement with the contract manufacturer to produce and ship the hiring firm’s goods.
A contract manufacturer (“CM”) is a manufacturer that enters into a contract with a firm to produce components or products for that firm . It is a form of outsourcing. In a contract manufacturing business model, the hiring firm approaches the contract manufacturer with a design or formula. The contract manufacturer will quote the parts based on processes, labor, tooling, and material costs. Typically a hiring firm will request quotes from multiple CMs. After the bidding process is complete, the hiring firm will select a source, and then, for the agreed-upon price, the CM acts as the hiring firm’s factory, producing and shipping units of the design on behalf of the hiring firm.
Benefits
Contract manufacturing offers a number of benefits:
• Cost Savings: Companies save on their capital costs because they do not have to pay for a facility and the equipment needed for production. They can also save on labor costs such as wages, training, and benefits. Some companies may look to contract manufacture in low-cost countries, such as China, to benefit from the low cost of labor.
• Mutual Benefit to Contract Site: A contract between the manufacturer and the company it is producing for may last several years. The manufacturer will know that it will have a steady flow of business at least until that contract expires.
• Advanced Skills: Companies can take advantage of skills that they may not possess, but the contract manufacturer does. The contract manufacturer is likely to have relationships formed with raw material suppliers or methods of efficiency within their production.
• Quality: Contract Manufacturers are likely to have their own methods of quality control in place that help them to detect counterfeit or damaged materials early.
• Focus: Companies can focus on their core competencies better if they can hand off base production to an outside company.
• Economies of Scale: Contract Manufacturers have multiple customers that they produce for. Because they are servicing multiple customers, they can offer reduced costs in acquiring raw materials by benefiting from economies of scale. The more units there are in one shipment, the less expensive the price per unit will be.
Risks
Balanced against the above benefits of contract manufacturing are a number of risks:
• Lack of Control: When a company signs the contract allowing another company to produce their product, they lose a significant amount of control over that product. They can only suggest strategies to the contract manufacturer; they cannot force them to implement those strategies.
• Relationships: It is imperative that the company forms a good relationship with its contract manufacturer. The company must keep in mind that the manufacturer has other customers. They cannot force them to produce their product before a competitor’s. Most companies mitigate this risk by working cohesively with the manufacturer and awarding good performance with additional business.
• Quality: When entering into a contract, companies must make sure that the manufacturer’s standards are congruent with their own. They should evaluate the methods in which they test products to make sure they are of good quality. The company has to ensure the contract manufacturer has suppliers that also meet these standards.
• Intellectual Property Loss: When entering into a contract, a company is divulging their formulas or technologies. This is why it is important that a company not give out any of its core competencies to contract manufacturers. It is very easy for an employee to download such information from a computer and steal it. The recent increase in intellectual property loss has corporate and government officials struggling to improve security. Usually, it comes down to the integrity of the employees.
• Outsourcing Risks: Although outsourcing to low-cost countries has become very popular, it does bring along risks such as language barriers, cultural differences, and long lead times. This could make the management of contract manufacturers more difficult, expensive, and time-consuming.
• Capacity Constraints: If a company does not make up a large portion of the contract manufacturer’s business, they may find that they are de-prioritized over other companies during high production periods. Thus, they may not obtain the product they need when they need it.
• Loss of Flexibility and Responsiveness: Without direct control over the manufacturing facility, the company will lose some of its ability to respond to disruptions in the supply chain. It may also hurt their ability to respond to demand fluctuations, risking their customer service levels.
KEY POINTS
• A hiring firm may enter a contract with a contract manufacturer (CM) to produce components or final products on behalf of the hiring firm for some agreed-upon price.
• There are many benefits to contract manufacturing, and companies are finding many reasons why they should be outsourcing their production to other companies.
• Production outside of the company does come with many risks attached. Companies must first identify their core competencies before deciding about contract manufacture.
Terms
• Contract manufacturing: Business model in which a firm hires a contract manufacturer to produce components or final products based on the hiring firm’s design. A business model where a firm hires another firm to produce components or products.
Source
The above content was adapted from Boundless Business. Authored by: Boundless. Provided by: Boundless. Located at: https://www.boundless.com/business/. License: CC BY-SA: Attribution-ShareAlike under a Creative Commons Attribution-NonCommercial-ShareAlike License.
Image of Circuit Boards. Authored by: JayHand. Located at: https://en.Wikipedia.org/wiki/Electr...cuit_Board.jpg. License: CC BY-SA: Attribution-ShareAlike | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/07%3A_Global_Market_Entry_Modes/7.06%3A_Contract_Manufacturing.txt |
Learning Objectives
After reading this section, students should be able to …
1. define joint ventures
2. explain the advantages and disadvantages of joint ventures
In a joint venture business model, two or more parties agree to invest time, equity, and effort for the development of a new shared project.
Joint Ventures
A joint venture is a business agreement in which parties agree to develop a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets.
When two or more persons come together to form a partnership for the purpose of carrying out a project, this is called a joint venture. In this scenario, both parties are equally invested in the project in terms of money, time and effort to build on the original concept. While joint ventures are generally small projects, major corporations use this method to diversify. A joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project as well as the resulting profits. Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short, both parties must be committed to focusing on the future of the partnership rather than just the immediate returns. Ultimately, short term and long term successes are both important. To achieve this success, honesty, integrity and communication within the joint venture are necessary.
A consortium JV (also known as a cooperative agreement) is formed when one party seeks technological expertise, franchise and brand-use agreements, management contracts, and rental agreements for one-time contracts. The JV is dissolved when that goal is reached. Some major joint ventures include Dow Corning, Miller Coors, Sony Ericsson, Penske Truck Leasing, Norampac, and Owens-Corning.
An equity joint venture is a contractual, strategic partnership between two or more separate business entities to pursue a business opportunity together. The partners in an equity joint venture each contribute capital and resources in exchange for an equity stake and share in any resulting profits. (In a nonentity joint venture, there is no contribution of capital to form a new entity.)
To see how an equity joint venture works, let’s return to the example of Egyptian company, Vitrac. Mounir Fakhry Abdel Nour founded his jam company to take advantage of Egypt’s surplus fruit products. Abdel Nour initially approached the French jam company, Vitrac, to enter into a joint venture with his newly founded company, VitracEgypt. Abdel Nour supplied the fruit and the markets, while his French partner supplied the technology and know-how for producing jams.
In addition to exporting to Australia, the United States, and the Middle East, Vitrac began exporting to Japan. Sales results from Japan indicated a high demand for blueberry jam. To meet this demand—in an interesting twist, given Vitrac’s origin—Vitrac had to import blueberries from Canada. Vitrac thus was importing blueberries from Canada, manufacturing the jam in Egypt, and exporting it to Japan.1
Using French Vitrac’s manufacturing know-how, Abdel Nour had found a new supply and the opportunity to enter new markets with it, thus expanding his partner’s reach. The partnership fit was good. The two companies’ joint venture continued for three years, until the French company sold its shares to Abdel Nour, making Vitrac a 100 percent owned and operated Egyptian company. Abdel Nour’s company reached \$22 million in sales and was the Egyptian jam-market leader before being bought by a larger Swiss company, Hero.
Risks of Joint Ventures
Equity joint ventures pose both opportunities and challenges for the companies involved. First and foremost is the challenge of finding the right partner—not just in terms of business focus but also in terms of compatible cultural perspectives and management practices.
Second, the local partner may gain the know-how to produce its own competitive product or service to rival the multinational firm. This is what’s currently happening in China. To manufacture cars in China, non-Chinese companies must set up joint ventures with Chinese automakers and share technology with them. Once the contract ends, however, the local company may take the knowledge it gained from the joint venture to compete with its former partner. For example, Shanghai Automotive Industry (Group) Corporation, which worked with General Motors (GM) to build Chevrolets, has pursued plans to increase sales of its own vehicles tenfold to 300,000 in five years and to compete directly with its former partner.2
Did You Know: Joint Ventures in China
In the past, joint ventures were the only relationship foreign companies could form with Chinese companies. In fact, prior to 1986, foreign companies could not wholly own a local subsidiary. The Chinese government began to allow equity joint ventures in 1979, which marked the beginning of the Open Door Policy, an economic liberalization initiative. The Chinese government strongly encouraged equity joint ventures as a way to gain access to the technology, capital, equipment, and know-how of foreign companies. The risk to the foreign company was that if the venture soured, the Chinese company could end up keeping all of these assets. Often, Chinese companies only contributed things like land or tax concessions that foreign companies couldn’t keep if the venture ended. As of 2010, equity joint ventures between a Chinese company and a foreign partner require a minimum equity investment by the foreign partner of at least 33 to 70 percent of the equity, but there’s no minimum investment set for the Chinese partner.
KEY TAKEAWAYS
• Joint business ventures involve two parties contributing their own equity and resources to develop a new project. The enterprise, revenues, expenses and assets are shared by the involved parties.
• Since money is involved in a joint venture, it is necessary to have a strategic plan in place.
• As the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project as well as the resulting profits.
Term
• Joint venture: A cooperative partnership between two individuals or businesses in which profits and risks are shared.
Example
• Sony Ericsson is a joint venture between Swedish telecom corporation Ericsson and Japanese electronics manufacturer Sony
Source
The above content was adapted from Boundless Business. Authored by: Boundless. Provided by: Boundless. Located at: https://www.boundless.com/business/. License: CC BY-SA: Attribution-ShareAlike under a Creative Commons Attribution-NonCommercial-ShareAlike License and from International Business. Authored by: anonymous. Provided by: Lardbucket. Located at: . License: CC BY-NC-SA: Attribution-NonCommercial-ShareAlike
Image of Sony-Ericsson. Authored by: mroach. Located at: http://commons.wikimedia.org/wiki/Fi...csson_sign.jpg. License: CC BY-SA: Attribution-ShareAlike | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/07%3A_Global_Market_Entry_Modes/7.07%3A_Joint_Ventures.txt |
Summary
The product is the most important element of a company’s marketing program. Global marketers face the challenge of formulating coherent product and brand strategies on a worldwide basis. A product can be viewed as a collection of tangible and intangible attributes that collectively provide benefits to a buyer or user. A brand is a complex bundle of images and experiences in the mind of the customer. In most countries, local brands compete with international brands and global brands. A local product is available in a single country; a global product meets the wants and needs of a global market.
Product and communications strategies can be viewed within a framework that allows for combinations of three strategies: extension strategy, adaptation strategy, and creation strategy. Five strategic alternatives are open to companies pursuing geographic expansion: product-communication extension; product extension-communication adaptation; product adaptation-communication extension; product-communication adaptation; and product invention (innovation). The strategic alternative(s) that a particular company chooses will depend on the product and the need it serves, customer preferences and purchasing power, and the costs of adaptation versus standardization. Product transformation occurs when a product that has been introduced into new country markets serves a different function or is used differently than originally intended. When choosing a strategy, management should consciously strive to avoid the “not invented here” syndrome.
Global competition has put pressure on companies to excel at developing standardized product platforms that can serve as a foundation for cost-efficient adaptation. New products can be classified as discontinuous, dynamically continuous, or continuous innovations. A successful product launch requires an understanding of how markets develop: sequentially over time or simultaneously. Today, many new products are launched in multiple national markets as product development cycles shorten and product development costs soar.
Source
This page is licensed under a Creative Commons Attribution Non-Commercial Share-Alike License (Links to an external site) Links to an external site and contains content from a variety of sources published under a variety of open licenses, including:
• The course note from the ‘Global Marketing’ course published online by Centre for Teaching and Learning (CTL) of Universiti Teknologi Malaysia (UTM). ‘The Economic and Political environment’ is Copyright (c) by Dr. Inda Sukati and made available under a Attribution-Noncommercial-Share Alike 3.0 license.
8.02: Global Product Development
Learning Objectives
After reading this section, students should be able to …
1. appreciate the fundamentals of global product development
Globalization pressures have changed the practice of product development (PD) in many industries in recent years. Eppinger and Chitkara (2006). Rather than using a centralized or local cross-functional model, companies are moving to a mode of global collaboration in which skilled development teams dispersed around the world collaborate to develop new products. Today, a majority of global corporations have engineering and development operations outside of their home region. China and India offer particularly attractive opportunities: Microsoft, Cisco, and Intel all have made major investments there.
The old model was based on the premise that colocation of cross-functional teams to facilitate close collaboration among engineering, marketing, manufacturing, and supply-chain functions was critical to effective product development. Colocated PD teams were thought to be more effective at concurrently executing the full range of activities involved, from understanding market and customer needs through conceptual and detailed design, testing, analysis, prototyping, manufacturing engineering, and technical product support and engineering. Such colocated concurrent practices were thought to result in better product designs, faster time to market, and lower-cost production. They were generally located in corporate research and development centers, which maintained linkages to manufacturing sites and sales offices around the world.
Today, best practice emphasizes a highly distributed, networked, and digitally supported development process. The resulting global product development process combines centralized functions with regionally distributed engineering and other development functions. It often involves outsourced engineering work as well as captive offshore engineering. The benefits of this distributed model include greater engineering efficiency (through utilization of lower-cost resources), access to technical expertise internationally, more global input to product design, and greater strategic flexibility.
Source
The above content was adapted from “Combining Adaptation and Arbitrage: Global Product Development”, section 6.4 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/08%3A_Global_Products/8.01%3A_Global_Products_Summary.txt |
Learning Objectives
After reading this section, students should be able to …
1. outline the trade-offs between standardized versus customized products.
2. know the influence of the country-of-origin effect.
3. comprehend the benefits of reverse innovation.
Straight Product Extension
Companies deciding to market their products in different countries typically have a choice of three common strategies to pursue. The first is the straight product extension. This means taking the company’s current products and selling them in other countries without making changes to the product. The advantages of this strategy are that the company doesn’t need to invest in new research, development, or manufacturing. Changes may be made in packaging and labeling, but these are driven by local regulatory requirements. The disadvantages, however, are that its products may not be well suited to local needs and that the products may be more costly due to higher manufacturing and labor costs in the United States.
Product Adaptation
The second strategy is product adaptation and refers to modifying the company’s existing product in a way that makes it fit better with local needs. For example, when Procter & Gamble (P&G) introduced Tide laundry detergent in emerging markets like India, it changed the formulation to remove softeners. The reformulated Tide cost less than the original Tide. This change was important because price was an important factor in India where income levels were lower. Indian consumers were more able to afford the reformulated Tide.
Another way to localize a product is through packaging. Locally appropriate packaging doesn’t just mean using the country’s language. It also means creating packaging sizes that suit the country. For example, a company wanting to make its products more economical to less-wealthy countries may be tempted to sell larger, economy-sized packaging. But emerging-market consumers often prefer smaller package sizes, even if that increases the cost-per-use. They tend to buy sachets of shampoo rather than economy-size bottles. These smaller sizes are also easier to transport to local villages or to store in smaller-sized homes.
Mobile-phone maker Nokia went a step further in localizing its phones to different markets. The company uses local designers to create mobile-phone handset models that are specifically appropriate for each country. For example, the handsets designed in India are dust resistant and have a built-in flashlight. The models designed in China have a touchscreen, stylus, and Chinese character recognition.
Local designers are more likely to understand the needs of the local population than headquarters-located designers do.
The examples of Tide and Nokia show how companies can create a version of their existing product tailored to specific countries.
Product Invention: P&G Diapers
The third strategy, product invention, is creating an entirely new product for the target market. In this strategy, companies go back to the drawing board and rethink how best to design a product for that country.
The first step in inventing a product for a new country market is to understand the key product characteristics needed to succeed in that market. For example, when P&G wanted to sell diapers in BRIC countries (i.e., Brazil, Russia, India, and China), it started from square one. Rather than merely modifying the existing design, P&G engaged local knowledge and reconsidered all the key features of the design in the context of the needs of the emerging markets.
A major issue was price. To make the diaper affordable, P&G settled on an aggressive price target—each diaper should cost as much as one egg. But the company also wanted a diaper that could uphold the P&G brand name. At first, the designers thought that the lower-cost product needed to do everything that the current developed-world product did. But further discussions refined and narrowed the definition so that P&G could meet the cost target without damaging the brand.
P&G designers debated features such as absorbency, color, fit, and packaging to find a design that was acceptable on cost targets, acceptable to emerging-market consumers, and acceptable as a P&G-branded product. The designers considered materials and how they could avoid using high-paid, specialized suppliers. Some characteristics, such as packaging, could be adjusted to meet local cost standards. In other cases, a characteristic was nonnegotiable—such as corporate social-responsibility issues. For example, P&G wanted to ensure that none of the suppliers to its diaper business used child labor. In the end, P&G succeeded by understanding both the critical elements of the brand and the emerging-market customers’ expectations.
Nuances of Product Extension, Adaptation, and Invention
The product-adaptation strategy is easier for firms to execute than product invention. Nonetheless, even product adaptation requires understanding the local market well. Consider Ford Motor Company’s missteps in adapting its midpriced car model to the Indian market. Ford realized that it needed to lower the cost of its car to make it more affordable to Indian consumers. Ford brought a team of designers together in Detroit and tasked them with figuring out how to reduce the cost of the car. The designers looked at removing nonessential elements. The first feature to go was air conditioning. Next, the team decided to remove power windows in the back, keeping them only in the front. These and other such tweaks brought the total cost of the car down from \$20,000 to \$15,000. Reducing the cost by 25 percent is notable, but unfortunately the design team lacked vital local knowledge about India. First, even though the price of the car was lower, the \$15,000 price point in India is still way above what the middle class can afford. The Indians who can afford a \$15,000 car are the very rich. Second, the very rich in India who can afford to pay \$15,000 for a car can also afford (and will have) a chauffeur. Remember the clever idea of removing the air conditioning and the power windows in the back? The consequence is that the chauffeur is the only one who gets a breeze. Given the sweltering summer temperatures and traffic congestion in Indian cities, you can guess that the Ford car didn’t sell well.1
Country-of-Origin Effect
The country-of-origin effect refers to consumers using the country where the product was made as a barometer for evaluating the product. Their perceptions of the country influence whether they will perceive the product favorably or unfavorably. That perception influences consumers’ purchasing decisions. For example, France is known for its wines and luxury goods. Wines from Chile may be just as good and more affordably priced, but consumers may perceive French wines to be better due to the country-of-origin effect. In the 1960s, “Made in Japan” was a signal of low quality, but over time Japan has changed that perception through a dedicated focus on high quality. Specifically, Japan adopted Total Quality Management (TQM) which is a set of management practices initially introduced to Japan by W. Edwards Deming. The focus of TQM is increasing quality and reducing errors in production or service delivery. TQM consists of systematic processes, planning, measurement, continuous improvement, and customer satisfaction. These days, “made in Japan” is viewed positively, but “made in China” faces more of a stigma. Likewise, consumers in Colombia don’t want products that are made in Colombia. A similar problem happens with Mercedes-Benz—Mercedes-Benz cars assembled in Egypt have much lower resale value than those assembled in Germany. In these cases, local assembly in Egypt might be taken as a sign of inferior quality.
Reverse Innovation: How Designing for Emerging Economies Brings Benefits Back Home
Increasingly, marketing and innovation are directly linked. Reverse innovation means designing a product for a developing country and bringing that innovation back to the home country. Creating new products and services for developing countries requires radical innovation and opens new opportunities in developed-world markets as well. For example, GE Healthcare sells sophisticated medical-imaging devices around the world. Historically, GE has sold these high-end machines in emerging economies like India. But only 10 percent of Indian hospitals can afford a \$10,000 electrocardiogram (ECG) machine. Reaching the other 90 percent of the market takes more than simply cutting a few costs. It requires radical innovation and an in-depth understanding of local conditions.
One important local fact to know is that most Indians live in rural areas. That means they don’t have a local hospital to visit. Therefore, medical equipment needs to go to them, and no rural health care clinic is going to lug a \$10,000 ECG machine into the field even if it could afford the device. Achieving the goal of a lightweight, reliable, simple-to-use ECG device took radical rethinking. GE built such a device that could fit in a shoulder bag or backpack. The device has a built-in replaceable printer and costs only \$500. In addition, because the device would be used in rural locations with scant access to electricity, GE designed a battery that could do 500 ECGs on one charge. To make it easy to use, GE designed the device to have only three buttons. Finally, just because the device is inexpensive doesn’t mean it’s dumb. GE installed professional-level analysis software to aid rural doctors.
With its new portable ECG device, GE has unlocked a whole new market in developing countries. Beyond that, GE has also opened up new opportunities back home—and that’s the reverse innovation side of the story. How? The portable ECG machine with a \$500 price tag is ideal for use in ambulances, saving lives of accident victims in developed countries as well. Cheap, portable, and easy-to-use devices are desirable in any country.2
Key Takeaways
• There are three strategies for introducing a company’s product to a new international market: (1) straight product extension, (2) product adaptation, and (3) product invention.
• A straight product extension involves taking the company’s current product and selling it in other countries without making changes to the product. The advantages of this strategy are that the company doesn’t need to invest in new research and development or manufacturing. The disadvantages, however, are that its products may not be well suited to local needs and that the products may be more costly due to higher US manufacturing and labor costs.
• Product adaptation refers to modifying the company’s existing product in a way that makes it fit better with local needs, as Nokia did by making its mobile phones for India dust-resistant.
• Product invention means creating an entirely new product for the target market, as P&G did by designing a diaper for emerging markets that cost the same as a single egg. Such a price would make the diaper affordable in emerging-market countries.
• When adapting or inventing a product for a new market, it’s important to have local knowledge, as the missteps of Ford’s car for India have shown. In addition, the country-of-origin effect influences consumers’ purchasing decisions. If consumers perceive one country more favorably than another, they’re more apt to buy products from that country.
• Inventing a new product for an international country can bring benefits back to the home market. GE Healthcare completely reinvented a \$10,000 medical-imaging device to create a \$500 portable, imaging device for the Indian market. In the process, GE realized it had created a new product for its home market as well.
Source
This chapter was adapted under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License from the book ‘International Business v. 1.0’ published by Saylor Academy, the creator or licensor of this work. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/08%3A_Global_Products/8.03%3A_Global_Products_and_Services.txt |
Learning Objectives
After reading this section, students should be able to …
1. appreciate when product adaptation are warranted
2. list the dimensions of value proposition adaptation
3. list the major drivers behind value proposition adaptation
Value proposition adaptation deals with a whole range of issues, ranging from the quality and appearance of products to materials, processing, production equipment, packaging, and style. A product may have to be adapted to meet the physical, social, or mandatory requirements of a new market. It may have to be modified to conform to government regulations or to operate effectively in country-specific geographic and climatic conditions. Or it may be redesigned or repackaged to meet the diverse buyer preferences or standard-of-living conditions. A product’s size and packaging may also have to be modified to facilitate shipment or to conform to possible differences in engineering or design standards in a country or in regional markets. Other dimensions of value proposition adaptation include changes in brand name, color, size, taste, design, style, features, materials, warranties, after-sale service, technological sophistication, and performance.
The need for some changes, such as accommodating different electricity requirements, will be obvious. Others may require in-depth analysis of societal customs and cultures, the local economy, technological sophistication of people living in the country, customers’ purchasing power, and purchasing behavior. Legal, economic, political, technological, and climatic requirements of a country market may all dictate some level of localization or adaptation.
As tariff barriers (tariffs, duties, and quotas) are gradually reduced around the world in accordance with World Trade Organization (WTO) rules, other nontariff barriers, such as product standards, are proliferating. For example, consider regulations for food additives. Many of the United States’ “generally recognized as safe” (GRAS) additives are banned today in foreign countries. In marketing abroad, documentation is important not only for the amount of additive but also for its source, and often additives must be listed on the label of ingredients. As a result, product labeling and packaging must often be adapted to comply with another country’s legal and environmental requirements.
Many kinds of equipment must be engineered in the metric system for integration with other pieces of equipment or for compliance with the standards of a given country. The United States is virtually alone in its adherence to a nonmetric system, and U.S. firms that compete successfully in the global market have found metric measurement to be an important detail in selling to overseas customers. Even instruction or maintenance manuals, for example, should be made available in centimeters, weights in grams or kilos, and temperatures in degrees Celsius.
Many products must be adapted to local geographic and climatic conditions. Factors such as topography, humidity, and energy costs can affect the performance of a product or even define its use in a foreign market. The cost of petroleum products, along with a country’s infrastructure, for example, may mandate the need to develop products with a greater level of energy efficiency. Hot, dusty climates of countries in the Middle East and other emerging markets may force automakers to adapt automobiles with different types of filters and clutch systems than those used in North America, Japan, and European countries. Even shampoo and cosmetic product makers have to chemically reformulate their products to make them more suited for people living in hot, humid climates.
The availability, performance, and level of sophistication of a commercial infrastructure will also warrant a need for adaptation or localization of products. For example, a company may decide not to market its line of frozen food items in countries where retailers do not have adequate freezer space. Instead, it may choose to develop dehydrated products for such markets. Size of packaging, material used in packaging, before- and after-sale service, and warranties may have to be adapted in view of the scope and level of service provided by the distribution structure in the country markets targeted. In the event that postsale servicing facilities are conspicuous by their absence, companies may need to offer simpler, more robust products in overseas markets to reduce the need for maintenance and repairs.
Differences in buyer preferences are also major drivers behind value proposition adaptation. Local customs, such as religion or the use of leisure time, may affect market acceptance. The sensory impact of a product, such as taste or its visual impression, may also be a critical factor. The Japanese consumer’s desire for beautiful packaging, for example, has led many U.S. companies to redesign cartons and packages specifically for this market. At the same time, to make purchasing mass-marketed consumer products more affordable in lesser developed countries, makers of products such as razor blades, cigarettes, chewing gum, ball-point pens, and candy bars repackage them in small, single units rather than multiple units prevalent in the developed and more advanced economies.
Expectations about product guarantees may also vary from country to country depending on the level of development, competitive practices, and degree of activism by consumer groups; local standards of production quality; and prevalent product usage patterns. Strong warranties may be required to break into a new market, especially if the company is an unknown supplier. In other cases, warranties similar to those in the home country market may not be expected.
As a general rule, packaging design should be based on customer needs. For industrial products, packaging is primarily functional and should reflect needs for storage, transportation, protection, preservation, reuse, and so on. For consumer products, packaging has additional functionality and should be protective, informative, appealing, conform to legal requirements, and reflect buying habits (e.g., Americans tend to shop less frequently than Europeans, so larger sizes are more popular in the United States).
In analyzing adaptation requirements, careful attention to cultural differences between the target customers in the home country (country of origin) and those in the host country is extremely important. The greater the cultural differences between the two target markets, the greater the need for adaptation. Cultural considerations and customs may influence branding, labeling, and package considerations. Certain colors used on labels and packages may be found unattractive or offensive. Red, for example, stands for good luck and fortune in China and parts of Africa; aggression, danger, or warning in Europe, America, Australia, and New Zealand; masculinity in parts of Europe; mourning (dark red) in the Ivory Coast; and death in Turkey. Blue denotes immortality in Iran, while purple denotes mourning in Brazil and is a symbol of expense in some Asian cultures. Green is associated with high tech in Japan, luck in the Middle East, connotes death in South America and countries with dense jungle areas, and is a forbidden color in Indonesia. Yellow is associated with femininity in the United States and many other countries but denotes mourning in Mexico and strength and reliability in Saudi Arabia. Finally, black is used to signal mourning, as well as style and elegance, in most Western nations, but it stands for trust and quality in China, while white—the symbol for cleanliness and purity in the West—denotes mourning in Japan and some other Far Eastern nations.
A country’s standard of living and the target market’s purchasing power can also determine whether a company needs to modify its value proposition. The level of income, the level of education, and the availability of energy are all factors that help predict the acceptance of a product in a foreign market. In countries with a lower level of purchasing power, a manufacturer may find a market for less-sophisticated product models or products that are obsolete in developed nations. Certain high-technology products are inappropriate in some countries, not only because of their cost but also because of their function. For example, a computerized, industrial washing machine might replace workers in a country where employment is a high priority. In addition, these products may need a level of servicing that is unavailable in some countries.
When potential customers have limited purchasing power, companies may need to develop an entirely new product designed to address the market opportunity at a price point that is within the reach of a potential target market. Conversely, companies in lesser-developed countries that have achieved local success may find it necessary to adopt an “up-market strategy” whereby the product may have to be designed to meet world-class standards.
Mini Case: Kraft Reformulates Oreo Cookies in China, Jargon (2008, May 1)
Kraft’s Oreo has long been the top-selling cookie in the U.S. market, but the company had to reinvent it to make it sell in China. Unlike their American counterparts, Oreo cookies sold in China are long, thin, four-layered, and coated in chocolate.
Oreos were first introduced in 1912 in the United States, but it was not until 1996 that Kraft introduced Oreos to Chinese consumers. After more than 5 years of flat sales, the company embarked on a complete makeover. Research had shown, among other findings, that traditional Oreos were too sweet for Chinese tastes and that packages of 14 Oreos priced at 72 cents were too expensive. In response, Kraft developed and tested 20 prototypes of reduced-sugar Oreos with Chinese consumers before settling on a new formula; it also introduced packages containing fewer Oreos for just 29 cents.
But Kraft did not stop there. The research team had also picked up on China’s growing thirst for milk, which Kraft had not considered before. It noted that increased milk demand in China and other developing markets was a contributing factor to higher milk prices around the world. This put pressure on food manufacturers like Kraft, whose biggest business is cheese, but it also spelled opportunity.
Kraft began a grassroots marketing campaign to educate Chinese consumers about the American tradition of pairing milk with cookies. The company created an Oreo apprentice program at 30 Chinese universities that drew 6,000 student applications. Three hundred were accepted and trained as Oreo-brand ambassadors. Some of them rode around Beijing on bicycles, outfitted with wheel covers resembling Oreos, and handed out cookies to more than 300,000 consumers. Others organized Oreo-themed basketball games to reinforce the idea of dunking cookies in milk. Television commercials showed kids twisting apart Oreo cookies, licking the cream center, and dipping the chocolate cookie halves into glasses of milk.
Still, Kraft realized it needed to do more than just tweak its recipe to capture a bigger share of the Chinese biscuit market. China’s cookie-wafer segment was growing faster than the traditional biscuit-like cookie segment, and Kraft needed to catch up to rival Nestlé SA, the world’s largest food company, which had introduced chocolate-covered wafers there in 1998.
So Kraft decided this market opportunity was big enough to justify a complete remake of the Oreo itself and, departing from longstanding corporate policy for the first time, created an Oreo that looked almost nothing like the original. The new Chinese Oreo consisted of four layers of crispy wafer filled with vanilla and chocolate cream, coated in chocolate. To ensure that the chocolate product could be shipped across the country, could withstand the cold climate in the north and the hot, humid weather in the south, and would still melt in the mouth, the company had to develop a new proprietary handling process.
Kraft’s adaptation efforts paid off. In 2006, Oreo wafer sticks became the best-selling biscuit in China, outpacing HaoChiDian, a biscuit brand made by the Chinese company Dali. The new Oreos also outsell traditional (round) Oreos in China. They also have created opportunities for further aggregation and product innovation. Kraft now sells the wafers elsewhere in Asia, as well as in Australia and Canada, and the company has introduced another new product in China: wafer rolls, a tube-shaped wafer lined with cream. The hollow cookie can be used as a straw through which to drink milk.
This success encouraged Kraft to empower managers in other businesses around the globe. For example, to take advantage of the European preference for dark chocolate, Kraft introduced dark chocolate in Germany under its Milka brand. Research showed that Russian consumers like premium instant coffee, so Kraft positioned its Carte Noire freeze-dried coffee as an upscale brand. And in the Philippines, where iced tea is popular, Kraft launched iced-tea-flavored Tang.
As Kraft’s experience shows, successful global marketing and branding is rooted in a careful blend of aggregation, adaptation, and arbitrage strategies that is tailored to the specific needs and preferences of a particular region or country.
Source
The above content was adapted from “Value Proposition Adaptation Decisions”, section 6.1 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/08%3A_Global_Products/8.04%3A_Product_Adaptation_Decisions.txt |
Learning Objectives
After reading this section, students should be able to …
1. illustrate the significant advantages of a global innovation strategy
2. explain the relationship between geography and knowledge diversity
3. list the steps in the global innovation strategy of a firm
Many companies now have global supply chains and product development processes, but few have developed effective global innovation capabilities. Santos, Doz, and Williamson (2004, Summer).Increasingly, however, technology access and innovation are becoming key global strategic drivers. This move from cost to growth and innovation is likely to continue as the center of gravity of economic activity shifts further to the East.
To illustrate the significant advantages of a truly global innovation strategy, Santos and others cite the battle between Motorola, Inc. and Nokia Corporation in the cellular phone industry. Motorola was a pioneer in the technology, building on initial path-breaking research from Bell Laboratories. But by focusing primarily on U.S. customers and U.S. solutions, it missed the market shift toward digital mobile technology and the global system for mobile (GSM) communication, which became the standard in Europe. The company also failed to appreciate that consumers were rapidly developing different use patterns and preferences about product design, thereby rendering a one-size-fits-all strategy obsolete.
A core competency in global innovation—the ability to leverage new ideas all around the world—has become a major source of global competitive advantage, as companies such as Nokia, Airbus, SAP, and Starbucks demonstrate. They realize that the principal constraint on innovation “performance” is knowledge. Accessing a diverse set of sources of knowledge is, therefore, a key challenge and is critical to successful differentiation. Companies whose knowledge pool is the same as that of its competitors will likely develop uninspired “me, too” products; access to a diversity of knowledge allows a company to move beyond incremental innovation to attention-grabbing designs and breakthrough solutions.
There is an interesting relationship between geography and knowledge diversity. In Finland, for example, the high cost of installing and maintaining fixed telephone lines in isolated places has spurred advances in radio telephony. In Germany, cultural and political factors have encouraged the growth of a strong “green movement,” which in turn has generated a distinctive market and technical knowledge in recycling and renewable energy. Just-in-time production systems were pioneered in part because of high land costs there. Recognition of the role played by geography in innovation has prompted many companies to globalize their perspective on the innovation process. For example, pharmaceutical companies such as Novartis AG and GlaxoSmithKline plc now realize that the knowledge they need extends far beyond traditional chemistry and therapeutics to include biotechnology and genetics. What is more, much of this new knowledge comes from sources other than the companies’ traditional R&D labs in Basel, Bristol, and in New Jersey, from places such as California, Tel Aviv, Cuba, or Singapore. For these companies, globalization of innovation processes is no longer optional—it has become imperative.
Companies that globalize their supply chains by accessing raw materials, components, or services from around the world are typically able to reduce the overall costs of their operations. Similarly, a side benefit of global innovation is cost reduction. Consider, for example, how companies are now leveraging software programmers in Bangalore, India, aerospace technologists in Russia, or chipset designers in China to cut the costs of their innovation processes.
To reap the benefits of global innovation, companies must do three things:
1. Prospect (find the relevant pockets of knowledge from around the world)
2. Assess (decide on the optimal “footprint” for a particular innovation)
3. Mobilize (use cost-effective mechanisms to move distant knowledge without degrading Santos, Doz, and Williamson (2004, Summer).
Prospecting—that is, finding valuable new pockets of knowledge to spur innovation—may well be the most challenging task. The process involves knowing what to look for, where to look for it, and how to tap into a promising source. Santos and colleagues cite the efforts of the cosmetics maker Shiseido Co., Ltd., in entering the market for fragrance products. Based in Japan, a country with a very limited tradition of perfume use, Shiseido was initially unsure of the precise knowledge it needed to enter the fragrance business. But the company did know where to look for it. So it bought two exclusive beauty boutique chains in Paris, mainly as a way to experience, firsthand, the personal care demands of the most sophisticated customers of such products. It also hired the marketing manager of Yves Saint Laurent Parfums and built a plant in Gien, a town located in the French perfume “cluster.” France’s leadership in that industry made the where fairly obvious to Shiseido. The howhad also become painfully clear because the company had previously flopped in its efforts to develop perfumes in Japan. Those failures convinced Shiseido executives that to access such complex knowledge—deeply rooted in local culture and combining customer information, aesthetics, and technology—the company had to immerse itself in the French environment and learn by doing. Having figured out the where and how, Shiseido would gradually learn what knowledge it needed to succeed in the perfume business.
Assessing new sources of innovation, that is, incorporating new knowledge into and optimizing an existing innovation network, is the second important challenge companies face. If a semiconductor manufacturer is developing a new chipset for mobile phones, for example, should it access technical and market knowledge from Silicon Valley, Austin, Hinschu, Seoul, Bangalore, Haifa, Helsinki, and Grenoble? Or should it restrict itself to just some of those sites? At first glance, determining the best footprint for innovation does not seem fundamentally different from the trade-offs companies face in optimizing their global supply chains: adding a new source might reduce the price or improve the quality of a required component, but more locations may also mean additional complexity and cost. Similarly, every time a company adds a source of knowledge to the innovation process, it might improve its chances of developing a novel product, but it also increases costs. Determining an optimal innovation footprint is more complicated, however, because the direct and indirect cost relationships are far more imprecise.
Mobilizing the footprint, that is, integrating knowledge from different sources into a virtual melting pot from which new products or technologies can emerge, is the third challenge. To accomplish this, companies must bring the various pieces of (technical) knowledge that are scattered around the world together and provide a suitable organizational form for innovation efforts to flourish. More importantly, they would have to add the more complex, contextual (market) knowledge to integrate the different pieces into an overall innovation blueprint.
Mini CaseP&G’s Success in Trickle-Up Innovation: Vicks Cough Syrup With Honey, Jana (2009, March 31)
A new over-the-counter medicine from Vicks that has recently become popular in Switzerland is not as new as it seems. The product, Vicks Cough Syrup with Honey, is really just the latest incarnation of a product that Vicks parent company, Procter & Gamble (P&G), initially created for lower-income consumers in Mexico and then “trickled up” to more affluent markets.
The term “trickle up” refers to a strategy of creating products for consumers in emerging markets and then repackaging them for developed-world customers. Until recently, affluent consumers in the United States and Western Europe could afford the latest and greatest in everything. Now, with purchasing power dramatically reduced because of the global recession, budget items once again make up a growing portion of total sales in many product categories.
P&G is not the only multinational company using this strategy. Other practitioners of trickle-up innovation include General Electric (GE), Nestlé, and Nokia. In early 2008, GE Healthcare launched the MAC 400, GE’s first portable Electrocardiograph (ECG) that was designed in India for the fast-growing local market there. The company simplified elements of its earlier, 65-lb devices made for U.S. hospitals by shrinking its case to the size of a fax machine and removing features such as the keyboard and screen. The smaller MAC 400 costs only \$1,500, versus \$15,000 for its U.S. predecessor. This trickle-down innovation trickled back up again when GE Healthcare decided to sell the unit in Germany as well.
Nestlé offers inexpensive instant noodles in India and Pakistan under its Maggi brand. The line includes dried noodles that are engineered to taste as if they were fried, while they have a whole-wheat flavor that is popular in South Asia. And Nokia researches how people in emerging nations share phones, such as the best-selling 1100 series of devices created for developing-world consumers. The company then uses the information as inspiration for new features for developed-world users.
But what is unique about P&G’s Honey Cough, as it is also called, is that it has moved around the globe in more than one direction. Honey Cough originated in 2003 in P&G’s labs in Caracas, Venezuela, which creates products for all of Latin America. Market research revealed that Latin American shoppers tended to prefer homeopathic remedies for coughs and colds, so P&G set out to create a medicine using natural honey rather than the artificial flavors typically used. The company first introduced the syrup in Mexico, under the label VickMiel, and then in other Latin American markets, including Brazil.
P&G deduced that the product would appeal to parts of the United States that have large Hispanic populations. In 2005, the company rebranded it as Vicks Casero for sale in California and Texas, at a price slightly less than Vicks’ mainstay product, Vicks Formula 44. Within the first year of its release, the company boosted distribution to 27% more outlets.
Figuring that natural ingredients could appeal to even wider groups, P&G took the product to other markets where research indicated that homeopathic cold medicines are popular. In the past 2 years, the company has been marketing the product in Britain, France, Germany, and Italy, as well as Switzerland, and plans to add other Western European countries to the roster.
And Western Europe is not the last destination for iterations of Honey Cough. If P&G’s current market research in the greater United States shows that mainstream American shoppers will buy Honey Cough, P&G will repackage it and market it nationwide, not just as Vicks Casero in Latino markets.
Developing and marketing a new product for each nation or ethnic group can take half a decade. Trickle-up innovation can reduce this time by several years, which explains its appeal. In each rollout, P&G has needed to do little more than make adjustments for each nation’s health regulations.
At a time when companies are looking to speed product offerings while dealing with shrinking budgets and cash-strapped consumers, P&G’s experience with its Honey Cough line shows how an international product portfolio can be tapped quickly and cheaply—that is, if American companies learn how to go against the flow.
Source
The above content was adapted from ‘Fundamentals of Global Strategy v. 1.0’ under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/08%3A_Global_Products/8.05%3A_Global_Innovation.txt |
Innovation for the Bottom of the Pyramid
Learning Objectives
After reading this section, students should be able to …
1. outline the nature and size of BOP markets.
2. know examples of firms pursuing BOP strategies.
3. be conversant with the twelve principles of BOP innovation.
Contemporary View of BOP
In 1998, Professors C. K. Prahalad and Stuart L. Hart defined the bottom of the pyramid (BOP)as the billions of people living on less than \$2 per day. Both men expanded this definition of BOP in their subsequent writing1.The BOP is estimated to comprise between four billion and five billion people.
Too Good to Be True?
Professor Aneel Karnani at the University of Michigan argues that the BOP proposition is indeed too good to be true. “It is seductively appealing, but it is riddled with fallacies. There is neither glory nor fortune at the bottom of the pyramid—it is all a mirage.”2 He argues that the BOP proposition is logically flawed and is not supported by empirical evidence. He proposes an alternative approach for the private sector to alleviate poverty by viewing the poor as producers, not consumers. This shift in view, Karnani argues, is the way to alleviate poverty by raising the incomes of the poor.
In Prahalad and Hart’s view, companies that understand the potential for commercial consumption at the BOP can open a new, potentially lucrative market that benefits the business as well as BOP consumers. By innovating to meet the needs of BOP customers, a company treats them with dignity and respect that previously was afforded only to the wealthy, Prahalad and Hart say.
Twelve Principles of BOP Innovation
Addressing the bottom of the pyramid requires a fresh managerial mind-set, summarized below in Prahalad’s “12 Principles of BOP Innovation”—which are innovations themselves.3 In developed markets, Prahalad suggests that one may take the availability of electricity, telephones, credit, refrigeration, and other such amenities for granted. At the BOP, the infrastructure is much spottier and more hostile. Consumers may have to cope with frequent electric-power blackouts and brownouts. Credit may be extremely costly. Refrigeration may be unavailable. Products marketed to the bottom of the pyramid must be able to withstand such an environment.
Below are Prahalad’s “12 Principles of BOP Innovation,” along with examples of each.
1. Focus on value and on delivering performance for the price. The BOP consumer isn’t interested merely in cheap prices but in getting the greatest possible performance for the price paid. It’s extraordinary how low a price can be and still be highly profitable, if the seller is organized to deliver value. For example, doctors at India’s Aravind Eye Care System, the world’s largest eye-care business, perform hundreds of thousands of cataract surgeries each year. The prices range from \$50 to \$300 per surgery, including the hospital stay. Aravind is quite profitable, although 60 percent of its patients pay nothing.
2. Innovate. Old technologies can’t solve the problems of BOP consumers, and products aimed at the BOP market can’t simply be watered-down versions of developed-world products. Instead, products must be rethought to bring radically lower cost while at the same time having features that meet the BOP’s highest needs. For example, Hindustan Unilever Limited (HUL), a Unilever subsidiary, developed a new molecular encapsulation technology to prevent iodized salt from losing its iodine before consumption. To test the efficacy of the technology, the researchers used radioactive tracing techniques pioneered by the Indian Atomic Energy Commission.
3. Make the solution scalable. When delivering high performance at affordable prices, profits must be generated through volume sales. The product itself must be low cost, but with four billion to five billion BOP customers across the world, scaling the operation is what will make the venture sustainable. Solutions should be scalable across borders.
4. Aim to conserve resources. BOP consumers cannot afford to waste resources. Per capita water consumption in the United States is almost 2,000 cubic meters per year, compared to less than 500 in China and less than 700 in India. The developed world’s high standard of living is a water- and waste-intensive lifestyle. Innovations should emphasize conserving resources, recycling materials, and eliminating waste. Creating products for five billion people means designing the products in ways that can be environmentally sustainable. China’s focus on electric cars rather than gasoline-powered cars reflects the reality that it’s unlikely China could obtain the oil it would need for that many cars and that its extremely polluted cities could handle the additional exhaust fumes.
5. Identify functionality. BOP customers likely require different functionality than high-end consumers. For example, prosthetic legs developed for India’s BOP consumers needed to meet some special requirements: consumers needed to be able to squat, sit cross-legged, and walk on rough ground. Dr. Pramod Karan Sethi and Ram Chandra developed the Jaipur Foot prosthetic for this purpose. The charity Bhagwan Mahaveer Viklang Sahayata Samiti, which is based in Jaipur, India, made them available for less than \$30.4
6. Think in terms of process innovations. One way to bring costs down dramatically is to standardize processes. That’s how Aravind is able to bring down the costs of cataract surgery so dramatically. Aravind made the process highly standardized and trained young village women to prepare patients and handle postoperative care. Thus doctors focus exclusively on surgery and perform only cataract surgery—nothing else. This focused process lets one doctor and two technicians perform fifty surgeries per day.
7. Reduce the skills required to do the job. Design products and services suitable to people without skills. Voxiva, a Peruvian start-up, developed a system enabling health-care workers to diagnose illnesses such as smallpox by comparing a patient’s lesions to a picture of a similar lesion. With this simplified diagnostic process, health-care workers don’t require great skills to know when to call a doctor.
8. Educate consumers in the use of products. This may require collaborating with nongovernmental organizations (NGOs), governments, and others. HUL launched a program in some of India’s village schools to promote the washing of hands with soap as a way to prevent the childhood diarrhea that kills two million children per year. HUL educated the children, who in turn educated their parents.
9. Design products and services to operate in very tough infrastructure environments.For example, when Indian conglomerate ITC built a network connecting Indian villages, it had to provide personal computers that could handle wide voltage fluctuations. ITC included surge suppressors and solar panels to give the system adequate, reliable electricity.
10. Make the interface simple and the learning curve short. In Mexico, the chain retailer Elektra uses automated teller machines (ATMs) with a fingerprint identification system so BOP consumers don’t have to remember lengthy identification codes.
11. Innovate in distribution. Avon has built a Brazilian direct-sales business that delivers revenues of \$1.7 billion annually.
12. Challenge assumptions. The Jaipur Foot and Aravind Eye Care System hospitals defy conventional wisdom about how (and at what price) it’s possible to deliver health care to the poor.
Ethics in Action
NextBillion.net began as an initiative of the World Resources Institute’s Markets and Enterprise Program. The name refers to the next billion people to rise from the bottom of the pyramid into the middle class and connotes the next billion in profits that companies can make serving this market. The purpose of the site is to provide a source for news, analysis, research and discussion on development through enterprise and BOP ideas. In addition, the NextBillion.net website has a career center that posts jobs (consulting projects as well as full-time jobs and academic appointments). As the site states, its mission is to “highlight the development and implementation of business strategies that open opportunities and improve the lives of the world’s approximately 4 billion low-income producers and consumers.”5
Key Takeaways
• The BOP (or bottom-of-the-pyramid) market refers to the four billion to five billion people living on less than \$2 per day.
• When businesses get involved in BOP economies, they can stimulate the creation of new services and products. Though there is some debate as to whether the goal should be to innovate and sell to the BOP or to engage the BOP markets as the source of innovation, all parties agree that engagement with BOP economies is desired and productive.
Source
This chapter was adapted under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License from the book ‘International Business v. 1.0’ published by Saylor Academy, the creator or licensor of this work. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/08%3A_Global_Products/8.06%3A_Global_Innovation_at_the_BOP.txt |
Summary
A global brand has the same name and a similar image and positioning in most parts of the world. Many global companies leverage favorable brand images and high brand equity by employing combination (tiered) branding, cobranding, and brand extension strategies. Companies can create strong brands in all markets through global brand leadership. Maslow’s hierarchy is a needs-based framework that offers a way of understanding opportunities to develop local and global products in different parts of the world. Some products and brands benefit from the country-of-origin effect. Product decisions must also address packaging issues such as labeling and aesthetics. Also, express warranty policies must be appropriate for each country market.
Companies invest a lot in building their brand recognition and reputation because a brand name signals trust. “Trust is what drives profit margin and share price,” says Larry Light, CEO of Arcature brand consultancy and a veteran of McDonald’s and BBDO Worldwide and Bates Worldwide advertising agencies. “It is what consumers are looking for and what they share with one another.”1
Many emerging markets call for lower-cost goods. But how low can a company go on quality and performance without damaging the company’s brand? The challenge is to balance maintaining a global reputation for quality while serving local markets at lower cost points.
One way to resolve the challenge is to offer the product at quality levels that are the best in that country even though they would be somewhat below developed-country standards. This is the tactic Walmart has successfully used in Mexico. Walmart’s flooring, lighting, and air conditioning make its Mexican stores better than any other local stores even if they might seem Spartan to US consumers.
Source
This page is licensed under a Creative Commons Attribution Non-Commercial Share-Alike License (Links to an external site) Links to an external site and contains content from a variety of sources published under a variety of open licenses, including:
• The book ‘International Business v. 1.0’ published by Saylor Academy, the creator or licensor of this work.
• The course note from the ‘Global Marketing’ course published online by Centre for Teaching and Learning (CTL) of Universiti Teknologi Malaysia (UTM). ‘The Economic and Political environment’ is Copyright (c) by Dr. Inda Sukati and made available under a Attribution-Noncommercial-Share Alike 3.0 license.
9.02: Formulating a Global Brand Strategy
Learning Objectives
After reading this section, students should be able to …
1. outline the elements of brand architecture
2. explain the value of a corporate brand endorsement
To create an effective global brand structure capable of spanning operations in different countries and product lines, companies must clearly define the importance and role of each level of branding (corporate, product division, or product brand level), as well as the interrelation or overlap of branding at each level. They should also determine the appropriate geographic scope for each level relative to the firm’s current organizational structure. To be effective, such “architecture” should satisfy three key principles: parsimony, consistency, and connectivity.
Parsimony requires that the brand architecture should incorporate all existing brands, whether developed internally or acquired, and provide a framework for consolidation to reduce the number of brands and strengthen the role of individual brands. Brands that are acquired need to be melded into the existing structure, especially when these brands occupy similar market positions to those of existing brands. When the same or similar products are sold under different brand names or are positioned differently in each country, ways to harmonize these should be examined.
Student Example
PVH Corp. is one of the largest fashion apparel companies in the world. In addition to owning Tommy Hilfiger and Calvin Klein, they also own Heritage Brands. Heritage Brands is the umbrella for the other existing clothing lines like Van Heusen, IZOD, ARROW, Speedo, and more. This allows PVH Corp. to consolidate its additional clothing lines under one main brand, allowing for the individuality of each line as well as a centralized management team. Each line has its own market, but they are all clothing lines and owned by the same company.
Zach Harper
Class of 2020
A second important element of brand architecture is its consistency relative to the number and diversity of products and product lines within the company. A balance needs to be struck between the extent to which brand names differentiate product lines or establish a common identity across different products. The development of strong and distinctive brand images for different product lines helps establish their separate identities. Conversely, the use of a common brand name consolidates effort and can produce synergies.
The value of corporate brand endorsement across different products and product lines and at lower levels of the brand hierarchy—a brand’s connectivity—also needs to be assessed. The use of corporate brand endorsement as either a name identifier or logo connects the different product brands to the company and helps provide reassurance to customers, distributors, and other value-chain partners. Implemented well, a corporate brand endorsement can integrate and unify different brand identities across national boundaries. At the same time, corporate endorsement of a highly diverse range of product lines can result in dilution of the image. Worse, if one product brand is “damaged,” corporate endorsement can spread the resulting negative effects or associations to other brands in the portfolio and create lasting effects across multiple product lines. Thus, both aspects need to be weighed in determining the role of corporate brand endorsement in brand architecture.
Source
The above content was adapted from “Formulating a Global Brand Strategy”, section 7.4 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/09%3A_Global_Branding/9.01%3A_Global_Branding_Summary.txt |
Learning Objectives
After reading this section, students should be able to …
1. outline the advantages and disadvantages of global branding.
2. know the trade-offs of centralized versus decentralized marketing decision making.
3. identify the special challenges of branding decisions in emerging markets.
Global Branding
A global brand is the brand name of a product that has worldwide recognition. Indeed, the world does become flatter to the extent a brand is recognized, accepted, and trusted across borders. Some of the most-recognized brands in the world include Coca-Cola, IBM, Microsoft, GE, Nokia, McDonald’s, Google, Toyota, Intel, and Disney.1
Student Example
Apple’s success in establishing a global brand with a strong identity exemplifies the concept discussed above. Apple is one company out of many that have succeeded in creating a big global brand so it can sell its products the same way everywhere. Their one-size-fits-all approach involves using a standardized design and features across all countries. One of Apple’s largest strengths is its brand equity. Everyone around the world knows Apple and what products they sell. Having a global brand like Apple is beneficial because they do not have to modify their products to sell them in other regions. Not all companies that have created a global brand can sell its products the same way everywhere like Apple. One-way Apple achieved this was by opening stores in every country they served and matching the building with the culture there, which caught the attention of consumers. For example, the Apple store in Paris is housed in a Haussmann-type building that satisfies the architectural tastes of the people there.
Ivan Chavez
Class of 2020
The advantages of creating a global brand are economies of scale in production and packaging, which lower marketing costs while leveraging power and scope. The disadvantages, however, are that consumer needs differ across countries, as do legal and competitive environments. So while global branding, and consumer acceptance of such, is a flattener, significant country differences remain even when a firm has a strong global brand. Companies may decide to follow a global-brand strategy but also make adjustments to their communications strategy and marketing mix locally based on local needs.
The decision companies face is whether they should market one single brand around the world or multiple brands. Coca-Cola uses the Coke name on its cola products around the world but markets its water under the Dasani brand. Nestlé uses a local branding strategy for its 7,000 brands but also promotes the Nestlé corporate brand globally.
Acer’s Multiple-Brand Strategy
PC maker Acer sells its personal computers under four different brands. Using a multi-brand strategy is a good choice when a country has a strong, positive association with a particular brand. For example, when Taiwan-based Acer bought US PC-maker Gateway, Acer kept the Gateway brand to use in the United States for midtier PCs. In Europe, however, Acer uses the Packard Bell brand. Acer also has two other brands, which are segmented by price. Acer’s eMachines brand is for the lower-end consumer who is most focused on price, whereas the Acer brand is reserved for the highest-quality products aimed at technophiles. This multi-brand strategy also helps Acer’s distribution. As Acer’s chief marketing officer, Gianpiero Morello, says, “It’s difficult to get a retailer to place 50 percent of his space with one brand. It’s easier to split that same space with three brands.”2
Student Example
Starbucks owns multiple brands other than its eponymous coffee. The firm also owns Seattle’s Best, Tazo, and Ethos water, among other beverage brands. This allows Starbucks to capture parts of the market that are inaccessible to their Starbucks brand, for instance, those who refuse to pay Starbucks’ coffee’s premium price tag would be more likely to buy Seattle’s Best. On the other hand, those who only drink tea would be more likely to purchase Tazo, both at Starbucks stores or in the grocery store. In this way too, retailers can dedicate space to a variety of brands, rather than just Starbucks.
David Brown
Class of 2020
Global Brand Web Strategy
Companies that are promoting their global brands successfully on the web include Google, Philips, Skype, Ericsson, Hewlett-Packard, and Cisco Systems. These companies are mindful of the cultural and language differences across countries. They have created websites in local languages and are using images and content specific to each country. At the same time, however, each country website has the same look and feel of the main corporate website to preserve the overall brand.3
Planning a Brand Strategy for Emerging Markets
Entering an emerging market with a developed-country brand poses an extra challenge. Income levels in emerging markets are lower, so companies tend to price their products as inexpensively as possible. This low-cost strategy may have consequences for the company’s brand, however. For example, if a company introduces its brand as a “premium” product despite having a lower price, how will it introduce and differentiate its true “premium” brand later as consumers’ incomes rise?
Centralized versus Decentralized Marketing Decisions
Who has the authority to make marketing decisions? In a centralized-marketing organizational structure, the home-country headquarters retains decision-making power. In a decentralized-marketing organizational structure, the regions are able to make decisions without headquarters’ approval. The advantage of the centralized structure is speed, consistency, and economies of scale that can save costs (such as through global-marketing campaigns). The disadvantages are that the marketing isn’t tied to local knowledge and doesn’t reflect local tastes, so sales aren’t optimized to appeal to regional differences.
Student Example
Ford Motor Company (FoMoCo) is a great example of this concept. Ford sells its vehicles in many countries, both developed and developing. For instance, we have a U.S. based Ford division that primarily targets its marketing efforts towards U.S. based customers. There is also a Ford Germany division that focuses its marketing efforts on the German market. These are just two countries where FoMoCo has shown its responsiveness to local needs. For instance, Ford does not sell full-size pick-ups in Germany. I believe the closest to the truck they do provide in that market is the Ford Ranger. However, they heavily market their F-150 trucks in the United States. By allowing each division to make their own calls, Ford can increase sales because they can focus on what local markets need rather than what Ford thinks they need.
Silviano Espana Silva
Class of 2020
Key Takeaways
• One of the key decisions that must be made when marketing internationally is how to set up the structure of the marketing organization in the company—centralized or decentralized. In a centralized structure, the home-country headquarters makes the decisions, which can save costs and bring consistency to marketing campaigns. In a decentralized organizational structure, the regions are able to make decisions autonomously, which enables regions to tailor their marketing to local sensibilities.
• Another decision concerns whether to pursue a single global-brand strategy or a multiple-brand strategy. A global brand is the brand name of a product that has worldwide recognition, such as Coca-Cola or IBM. Global brands bring economies of scale and marketing power. Multiple brands, however, may resonate more with specific markets, especially if a company merges with or acquires a local brand that is well respected in that region. The purpose of brands is to signal trust. In some cases, consumers may trust a familiar local brand more than a foreign global brand.
• Finally, companies need to plan a brand strategy for emerging markets, where products have to be sold at lower price points, which could hurt a premium brand reputation.
Source
This chapter was adapted under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License from the book ‘International Business v. 1.0’ published by Saylor Academy, the creator or licensor of this work. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/09%3A_Global_Branding/9.03%3A_Global_Branding.txt |
Learning Objectives
After reading this section, students should be able to …
1. outline the brand structures in multinational companies
2. outline the principles guiding brands in the global market
Multinational companies typically operate with one of three brand structures: (a) a corporate-dominant, (b) a product-dominant, or (c) a hybrid structure. A corporate-dominant brand structure is most common among firms with relatively limited product or market diversity, such as Shell, Toyota, or Nike. Product-dominant structures, in contrast, are often used by (mostly industrial) companies, such as Akzo Nobel, that have multiple national or local brands or by firms such as Procter & Gamble (P&G) that have expanded internationally by leveraging their “power” brands. The most commonly used structure is a hybrid (think of Toyota Corolla cars or Cadbury Dairy Milk chocolate) consisting of a mix of global (corporate), regional, and national product-level brands or different structures for different product divisions.
Student Example
An example of a company with a corporate-dominant brand structure is Duracell. While Duracell might sell various products such as LED light bulbs and flashlights, they are primarily known for their strong and trusted batteries. Even though Duracell has a wide range of batteries, such as AAA and car batteries, their customers do not distinguish between or identify brand differences between those batteries, or the different products Duracell sells. Rather, their customers recognize the Duracell name and brand as one that creates and sells reliable batteries. When someone hears the Duracell name, they will most likely immediately think of batteries.
Emily Ternes
Class of 2020
One example of a Hybrid brand is the Nintendo Switch gaming console. In their marketing, Nintendo emphasizes both its corporate brand name and the unique Switch branding and logo. By using both the company and brand name Nintendo can draw on the strong reputation of their other products while also promoting the unique product attributes of the Switch.
Ridge Peterson
Class of 2020
In many companies, “global” branding evolves as the company enters new countries or expands product offerings within an existing country. Typically, expansion decisions are made incrementally, and often on a country-by-country, product-division, or product-line basis, without considering their implications on the overall balance or coherence of the global brand portfolio. As their global market presence evolves and becomes more closely interlinked, however, companies must pay closer attention to the coherence of their branding decisions across national markets and formulate an effective global brand strategy that transcends national boundaries. In addition, they must decide how to manage brands that span different geographic markets and product lines, who should have custody of international brands and who is responsible for coordinating their positioning in different national or regional markets, as well as making decisions about use of a given brand name on other products or services.
To make such decisions, companies must formulate a coherent set of principles to guide the effective use of brands in the global marketplace. These principles must define the company’s “brand architecture,” that is, provide a guide for deciding which brands should be emphasized at what levels in the organization, how brands are used and extended across product lines and countries, and the extent of brand coordination across national boundaries.
Mini Case: Henkel’s “Fox” Brands: An Example of a Hybrid Strategy, Arnold (2007); Schroiff and Arnold (2004)
Like many European companies, Henkel, the German consumer-brands corporation, has globalized mostly via acquisitions, and, consequently, it has a portfolio of localized brands with a national heritage and good local market shares. As the portfolio grew, escalating media costs, increased communication and stronger linkages across markets, and the globalization of distribution created pressures for parsimony in the number of the firm’s brands and the consolidation of architecture across countries and markets. Henkel executives understood very well that a focus on a limited number of global strategic brands can yield cost economies and potential synergies. At the same time, they also knew that they needed to develop procedures for managing the custody of these brands, and that these should be clearly understood and shared throughout all levels of the organization, thus promoting a culture focused on global growth. They knew that failing to do so would likely trigger territorial power struggles between corporate and local teams for control of the marketing agenda.
While many companies would have focused on deciding between sacrificing local brand equity to develop “global power brands” (aggregation) or continuing to sacrifice global marketing economies of scale by investing separately in its portfolio of local brands (adaptation), Henkel chose an ingenious middle path. Henkel’s choice serves as a model for globalization of marketing concepts without loss of local brand equity through the grouping of all its “value-for-money” brands under the umbrella “Fox” brand. In each country, Henkel retained the local brand name but identifies it with the Fox umbrella brand. (In most cultures, the fox is seen as clever, selfish, and cunning—the sort of character who would buy a value-for-money brand but not a brand so cheap that its quality might be compromised.)
By using a fox to represent smart and cunning shoppers, Henkel has created a “global power brand concept” that can travel to almost any culture to enrich a local brand—especially local brands that individually could not have been globalized. But the scale economies Henkel gains from this program are more managerial than economic in nature. Programs and ideas to promote the Fox brands, and the concept of value-for-money detergents, are managed centrally and offered as a menu to all local markets in which these brands participate. Thus, a manager experienced in managing one of the Fox families of brands in one market can be transferred to another market and rapidly reach effective levels of performance. Because each brand still requires local investment, financial economies of scale are more modest.
Compare Henkel’s success to the failures of its major competitors as they tried to fully globalize their brand portfolios. Years ago, P&G, for example, attempted to globalize its European laundry detergent operations. In 2000, the company renamed its popular “Fairy” laundry detergent in Germany “Dawn” to position the latter as a global brand. There was no change in the product’s formulation. But by the end of 2001, P&G’s market share of Dawn in Germany had fallen drastically. While Fairy had represented a familiar and trusted brand persona to German consumers, Dawn meant nothing. With the renaming, the bond between consumers and the brand was broken; not even changing the brand’s name back to Fairy could restore it.
This experience suggests that attempting to achieve global brand positioning by deleting local brands can be problematic. In fact, a strategy of acquisition, and the subsequent shedding, of local brands by multinationals may actually create fragmentation in consumer demand rather than be a globalizing force. Such a scenario is particularly plausible if one or more of the local brands have reached “icon” status. Icon brands do not necessarily have distinctive features, deliver good service, or represent innovative technology. Rather, they resonate deeply with consumers because they possess cultural brand equity. Most of these brands fall into lifestyle categories: food, apparel, alcohol, and automobiles.
Source
The above content was adapted from “Global Brand Structures”, section 7.2 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/09%3A_Global_Branding/9.04%3A_Global_Brand_Structures.txt |
Learning Objectives
After reading this section, students should be able to …
1. outline the factors shaping a company’s international brand structure
2. explain the role of firm-based, product-market, and market dynamic characteristics in global branding
The kinds of issues a company must resolve as it tries to shape a coherent global branding strategy reflect its globalization history—how it has expanded internationally and how it has organized its international operations. At any given point, the structure of a brand portfolio reflects a company’s past management decisions as well as the competitive realities the brand faces in the marketplace. Some companies, such as P&G and Coca-Cola, expanded primarily by taking domestic “power” brands to international markets. As they seek to expand further, they must decide whether to further extend their power brands or to develop brands geared to specific regional or national preferences and how to integrate the latter into their overall brand strategy. Others, such as Nestlé and Unilever, grew primarily by acquisition. As a consequence, they relied mainly on country-centered strategies, building or acquiring a mix of national and international brands. Such companies must decide how far to move toward greater harmonization of brands across countries and how to do so. This issue is particularly relevant in markets outside the United States, which often are fragmented, have small-scale distribution, and lack the potential or size to warrant the use of heavy mass-media advertising needed to develop strong brands.
Specifically, a company’s international brand structure is shaped by three sets of factors: (a) firm-based characteristics, (b) product-market characteristics, and (c) underlying market dynamics (Douglas, Craig, and Nijssen (2001).
Firm-Based Characteristics
Firm-based characteristics reflect the full array of past management decisions. First, a company’s administrative heritage—in particular, its organizational structure—defines the template for its brand structure. Second, a firm’s international expansion strategy—acquisition or organic growth—affects how its brand structure evolves over time. What is more, the use of strategic alliances to broaden the geographic scope of the firm’s operations often results in a “melding” of the brand strategies of the partners. Third and fourth, the importance of corporate identity and the diversity of the firm’s product lines and product divisions also determine the range and number of brands.
An appreciation of a company’s administrative heritage is critical to understanding its global brand structure.Bartlett and Ghoshal (1989). A firm that has historically operated on a highly decentralized basis, in which country managers have substantial autonomy and control over strategy as well as day-to-day operations, is likely to have a substantial number of local brands. In some cases, the same product may be sold under different brand names in different countries. In others, a product may be sold under the same brand name but have a different positioning or formulation in different countries.
Firms with a centralized organizational structure and global product divisions, such as Panasonic or Siemens, are more likely to have global brands. Both adopted a corporate branding strategy that emphasizes quality and reliability. Product lines are typically standardized worldwide, with minor variations in styling and features for local country markets.
Firms that expand internationally by acquiring local companies, even when the primary goal is to gain access to distribution channels, often acquire local brands. If these brands have high local recognition or a strong customer or distributor franchise, the company will normally retain the brand. This is particularly likely if the brand does not occupy a similar positioning to that of another brand currently owned by the firm. Nestlé and Unilever are examples of companies following this type of expansion strategy.
Expansion is often accompanied by diversification. Between 1960 and 1990, Nestlé expanded by acquiring a number of companies in a range of different product-markets, mostly in the food and beverage segment. These acquisitions included well-known global brands such as Perrier and San Pellegrino (mineral water), confectionery companies such as Rowntree and Perugina, pet food companies and brands such as Spillers and Alpo, and grocery companies such as Buitoni, Crosse & Blackwell, and Herta. The resulting proliferation of brands created the need to consolidate and integrate company-branding structures (Douglas, Craig, and Nijssen (2001), p. 101).
Firms that have expanded predominantly by extending strong domestic, so-called power brands into international markets primarily use product-level brand strategies. P&G, for instance, has rolled out several of its personal products brands, such as Camay and Pampers, into international markets. This strategy appears most effective when customer interests and desired product attributes are similar worldwide and brand image is an important cue for the consumer.
The relative importance placed by the firm on its corporate identity also influences brand structure. Companies such as General Electric (GE) and Apple place considerable emphasis on corporate identity in the communications strategies. In the case of GE, “Imagination at Work” is associated with a corporate reputation dedicated to turning innovative ideas into leading products and services that help alleviate some of the world’s toughest problems. Equally, Apple uses its apple logo to project the image of a vibrant innovator in the personal computer market. Increasingly, companies use their corporate identity as a means of reassuring customers and distributors that the company is reliable and stands behind its products. As a result, even companies with highly diverse product lines—such as Samsung—rely on the corporate brand name (and its logo) to project an image of reliability.
A fourth determinant of a company’s brand structure is the diversity, or, conversely, the interrelatedness of the product businesses in which the firm is involved. Firms that are involved in closely related product lines or businesses that share a common technology or rely on similar core competencies often emphasize corporate brands. 3M Corporation, for example, is involved in a wide array of product businesses worldwide, ranging from displays and optics to health care products to cleaners to abrasives and adhesives. All rely heavily on engineering skills and have a reputation of being cutting-edge. The use of the 3M brand provides reassurance and reinforces the firm’s reputation for competency and reliable products worldwide.
Mini Case: Pharmaceutical Companies Try Global Branding
In Paris, stomach ulcers are treated with Mopral; in Chicago, it is called Prilosec. These two products are, in fact, exactly the same drug. Prilosec is the U.S. brand of AstraZeneca’s omeprazole; Mopral is its French counterpart. Unlike manufacturers of consumer goods, the pharmaceutical industry traditionally has been wary of creating big, international brands. But that is about to change. Take a look at pharmacists’ shelves. Viagra is there. So are Celebrex for arthritis pain, the antidiabetic agent Avandia, and the anticoagulant Plavix.
It is perhaps surprising that companies did not consider global branding sooner because a drug works for everybody in the same way in every country. While the industry has become global from a technological and geopolitical perspective, few companies have mastered globally integrated marketing practices. But change is coming—and fast. As more people travel internationally and the Internet makes information—including drug advice—readily available for doctors and patients, companies want to avoid any brand inconsistencies while maximizing exposure. Another globalizing force is growing standardization of the regulatory environment. With the establishment of the European Medical Evaluations Agency, for example, which approves drugs for all the members of the European Union, the borders are coming down. Japan has also adapted its approval system to facilitate the entry of Western products.
And then there is direct-to-consumer (DTC) advertising. While doctors and health care professionals remained the targets for pharmaceutical marketing, consumer-style branding was unnecessary. But companies are preparing for the spread of DTC beyond the shores of the United States. The introduction of global branding anticipates the transition to a more consumer-driven market.
Pressure to cut or contain costs is perhaps the most powerful driver behind the industry’s move to global branding. Mega mergers were a way to contain the costs of research and development and find pipeline products, yet the big companies still need about five new blockbuster products each year to return the promised growth. Global branding promises reduced marketing costs and much faster and higher product rollout.
Local market conditions, such as reimbursement policies, however, may still override the benefits of global strategies and therefore inhibit the globalization of brands. Local flexibility will be key to success. Significant cost savings may therefore be slow in coming. Even with a centralized, global brand, most companies will still likely use local agencies for their marketing campaigns.
Product-Market Factors
Three product-market factors play an important role in brand architecture: the nature and scope of the target market, the product’s cultural associations, and the competitive market structure (Douglas, Craig, and Nijssen (2001), p. 103).
When companies target a global market segment with relatively homogeneous needs and preferences worldwide, global brands provide an effective means of establishing a distinctive global identity. Luxury brands such as Godiva, Moet and Chandon, and Louis Vuitton, as well as brands such as deBeers, Benetton, and L’Oreal are all targeted to the same market segment worldwide and benefit from the cachet provided by their appeal to a global consumer group. Sometimes it is more effective to segment international markets by region and target regional segments with similar interests and purchase behavior, such as Euro-consumers. This provides cost efficiencies when such segments are readily accessible through targeted regional media and distribution channels.
A critical factor influencing brand structure is the extent to which the product is associated with a particular culture, that is, the extent to which there are strong and deeply ingrained local preferences for specific products or product variants (think of beer) or the products are an integral part of a culture (think of bratwurst, soccer teams). The stronger the cultural association, the less likely it is that global product brands will thrive; instead, local branding may be called for.
Student Example
In almost all of Mexico, global brands tend to struggle due to the price being a bit more than the products developed in their country. Many Mexican consumers tend to be loyal to one brand because of its price and because they already know the quality of the product. An example of this can be seen in baked goods. Mexico has a well-known brand called BIMBO, which they manufacture a variety of pastries and snacks. They are the Mexican version of the Hostess brand from the US. BIMBO is very popular among Mexican consumers and in any store, you’ll see BIMBO products. There are some stores in Mexico that sell pastries from other parts of the world, but they are usually priced higher and available in small quantities. Most Mexicans tend to stick to pastries that BIMBO makes, such as Mantecadas, Bimbunelos, Rebanadas, among many others. Since BIMBO is a Mexican company, they know the Mexican people better than any outside organization ever could.
Lucio Chavarria
Class of 2020
A third product-market driver of a company’s brand structure is the product’s competitive market structure, defined as the relative strength of local (national) versus global competitors in a given product market. If markets are fully integrated and the same competitors compete in these markets worldwide, as in aerospace, the use of global brands helps provide competitive differentiation on a global basis. If strong local, national, or regional competitors, as well as global competitors, are present in a given national or regional market, the use of a multitier branding structure, including global corporate or product brands as well as local brands, is desirable. Coca-Cola, for example, beyond promoting its power brands, has introduced several local and regional brands that cater to specific market tastes around the world.
Mini Case: Use of Country of Origin Effects in Global Branding, Silverstein (2008, November 24)
Whether you prefer obscure imports or something mainstream, most beer brands like to invoke their country of origin. Guinness comes from Ireland, Corona is Mexican, Heineken and Amstel are Dutch, and Budweiser is a truly American brand.
The use of “country of origin effects” is an essential part of beer branding. Using the country of origin as part of the brand equity is free, so companies can avoid having to build an image from scratch over decades. For a long time, Foster’s used a kangaroo in its advertisements, while Lapin Kulta, from Lapland in Finland, relies heavily on its unusual provenance in its marketing. Images of Finland’s stark landscapes adorn communications material and bottle labels.
Swiss watchmakers certainly know the value of their “Swiss made” brand. The Federation of the Swiss Watch Industry actively polices all uses of the term and has strict guidelines on how it may be used on clocks and watches. In a similar vein, the French leverage their reputation for good wine, cooking, and fashion and the Italians view themselves as the masters of style.
German companies have been particularly effective in leveraging country effects. Of Interbrand’s Top 100 Global Brands in 2008, 10 were German brands—five automobile brands (BMW, Porche, Mercedes-Benz, Volkswagen, and Audi), while brands in technology (SAP and Siemens), clothing (Adidas), financial services (Allianz), and cosmetics (Nivea) were also represented. Together, this group of German brands is valued at over \$98 billion. Germany was second only to the United States in the number of brands making the Top 100 list.
It should come as no surprise, then, that Germany itself was ranked the best overall “country brand” in the 2008 Anholt-GfK Roper Nation Brands Index, which measures the world’s perception of each nation as if it were a public brand. Fifty nations were measured in the study. The United States, the world’s leading branding powerhouse, ranked seventh. So what is it about German brands, and the country that produces them, that is so special? Two words might be all the explanation that’s required: discipline and quality.
German companies are highly disciplined in their approach to creating, introducing, and selling brands. They have the ability to consistently produce exceptional-quality products that are of lasting value. “German engineering” is a term closely associated with the country’s automobile industry, which has seen a level of global success second only to the Japanese automakers. In fact, between 1990 and 2000, Mercedes-Benz and BMW more than doubled their sales in the United States alone.
Why do customers like German brands? German companies are widely admired for their intense focus on product quality and service, thought to be less interested in competing on price and strict about adhering to safety and other government standards.
BMW, a maker of premium automobiles, is one such revered brand. Founded in 1917 in Munich, Germany, as “Bavarian Motor Works,” BMW produced aircraft engines during World War I, then built motorcycles in 1923 and went on to make cars in 1928. In recent years, BMW has been recognized as much for its innovative, quality marketing as for its high-performance cars.
But Germany’s branding power extends well beyond automobiles. NIVEA, whose name comes from the Latin for “snow white,” was created in late 1911. From its origins as a simple cream, NIVEA has now grown into a global manufacturer of a broad range of cosmetic and personal care products. NIVEA was voted the most trusted skin-care brand in 15 countries in the Reader’s Digest survey of European Trusted Brands 2007.
Adidas, named after its founder Adolf (Adi) Dassler (Das), is an 80-year-old company that today is a global leader in sports footwear, apparel, and accessories. In 1996, Adidas equipped 6,000 Olympic athletes from 33 countries with its athletic gear. “Adidas athletes” won 220 medals, including 70 gold, and apparel sales increased 50%.
SAP, founded in 1972, is the world’s largest business software company and the third-largest software supplier overall. The company employs almost 52,000 people and serves more than 76,000 customers in over 120 countries.
Other well-known global brands, from Bayer (pharmaceuticals) to Becks (beer) to Boss (clothing) to Braun (consumer products), are a testament to the fact that Germany is, and will continue to be, a prolific producer of some of the world’s finest products. It is Germany’s disciplined approach to quality that inspires consumer loyalty to German brands.
Market Dynamics
Finally, while the firm’s history and the product markets in which it operates shape its brand structure, market dynamics—including ongoing political and economic integration, the emergence of a global market infrastructure, and consumer mobility—shape and continually change the context in which this evolves (Douglas, Craig, and Nijssen (2001), p. 104).
Increasing political and economic integration in many parts of the world has been a key factor behind the growth of international branding. As governments remove tariff and nontariff barriers to business transactions and trade with other countries, and as people and information move easily across borders, the business climate has become more favorable to the marketing of international brands. Firms are less frequently required to modify products to meet local requirements or to develop specific variants for local markets and increasingly can market standardized products with the same brand name in multiple country markets. In many cases, harmonization of product regulation across borders has further facilitated this trend.
The growth of a global market infrastructure is also a major catalyst to the spread of international brands. Global and regional media provide economical and effective vehicles for advertising international brands. At the same time, global media help lay the groundwork for consumer acceptance of, and interest in, international brands by developing awareness of these brands and the lifestyles with which they are associated in other countries. In many cases, this stimulates a desire for the brands that consumers perceive as symbolic of a coveted lifestyle.
The globalization of retailing has further facilitated and stimulated the development of international manufacturer brands. As retailers move across borders, they provide an effective channel for international brands and, at the same time, increase their power. This forces manufacturers to develop strong brands with an international appeal so that they can negotiate their shelf position more effectively and ensure placement of new products.
A final factor shaping the context for international branding is increased consumer mobility. While global media provide passive exposure to brands, increasing international travel and movement of customers across national boundaries provides active exposure to brands in different countries. Awareness of the availability and high visibility of an international brand in multiple countries enhances its value to consumers and provides reassurance of its strength and reliability. Increased exposure to, and familiarity with, new and diverse products and the lifestyles and cultures in which they are embedded also generate greater receptivity to products of foreign origin or those perceived as international rather than domestic. All these factors help create a climate more favorable to international brands.
Source
The above content was adapted from “Determinants of Global Brand Structure”, section 7.3 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/09%3A_Global_Branding/9.05%3A_Determinants_of_Global_Brand_Structure.txt |
Learning Objectives
After reading this section, students should be able to …
1. list the approaches to globally manage and monitor strategic brands
2. state the benefits of corporate branding
Companies must also think about how to globally manage and monitor key strategic brands to ensure that they build and retain their integrity, visibility, and value. This entails assigning brand custody or appointing a brand champion responsible for approving brand extensions and monitoring brand positioning.
One option is to negotiate the harmonization of specific brand positions between corporate headquarters and country managers. This is appropriate for firms with strong country management that operate in product markets where brands were historically tailored to local market characteristics.
A more proactive and increasingly popular solution is to appoint a brand champion responsibility for building and managing a brand worldwide. This includes monitoring the consistency of the brand positioning in international markets as well as authorizing use of the brand (brand extensions) on other products or other product businesses. The brand champion can be a senior manager at corporate headquarters, a country manager, or a product development group. It is critical that the brand champion report directly to top management and have clear authority to sanction or refuse brand extensions to other product lines and product businesses so as to maintain the integrity of the brand and avoid brand dilution.
A third option is to centralize control of brands within a global product division. This approach is likely to be most effective when the business is targeted to a specific global market segment, with new products or brands, when there is greater consistency in market characteristics across countries, and when the company’s administrative heritage has only a limited history of strong country management.
Benefits of Corporate Branding
Corporations around the world are increasingly becoming aware of the enhanced value that corporate branding strategies can provide. Holt, Quelch, and Taylor (2004, September). A strong corporate branding strategy can add significant value in terms of helping the entire corporation and the management team with implementing its long-term vision, creating unique positions in the marketplace for the company and its brands, and signaling a commitment to a broader set of stakeholder issues. An effective corporate branding strategy therefore enables the company to leverage its tangible and nontangible assets and promote excellence throughout the corporation. To be effective and meet such objectives, corporate branding requires a high level of personal attention and commitment from the CEO and the senior management. Examples of effective corporate brands include Microsoft, Intel, Singapore Airlines, Disney, CNN, Samsung, and Mercedes. In recent years, the global financial powerhouses HSBC and Citibank have both acquired a vast number of companies across the globe and have fully adopted them under their international corporate brands with great success and within a relatively short time frame. All these companies understand that a well-executed corporate branding strategy can confer significant benefits.
Corporate Brand as the “Face of the Company”
A strong corporate brand acts as the face of the company, portraying what it wants to do and what it wants to be known for in the marketplace. In other words, the corporate brand is the umbrella for the corporation’s activities and encapsulates its vision, values, personality, positioning, and image, among many other dimensions. Think of HSBC. It employs the same slogan—“The world’s local bank”—around the world. This creative platform enables the corporation to portray itself as a bridge between cultures.
Simplicity
An effective corporate branding strategy creates simplicity by making the top of the brand portfolio the ultimate identifier of the corporation. P&G is widely known for its multibrand strategy. Yet, the corporate name P&G encapsulates all of its activities. Depending on the business strategy and the potential need for multiple brands, a corporate brand can assist management focus on the company’s core vision and values. Once established, it facilitates revisiting the definition of other brands in the corporations’ portfolio and the creation of new brand identities.
Cost Savings
A corporate branding strategy is often more cost-efficient than a multibrand architecture. Specifically, corporate branding produces efficiencies in terms of marketing and advertising spending as the corporate brand replaces budgets for individual product marketing efforts. Even a combined corporate and product branding strategy can often enable management to reduce costs and exploit synergies from a new and more focused brand architecture. The Apple brand has established a very strong position of being a design-driven and innovative company offering many types of products and services. Their corporate brand encapsulates the body and soul of the company, and the main messages from the company use the corporate Apple brand. Various sub-brands then help to identify the individual product lines.
Corporate Brands as Assets
In recent years, corporate brands themselves have become valuable assets on the company balance sheet, with market values very often much beyond book value.
Mini Case: The Best Global Brands, http://www.Interbrand.com/(2009)
Interbrand, a leading international brand consultancy specializing in brand services and activities, has developed a method for valuing (global) brands. It examines brands through the lens of financial strength, the importance of the brand in driving consumer selection, and the likelihood of ongoing revenue generated by the brand.
Each year, Interbrand compiles a list of global brands for analysis based on five criteria:
1. There must be substantial publicly available financial data for the brand.
2. One-third of the brand’s revenues must come from outside its country of origin.
3. The brand must be positioned to play a significant role in the consumers’ purchase decision.
4. The Economic Value Added (EVA) must be positive, showing that there is revenue above the company’s operating and financing costs.
5. The brand must have a broad public profile and awareness.
The use of these criteria excludes a number of brands one might expect to be included. The Mars and BBC brands, for example, are privately held and do not have financial data publicly available. Wal-Mart, although it does business in international markets, does not do so under the Wal-Mart brand and is therefore not sufficiently global. Certain industry sectors are also not included in Interbrand’s study. An example is provided by telecommunication brands, which tend to have strong national roots and have faced awareness challenges due to numerous mergers and acquisitions. The major pharmaceutical companies, while very valuable businesses, are also excluded since their consumers tend to build a relationship with the product brands rather than the corporate brand.
For brands that meet the Interbrand criteria, the company next looks at the current financial health of the business and brand, the brand’s role in creating demand, and the future strength of the brand as an asset to the business.
Financial Analysis
Interbrand’s model first forecasts the current and future revenue specifically attributable to the branded products. It subtracts operating costs from this revenue to calculate branded operating profit. Next, a charge is applied to the branded profit that is based on the capital a business spends versus the money it makes. This yields an estimate of a business’s economic earnings. All financial analysis is based on publicly available company information.
Role of Brand Analysis
Brand analysis involves a measurement of how a brand influences customer demand at the point of purchase. It is applied to the economic earnings in order to arrive at the revenue that the brand alone generates (branded earnings). Interbrand uses in-house market research to establish individual brand scores against industry benchmarks to define the role a brand plays within the category. For example, role of brand is traditionally much higher in the luxury category than in the energy and utilities sector. The brand, not the business, is the principal reason consumers choose these goods and services.
Brand Strength Score
As brands are assets, valuing them requires an assessment of their ability to secure future earnings on behalf of the businesses that own them. Brand strength is a measure of the brand’s ability to secure demand, and therefore earnings, over time. Securing customer demand typically means achieving loyalty, advocacy, and favorable levels of customer trial, as well as maintaining a price premium. Interbrand’s methodology generates a discount factor that adjusts the forecasted brand earnings for their riskiness based on the level of demand the brand is able to secure. Brand strength is calculated by assessing the brand’s performance against a set of seven critical factors, including measures of relevance, leadership, market position, customer franchise, diversification, and brand support.
Brand Value
A brand’s value is a financial representation of a business’s earnings due to the superior demand created for its products and services through the strength of its brand. Brand value is the absolute financial worth of the brand as it stands today. Accordingly, the brand’s value can be compared to the total value of the business as it would be assessed on the stock exchange.
The winner and number 1 global brand on Interbrand’s 2009 list, once again, is Coca-Cola, which has topped the list for more than 20 years. IBM is number 2, Microsoft ranks third, GE comes in fourth, and Nokia has moved up to fifth position. Rounding out the top 10 are McDonald’s (6), Google (7), Toyota (8), Intel (9), and Disney (10).
Interestingly, not one of the 100 Best Global Brands emanates from the developing world, at least for now. But Interbrand’s research suggests this may soon change. With their huge populations, there is a decided shift in economic power to countries like China, India, Russia, Brazil, and Africa, and former global giants are making way for new leaders from fast developing markets.
The following brands are strong leaders in their home markets and already show some early signs of globalization:
• China: Lenovo (PCs), Haier (refrigerators, Tsingtao (beer)
• India: Tata (communications and information technology, engineering, materials, services, energy, consumer products, and chemicals), Reliance (energy and materials), ArcelorMittal(steel)
• Russia: Kaspersky Lab (information security to computer users, Aeroflot (airline), Gazprom(gas)
• South Africa: MTN (communications), Anglo American (mining), SABMiller (beer and soft drinks).
• Brazil: Banco Itaú (finance), Vale (mining), Natura Cosmético (cosmetics)
Source
The above content was adapted from “Managing Key Strategic Brands”, section 7.5 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/09%3A_Global_Branding/9.06%3A_Managing_Key_Strategic_Brands.txt |
Summary
In today’s global competitive environment, individual companies no longer compete as autonomous entities but as supply-chain networks. Instead of brand versus brand or company versus company, then network is increasingly suppliers-brand-company versus suppliers-brand-company.
Top-performing supply chains have three distinct qualities. First, they are agile enough to react readily to sudden changes in demand or supply. Second, they adapt over time as market structures and environmental conditions change. And third, they align the interests of all members of the supply-chain network in order to optimize performance.
Driven by e-commerce’s capabilities to empower clients, most companies have moved from the traditional “push” business model—where manufacturers, suppliers, distributors, and marketers have most of the power—to a customer-driven “pull” model.
Supply-chain management (SCM) has three principal components: (a) creating the supply-chain network structure, (b) developing supply-chain business processes, and (c) managing the supply-chain activities. The supply-chain network structure consists of the member firms and the links between these firms. Business processes are the activities that produce a specific output of value to the customer. The management function integrates the business processes across the supply chain.
The best companies create supply chains that can respond to sudden and unexpected changes in markets. Agility—the ability to respond quickly and cost-effectively to unexpected change—is critical because in most industries, both demand and supply fluctuate more rapidly and widely than they used to. Key to increasing agility and resilience is building flexibility into the supply-chain structure, processes, and management.
Global companies must be able to adapt their supply networks when markets or strategies change. Companies that compete primarily on the basis of operational effectiveness typically focus on creating supply chains that deliver goods and services to consumers as quickly and inexpensively as possible. They invest in state-of-the-art technologies and employ metrics and reward systems aimed at boosting supply-chain performance. For companies competing on the basis of customer intimacy or product leadership, a focus on efficiency is not enough; agility is a key factor. Customer-intimate companies must be able to add and delete products and services as customer needs change; product leadership companies must be able to adapt their supply chains to changes in technology and to capitalize on new ideas.
Leading companies take care to align the interests of all the firms in their supply chain with their own. This is important because every supply-chain partner firm—whether a supplier, an assembler, a distributor, or a retailer—will focus on its own interests. If any company’s interests differ from those of the other organizations in the supply chain, its actions will not maximize the chain’s performance.
Source
This page is licensed under a Creative Commons Attribution Non-Commercial Share-Alike License (Links to an external site) Links to an external site and contains content from a variety of sources published under a variety of open licenses, including:
• “Points to Remember”, section 9.6 from the book Global Strategy(v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor.
• Section 10.1 Basics of Distribution Channels and Section 10.4 Organizing the channel are edited versions of the chapter ‘10. Channel concepts: distributing the product’ from the textbook ‘Introducing Marketing, First Edition, 2011’ authored by John Burnett – this book was published under The Global Text Project, funded by the Jacobs Foundation, Zurich, Switzerland.
• The following changes were made to the most recent edition: Divided ‘Chapter 10. Channel concepts: distributing the product’’ into three sections; Removed Created new title for Figure featuring Anderson ad.; Removed box titled ‘In Practice’ from wsj.com; Removed case application at the end of chapter; Added learning objectives for sections 10.1, and 10.4. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/10%3A_Global_Channels_and_Supply_Chains/10.01%3A_Global_Channels_and_Supply_Chains_Summary.txt |
Learning Objectives
After reading this section, students should be able to …
• outline the role of distribution channels
• explain flows in channels
• list the participants in the marketing channel
• state their capabilities and limitations
In this chapter, we will look at the basics of channels of distribution. We shall see that several basic functions have emerged that are typically the responsibility of a channel member. Also, it will become clear that channel selection is not a static, once-and-for-all choice, but that it is a dynamic part of marketing planning. As was true for the product, the channel must be managed in order to work. Unlike the product, the channel is composed of individuals and groups that exhibit unique traits that might be in conflict, and that have a constant need to be motivated. These issues will also be addressed. Finally, the institutions or members of the channel will be introduced and discussed.
The dual functions of channels
Just as with the other elements of the firm’s marketing program, distribution activities are undertaken to facilitate the exchange between marketers and consumers. There are two basic functions performed between the manufacturer and the ultimate consumer. The first called the exchange function, involves sales of the product to the various members of the channel of distribution. The second, the physical distribution function, moves products through the exchange channel, simultaneously with title and ownership. Decisions concerning both of these sets of activities are made in conjunction with the firm’s overall marketing plan and are designed so that the firm can best serve its customers in the market place. In actuality, without a channel of distribution the exchange process would be far more difficult and ineffective.
The key role that distribution plays is satisfying a firm’s customer and achieving a profit for the firm. From a distribution perspective, customer satisfaction involves maximizing time and place utility to: the organization’s suppliers, intermediate customers, and final customers. In short, organizations attempt to get their products to their customers in the most effective ways. Further, as households find their needs satisfied by an increased quantity and variety of goods, the mechanism of exchange—i.e. the channel—increases in importance.
As consumers, we have clearly taken for granted that when we go to a supermarket the shelves will be filled with products we want; when we are thirsty there will be a Coke machine 0r bar around the corner; and, when we do not have time to shop, we can pick-up the telephone and order from the J.C. Penney catalog or through the Internet. Of course, if we give it some thought, we realize that this magic is not a given, and that hundreds of thousands of people plan, organize, and labor long hours so that this modern convenience is available to you, the consumer. It has not always been this way, and it is still not this way in many other countries. Perhaps a little anthropological discussion will help our understanding.
The channel structure in a primitive culture is virtually nonexistent. The family or tribal group is almost entirely self-sufficient. The group is composed of individuals who are both communal producers and consumers of whatever goods and services can be made available. As economies evolve, people begin to specialize in some aspect of economic activity. They engage in farming, hunting, or fishing, or some other basic craft. Eventually this specialized skill produces excess products, which they exchange or trade for needed goods that have been produced by others. This exchange process or barter marks the beginning of formal channels of distribution. These early channels involve a series of exchanges between two parties who are producers of one product and consumers of the other.
With the growth of specialization, particularly industrial specialization, and with improvements in methods of transportation and communication, channels of distribution become longer and more complex. Thus, corn grown in Illinois may be processed into corn chips in West Texas, which are then distributed throughout the United States. Or, turkeys raised in Virginia are sent to New York so that they can be shipped to supermarkets in Virginia. Channels do not always make sense.
The channel mechanism also operates for service products. In the case of medical care, the channel mechanism may consist of a local physician, specialists, hospitals, ambulances, laboratories, insurance companies, physical therapists, home care professionals, and so forth. All of these individuals are interdependent, and could not operate successfully without the cooperation and capabilities of all the others.
Based on this relationship, we define a marketing channel as sets of interdependent organizations involved in the process of making a product or service available for use or consumption, as well as providing a payment mechanism for the provider.
This definition implies several important characteristics of the channel. First, the channel consists of institutions, some under the control of the producer and some outside the producer’s control. Yet all must be recognized, selected, and integrated into an efficient channel arrangement.
Second, the channel management process is continuous and requires continuous monitoring and reappraisal. The channel operates 24 hours a day and exists in an environment where change is the norm.
Finally, channels should have certain distribution objectives guiding their activities. The structure and management of the marketing channel is thus in part a function of a firm’s distribution objective. It is also a part of the marketing objectives, especially the need to make an acceptable profit. Channels usually represent the largest costs in marketing a product.
Flows in marketing channels
One traditional framework that has been used to express the channel mechanism is the concept of flow. These flows reflect the many linkages that tie channel members and other agencies together in the distribution of goods and services. From the perspective of the channel manager, there are five important flows.
• Product flow
• Negotiation flow
• Ownership flow
• Information flow
• Promotion flow
These flows are illustrated for Perrier Water in Figure Figure \(2\):
The product flow refers to the movement of the physical product from the manufacturer through all the parties who take physical possession of the product until it reaches the ultimate consumer. The negotiation flow encompasses the institutions that are associated with the actual exchange processes. The ownership flow shows the movement of title through the channel. Information flow identifies the individuals who participate in the flow of information either up or down the channel. Finally, the promotion flow refers to the flow of persuasive communication in the form of advertising, personal selling, sales promotion, and public relations.
Functions of the channel
The primary purpose of any channel of distribution is to bridge the gap between the producer of a product and the user of it, whether the parties are located in the same community or in different countries thousands of miles apart. The channel is composed of different institutions that facilitate the transaction and the physical exchange. Institutions in channels fall into three categories: (a) the producer of the product–a craftsman, manufacturer, farmer, or other extractive industry producer; (b) the user of the product–an individual, household, business buyer, institution, or government; and (c) certain middlemen at the wholesale and/or retail level. Not all channel members perform the same function.
Heskett (2) suggests that a channel performs three important functions:
• Transactional functions: buying, selling, and risk assumption
• Logistical functions: assembly, storage, sorting, and transportation
• Facilitating functions: post-purchase service and maintenance, financing, information dissemination, and channel coordination or leadership
These functions are necessary for the effective flow of product and title to the customer and payment back to the producer. Certain characteristics are implied in every channel. First, although you can eliminate or substitute channel institutions, the functions that these institutions perform cannot be eliminated. Typically, if a wholesaler or a retailer is removed from the channel, the function they perform will be either shifted forward to a retailer or the consumer, or shifted backward to a wholesaler or the manufacturer. For example, a producer of custom hunting knives might decide to sell through direct mail instead of retail outlets. The producer absorbs the sorting, storage, and risk functions; the post office absorbs the transportation function; and the consumer assumes more risk in not being able to touch or try the product before purchase.
Second, all channel institutional members are part of many channel transactions at any given point in time. As a result, the complexity may be quite overwhelming. Consider for the moment how many different products you purchase in a single year, and the vast number of channel mechanisms you use.
Third, the fact that you are able to complete all these transactions to your satisfaction, as well as to the satisfaction of the other channel members, is due to the routinization benefits provided through the channel. Routinization means that the right products are most always found in places (catalogues or stores) where the consumer expects to find them, comparisons are possible, prices are marked, and methods of payment are available. Routinization aids the producer as well as the consumer, in that the producer knows what to make, when to make it, and how many units to make.
Fourth, there are instances when the best channel arrangement is direct, from the producer to the ultimate user. This is particularly true when available middlemen are incompetent, unavailable, or the producer feels he can perform the tasks better. Similarly, it may be important for the producer to maintain direct contact with customers so that quick and accurate adjustments can be made. Direct-to-user channels are common in industrial settings, as are door-to-door selling and catalogue sales. Indirect channels are more typical and result, for the most part, because producers are not able to perform the tasks provided by middlemen.
Finally, although the notion of a channel of distribution may sound unlikely for a service product, such as health care or air travel, service marketers also face the problem of delivering their product in the form, at the place and time their customer demands. Banks have responded by developing bank-by-mail, Automatic Teller Machines (ATMs), and other distribution systems. The medical community provides emergency medical vehicles, out patient clinics, 24-hour clinics, and home-care providers. As noted in Figure 10.3 even performing arts employ distribution channels. In all three cases, the industries are attempting to meet the special needs of their target markets while differentiating their product from that of their competition. A channel strategy is evident.
Channel institutions: capabilities and limitations
There are several different types of parties participating in the marketing channel. Some are members, while others are nonmembers. The former perform negotiation functions and participate in negotiation and/or ownership while the latter participants do not.
Producer and manufacturer
These firms extract, grow, or make products. A wide array of products is included, and firms vary in size from a one-person operation to those that employ several thousand people and generate billions in sales. Despite these differences, all are in business to satisfy the needs of markets. In order to do this, these firms must be assured that their products are distributed to their intended markets. Most producing and manufacturing firms are not in a favorable position to perform all the tasks that would be necessary to distribute their products directly to their final user markets. A computer manufacturer may know everything about designing the finest personal computer, but know absolutely nothing about making sure the customer has access to the product.
In many instances, it is the expertise and availability of other channel institutions that make it possible for a producer or manufacturer to even participate in a particular market. Imagine the leverage that a company like Frito-Lay has with various supermarket chains. Suppose you developed a super-tasting new snack chip. What are your chances of taking shelf-facings away from Frito-Lay? Zero. Thankfully, a specialty catalog retailer is able to include your product for a prescribed fee. Likewise, other channel members can be useful to the producer in designing the product, packaging it, pricing it, promoting it, and distributing it through the most effective channels. It is rare that a manufacturer has the expertise found with other channel institutions.
Retailing
Retailing involves all activities required to market consumer goods and services to ultimate consumers who are motivated to buy in order to satisfy individual 0r family needs in contrast to business, institutional, or industrial use. Thus, when an individual buys a computer at Circuit City, groceries at Safeway, or a purse at Ebags.com, a retail sale has been made.
We typically think of a store when we think of a retail sale. However, retail sales are made in ways other than through stores. For example, retail sales are made by door-to-door salespeople, such as an Avon representative, by mail order through a company such as: L.L. Bean, by automatic vending machines, and by hotels and motels. Nevertheless, most retail sales are still made in brick-and-mortar stores.
The structure of retailing
Stores vary in size, in the kinds of services that are provided, in the assortment of merchandise they carry and in many other respects. Most stores are small and have weekly sales of only a few hundred dollars. A few are extremely large, having sales of USD 500,000 or more on a single day. In fact, on special sale days, some stores have exceeded USD 1 million in sales.
Department stores
Department stores are characterized by their very wide product mixes. That is, they carry many different types of merchandise that may include hardware, clothing, and appliances. Each type of merchandise is typically displayed in a different section or department within the store. The depth of the product mix depends on the store.
Chain stores
The 1920s saw the evolution of the chain store movement. Because chains were so large, they were able to buy a wide variety of merchandise in large quantity discounts. The discounts substantially lowered their cost compared to costs of single unit retailers. As a result, they could set retail prices that were lower than those of their small competitors and thereby increase their share of the market. Furthermore, chains were able to attract many customers because of their convenient locations, made possible by their financial resources and expertise in selecting locations.
Supermarkets
Supermarkets evolved in the 192os and 1930s. For example, Piggly Wiggly Food Stores, founded by Clarence Saunders around 1920, introduced self-service and customer checkout counters. Supermarkets are large, selfservice stores with central checkout facilities, they carry an extensive line of food items and often nonfood products.
Supermarkets were among the first to experiment with such innovations as mass merchandising and low-cost distributed on methods. Their entire approach to the distribution of food and household cleaning and maintenance products was to make available to the public large assortments of a variety of such goods at each store at a minimal price.
Discount houses
Cut-rate retailers have existed for a long time. However, since the end of World War II, the growth of discount houses as a legitimate and extremely competitive retailer has assured this type of outlet a permanent place among retail institutions. It essentially followed the growth of the suburbs.
Discount houses are characterized by an emphasis on price as their main sales appeal. Merchandise assortments are generally broad including both hard and soft goods, but assortments are typically limited to the most popular items, colors, and sizes. Such stores are usually large, self-service operations with long hours, free parking, and relatively simple fixtures.
Warehouse retailing
Warehouse retailing is a relatively new type of retail institution that experienced considerable growth in the 1970s. Catalog showrooms are the largest type of warehouse retailer, at least in terms of the number of stores operated. Retail sales for catalog showrooms grew from USD 1 billion dollars in 1970 to over USD 12 billion today. Their growth rate has slowed recently, but is still substantial.
Franchises
Over the years, particularly since the 1930s, large chain store retailers have posed a serious competitive threat to small storeowners. One of the responses to this threat has been the rapid growth of franchising. Franchising is not a new development. The major oil companies such as Mobil have long enfranchised its dealers, who only sell the products of the franchiser (the oil companies). Automobile manufacturers also enfranchise their dealers, who sell a stipulated make of car (e.g. Chevrolet) and operate their business to some extent as the manufacturer wishes.
Student Example
I used to work at McDonald’s and every time I get the opportunity to talk about a franchise I choose their example. They started out with two brothers who streamlined ways to make food quickly. A milkshake machine salesman named Ray Kroc was so amazed at their restaurant that he worked with them to franchise the restaurant and later bought them out. Today, people can own a franchise of McDonald’s which means that they pay McDonald’s to use their business. New owners usually need to pay an upfront payment (e.g., \$500,000) to get started and then pay a small percentage of profits to the McDonald’s corporation.
Cade Timmons
Class of 2020
Planned shopping centers/malls
After World War II, the United States underwent many changes. Among those most influential on retailing were the growth of the population and of the economy. New highway construction enabled people to leave the congested central cities and move to newly developed suburban residential communities. This movement to the suburbs established the need for new centers of retailing to serve the exploding populations. By 1960 there were 4,500 such centers with both chains and nonchains vying for locations.
Such regional shopping centers are successful because they provide customers with a wide assortment of products. If you want to buy a suit or a dress, a regional shopping center pr0vides many alternatives in one location. Regional centers are those larger centers that typically have one or more department stores as major tenants. Community centers are moderately sized with perhaps a junior department store; while neighborhood centers are small, with the key store usually a supermarket. Local clusters are shopping districts that have simply grown over time around key intersections, courthouses, and the like. String street locations are along major traffic routes, while isolated locations are freestanding sites not necessarily in heavy traffic areas. Stores in isolated locations must use promotion or some other aspect of their marketing mix to attract shoppers. Still, as indicated in the next Newsline, malls are facing serious problems.
Newsline: The mall: a thing of the past?
She was born into retail royalty, a double-decker shrine to capitalism that seduced cool customers and wild-eyed shopaholics alike to roam her exhausting mix of 200 stores. Her funky, W-shaped design was pure 1960s, as if dreamed up by that era’s noted architectural whiz, Mike Brady. When her doors opened the first morning, a brass band serenaded the arriving mob.
Cinderella City, once the biggest covered malls on the planet, was a very big deal–for about six years, until the next gleaming mall came along in 1974. That’s when the music stopped at Cinderella City. Soon the patrons grew scarce, the concrete began crumbling and graffiti stained some of the walls. It’s not pretty, but that’s the cold law of the consumer jungle. One minute you’re luring shoppers from miles around to chug an Orange Julius or grab a snack at the Pretzel Hut; a few years go by, and they’re planting you in the dreaded mall graveyard.
Back then, people made a day out of wandering the massive concourses and lunching in the food courts. Today, with less free time available for many people, shopping is seen as a necessity. Spending time with your family and at home is more important than spending time in a store.
The newest malls reflect the modern need for shopping speed. Covered shopping centers now come equipped with dozens of doors to the outside instead of two main entrances that usher crowds in and out through the anchor department store. That same trend paved the way for the flurry of freestanding Home Depots and TJ Maxx stores as well as discount giants like Wal-Mart. All are sapping customers from mid-market malls, already struggling. In addition to the fresh success of freestanding discount stores, the Internet is drawing off even more customers who seek to buy books or music online.
For the mall to survive, they’ll have to be something different–a high-quality environment for the delivery of high touch, high experience, high margin retail goods and services: a place you go for the entertainment shopping experience. (37)
Nonstore retailing
Nonstore retailing describes sales made to ultimate consumers outside of a traditional retail store setting. In total, nonstore retailing accounts for a relatively small percentage of total retail sales, but it is growing and very important with certain types of merchandise, such as life insurance, cigarettes, magazines, books, CDs, and clothing.
Student Example
Many businesses had found non-store retailing as a successful model of selling their products. Some non-store retailing businesses heavily rely on personal connections between the seller and the buyer. In the life insurance business, many individuals own life insurance policies through group policy through their employers. However, some individuals also purchase their individual policies through agents or brokers. Many agents and brokers have their office but they often meet their clients at a public location or the clients’ house. I had experience with being an insurance broker for a few years, my clients are referred by friends and clients. I did presentations to the clients at the café, library, or their home. My life insurance license not only allows me to sell life insurance products but also other types of fixed financial products, such as a fixed annuity. I was able to help the clients to review their financial situation and offer the most suitable products for the clients.
Anthony Chen
Class of 2020
One type of nonstore retailing used by such companies as Avon, Electrolux, and many insurance agencies is inhome selling. Such sales calls may be made to preselected prospects or in some cases on a cold call basis. A variation of door-to-door selling is the demonstration party. Here one customer acts as a host and invites friends. Tupperware has been very successful with this approach.
Vending machines are another type of nonstore retailing. Automated vending uses coin-operated, self-service machines to make a wide variety of products and services available to shoppers in convenient locations. Cigarettes, soft drinks, hosiery, and banking transactions are but a few of the items distributed in this way. This method of retailing is an efficient way to provide continuous; service. It is particularly useful with convenience goods.
Mail order is a form of nonstore retailing that relies on product description to sell merchandise. The communication with the customer can be by flyer or catalog. Magazines, CDs, clothing, and assorted household items are often sold in this fashion. As with vending machines, mail order offers convenience but limited service. It is an efficient way to cover a very large geographical area when shoppers are not concentrated in one location. Many retailers are moving toward the use of newer communications and computer technology in catalog shopping.
Online marketing has emerged during the last decade; it requires that both the retailer and the consumer have computer and modem. A modem connects the computer to a telephone line so that the computer user can reach various online information services. There are two types of online channels: (a) commercial online channels— various companies have set up online information and marketing services that can be assessed by those who have signed up and paid a monthly fee, and (b) Internet—a global web of some 45,000 computer networks that is making instantaneous and decentralized global communication possible. Users can send e-mail, exchange views, shop for products, and access real-time news.
Student Example
Steam is an online marketplace that sells video games directly from developers to PC users. Steam either completely manages the digital rights management of the games that it sells, or sells license keys for games which then are launched through other digital rights management platforms. For a very long time, Steam was the only retail platform available for the digital distribution of video games on PC. In fact, the physical distribution of PC games is rapidly becoming a thing of the past.
David Brown
Class of 2020
Marketers can carry on online marketing in four ways: (a) using e-mail; (b) participating in forums, newsgroups, and bulletin boards; (c) placing ads online; and (d) creating an electronic storefront. The last two options represent alternative forms of retailing. Today, more than 40,000 businesses have established a home page on the Internet, many of which serve as electronic storefronts. One can order clothing from Lands’ End or J.C. Penney, books from B. Dalton or Amazon.com, or flowers from Lehrer’s Flowers to be sent anywhere in the world. Essentially, a company can open its own store on the Internet.
Companies and individuals can place ads on commercial online services in three different ways. First, the major commercial online services offer an ad section for listing classified ads; the ads are listed according to when they arrived, with the latest ones heading the list. Second, ads can be placed in certain online newsgroups that are basically set up for commercial purposes. Finally, ads can also be put on online billboards; they pop up while subscribers are using the service, even though they did not request an ad.
Catalog marketing occurs when companies mail one or more product catalogs to selected addresses that have a high likelihood of placing an order. Catalogs are sent by huge general-merchandise retailers–J.C. Penney’s, Spiegel–that carry a full line of merchandise. Specialty department stores such as Neiman-Marcus and Saks Fifth Avenue send catalogs to cultivate an upper-middle class market for high-priced, sometimes exotic merchandise.
Integrated marketing
The death of retailing greatly exaggerated
Recently, the MIT economist Lester Thurow suggested that e-commerce could mean the end of 5,000 years of conventional retailing if online stores can combine price advantages with a pleasant virtual shopping experience. Let’s face it: the growth of malls and megastores have shown that people want selection, convenience, and low prices, and that’s about it. Sure, people say they would rather shop from the mom-and-pop on Main Street. But if the junk chain store out on the highway has those curling irons for a dollar less, guess where people go?
So a few years into the e-commerce revolution, here are a few observations and predictions:
• Online stores need to become easier to use as well as completely trustworthy.
• If people can go online and get exactly what they get from retail stores for less money, that is precisely what they will do.
• Some stores will have a kind of invulnerability to online competition; i.e. stores that sell last minute items or specialty items that you have to see.
• Retail stores may improve their chances by becoming more multidimensional; i.e. they have to be fun to visit.
• Still, not everything is rosy for e-tailers. Research provides the following insights:
• For net upstarts, the cost per new customer is USD 82, compared to USD 31 for traditional retailers.
• E-tailers customer satisfaction levels were: 41 per cent for customer service; 51 per cent for easy returns; 57 per cent for better product information; 66 per cent for product selection; 70 per cent for price, and 74 per cent for ease of use.
• Repeat buyers for e-tailers was 21 per cent compared to 34 per cent for traditional retailers.
Suggstions to improve the plight of e-tailers include the following :
• Keep it simple.
• Think like your customer.
• Engage in creative marketing
• Don’t blow everything on advertising.
• Don’t undercut prices.
While all this advice is good, the recent roller coaster ride of high-tech stocks and its disappointing results for e-tailers has completely changed the future of e-tailing. While e-tailers have spent about USD 2 billion industry-wide on advertising campaigns, they often devote far less attention and capital to the quality of services their prospective customers receive once they arrive on site. Etailers are learning what brick and mortar retailers have known all along, that success is less about building market share than about satisfying and retaining customers who can generate substantial profits. (38)
Several major corporations have also acquired or developed mail-order divisions via catalogs. Using catalogs, Avon sells women’s apparel, W.R. Grace sells cheese, and General Mills sells sport shirts.
Some companies have designed “customer-order placing machines”, i.e. kiosks (in contrast to vending machines, which dispense actual products), and placed them in stores, airports, and other locations. For example, the Florsheim Shoe Company includes a machine in several of its stores in which the customer indicates the type of shoe he wants (e.g. dress, sport), and the color and size. Pictures of Florsheim shoes that meet his criteria appear on the screen.
Wholesaling
Another important channel member in many distribution systems is the wholesaler. Wholesaling includes all activities required to market goods and services to businesses, institutions, or industrial users who are motivated to buy for resale or to produce and market other products and services. When a bank buys a new computer for data processing, a school buys audio-visual equipment for classroom use, or a dress shop buys dresses for resale, a wholesale transaction has taken place.
The vast majority of all goods produced in an advanced economy have wholesaling involved in their marketing. This includes manufacturers. who operate sales offices to perform wholesale functions, and retailers, who operate warehouses or otherwise engage in wholesale activities. Even the centrally planned socialist economy needs a structure to handle the movement of goods from the point of production to other product activities or to retailers who distribute to ultimate consumers. Note that many establishments that perform wholesale functions also engage in manufacturing or retailing. This makes it very difficult to produce accurate measures of the extent of wholesale activity. For purposes of keeping statistics, the Bureau of the Census of the United States Department of Commerce defines wholesaling in terms of the per cent of business done by establishments who are primary wholesalers. It is estimated that only about 60 per cent of all wholesale activity is accounted for in this way.
Today there are approximately 600,000 wholesale establishments in the United States, compared to just fewer than 3 million retailers. These 600,000 wholesalers generate a total volume of over USD 1.3 trillion annually; this is approximately 75 per cent greater than the total volume of all retailers. Wholesale volume is greater because it includes sales to industrial users as well as merchandise sold to retailers for resale.
Functions of the wholesaler
• Wholesalers perform a number of useful functions within the channel of distributions. These may include all or some combination of the following:
• Warehousing–the receiving, storage, packaging, and the like necessary to maintain a stock of goods for the customers they service.
• Inventory control and order processing–keeping track of the physical inventory, managing its composition and level, and processing transactions to insure a smooth flow of merchandise from producers to buyers and payment back to the producers.
• Transportation–arranging the physical movement of merchandise.
• Information–supplying information about markets to producers and information about products and suppliers to buyers.
• Selling–personal contact with buyers to sell products and service.
In addition, the wholesaler must perform all the activities necessary for the operation of any other business such as planning, financing, and developing a marketing mix. The five functions listed previously emphasize the nature of wholesaling as a link between the producer and the organizational buyer.
By providing this linkage, wholesales assist both the producer and the buyer. From the buyer’s perspective, the wholesaler typically brings together a wide assortment of products and lessens the need to deal directly with a large number of producers. This makes the buying task much more convenient. A hardware store with thousands of items from hundreds of different producers may find it more efficient to deal with a small number of wholesalers. The wholesaler may also have an inventory in the local market, thus speeding delivery and improving service. The wholesaler assists the producer by making products more accessible to buyers. They provide the producer with wide market coverage information about local market trends in an efficient manner. Wholesalers may also help with the promotion of a producer’s products to a local or regional market via advertising or a sales force to call on organizational buyers.
Types of wholesalers
There are many different types of wholesalers. Some are independent; others are part of a vertical marketing system. Some provide a full range of services; others offer very specialized services. Different wants and needs on the part of both buyers and producers have led to a wide variety of modern wholesalers. Table \(1\) provides a summary of general types. Wholesaling activities cannot be eliminated, but they can be assumed by manufacturers and retailers. Those merchant wholesalers who have remained viable have done so by providing improved service to suppliers and buyers. To do this at low cost, modern technologies must be increasingly integrated into the wholesale operation.
Table \(1\): Types of modern wholesalers
Type Definition Subcategories
Full-service merchandise wholesaler Take title to the merchandise and assume the risk involved in an independent operation; buy and resell products; offer a complete range of services. General
Limited-line
Limited-service merchant wholesalers Take title to the merchandise and assume the risk involved in an independent operation; buy and resell products; offer a limited range of services. Cash and carry
Rack jobbers
Drop shippers
Mail orders
Agents and brokers Do not take title to the merchandise; bring buyers and sellers together and negotiate the terms of the transaction: agents merchants represent either the buyer or seller, usually on a permanent basis; brokers bring parties together on a temporary basis. Agents
Buying agents
Selling agents
Commission merchants
Manufacturers’ agents
Brokers
Real estate
Food
Other products
Manufacturer’s sales Owned directly by the manufacturers; performs wholesaling functions for the manufacturer.
Facilitator Perform some specialized functions such as finance or warehousing; to facilitate the wholesale transactions; may be independent or owned by producer or buyer. Warehouses
Finance companies
Transportation companies
Trade marts
Physical distribution
In a society such as ours, the task of physically moving, handling and storing products has become the responsibility of marketing. In fact, to an individual firm operating in a high level economy, these logistical activities are critical. They often represent the only cost saving area open to the firm. Likewise, in markets where product distinctiveness has been reduced greatly, the ability to excel in physical distribution activities may provide a true competitive advantage. Ultimately, physical distribution activities provide the bridge between the production activities and the markets that are spatially and temporally separated.
Physical distribution management may be defined as the process of strategically managing the movement and storage of materials, parts, and finished inventory from suppliers, between enterprise facilities, and to customers. Physical distribution activities include those undertaken to move finished products from the end of the production line to the final consumer. They also include the movement of raw materials from a source of supply to the beginning of the production line, and the movement of parts, etc. to maintain the existing product. Finally, it may include a network for moving the product back to the producer or reseller, as in the case of recalls or repair.
Before discussing physical distribution, it is important to recognize that physical distribution and the channel of distribution are not independent decision areas. They must be considered together in order to achieve the organization’s goal of satisfied customers. Several relationships exist between physical distribution and channels, including the following:
• Defining the physical distribution standards that channel members want.
• Making sure the proposed physical distribution program designed by an organization meets the standards of channel members.
• Selling channel members on physical distribution programs.
• Monitoring the results of the physical distribution program once it has been implemented.
As you can see in Figure Figure \(5\) successful management of the flow of goods from a source of supply (raw materials) to the final customer involves effective planning, implementation, and control of many distribution activities. These involve raw material, in-process inventories (partially completed products not ready for resale), and finished products. Effective physical distribution management results initially in the addition of time, place, and possession utility of products; and ultimately, the efficient movement of products to customer and the enhancement of the firm’s marketing efforts.
Physical distribution represents both a cost component and a marketing tool for the purpose of stimulating customer demand. The major costs of physical distribution include transportation, warehousing, carrying inventory, receiving and shipping, packaging, administration, and order processing. The total cost of physical distribution activities represents 13.6 per cent for reseller companies. Poorly managed physical distribution results in excessively high costs, but substantial savings can occur via proper management.
Physical distribution also represents a valuable marketing tool to stimulate consumer demand. Physical distribution improvements that lower prices or provide better service are attractive to potential customers. Similarly, if finished products are not supplied at the right time or in the right places, firms run the risk of losing customers.
Footnotes
(36): Murra Raphel, “Up Against the Wal-Mart,” Direct Marketing, April 1999, pp. 82-84; Adrienne Sanders, “Yankee Imperialists,” Forbes December 13,1999, p. 36; Jack Neff, “Wal-mart Stores Go Private (Label),” Advertising Age, November 29,1999, pp. 1, 34, 36; Alice Z. Cuneo, “Wal-Mart’s Goal: To Reign Over Web,” Advertising Age, July 5 1999, pp. 1, 27.
(37): Herb Greenberg, “Dead Mall Walking,” Fortune, July 8, 2000, p. 304; Calmetla Y. Coleman, “Making Malls (Gasp!) Convenient,” The Wall Street Journal, February 8 , 2000, pp. B 1, B2; Bill Briggs. “Birth and Death of the American Mall,” The Denver Post, June 4, 2000, pp. D1 D4.
(38): Heather Green, “Shake Out E- Tailers,” Business Week, May 15, 2000, pp. 103-106; Ellen Neubome, “It’s the Service, Stupid,” Business Week, April 3. 2000. p. E8; Chris Ott; “Will Online Shopping Kill Traditional Retail?” The Denver Business Journal, Oct. 28. 1999, p. 46A; Steve Caulk, “Online Merchants Need More Effective Web Sites,” Rocky Mountain News. Thursday, March 8. 2001 , p. 5B.
Sources
Section 10.1 Basics of Distribution Channels is adapted from the chapter ‘10. Channel concepts: distributing the product’ from the textbook ‘Introducing Marketing, First Edition, 2011’ authored by John Burnett – this book was published under The Global Text Project, funded by the Jacobs Foundation, Zurich, Switzerland.
The following changes were made to the most recent edition: Divided ‘Chapter 10. Channel concepts: distributing the product’’ into three sections; Removed Created new title for Figure featuring Anderson ad.; Removed box titled ‘In Practice’ from wsj.com; Removed case application at the end of chapter; Added learning objectives. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/10%3A_Global_Channels_and_Supply_Chains/10.02%3A_Basics_of_Distribution_Channels.txt |
Learning Objectives
After reading this section, students should be able to …
1. define a supply chain
2. explain the traditional to the new supply-chain model
A supply chain refers to the flow of physical goods and associated information from the source to the consumer. Key supply-chain activities include production planning, purchasing, materials management, distribution, customer service, and sales forecasting. These processes are critical to the success manufacturers, wholesalers, or service providers alike.
Student Example
As a major producer of material products, Vietnam plays a major role in manufacturing for a majority of businesses around the world; including Nike, Adidas, The North Face. and Puma. These products are then shipped to locations around the world to be sold at many different retail locations. The global supply chain of these products is a lot more complex than many other brands around the world as they have outsourced the manufacturing to best suit their needs and the customers’ needs (quality, price, speed…etc…).
Hollis Cherry
Class of 2020
Electronic commerce and the Internet have fundamentally changed the nature of supply chains and have redefined how consumers learn about, select, purchase, and use products and services. The result has been the emergence of new business-to-business supply chains that are consumer-focused rather than product-focused. They also provide customized products and services.
In the traditional supply-chain model, raw material suppliers define one end of the supply chain. They were connected to manufacturers and distributors, which, in turn, were connected to a retailer and the end customer. Although the customer is the source of the profits, they were only part of the equation in this “push” model. The order and promotion process, which involves customers, retailers, distributors, and manufacturers, occurred through time-consuming paperwork. By the time customers’ needs were filtered through the agendas of all the members of the supply chain, the production cycle ended up serving suppliers every bit as much as customers.
Driven by e-commerce’s capabilities to empower clients, most companies have moved from the traditional “push” business model, where manufacturers, suppliers, distributors, and marketers have most of the power, to a customer-driven “pull” model. This new business model is less product-centric and more directly focused on the individual consumer. As a result, the new model also indicates a shift in the balance of power from suppliers to customers.
Whereas in the old “push” model, many members of the supply chain remained relatively isolated from end users, the new “pull” model has each participant scrambling to establish direct electronic connections to the end customer. The result is that electronic supply-chain connectivity gives end customers the opportunity to become better informed through the ability to research and give direction to suppliers. The net result is that customers now have a direct voice in the functioning of the supply chain, and companies can better serve customer needs, carry less inventory, and send products to market more quickly.
Minicase: Zara’s Global Business, ModelCapell, Kamenev, and Saminather, N. (2006, September 4)
Inditex, the parent company of cheap, chic-fashion chain Zara, has transformed itself into Europe’s leading apparel retailer over the past 10 years and has racked up impressive results in Asia and the United States. Since 2000, Inditex has more than quintupled its sales and profits as it has tripled the number of stores of its eight brands. (Zara is the biggest, accounting for two-thirds of total revenues.) More recently, Inditex increased its year-on-year net sales by 6% in the first nine months of its 2009 fiscal year to 7,759 million euros. Net income grew to 831 million euros. The retailer launched 266 new stores in the first nine months, bringing the group’s total number of stores to 4,530 by the end of October 2009.
Key highlights for the period included openings in Asian markets, with 90 new establishments inaugurated by October 31, 2009. These store openings reflect the strategic importance of Asian markets for the group and underscore a year of robust growth in China, Japan, and South Korea. High points of store launches so far this year include flagship locations in Japan and Mainland China.
In Japan, Zara now has a total of 50 stores, including a second flagship location in Tokyo’s Shibuya district, which is a must-see global fashion destination. Prior to this opening, Zara had already welcomed shoppers at another upscale store in Shibuya. Zara thus enhances its excellent retail presence in Tokyo’s four key shopping areas: the two aforementioned flagship stores in Shibuya, two each in Ginza and Shinjuku, and one in Harajuku.
Meanwhile, in Beijing, the group celebrated the opening of a flagship location in one of the Chinese capital’s busiest shopping hubs. The store, which opened its doors on the pedestrian Wangfujing Street, brings the group’s number of stores in China to more than 60. The company’s firm commitment to expansion in the Chinese fashion market is reflected in its decision to locate shops not only in Beijing and Shanghai but also in emerging cities such as Harbin, Dalian, Qingdao, Changchun, and Kunming.
To get where it is today, Zara has turned globalization on its head, distributing all of its merchandise, regardless of origin, from Spain. With more outlets in Asia and the United States, replenishing stores twice a week—as Zara does now—will become increasingly complex and expensive. The strain is already starting to show. Costs are climbing and growth in same-store sales is slowing: at outlets open for 2 years or more, revenues were up by 5% last year, compared with a 9% increase in 2004. So far, the company has managed to offset that problem by charging more for its goods as it gets farther from headquarters. For instance, Zara’s prices in the United States are some 65% higher than in Spain, brokerage Lehman Brothers, Inc., estimates.
Zara has succeeded by breaking every rule in retailing. For most clothing stores, running out of best-selling items is a disaster, but Zara encourages occasional shortages to give its products an air of exclusivity. With new merchandise arriving at stores twice a week, the company trains its customers to shop and shop often. And forget about setting trends—Zara prefers to follow them. Its aim is to give customers plenty of variety at a price they can afford. Zara made 30,000 different items last year, about triple what the Gap did.
Zara does not collaborate with big-name designers and or use multimillion-dollar advertising campaigns. Instead, it uses its spacious, minimalist outlets—more Gucci than Target—and catwalk-inspired clothing to build its brand. Their advertising is their stores. To get shoppers’ attention, Zara is located on some of the world’s priciest streets: New York’s Fifth Avenue, Tokyo’s Ginza, Rome’s Via Condotti, and the Champs-Elysees in Paris.
Keeping those locations flush with an ever-changing supply of new clothing means striking the right balance between flexibility and cost. So while rivals outsource to Asia, Zara makes its most fashionable items—half of all its merchandise—at a dozen company-owned factories in Spain. Clothes with a longer shelf life, such as basic T-shirts, are outsourced to low-cost suppliers, mainly in Asia and Turkey.
The tight control makes Zara more fleet-footed than its competitors. While rivals push their suppliers to churn out goods in bulk, Zara intentionally leaves extra capacity in the system. That results in fewer fashion mistakes, which means Zara sells more at full price, and when it discounts, it does not have to go as deep. The chain books 85% of the full ticket price for its merchandise, while the industry average is 60%.
Zara’s nerve center is an 11,000-square-foot hall at its headquarters in Arteixo, a town of 25,000 in Galicia. That is where hundreds of twenty-something designers, buyers, and production planners work in tightly synchronized teams. It is there that the company does all of its design and distribution and half of its production. The concentrated activity enables it to move a dress, blouse, or coat from drawing board to shop floor in just 2 weeks, less than a quarter of the industry average.
Consider how Zara managed to latch onto one of hottest trends in just 4 weeks in 2006. The process started when trend-spotters spread the word back to headquarters: white eyelet—cotton with tiny holes in it—was set to become white-hot. A quick telephone survey of Zara store managers confirmed that the fabric could be a winner, so in-house designers got down to work. They zapped patterns electronically to Zara’s factory across the street, and the fabric was cut. Local subcontractors stitched white-eyelet v-neck belted dresses and finished them in less than a week. The \$129 dresses were inspected, tagged, and transported through a tunnel under the street to a distribution center. From there, they were quickly dispatched to Zara stores from New York to Tokyo, where they were flying off the racks just 2 days later.
Supply-Chain Management
Supply-chain management (SCM) has three principal components: (a) creating the supply-chain network structure, (b) developing supply-chain business processes, and (c) managing the supply-chain activities, Lambert and Cooper (2000, January).
The supply-chain network structure consists of the member firms and the links between these firms. Primary members of a supply chain include all autonomous companies or strategic business units that carry out value-adding activities in the business processes designed to produce a specific output for a particular customer or market. Supporting members are companies that simply provide resources, knowledge, utilities, or assets for the primary members of the supply chain. For example, supporting companies include those that lease trucks to a manufacturer, banks that lend money to a retailer, or companies that supply production equipment, print marketing brochures, or provide administrative assistance.
Supply chains have three structural dimensions: horizontal, vertical, and the horizontal position of the focal company within the endpoints of the supply chain. The first dimension, horizontal structure, refers to the number of tiers across the supply chain. The supply chain may be long, with numerous tiers, or short, with few tiers. As an example, the network structure for bulk cement is relatively short. Raw materials are taken from the ground, combined with other materials, moved a short distance, and used to construct buildings. The second dimension, vertical structure, refers to the number of suppliers or customers represented within each tier. A company can have a narrow vertical structure, with few companies at each tier level, or a wide vertical structure with many suppliers or customers at each tier level. The third structural dimension is the company’s horizontal position within the supply chain. A company can be positioned at or near the initial source of supply, be at or near to the ultimate customer, or be somewhere between these end points of the supply chain.
Business processes are the activities that produce a specific output of value to the customer. The management function integrates the business processes across the supply chain. Traditionally, in many companies, upstream and downstream portions of the supply chain were not effectively integrated. Today, competitive advantage increasingly depends on integrating eight key supply-chain processes—customer relationship management, customer service management, demand management, order fulfillment, manufacturing flow management, procurement, product development and commercialization, and managing returns—into an effective value delivery network, Lambert , Guinipero, and Ridenhower (1998).
Regarding the supply-chain management function itself, in some companies, management emphasizes a functional structure, others a process structure, and yet others a combined structure of processes and functions. The number of business processes that it is critical or beneficial to integrate and manage between companies will likely vary. In some cases, it may be appropriate to link just one key process, and, in other cases, it may be appropriate to link multiple or all the key business processes. However, in each specific case, it is important that executives thoroughly analyze and discuss which key business processes to integrate and manage. With the shift from the traditional “push” to the modern “pull” model, supply-chain management has changed—the integration of e-commerce has produced (a) greater cost efficiency, (b) distribution flexibility, (c) better customer service, and (d) the ability to track and monitor shipments.
Supply-Chain Agility and Resiliency
The best companies create supply chains that can respond to sudden and unexpected changes in markets. Agility—the ability to respond quickly and cost-effectively to unexpected change—is critical because in most industries, both demand and supply fluctuate more rapidly and widely than they used to. In fact, the best companies use agile supply chains to differentiate themselves from rivals. For instance, Zara has become Europe’s most profitable apparel brands by building agility into every link of their supply chains. At one end of the product pipeline, Zara has created an agile design process. As soon as designers spot possible trends, they create sketches and order fabrics. That gives them a head start over competitors because fabric suppliers require the longest lead times. However, the company approves designs and initiates manufacturing only after it gets feedback from its stores. This allows Zara to make products that meet consumer tastes and reduces the number of items they must sell at a discount. At the other end of supply chain, the company has created a superefficient distribution system. In part because of these decisions, Zara has grown at more than 20% annually since the late 1990s, and its double-digit net profit margins are the envy of the industry.
Student Example
Starbucks was able to transform its supply chain when they recognized that costs were getting to be too high and sales were cooling. They noticed that their supply chain was not functioning in a way that was best benefiting the company, so they used agility to quickly turn things around. They did this by appointing a new head for the company’s supply chain who quickly evaluated what was going wrong in the supply chain. He discovered that service quality was not as high as it should be and that outsourcing led to cost inflation. To combat this, he simplified the supply chain structure and clearly defined functional roles. This ended up greatly benefiting the company.
Kaylee Hogsed
Class of 2020
Agility and resiliency have become more critical in recent years because sudden shocks to supply chains have become more frequent. The terrorist attack in New York in 2001, the dockworkers’ strike in California in 2002, and the SARS epidemic in Asia in 2003, for instance, disrupted many companies’ supply chains.
Agility and resiliency help supply chains recover more quickly from such sudden setbacks. When, in September 1999, an earthquake hit Taiwan, shipments of computer components to the United States were delayed by weeks and, in some cases, by months. Most computer manufacturers, such as Compaq, Apple, and Gateway, could not deliver products to customers on time and incurred losses. One exception was Dell. The company changed the prices of PC configurations overnight to steer consumer demand away from hardware built with components that were not available to machines that did not require those parts. Dell could do this because it had contingency plans in place. Not surprisingly, Dell gained market share in the earthquake’s aftermath, Lee (2004, October).
Supply-chain agility and resilience no longer imply merely the ability to manage risk. It now assumes that the ability to manage risk means being better positioned than competitors to deal with—and even gain advantage from—disruptions. Key to increasing agility and resilience is building flexibility into the supply-chain structure, processes, and management, Sheffi (2005, October).
GLOBAL SUPPLY CHAINS
Global companies must be able to adapt their supply networks when markets or strategies change. The best companies tailor their supply chains to the nature of the markets they serve. They often end up with more than one supply chain, which can be expensive, but, in return, they secure the best manufacturing and distribution capabilities for each offering. Cisco, for example, uses contract manufacturers in low-cost countries such as China for standard, high-volume networking products. For its broad line of mid-value items, the company uses vendors in low-cost countries to build core products, but it customizes those products itself in major markets such as the United States and Europe. And for highly customized, low-volume products, Cisco uses vendors close to main markets, such as Mexico for the United States and Eastern European countries for Europe. Despite the fact that it uses three different supply chains at the same time, the company is careful not to become less agile. Because it uses flexible designs and standardized processes, Cisco can switch the manufacture of products from one supply network to another, when necessary, Sheffi (2005, October).
Companies that compete primarily on the basis of operational excellence typically focus on creating supply chains that deliver goods and services to consumers as quickly and inexpensively as possible. They invest in state-of-the-art technologies and employ metrics and reward systems aimed at boosting supply-chain performance.
For companies competing on the basis of customer intimacy or product leadership, a focus on efficiency is not enough—agility is a key factor. Customer-intimate companies must be able to add and delete products and services as customer needs change; product leadership companies must be able to adapt their supply chains to changes in technology and to capitalize on new ideas.
All companies must align their supply-chain infrastructure and management with their underlying value proposition to achieve sustainable competitive advantage. That is, they must align the interests of all the firms in the supply network so that companies optimize the chain’s performance when they maximize their interests.
Minicase: Nikon, With the Help of UPS, Focuses on Supply-Chain Innovation1
To support the launch of its new digital cameras, Nikon, with the help of UPS Supply Chain Solutions, reengineered its distribution network to keep retailers well supplied. Nikon knew that customer service capabilities needed to be completely up to speed from the start and that distributors and retailers would require up-to-the-minute information about product availability. While the company had previously handled new product distribution in-house, this time Nikon realized that burdening its existing infrastructure with a new, demanding, high-profile product line could impact customer service performance adversely. So Nikon applied its well-known talent for innovation to creating an entirely new distribution strategy, and it took the rare step of outsourcing distribution of an entire consumer-electronics product line. With UPS Supply Chain Solutions on board, Nikon was able to quickly execute a synchronized supply-chain strategy that moves products to retail stores throughout the United States, Latin America, and the Caribbean, and allows Nikon to stay focused on the business of developing and marketing precision optics.
Starting at Nikon’s manufacturing centers in Korea, Japan, and Indonesia, UPS Supply Chain Solutions now manages air and ocean freight and related customs brokerage. Nikon’s freight is directed to Louisville, Kentucky, which not only serves as the all-points connection for UPS’s global operations but is also home to the UPS Supply Chain Solutions Logistics Center main campus. Here, merchandise can be either “kitted” with accessories such as batteries and chargers or repackaged to in-store display specifications. Finally, the packages are distributed to literally thousands of retailers across the United States or shipped for export to Latin American or Caribbean retail outlets and distributors, using any of UPS’s worldwide transportation services to provide the final delivery.
With the UPS Supply Chain Solutions system in place, the process calibrates the movement of goods and information by providing SKU-level visibility within complex distribution and information technology (IT) systems. UPS also provides Nikon advance shipment notifications throughout the U.S., Caribbean, and Latin American markets. The result: a “snap shot” of the supply chain that rivals the performance of a Nikon camera.
Nikon has already seen the results of its innovation in both digital technology and product distribution. The consumer digital-camera sector is one of Nikon’s fastest-growing product lines. In addition, supply-chain performance and customer service have measurably improved. Products leaving Nikon manufacturing facilities in Asia can now be on a retailer’s shelf in as few as 2 days. While products are en route, Nikon also has the ability to keep retailers informed of delivery times and to adjust them as needed so that no retailer needs to miss sales opportunities due to lack of product availability.
Leading companies take care to align the interests of all the firms in their supply chain with their own. This is important, because every supply-chain partner firm—whether a supplier, an assembler, a distributor, or a retailer—will focus on its own interests. If any company’s interests differ from those of the other organizations in the supply chain, its actions will not maximize the chain’s performance.
One way companies align their partners’ interests with their own is by redefining the terms of their relationships so that firms share risks, costs, and rewards equitably. Another involves the use of intermediaries, for example, when financial institutions buy components from suppliers at hubs and resell them to manufacturers. Everyone benefits because the intermediaries’ financing costs are lower than the vendors’ costs. Although such an arrangement requires trust and commitment on the part of suppliers, financial intermediaries, and manufacturers, it is a powerful way to align the interests of companies in supply chains.
A prerequisite to creating alignment is the availability of information so that all the companies in a supply chain have equal access to forecasts, sales data, and plans. Next, partner roles and responsibilities must be carefully defined so that there is no scope for conflict. Finally, companies must align incentives so that when companies try to maximize returns, they also maximize the supply chain’s performance.
Minicase: Nestlé Pieces Together Its Global Supply Chain, Steinert-Threlkeld (2006, January)
A few years ago, Nestlé, the world’s largest food company, set out to standardize how it operates around the world. It launched GLOBE (Global Business Excellence), a comprehensive program aimed at implementing a single set of procurement, distribution, and sales management systems. The logic behind the \$2.4-billion project was impeccable: implementing a standardized approach to demand forecasting and purchasing would save millions and was critical to Nestlé’s operating efficiency in 200 countries around the world.
Nestlé’s goal was simple: to replace its 14 different SAP enterprise-planning systems—in place in different countries—with a common set of processes, in factory and in administration, backed by a single way of formatting and storing data and a single set of information systems for all of Nestlé’s businesses.
For Nestlé, this was not an everyday project. When it built a factory to make coffee, infant formula, water, or noodles, it would spend \$30 to \$40 million; committing billions in up-front capital to a backroom initiative was unheard of, or, as someone noted, “Nestlé makes chocolate chips, not electronic ones.”
The GLOBE project also stood as the largest-ever deployment of mySAP.com. But whether the software got rolled out to 230,000 Nestlé employees or 200 was not the point. The point was to make Nestlé the first company to operate in hundreds of countries in the same manner as if it operated in one. And that had not been achieved by any company—not even the British East India Company at the peak of its tea-trading power—in the history of global trade.
Consider the complexities. Nestlé was the world’s largest food company, with almost \$70 billion in annual sales. By comparison, the largest food company based in the United States, Kraft Foods, was less than half that size. Nestlé’s biggest Europe-based competitor, Unilever, had about \$54 billion in sales. In addition, Nestlé grew to its huge size by selling lots of small-ticket items—Kit Kat, now the world’s largest-selling candy bar; Buitoni spaghetti; Maggi packet soups; Lactogen dried milk for infants; and Perrier sparkling water.
The company operated in some 200 nations, including places that were not yet members of the United Nations. It ran 511 factories and employed 247,000 executives, managers, staff, and production workers worldwide.
What is more, for Nestlé, nothing was simple. The closest product to a global brand it had was Nescafé; more than 100 billion cups were consumed each year. But there were more than 200 formulations, made to suit local tastes. All told, the company produced 127,000 different types and sizes of products. Keeping control of its thousands of supply chains, scores of methods of predicting demand, and its uncountable variety of ways of invoicing customers and collecting payments was becoming evermore difficult and eating into the company’s bottom line.
The three baseline edicts for project GLOBE were: harmonize processes, standardize data, and standardize systems. This included how sales commitments were made, factory production schedules established, bills to customers created, management reports pulled together, and financial results reported. Gone would be local customs, except where legal requirements and exceptional circumstances mandated an alternative manner of, say, finding a way to pay the suppliers of perishable products like dairy or produce in a week rather than 30 days. And when was this all to be done? In just 3 and a half years. The original GLOBE timeline, announced by Nestlé’s executive board, called for 70% of the company’s \$50 billion business to operate under the new unified processes by the end of 2003.
Mission impossible? The good news was that in one part of the world, Asia, market managers had shown they could work together and create a common system for doing business with their customers. They had used a set of applications from a Chicago supplier, SSA Global, that allowed manufacturers operating worldwide to manage the flow of goods into their factories, the factories themselves, and the delivery of goods to customers while making sure the operations met all local and regional legal reporting requirements. The system was adopted in Indonesia, Malaysia, the Philippines, Thailand, even South Africa, and was dubbed the “Business Excellence Common Application.”
But this project was orders of magnitude more involved and more complex. Instead of just a few countries, it would affect 200 of them. Change would have to come in big, not small, steps. Using benchmarks they could glean from competitors such as Unilever and Danone, and assistance from PricewaterhouseCoopers consultants and SAP’s own deployment experts, the executives in charge of the GLOBE project soon came to a conclusion they had largely expected going in: this project would take more people, more money, and more time than the board had anticipated. Instead of measuring workers in the hundreds, and Swiss francs in the hundreds of millions, as originally expected, the team projected that 3,500 people would be involved in GLOBE at its peak. The new cost estimate was 3 billion Swiss francs, about \$2.4 billion. And the deadline was pushed back as well. The new target: putting the “majority of the company’s key markets” onto the GLOBE system by the end of 2005, not 2003.
To lead this massive undertaking, GLOBE’s project manager chose a group of business managers, not technology managers, from all of Nestlé’s key functions—manufacturing, finance, marketing, and human resources—and from all across the world—Europe, Asia, the Americas, Africa, and Australia.
These were people who knew how things actually worked or should work. They knew how the company estimated the demand for each of its products, how supplies were kept in the pipeline, even mundane things like how to generate an invoice, the best way to process an order, how to maintain a copier or other office equipment, and how to classify all the various retail outlets, from stores to vending machines, that could take its candy bars and noodles. The system would allow managers to manage it all from the web.
The process for the team of 400 executives started with finding, and then documenting, the four or five best ways of doing a particular task, such as generating an invoice. Then, the GLOBE team brought in experts with specific abilities, such as controlling financial operations, and used them as “challengers.” They helped eliminate weaknesses, leaving the best practices standing.
At the end of that first year, the project teams had built up the basic catalog of practices that would become what they would consider the “greatest asset of GLOBE”: its “Best Practices Library.” This was an online repository of step-by-step guides to the 1,000 financial, manufacturing, and other processes that applied across all Nestlé businesses. Grouped into 45 “solution sets,” like demand planning or closing out financial reports, the practices could now be made available online throughout the company, updated as necessary, and commented on at any time.
It was not always possible to choose one best practice. Perhaps the hardest process to document was “generating demand.” With so many thousands of products, hundreds of countries, and local tastes to deal with, there were “many different ways of going to market,” many of which were quite valid. This made it hard to create a single software template that would serve all market managers.
So GLOBE executives had to practice a bit more tolerance on that score. The final GLOBE template included a half-dozen or so different ways of taking products to market around the world. But no such tolerance was shown for financial reporting. The 400 executives were determined to come up with a rigorous step-by-step process that would not change.
Experts were brought in along the way to challenge each process. But in the end, one standard would, in this case, have to stand. Financial terms would be consistent. The scheme for recording dates and amounts would be the same. The timing of inputting data would be uniform; only the output could change. In Thailand, there would have to be a deviation so that invoices could be printed out in Thai characters so that they could be legal and readable. In the Philippines, dates would have to follow months, as in the United States. Most of the rest of the world would follow the European practice of the day preceding the month.
Progress was slow, however. Nestlé managers had always conducted their businesses as they saw fit. As a consequence, even standardizing on behind-the-scenes practices, like how to record information for creating bills to customers met, with resistance. As country managers saw it, decision making was being taken out of local markets and being centralized. Beyond that, someone had to pay the bill for the project itself. That would be the countries, too.
By the fall of 2005, almost 25% of Nestlé was running on the GLOBE templates. And GLOBE’s project manager was confident that 80% of the company would operate on the new standardized processes by the end of 2006. The greatest challenge was getting managers and workers to understand that their jobs would change—in practical ways. In many instances, workers would be entering data on raw materials as they came into or through a factory. Keeping track of that would be a new responsibility. Doing it on a computer would be a wholly new experience. And figuring out what was happening on the screen could be a challenge. Minutia? Maybe. Considerable change? Definitely.
But the templates got installed and business went on—in Switzerland, Malaysia-Singapore, and the Andean region. In each successive rollout, the managers of a given market had 9 months or more to document their processes and methodically adjust them to the templated practices. In 2003, Thailand, Indonesia, and Poland went live. In 2004, Canada, the Philippines, and the Purina pet food business in the United Kingdom joined the network. But, by then, the system was bumping up against some technical limits. In particular, the mySAP system was not built for the unusual circumstances of the Canadian food retailing market. Food manufacturers have lots of local and regional grocery chains to sell to, and promotional campaigns are rife. MySAP was not built to track the huge amount of trade promotions engaged in by Nestlé’s Canadian market managers: there were too many customers, too many products, and too many data points.
In India, changing over in mid-2005 was complicated by the fact that not only was Nestlé overhauling all of its business processes, but it also did not know what some of the key financial processes would have to be. At the same time it was converting to the GLOBE system, India was changing its tax structure in all 29 states and six territories. Each would get to choose whether, and how, to implement a fee on the production and sale of products, known as a value-added tax. Meeting the scheduled go-live date proved difficult.
And all over the world, managers learned that the smallest problem in standardized systems means that product can get stopped in its tracks. In Indochina, for instance, pallets get loaded with 48 cases of liquids or powders, and are then moved out. If a worker fails to manually check that the right cases have been loaded on a particular pallet, all dispatching stops are held up until the pallet is checked.
These setbacks notwithstanding, GLOBE taught Nestlé how to operate as a truly global company. For example, managers from the water businesses initially rejected the idea of collecting, managing, and disseminating data in the same way as their counterparts in chocolate and coffee. Some managers figured that if they were able to produce all the water or all the chocolate they needed for their market locally, that should be enough. But the idea was to get Nestlé’s vast empire to think, order, and execute as one rather than as a collection of disparate companies. This meant that a particular manufacturing plant in a particular manager’s region might be asked to produce double or triple the amount of coffee it had in the past. Or it might mean that a particular plant would be closed.
So, while the company did away with data centers for individual countries, each one does now have a data manager. The task is to make sure that the information that goes into GLOBE’s data centers is accurate and complete. That means that country managers can concentrate more on what really matters: serving customers.
Sources
This page is licensed under a Creative Commons Attribution Non-Commercial Share-Alike License (Links to an external site) Links to an external site and contains content from a variety of sources published under a variety of open licenses, including:
• “Supply Chains: From Push to Pull”, section 9.1 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor.
• “Supply-Chain Management”, section 9.2 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor.
• “Supply-Chain Agility and Resiliency”, section 9.3 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor.
• “Making Supply Chains Adaptable”, section 9.4 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor.
• “Creating Supply-Chain Alignment”, section 9.5 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/10%3A_Global_Channels_and_Supply_Chains/10.03%3A_Global_Supply_Chains.txt |
Learning Objectives
After reading this section, students should be able to …
1. outline the advantages of global sourcing.
2. know the pros and cons of sole-sourcing and multisourcing.
3. describe the distribution-management choices companies have when entering new international markets.
Global sourcing refers to buying the raw materials or components that go into a company’s products from around the world, not just from the headquarters’ country. For example, Starbucks buys its coffee from locations like Colombia and Guatemala. The advantages of global sourcing are quality and lower cost. Global sourcing is possible to the extent that the world is flat—for example, buying the highest-quality cocoa beans for making chocolate or buying aluminum from Iceland, where it’s cheaper because it’s made using free geothermal energy.
When making global-sourcing decisions, firms face a choice of whether to sole-source (i.e., use one supplier exclusively) or to multisource (i.e., use multiple suppliers). The advantage of sole-sourcing is that the company will often get a lower price by giving all of its volume to one supplier. If the company gives the supplier a lot of business, the company may have more influence over the supplier for preferential treatment. For example, during a time of shortage or strained capacity, the supplier may give higher quantities to that company rather than to a competitor as a way of rewarding the company’s loyalty.
Student Example
Nestlé is a global company, comprising brands such as Kit Kat, Nesquick, and Stouffer’s, as well as other food brands and baby formulas. To source their raw materials, they follow a multisource model. A specific example within Nestle is that they are sourcing some of their global palm oil from five smallholder farms in Indonesia, Malaysia, Ghana, Côte d’Ivoire, and Peru. This multisourcing benefits Nestlé because they can source their palm oil from various countries, allowing for a supply chain with less uncertainty. If one palm oil supplier were to go out of business or provide less than expected, one of the other suppliers would be able to make up for the slack. A side benefit is these smallholders gain a foothold in the global market.
Zach Harper
Class of 2020
On the other hand, using multiple suppliers gives a company more flexibility. For instance, if there’s a natural disaster or other disruption at one of their suppliers, the company can turn to its other suppliers to meet its needs. For example, when Hurricane Mitch hit Honduras with 180-mile-per-hour winds, 70 to 80 percent of Honduras’s infrastructure was damaged and 80 percent of its banana crop was lost. Both Dole Food Company and Chiquita bought bananas from Honduras, but Dole relied more heavily on bananas from Honduras than from other countries. As a result, Dole lost 25 percent of its global banana supply, but Chiquita lost only 15 percent.1
Sole-Sourcing Advantages
• Price discounts based on higher volume
• Rewards for loyalty during tough times
• Exclusivity brings differentiation
• Greater influence with a supplier
Sole-Sourcing Disadvantages
• Higher risk of disruption
• Supplier has more negotiating power on price
Multisourcing Advantages
• More flexibility in times of disruption
• Negotiating lower rates by pitting one supplier against another
Multisourcing Disadvantages
• Quality across suppliers may be less uniform
• Less influence with each supplier
• Higher coordination and management costs
Whichever sourcing strategy a company chooses, it can reduce risk by visiting its suppliers regularly to ensure the quality of products and processes, the financial health of each supplier, and the supplier’s adherence to laws, safety regulations, and ethics.
Ethics in Action
The Case of Global Sourcing
While there is little systematic research on questions related to ethics and global sourcing, one recent survey in the context of clothing manufacturers identified the following most encountered issues:2
• Child labor. Forty-three percent of the respondents had encountered factories where child labor was being used. India, China, Thailand, and Bangladesh were cited as the worst offenders in this regard, partly because of the absence or unreliability of birth certificates, but also because of the difficulty that Westerners have in assessing the age of workers in these countries. Buyers relied on the management of the factory to check on documents supplied by the employee.
• Dangerous working conditions and health and safety issues. Forty-three percent of the respondents had encountered dangerous working conditions in factories. These included unsafe machinery (e.g., machine guards having been removed to speed up production), workers failing to use safety equipment such as cutting gloves, and the use and storage of hazardous chemicals (e.g., those used for dyeing and printing). Fire regulations were also sometimes inadequate, both in factories and in the dormitory accommodation often provided for workers who live away from their home regions. Sometimes fire exits were locked, and fire extinguishers were missing.
• Bribery and corruption. Thirty-one percent of respondents said that they had experienced bribery and corruption. One blatantly fraudulent practice mentioned was for suppliers to mislead the buyer over the true source of production. Many suppliers claim that goods are made in one factory, then transfer the production elsewhere, making it difficult for the retailer to audit.
• Exploitation of the workforce. Twenty-five percent of respondents mention some aspect of exploitation of the workforce, encompassing the issues of child labor and health and safety. However, it can also cover low wages being paid to workers and excessive overtime being expected by employers. Respondents specifically mentioned that they had encountered worker exploitation. Many spoke of long working hours in factories, especially at peak periods, with employees often working over seventy hours per week.
Student Example
Apple uses global sourcing to acquire most of their products. I learn that their products are made in factories in China. In the past, they have allegedly experienced ethical issues, like child labor and dangerous working conditions. It was reported in the news that they had children working in those factories. Also, they were allegedly working in very harsh conditions; so harsh that workers started committing suicide. If this is true, global sourcing can be risky for the reason that they may not have complete control over what happens in the factories, and might not even know what goes on inside them.
Elizabeth Garcia
Class of 2020
Distribution Management
Selling internationally means considering how your company will distribute its goods in the market. Developed countries have good infrastructure—passable roads that can accommodate trucks, retailers who display and sell products, and reliable communications infrastructure and media choices. Emerging markets, on the other hand, often have very fragmented distribution networks, limited logistics, and much smaller retailer outlets. Hole-in-the-wall shops, door-to-door peddlers, and street vendors play a much larger role in emerging-market countries. In the emerging countries of Africa, for example, books might be sold from the back of a moped.
In addition, the standards of living in emerging countries vary widely. Most of the middle class lives in cities, but the percentage of the population that lives in rural areas varies by country. In India, 70 percent of the population lives in rural areas, whereas in Latin America only 30 percent does.
Rural logistics are especially problematic. Narrow dirt roads, weight-limited bridges, and mud during the rainy season hamper the movement of goods. An executive at computer storage device manufacturer EMC noted that sometimes the company’s refrigerator-sized, data-storage systems have had to be transported on horse-drawn wagons.
How Nokia Tackles Distribution Challenges
Nokia is a \$59 billion company with over 123,000 employees.3 It sells 150 different devices, of which 50 to 60 are newly introduced each year. Each device can be customized on many variants, including language and content. This variation adds greatly to the devices’ complexity; three hundred to four hundred components need to arrive on time at factories in order for the devices to be built. Approximately one billion people use Nokia devices worldwide. Countries like China, India, and Nigeria, which ten years ago had almost zero penetration of mobile phones, now have twenty million to forty million users each. Emerging markets now account for over half of Nokia’s annual sales.
Nokia has the challenge of selling a growing variety of mobile devices in hundreds of thousands of tiny retail outlets in the developing world. To tackle reaching its rural customers in developing countries, Nokia has 350,000 points of presence in rural areas, from small kiosks and corner shops to organized retail outlets. Nokia has 100,000 such point-of-sale (POS) outlets in India, 80,000 in China, and 120,000 in the Middle East and Africa.
To train salespeople in developing countries, Nokia created an internal university to educate the people who sell its phones in these POS locations—an average of five people per location. Nokia Academy teaches local salespeople about the features of the phones and how to sell them. As Nokia expands further into these emerging markets, it will penetrate deeper into the rural areas and will distribute through local providers.
Nokia’s challenge is to maintain its strong brand name—the fifth most recognized brand in the world—across these POS locations. Meeting this challenge has taken years. One way that Nokia maintains control of its brand across these locations is by having managers visit the outlets on a regular basis and using their mobile phones to photograph the shelf layout at each location. This lets Nokia control quality and improve merchandizing techniques at all locations.
Distribution-Management Choices: Partner, Acquire, or Build from Scratch
There are typically three distribution strategies for entering a new market. First, companies can do a joint-venture or partnership with a local company. This is the strategy Walmart used when entering Mexico. A second strategy is to acquire a local company to have immediate access to large-scale distribution. The Home Depot pursued this strategy in China when it acquired a partner with whom it had been working for quite some time. Third, a company can to build its own distribution from scratch. Retailer Carrefour chose this route in China years ago, because it knew China would offer a big opportunity, and Carrefour wanted to develop its own local capabilities. Which strategy the company chooses depends on its timetable for volume in the market, local foreign-ownership laws, and the availability of suitable partners or acquisition targets.
Spotlight on International Strategy and Entrepreneurship
Unilever Solves Distribution Issues in India
Hindustan Unilever Limited (HUL), Unilever’s Indian subsidiary, wanted to reach the 70 percent of Indians who live in rural villages. This underserved market is very hard to reach. Not only is marketing to remote villages difficult, but the physical transport of products is no easier. Most of the villages lack paved roads, making traditional truck-based distribution arduous. The only way to reach many of these remote villages is by single-track dirt trails.
In response to these conditions, HUL has created Project Shakti (the word means “strength”) and developed a network of 14,000 women and women-owned cooperatives to serve 50,000 villages. The women handle the logistics and door-to-door retailing of a range of personal-care products. To address the needs of the market and this novel distribution system, HUL has packaged its products in much smaller sizes. The effort has created \$250 million in new revenues for HUL, of which 10 percent is used for financing the women entrepreneurs. By using this approach, HUL doesn’t have to deal with the problem of moving products in rural India. The women or their employees come to the company’s urban distribution centers to get the products.
Key Takeaways
• Global sourcing refers to buying the raw materials or components that go into a company’s products from around the world, not just from the headquarters’ country. The advantages of global sourcing include access to higher quality or lower prices.
• When making sourcing decisions, companies must decide whether to sole-source (i.e., to use one supplier exclusively) or to use two or more suppliers. Sole-sourcing can bring advantages of price discounts based on volume and may give the company greater influence over a supplier or preferential treatment during times of constrained capacity Sole-sourcing can also bring advantages of differentiation or high quality. The disadvantages of sole-sourcing, however, are that the company faces a higher risk of disruption if something happens to that supplier. Also, the supplier may hold more negotiating power on price.
• A company typically has three distribution strategies for entering a new market—to engage in a joint venture, to acquire a local company, or to build its own distribution network from scratch. Establishing a partnership or joint venture is the least costly approach, followed by acquisition. Building a distribution network from scratch is the most costly and time consuming, but it may give the company the most local experience and capabilities for the long term.
• Distribution channels in emerging markets are less developed, which means that companies may need to seek novel solutions to distributing their products, such as Hindustan Unilever Limited creating its own distribution network of 14,000 female independent distributors and cooperatives or Nokia creating Nokia Academy to train salespeople.
Sources
This page is licensed under a Creative Commons Attribution Non-Commercial Share-Alike License (Links to an external site) Links to an external site and contains content from a variety of sources published under a variety of open licenses, including:
• “Competing Effectively through Global Marketing, Distribution, and Supply-Chain Management”, chapter 14 from the book Challenges and Opportunities in International Business (v. 1.0)under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor.
• “Supply-Chain Management”, section 9.2 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor.
• “Supply-Chain Agility and Resiliency”, section 9.3 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor.
• “Making Supply Chains Adaptable”, section 9.4 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor.
• “Creating Supply-Chain Alignment”, section 9.5 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/10%3A_Global_Channels_and_Supply_Chains/10.04%3A_Global_Sourcing_and_Distribution.txt |
Learning Objectives
After reading this section, students should be able to …
• list the methods used in organizing channels
• outline the management of underlying behavioral dimensions present in most channels
ORGANIZING THE CHANNEL
Either through a planned process or through a natural evolution, channels of distribution reflect an observable organization structure. Three types are most common: conventional channels, vertical marketing systems, and horizontal channel systems.
Conventional channels
The conventional channel of distribution could be described as a group of independent businesses, each motivated by profit, and having little concern about any other member of the distribution sequence. There are no all-inclusive goals, and in many instances, the assignment of tasks and the evaluation process are totally informal. Consequently, channel frameworks might be working against one another, tasks may go undone, and ineffective channel member relationships may last for years. Despite these deficiencies, this type of channel structure remains most common, and there are numerous examples of such networks working.
Vertical marketing systems
Vertical marketing systems have emerged as a solution to the problems of conventional networks. A vertical marketing system (VMS) comes about when a member of the distribution channel (usually the manufacturer) assumes a leadership role and attempts to coordinate the efforts of the channel so that mutually beneficial goals can be attained. Three forms of vertical integration are now common.
Administered VMS
The administered VMS is very close to the conventional network, but differs in that it is informally guided by goals and programs developed by one or a limited number of firms in the existing channel. This framework is the source of the concept of a channel captain, in that administrative skills and the power of one individual may be the driving force of the channel. Often the dominant brands, as in the case of Xerox or Procter & Gamble, are able to manifest this cooperation.
Through the recognition of a channel leader, the distribution networks function better, sales and profits are higher, product exposure improves, inventory management systems are initiated, and the coordination of promotional activities becomes a reality. An administered system is not without its problems. Often, this effort is placed on the shoulders of a single individual. Another drawback is the tendency of polarizing channel members. Businesses either become part of the VMS or remain strongly independent. Eventually these independents may find themselves at a tremendous competitive disadvantage, and may even be deprived of certain channel benefits.
Contractual VMS
There are instances when channel members wish to formalize their relationship by employing a contractual agreement, known as a contractual VMS. This provides additional control, and either explicitly or implicitly spells out the marketing functions to be performed by all the members of the channel. This is the most popular form of vertical marketing arrangement.
Corporate VMS
When channel members on different levels are owned and operated by one organization, a corporate vertical marketing system is said to exist. Such integration can be forward or backward. A manufacturer who owns the various intermediaries in its channel network has engaged in forward integration. A retailer who takes over the wholesaling and manufacturing tasks is backward integrating. This process can entail either the organization’s purchasing the institutions, or establishing its own facilities. Although partial forward or backward integration is most common, total integration is becoming more popular. Manufacturers who have recently integrated through to the retail level are Dannon Yogurt, Blue Bell Ice Cream, and Pepperidge Farms. Sears and Safeway stores are two retailers that have successfully integrated backward. American Hospital Supply Corporation is an example of a wholesaler that has integrated both backward and forward.
Horizontal channel systems
There are instances where two or more companies are unable to acquire the capital, or do not have the technical or production know-how, to effectively market their products alone. In such cases, these companies may establish a temporary or quasi-permanent relationship in order to work with each other, and create the channel mechanism required to reach their target markets. This arrangement has been labeled a horizontal channel system. For example, two small manufacturers might combine their shipments to common markets in order to gain full carload transportation rates that each could not obtain separately. Another common scenario is for a large retailer to buyout several competing small retailers in order to gain entry into certain markets or with certain customers.
THE CHANNEL MANAGEMENT PROCESS
Evidence suggests that a channel should be managed just like the product, promotion, and pricing functions.
This channel management process contains five steps.
Analyze the consumer
We begin the process of channel management by answering two questions. First, to whom shall we sell this merchandise immediately? Second, who are our ultimate users and buyers? Depending upon a host of factors, including the type of product, functions performed in the channel, and location in the channel, the immediate and ultimate customers may be identical or they may be quite separate. In both cases, some fundamental questions would apply. There is a need to know what the customer needs, where they buy, when they buy, why they buy from certain outlets, and how they buy.
It is best that we first identify the traits of the ultimate user, since the results of this evaluation might determine the other channel institutions we would use to meet these needs. For example, the buying characteristics of the purchaser of a high-quality VCR might be as follows:
• purchased only from a well-established, reputable dealer
• purchased only after considerable shopping to compare prices and merchandise characteristics
• purchaser willing to go to some inconvenience (time and distance) to locate the most acceptable brand
• purchased only after extended conversations involving all interested parties, including dealer, users, and purchasers
• purchase may be postponed
• purchased only from a dealer equipped to render prompt and reasonable product service
These buying specifications illustrate the kinds of requirements that the manufacturer must discover. In most cases, purchase specifications are fairly obvious and can be discovered without great difficulty. On the other hand, some are difficult to determine. For example, certain consumers will not dine at restaurants that serve alcohol; others will patronize only supermarkets that exhibit definite ethnic characteristics in their merchandising. Nonetheless, by careful and imaginative research, most of the critical factors that bear on consumer buying specifications can be determined.
Knowing the buying specifications of consumers, the channel planner can decide on the type or types of wholesaler or retailer through which a product should be sold. This requires that a manufacturer contemplating distribution through particular types of retailers become intimately familiar with the precise location and performance characteristics of those he is considering.
In much the same way that buying specifications of ultimate users are determined, the manufacturers must also discover buying specifications of resellers. Of particular importance is the question, “from whom do my retail outlets prefer to buy?” The answer to this question determines the types of wholesalers (if any) that the manufacturer should use. Although many retailers prefer to buy directly from the manufacturers, this is not always the case. Often, the exchange requirements of manufacturers (e.g. infrequent visit, large order requirements, and stringent credit terms) are the opposite of those desired by retailers. Such retailers would rather buy from local distributors who have lenient credit terms and offer a wide assortment of merchandise.
Establish the channel objectives
The channel plan is derived from channel objectives. They are based on the requirements of the purchasers and users, the overall marketing strategy, and the long-run goals of the corporation. However, in cases when a company is just getting started, or an older company is trying to carve out a new market niche, the channel objectives may be the dominant objectives. For example, a small manufacturer wants to expand outside the local market. An immediate obstacle is the limited shelf space available to this manufacturer. The addition of a new product to the shelves generally means that space previously assigned to competitive products must be obtained. Without this exposure, the product is doomed.
As one would expect, there is wide diversity of form that channel objectives can take. The following areas encompass the major categories:
• Growth in sales by reaching new markets, and/or increasing sales in existing markets.
• Maintenance or improvement of market share–educate or assist channel components in their efforts to increase the amount of product they handle.
• Achieve a pattern of distribution–structure the channel in order to achieve certain time, place, and form utilities.
• Create an efficient channel–improve channel performance by modifying various flow mechanisms.
Specify distribution tasks
After the distribution objectives are set, it is appropriate to determine the specific distribution tasks (functions) to be performed in that channel system. The channel manager must be far more specific in describing the tasks, and must define how these tasks will change depending upon the situation. An ability to do this requires the channel manager to evaluate all phases of the distribution network. Tasks must be identified fully, and costs must be assigned to these tasks. For example, a manufacturer might delineate the following tasks as being necessary in order to profitably reach the target market:
• provide delivery within 48 hours after order placement
• offer adequate storage space
• provide credit to other intermediaries
• facilitate a product return network
• provide readily available inventory (quantity and type)
• provide for absorption of size and grade obsolescence
Evaluate and select from channel alternatives
Determining the specific channel tasks is a prerequisite for the evaluation and selection process. There are four bases for channel alternatives: number of levels, intensity at the various levels, types of intermediaries at each level, and application of selection criterion to channel alternatives.
Number of levels
Channels can range in levels from two to several (five being typical). The two-level channel (producer to consumer) is a direct channel and is possible only if the producer or customer are willing to perform several of the tasks performed by intermediaries. The number of levels in a particular industry might be the same for all the companies simply because of tradition. In other industries, this dimension is more flexible and subject to rapid change.
Intensity at each level
Once the number of levels has been decided, the channel manager needs to determine the actual number of channel components involved at each level. How many retailers in a particular market should be included in the distribution network? How many wholesalers? Although there are limitless possibilities, the categories shown in Tabvle 10.2 describes the general alternatives.
The intensity decision is extremely critical, because it is an important part of the firm’s overall marketing strategy. Companies such as Coca-Cola and Timex watches have achieved high levels of success through their intensive distribution strategy.
Types of intermediaries
As discussed earlier, there are several types of intermediaries that operate in a particular channel system. The objective is to gather enough information to have a general understanding of the distribution tasks these intermediaries perform. Based on this background information, several alternatives will be eliminated.
1. Exclusive distribution (such as Ethan Allen and Drexel Heritage Furniture)
1. the use of a single or very few outlets
2. creates high dealer loyalty and considerable sales support
3. provides greater control
4. limits potential sales volume
5. success of the product is dependent upon the ability of a single intermediary
2. Intensive distribution (such as candy)—the manufacturer attempts to get as many intermediaries of a particular type as possible to carry the product
1. provides for increased sales volume, wider consumer recognition, and considerable impulse purchasing
2. low price, low margin, and small order sizes often result
3. extremely difficult to stimulate and control this large number of intermediaries
3. Selective distribution (such as Baskin-Robbins)–an intermediary strategy, with the exact number of outlets in any given market dependent upon market potential, density of population, dispersion of sales, and competitors’ distribution policies
1. contains some of the strengths and weaknesses of the other two strategies
2. it is difficult to determine the optimal number of intermediaries in each market
Table 10.2: Levels of channel intensity.
Having identified several possible alternative channel structures, the channel manager is now at a place where he or she can evaluate these alternatives with respect to some set of criteria. Company factors, environmental trends, reputation of the reseller, experience of reseller are just a few examples.
Who should lead
Regardless of the channel framework selected, channels usually perform better if someone is in charge, providing some level of leadership. Essentially, the purpose of this leadership is to coordinate the goals and efforts of channel institutions. The level of leadership can range from very passive to quite active-verging on dictatorial. The style may range from very negative, based on fear and punishment, to very positive, based on encouragement and reward. In a given situation, any of these leadership styles may prove effective.
Given the restrictions inherent in channel leadership, the final question is “who should lead the channel?” Two important trends are worth noting, since they influence the answer. First, if we look at the early years of marketing, i.e. pre-1920, the role of the wholesaler (to bring the producer and consumer together) was most vital. Consequently, during this period, the wholesaler led most channels. This is no longer true. A second trend is the apparent strategy of both manufacturers and retailers to exert power through size. In a type of business cold war, manufacturers and retailers are constantly trying to match each other’s size. The result has been some serious warfare to gain channel superiority.
Under which conditions should the manufacturers lead? The wholesaler? The retailer? While the answer is contingent upon many factors, in general, the manufacturer should lead if control of the product (merchandising, repair) is critical and if the design and redesign of the channel is best done by the manufacturer. The wholesaler should lead where the manufacturers and retailers have remained small in size, large in number, relatively scattered geographically, are financially weak, and lack marketing expertise. The retailer should lead when product development and demand stimulation are relatively unimportant and when personal attention to the customer is important.
Evaluating channel member performance
The need to evaluate the performance level of the channel members is just as important as the evaluation of the other marketing functions. Clearly, the marketing mix is quite interdependent and the failure of one component can cause the failure of the whole. There is one important difference, with the exception of the corporate VMS; the channel member is dealing with independent business firms, rather than employees and activities under the control of the channel member, and their willingness to change is lacking.
Sales is the most popular performance criteria used in channel evaluation. Sales might further be subdivided into current sales compared with historical sales, comparisons of sales with other channel members, and comparisons of the channel member’s sales with predetermined quotas. Other possible performance criteria are: maintenance of adequate inventory, selling capabilities, attitudes of channel intermediaries toward the product, competition from other intermediaries and from other product line carried by the manufacturers own channel members.
Correcting or modifying the channel
As a result of the evaluation process, or because of other factors such as new competition, technology, or market potential, changes will be made in the channel structure. Because channel relationships have tended to be longterm, and the channel decision has such a pervasive impact on the business, great care should be taken before changing the status quo.
Terminations of channel members not performing at minimum performance standards should be employed only as a last resort. Corrective actions are far less destructive and maintain the goodwill that is so crucial in channel relationships. This requires that the channel manager attempt to find out why these channel members have performed poorly and then implement a strategy to correct these deficiencies.
Sometimes a producer decides that an entirely new channel needs to be added, or an existing one deleted. A manufacturer of camera accessories might decide that he wants to reach the skilled amateur market in addition to the professional photographer market. This would mean designing a different channel, and learning about a different set of intermediaries.
THE HUMAN ASPECT OF DISTRIBUTION
A channel of distribution by its very nature is made up of people. Ideally, a channel member should coordinate his or her efforts with other members in such a way that the performance of the total distribution system to which he or she belongs is enhanced. This is rarely the case. Part of this lack of cooperation is due to the organization structure of many channels, which encourages a channel member to be concerned only with channel members immediately adjacent to them, from whom they buy and to whom they sell. A second reason is the tendency of channel members to exhibit their independence as separate business operations. It is difficult to gain cooperation under this arrangement. Four human dimensions have been incorporated into the study of channel behavior: roles, communication, conflict, and power. It is assumed that an understanding of these behavioral characteristics will increase the effectiveness of the channel.
Role
Most channel members participate in several channels. Establishing the role of a channel member means defining what the behavior of the channel member should be. For example, a basic role prescription of the manufacturer may be to maximize the sales of his or her particular brand of product. This connotes that the manufacturer is to actively compete for market share, and aggressively promote his or her brand. The role prescriptions of independent wholesalers, however, are likely to be quite different. Since wholesalers may represent several competing manufacturers, his or her role would be to build sales with whatever brands are most heavily demanded by retailers. Therefore, a major issue in channel management relates to defining the role prescriptions of the various participants in order to achieve desired results. This is accomplished through a careful appraisal of the tasks to be performed by each channel member and clear communication of these roles to the members.
Communication
Channel communication is sending and receiving information that is relevant to the operation of the channel. It is critical for the success of the channel member to work to create and foster an effective flow of information within the channel. Communication will take place only if the channel member is aware of the pitfalls that await. The channel manager should therefore try to detect any behavioral problems that tend to inhibit the effective flow of information through the channel and try to solve these problems before the communication process in the channel becomes seriously distorted.
Conflict
Anytime individuals or organizations must work together and rely on each other for personal success, conflict is inevitable. Conflict, unlike friendly competition, is personal and direct and often suggests a confrontation. Because it is so pervasive in distribution, a great deal of research has been conducted in attempts to identify its causes, outcomes, and solutions.
There is also a need to manage conflict in the channel. This consists of (a) establishing a mechanism for detecting conflict, (b) appraising the effects of the conflict, and (c) resolving the conflict. This last consideration is most difficult to implement. Techniques such as a channel committee, joint goal setting, and bringing in an arbitrator have all been used. There are even cases when conflict is necessary. Such is the case in the e-marketplace. For example, Eric Schmidt, Chairman and CEO of Google Inc., notes: “From my experience the most successful companies are the ones where there is enormous conflict. Conflict does not mean killing one another, but instead means there is a process by which there is a disagreement. It is okay to have different points of view and disagree, because tolerance of multiple opinions and people often leads to the right decision through some kind of process.”
Power
Power is our willingness to use force in a relationship. It is often the means by which we are able to control or influence the behavior of another party. In the channel mechanism, powerrefers to the capacity of a particular channel member to control or influence the behavior of another channel member. For instance, a large retailer may want the manufacturer to modify the design of the product or perhaps be required to carry less inventory. Both parties may attempt to exert their power in an attempt to influence the other’s behavior. The ability of either of the parties to achieve this outcome will depend upon the amount of power that each can bring to bear.
REFERENCES
1 Wroe Alderson, “Factors Governing the Development of Marketing Channels,” in R.M. Clewett (ed.), Marketing Channels for Manufactured Products, Homewood, IL: Richard D. Irwin. 1954, pp. 5-22.
2 James L. Heskett, Marketing, New York: Macmillan Publishing Co., Inc., 1976, pp. 265-267.
3 Roger M. Pegram, “Selecting and Evaluating Distributors,” New York: The Conference Board, Business Policy Study No. 116, 1965, p. 24.
4 Louis W. Stem, and Ronald H. Gorman, “Conflict in Distribution Channels: An Exploration,” in Distribution Channels: Behavioral Dimensions, ed. Louis W. Stern, New York: Houghton-Mifflin Co., 1969, p. 156.
Sources
Section 10.4 Organizing The Channel is adapted from chapter ‘10. Channel concepts: distributing the product’ from the textbook ‘Introducing Marketing, First Edition, 2011’ authored by John Burnett – this book was published under The Global Text Project, funded by the Jacobs Foundation, Zurich, Switzerland.
The following changes were made to the most recent edition: Divided ‘Chapter 10. Channel concepts: distributing the product’’ into three sections; Removed Created new title for Figure featuring Anderson ad.; Removed box titled ‘In Practice’ from wsj.com; Removed case application at the end of chapter; Added learning objectives. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/10%3A_Global_Channels_and_Supply_Chains/10.05%3A_Organizing_The_Channel.txt |
Summary
Marketing communications—the promotion P of the marketing mix—includes advertising, public relations, sales promotion, and personal selling. When a company embraces integrated marketing communications (IMC), it recognizes that the various elements of a company’s communication strategy must be carefully coordinated. Advertising is a sponsored , paid message that is communicated through nonpersonal channels. Global advertising consists of the same advertising appeals, messages, artwork, and copy in campaigns around the world. The effort required to create a global campaign forces a company to determine whether or not a global market exists for its product. The trade-off between standardized and adapted advertising is often accomplished by means of pattern advertising, which can be used to create localized global advertising. Many advertising agencies are part of larger advertising organizations. Advertisers may place a single global agency in charge of worldwide advertising; it is also possible to use one or more agencies on a regional or local basis.
The starting point in ad development is the creative strategy, a statement of what the message will say. The people who create ads often seek a big idea that can serve as the basis for memorable, effective messages. The advertising appeal is the communication approach—rational or emotional—that best relates to buyer motives. Rational appeals speak to the mind: emotional appeals speak to the heart. The selling proposition is the promise that captures the reason for buying the product. The creative execution is the way an appeal or proposition is presented. Art direction and copy must be created with cultural considerations in mind. Perceptions of humor, male-female relationships, and sexual imagery vary in different parts of the world. Media availability varies considerably from country to country. When selecting media, marketers are sometimes as constrained by laws and regulations as by literacy rates.
A company utilizes public relations (PR) to foster goodwill and understanding among constituents both inside and outside the company. In particular, the PR department attempts to generate favorable publicity about the company and its products and brands. The PR department must also manage corporate communications when responding to negative publicity. The most important PR tools are press releases, media kits, interviews, and tours. Many global companies make use of various types of corporate advertising, including image advertising and advocacy advertising. Public relations is also responsible for providing accurate, timely information, especially in the event of a crisis.
Source
This page is licensed under a Creative Commons Attribution Non-Commercial Share-Alike License (Links to an external site) Links to an external site and contains content from a variety of sources published under a variety of open licenses, including:
• Chapter 14 and Chapter 15 from the course note from the ‘Global Marketing’ course published online by Centre for Teaching and Learning (CTL) of Universiti Teknologi Malaysia (UTM) Copyright (c) is by Dr. Inda Sukati and made available under a Attribution-Noncommercial-Share Alike 3.0 license.
I would like to thank Andy Schmitz for his work in maintaining and improving the HTML versions of these textbooks. This textbook is adapted from his HTML version, and his project can be found here.
11.02: Changes in Promotion
Learning Objectives
After reading this section, students should be able to …
1. list driving factors in global promotion decisions
2. outline the steps in changing the global promotional mix
Changes in Promotion
Before a company decides to become global, it must consider a multitude of factors unique to the international marketing environment. These factors are social, cultural, political, legal, competitive, economic, and even technological in nature. Ultimately, at the global marketing level, a company trying to speak with one voice is faced with many challenges when creating a worldwide marketing plan. Unless a company holds the same position against its competition in all markets (market leader, low cost, etc.), it is impossible to launch identical marketing plans worldwide. Thus, global companies must be nimble enough to adapt to changing local market trends, tastes, and needs.
Global Promotion
Language is usually one element that is customized in a global promotional mix.
For global advertisers, there are four potentially competing business objectives that must be balanced when developing worldwide advertising: building a brand while speaking with one voice, developing economies of scale in the creative process, maximizing local effectiveness of advertisements, and increasing the company’s speed of implementation. Global marketers can use the following approaches when executing global promotional programs: exporting executions, producing local executions, and importing ideas that travel.
Factors in Global Promotion
To successfully implement these approaches, brands must ensure their promotional campaigns take into how consumer behavior is shaped by internal conditions (e.g., demographics, knowledge, attitude, beliefs) and external influences (e.g., culture, ethnicity, family, lifestyle) in local markets.
• Language– The importance of language differences is extremely crucial in global marketing, as there are almost 3,000 languages in the world. Language differences have caused many problems for marketers in designing advertising campaigns and product labels. Language becomes even more significant if a country’s population speaks several languages.
• Colors– Colors also have different meanings in different cultures. For example, in Egypt, the country’s national color of green is considered unacceptable for packaging because religious leaders once wore it. In Japan, black and white are colors of mourning and should not be used on a product’s package. Similarly, purple is unacceptable in Hispanic nations because it is associated with death.
• Values– An individual’s values arise from his or her moral or religious beliefs and are learned through experiences. For example, Americans place a very high value on material well-being and are much more likely to purchase status symbols than people in India. In India, the Hindu religion forbids the consumption of beef.
• Business norms– The norms of conducting business also vary from one country to the next. For example, in France, wholesalers do not like to promote products. They are mainly interested in supplying retailers with the products they need.
• Religious beliefs– A person’s religious beliefs can affect shopping patterns and products purchased in addition to his or her values. In the United States and other Christian nations, Christmas time tends to be a major sales period. In other religions, significant religious holidays may or may not serve as popular times for purchasing products.
There are many other factors, including a country’s political or legal environment, monetary circumstances, and technological environment that can impact a brand’s promotional mix. Companies have to be ready to quickly respond and adapt to these challenges as they evolve and fluctuate in the market of each country.
Changing the Global Promotional Mix
When launching global advertising, public relations or sales campaigns, global companies test promotional ideas using marketing research systems that provide results comparable across countries. The ability to identify the elements or moments of an advertisement that contribute to the success of a product launch or expansion is how economies of scale are maximized in marketing communications. Market research measures such as flow of attention, flow of emotion, and branding moments provide insight into what is working in an advertisement in one or many countries. These measures can be particularly helpful for marketers since they are based on visual, not verbal, elements of the promotion.
Considering these measures along with conducting extensive market research is essential to determining the success of promotional tactics in any country or region. Once brands discover what works (and what does not) in their promotional mix, those ideas can be imported by any other market. Likewise, companies can use this intelligence to modify various elements in their promotional mix that are receiving minimal or unfavorable response from global audiences.
Key Takeaways
• To successfully implement global marketing strategies, brands must ensure their promotional campaigns take into account how consumer behavior is shaped by internal conditions and external influences.
• Global companies must be nimble enough to adapt changing local market trends, tastes, and needs to their promotional mix.
• When launching global advertising, public relations or sales campaigns, global companies test promotion ideas to provide results that are comparable across countries.
• Using measures can be particularly helpful for marketers since they are based on visual, not verbal, elements of the promotion.
Terms
• Measure: To ascertain the quantity of a unit of material via calculated comparison with respect to a standard.
• Demographics: The observable characteristics of a population, such as physical traits, economic traits, occupational traits, and more.
Source
The above content was adapted from Boundless Business. Authored by: Boundless. Provided by: Boundless. Located at: https://www.boundless.com/business/. License: CC BY-SA: Attribution-ShareAlike under a Creative Commons Attribution-NonCommercial-ShareAlike License.
Image of Potato Chips. Authored by: kevin dooley. Located at: https://www.flickr.com/photos/pagedo...89227/sizes/l/. License: CC BY: Attribution. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/11%3A_Global_Promotions/11.01%3A_Global_Promotions_Summary.txt |
Learning Objectives
After reading this section, students should be able to …
1. appreciate the trade-off between creating global efficiencies and adaptation
One way around the trade-off between creating global efficiencies and adapting to local requirements and preferences is to design a global product or communication platform that can be adapted efficiently to different markets. This modularized approach to global product design has become particularly popular in the automobile industry. One of the first “world car platforms” was introduced by Ford in 1981. The Ford Escort was assembled simultaneously in three countries—the United States, Germany, and the United Kingdom—with parts produced in 10 countries. The U.S. and European models were distinctly different but shared standardized engines, transmissions, and ancillary systems for heating, air conditioning, wheels, and seats, thereby saving the company millions of dollars in engineering and development costs.
Minicase: Creating the Perfect Fit: New Car-Seat, DesignBuss (2009)
Imagine the challenge of being an automotive-seat engineer these days, and picture one of the hugest men you know—a large, American male weighing about 275 lbs. Now consider a petite woman, and throw in someone with lower-back pain. Your challenge: design a single seat that comfortably accommodates each of these physically and physiologically diverse individuals, not just for a few minutes but for a 4-hour drive. Welcome to the global automotive design challenge.
While the economic pressures to standardize are becoming stronger, car buyers are getting more size-diverse, more ergonomically distressed, and more demanding of power adjustments and other amenities. Seat developers are responding: they are using more versatile materials, new engineering techniques, digital technologies, and novel designs to make sitting in a car as, or even more, comfortable as sitting in your living room.
This concern for comfort is relatively new; hard benches were the standard during the industry’s earliest days. Even into the 1980s, most cars and trucks had simple bench seating in both the front and rear of the automobile. Automotive seat design only became a crucial discipline during the last generation as Americans began to spend more and more time in their vehicles and as interior comfort and appointments became a major competitive issue.
Federal regulations affect seat design only minimally, with the most important requirements focusing on headrests. And there are distance requirements between the driver’s body and the steering wheel, an issue that can also be addressed with telescoping steering wheels and adjustable pedals. In the end, automakers must mainly make sure the seat design helps the car pass the government’s crash-safety standards.
Consumers are far more demanding. Comfort and ergonomic functionality have become the focal points of seat design. Americans are getting bigger and heavier, and automakers try to design seats that can accommodate everyone from the smallest females to the largest males. This is not a simple feat, with the 95th-percentile American man now weighing about 24 lbs more than 2 decades ago. At the same time, while U.S. women in general also have gotten larger, the influx of immigrants from Asia actually kept the overall increase in the size of the 5th-percentile American woman down to under 5 lbs over the last 2 decades.
And just as airlines and home-furniture manufacturers have had to respond to wider girths by making seats bigger, auto companies are also faced with having to squeeze bigger people into cabins that are getting smaller as gas prices rise. At the same time, seats must secure tiny drivers and allow them to see clearly over the steering wheel and reach the accelerator and brake pedals.
The aging of the American population poses special difficulties. Younger demographics like their seats harder, but baby boomers and older customers are used to a soft seat. Whether this is best ergonomically is not important, despite the fact that more and more consumers are carrying specific maladies of aging into their cars, including back pain, aching knees, and a general decline in the basic nimbleness required to get in and out of an automobile.
It is one thing to design a single seat that can accommodate the frames of the smallest to the largest Americans. Now add the globalization challenge. As automakers seek to globalize vehicle platforms, their seats also have to be able to accommodate the diverse body proportions, size ranges, and consumer preferences of people around the world.
For example, while Europeans definitely prefer longer cushions, and Asians like shorter ones, Americans are somewhere in between. And in China, the second row must be as comfortable as the first because as many as 40% of car owners have a driver, and the owners tend to sit in the right rear seat.
Source
The above content was adapted from “Combining Aggregation and Adaptation: Global Product Platforms”, section 6.3 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor.
I would like to thank Andy Schmitz for his work in maintaining and improving the HTML versions of these textbooks. This textbook is adapted from his HTML version, and his project can be found here. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/11%3A_Global_Promotions/11.03%3A_Global_Communication_Platform.txt |
Learning Objectives
After reading this section, students should be able to …
1. outline the generic global strategies in the value proposition globalization matrix
2. explain usgae of gobal message strategies
A useful construct for analyzing the need to adapt the offer and message (positioning) dimensions is the value proposition globalization matrix shown in Figure 11.1 “The Value Proposition Globalization Matrix”, which illustrates four generic global strategies:
1. A pure aggregation approach (also sometimes referred to as a “global marketing mix” strategy) under which both the offer and the message are the same
2. An approach characterized by an identical offer (product/service aggregation) but different positioning (message adaptation) around the world (also called a “global offer” strategy)
3. An approach under which the offer might be different in various parts of the world (product adaptation) but where the message is the same (message aggregation; also referred to as a “global message” strategy)
4. A “global change” strategy under which both the offer and the message are adapted to local market circumstances
Global mix or pure aggregation strategies are relatively rare because only a few industries are truly global in all respects. They apply (a) when a product’s usage patterns and brand potential are homogeneous on a global scale, (b) when scale and scope cost advantages substantially outweigh the benefits of partial or full adaptation, and (c) when competitive circumstances are such that a long-term, sustainable advantage can be secured using a standardized approach. The best examples are found in industrial product categories such as basic electronic components or certain commodity markets.
Global offer strategies are feasible when the same offer can be advantageously positioned differently in different parts of the world. There are several reasons for considering differential positioning. When fixed costs associated with the offer are high, when key core benefits offered are identical, and when there are natural market boundaries, adapting the message for stronger local advantage is tempting. Although such strategies increase local promotional budgets, they give country managers a degree of flexibility in positioning the product or service for maximum local advantage. The primary disadvantage associated with this type of strategy is that it could be difficult to sustain or even dangerous in the long term as customers become increasingly global in their outlook and confused by the different messages in different parts of the world.
Mini Case: Starwood’s Branding in China, Palmeri and Balfour (2009, September 7)
Check into a Four Points Hotel by Sheraton in Shanghai and you will get all the perks of a quality international hotel: a free Internet connection, several in-house restaurants, a mah-jongg parlor, and an assortment of moon cakes, a Chinese delicacy. All this for \$80 a night, about 20% less than the average cost of a room in Shanghai.
For travelers who associate the Sheraton brand with plastic ice buckets and polyester bedspreads in the United States, this may come as a surprise. Like Buick, Kentucky Fried Chicken (KFC), and Pizza Hut, Sheraton is one of those American names that, to some, seems past its prime at home, but it is still popular and growing abroad. The hotel brand has particular cachet in China, going back to 1985, when it opened the Great Wall Sheraton Hotel Beijing. Local developers still compete to partner with Sheraton’s parent company—Starwood Hotels & Resorts Worldwide—to develop new properties. In the near future, the company will have more rooms in Shanghai than it does in New York.
Like many other U.S. companies experiencing pressure at home, Starwood sees China as one of its best hopes for growth. The company, which also owns the upscale St. Regis, Westin, W, and Le Meridien brands, expects much of this growth will come from outlying regions. Big cities such as Beijing now have plenty of rooms, thanks in part to the Olympics, but there is growing demand for business-class accommodation in second- and third-tier cities such as Jiangyin and Dalian. Lower construction costs and inexpensive labor mean the company’s Chinese hotel owners can offer guests a lot more than comparably priced U.S. properties.
In recent years, the focus in China has shifted from international travelers to Chinese consumers. Starwood now asks its hotel staff to greet guests in Mandarin instead of English, which was long used to convey a sense of prestige. Many of its hotels do not label their fourth floors as such because four is considered an unlucky number.
Starwood is not alone in recognizing the potential of the Chinese market. Marriott International hopes to increase its China presence by 50%, to 61 hotels by 2014. And InterContinental Hotels Group, parent of Holiday Inn, plans to double the 118 hotels it has in China over the next 3 years.
One major perk Starwood can offer over local competitors is its extensive global network and loyalty perks. More than 40% of its Chinese business comes through its preferred-guest program, and Chinese membership in the program is increasing rapidly. But local customers are not particularly focused on accruing points to earn a free stay. They are more interested in “status,” using points to get room upgrades, a free breakfast, or anything that accords them conspicuous VIP treatment. Among other things, the preferred guest system allows staffers to see people’s titles immediately. That makes it easier to give better rooms to managers than the subordinates they are traveling with and to greet them first when a party arrives.
After a long period in which Starwood paid more attention to its hipper W and Westin brands, the company has recently been remodeling its U.S. Sheratons. Among mainland Chinese travelers, the Sheraton name has continued to exude an aura of international class. While that is helpful for Sheraton’s domestic Chinese business, the real potential will only be realized when they start to travel. The company’s goal is to lock in the loyalty of mainland customers so they will stay at a Sheraton when they travel abroad. Indeed, if the experience with Japanese tourists in the mid-1980s is any guide, Starwood could be looking at 100 million or more outbound trips from China.
Global message strategies use the same message worldwide but allow for local adaptation of the offer. McDonald’s, for example, is positioned virtually identical worldwide, but it serves vegetarian food in India and wine in France. The primary motivation behind this type of strategy is the enormous power behind a global brand. In industries in which customers increasingly develop similar expectations, aspirations, and values; in which customers are highly mobile; and in which the cost of product or service adaptation is fairly low, leveraging the global brand potential represented by one message worldwide often outweighs the possible disadvantages associated with factors such as higher local research and development (R&D) costs. As with global-offer strategies, however, global message strategies can be risky in the long run—global customers might not find elsewhere what they expect and regularly experience at home. This could lead to confusion or even alienation.
Mini Case: KFC Abroad1
KFC is synonymous with chicken. It has to be because chicken is its flagship product. One of the more recent offers the company created—all around the world—is the marinated hot and crispy chicken that is “crrrrisp and crunchy on the outside, and soft and juicy on the inside.” In India, KFC offers a regular Pepsi with this at just 39 rupees. But KFC also made sure not to alienate the vegetarian community—in Bangalore, you can be vegetarian and yet eat at KFC. Why? Thirty-five percent of the Indian population is vegetarian, and in metros such as Delhi and Mumbai, the number is almost 50%. Therefore, KFC offers a wide range of vegetarian products, such as the tangy, lip-smacking Paneer Tikka Wrap ‘n Roll, Veg De-Lite Burger, Veg Crispy Burger. There are munchies such as the crisp golden veg fingers and crunchy golden fries served with tangy sauces. You can combine the veg fingers with steaming, peppery rice and a spice curry. The mayonnaise and sauces do not have egg in them.
While the vegetarian menu is unique to India because of the country’s distinct tastes, KFC’s “standard” chicken products are also adapted to suit local tastes. For example, chicken strips are served with a local sauce, or the sauce of the wrap is changed to local tastes. Thus, KFC tries to balance aggregation with adaptation: standardization of those parts of the value offering that travel easily (KFC’s core products and positioning), tailoring of standard chicken products with a different topping or sauce, and offering a vegetarian menu.
This adaptation strategy is used in every country that KFC serves: the U.S. and European markets have a traditional KFC menu based on chicken burgers and wraps, while Asian offerings like those in India are more experimental and adventurous and include rice meals, wraps, and culture-appropriate sides.
Global change strategies define a “best fit” approach and are by far the most common. As we have seen, for most products, some form of adaptation of both the offer and the message is necessary. Differences in a product’s usage patterns, benefits sought, brand image, competitive structures, distribution channels, and governmental and other regulations all dictate some form of local adaptation. Corporate factors also play a role. Companies that have achieved a global reach through acquisition, for example, often prefer to leverage local brand names, distribution systems, and suppliers rather than embark on a risky global one-size-fits-all approach. As the markets they serve and the company become more global, selective standardization of the message and the offer itself can become more attractive.
Mini Case: Targeting Muslim Customers, Power (2009, June 1)
Muslims often experience culture shock while staying in Western hotels. Minibars, travelers in bikinis, and loud music, among other things, embarrass Muslim travelers.
That is no longer necessary. A growing number of hotels has started to cater to Muslim travelers. In one, the lobby—decorated in white leather, brick, and glass, with a small waterfall—is quiet. Men in dishdashas and veiled women mingle with Westerners who are sometimes discreetly reminded to respect local customs. Minibars are stocked not with alcohol but with Red Bull, Pepsi, and the malt drink Barbican.
“Buying Muslim” used to mean avoiding pork and alcohol and getting your meat from a halal butcher, who slaughtered in accordance with Islamic principles. But the halal food market has exploded in the past decade and is now worth an estimated \$632 billion annually, according to the Halal Journal, a Kuala Lumpur–based magazine. That amounts to about 16% of the entire global food industry. Throw in the fast-growing Islam-friendly finance sector and the myriad of other products and services—cosmetics, real estate, hotels, fashion, insurance, for example—that comply with Islamic law and the teachings of the Koran, and the sector is worth well over \$1 trillion a year.
Seeking to tap that huge market, multinationals like Tesco, McDonald’s, and Nestlé have expanded their Muslim-friendly offerings and now control an estimated 90% of the global halal market. Governments in Asia and the Middle East are pouring millions into efforts to become regional “halal hubs,” providing tailor-made manufacturing centers and “halal logistics”—systems to maintain product purity during shipping and storage. The intense competition has created some interesting partnerships in unusual places. Most of Saudi Arabia’s chicken is raised in Brazil, which means Brazilian suppliers had to build elaborate halal slaughtering facilities. Abattoirs in New Zealand, the world’s biggest exporter of halal lamb, have hosted delegations from Iran and Malaysia. And the Netherlands, keen to exploit Rotterdam’s role as Europe’s biggest port, has built halal warehouses so that imported halal goods are not stored next to pork or alcohol.
It is not just about food. Major drug companies now sell halal vitamins free of the gelatins and other animal derivatives that some Islamic scholars say make mainstream products haram, or unlawful. The Malaysia-based company Granulab produces synthetic bone-graft material to avoid using animal bone, while Malaysian and Cuban scientists are collaborating on a halal meningitis vaccine. For Muslim women concerned about skin-care products containing alcohol or lipsticks that use animal fats, a few cosmetics firms are creating halal makeup lines.
The growing Islamic finance industry is trying to win non-Muslim customers. Investors are attracted by Islamic banking’s more conservative approach: Islamic law forbids banks from charging interest (though customers pay fees), and many scholars discourage investment in excessively leveraged companies. Though it currently accounts for just 1% of the global market, the Islamic finance industry’s value is growing at around 15% a year, and it could reach \$4 trillion in 5 years, according to a 2008 report from Moody’s Investors Service.
Source
The above content was adapted from “Adaptation or Aggregation: The Value Proposition Globalization Matrix”, section 6.2 from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor.
I would like to thank Andy Schmitz for his work in maintaining and improving the HTML versions of these textbooks. This textbook is adapted from his HTML version, and his project can be found here. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/11%3A_Global_Promotions/11.04%3A_Global_Communication_Strategies.txt |
Summary
Pricing decisions are a critical element of the marketing mix that must reflect costs, competitive factors, and customer perceptions regarding value of the product. In a true global market, the law of one price would prevail. Pricing strategies include market skimming, market penetration, and market holding. Novice exporters frequently use cost-plus pricing. International terms of a sale such as ex-works, F.A.S., F.O.B., and C.I.F. are known as Incoterms and specify which party to a transaction is responsible for covering various costs. These and other costs lead to export price escalation, the accumulation of costs that occurs when products are shipped from one country to another.
Expectations regarding currency fluctuations, inflation, government controls, and the competitive situation must also be factored into pricing decisions. The introduction of the euro has impacted price strategies in the EU because of improved price transparency. Global companies can maintain competitive prices in world markets by shifting production sources as business conditions change. Overall, a company’s pricing policies can be categorized as ethnocentric, polycentric, or geocentric.
Several additional pricing issues are related to global marketing. The issue of gray market goods arises because price variations between different countries lead to parallel imports. Dumping is another contentious issue that can result in strained relations between trading partners. Price fixing among companies is anticompetitive and illegal.
Transfer pricing is an issue because of the sheer monetary volume of intra-corporate sales and because country governments are anxious to generate as much tax revenue as possible. Various forms of countertrade play an important role in today’s global environment. Barter, counter purchase, offset, compensation trading, and switch trading are the main countertrade options.
Source
This page is licensed under a Creative Commons Attribution Non-Commercial Share-Alike License (Links to an external site) Links to an external site and contains content from a variety of sources published under a variety of open licenses, including:
Chapter 11 from the course note from the ‘Global Marketing’ course published online by Centre for Teaching and Learning (CTL) of Universiti Teknologi Malaysia (UTM) Copyright (c) is by Dr. Inda Sukati and made available under a Attribution-Noncommercial-Share Alike 3.0 license.
I would like to thank Andy Schmitz for his work in maintaining and improving the HTML versions of these textbooks. This textbook is adapted from his HTML version, and his project can be found here.
12.02: Basics of Pricing
Learning Objectives
After reading this section, students should be able to …
• outline the sellers’ objectives in making pricing decisions
Pricing objectives
Firms rely on price to cover the cost of production, to pay expenses, and to provide the profit incentive necessary to continue to operate the business. We might think of these factors as helping organizations to: (a) survive, (b) earn a profit, (c) generate sales, (d) secure an adequate share of the market, and (e) gain an appropriate image
• Survival: It is apparent that most managers wish to pursue strategies that enable their organizations to continue in operation for the long term. So survival is one major objective pursued by most executives. For a commercial firm, the price paid by the buyer generates the firm’s revenue. If revenue falls below cost for a long period of time, the firm cannot survive.
• Profit: Survival is closely linked to profitability. Making a USD 500,000 profit during the next year might be a pricing objective for a firm. Anything less will ensure failure. All business enterprises must earn a longterm profit. For many businesses, long-term profitability also allows the business to satisfy their most important constituents–stockholders. Lower-than-expected or no profits will drive down stock prices and may prove disastrous for the company.
• Sales: Just as survival requires a long-term profit for a business enterprise, profit requires sales. As you will recall from earlier in the text, the task of marketing management relates to managing demand. Demand must be managed in order to regulate exchanges or sales. Thus marketing management’s aim is to alter sales patterns in some desirable way.
• Market share: If the sales of Safeway Supermarkets in the Dallas-Fort Worth metropolitan area of Texas, USA, account for 30 per cent of all food sales in that area, we say that Safeway has a 30 per cent market share. Management of all firms, large and small, are concerned with maintaining an adequate share of the market so that their sales volume will enable the firm to survive and prosper. Again, pricing strategy is one of the tools that is significant in creating and sustaining market share. Prices must be set to attract the appropriate market segment in significant numbers.
• Image: Price policies play an important role in affecting a firm’s position of respect and esteem in its community. Price is a highly visible communicator. It must convey the message to the community that the firm offers good value, that it is fair in its dealings with the public, that it is a reliable place to patronize, and that it stands behind its products and services.
Developing a pricing strategy
While pricing a product or service may seem to be a simple process, it is not. As an illustration of the typical pricing process, consider the following quote: “Pricing is guesswork. It is usually assumed that marketers use scientific methods to determine the price of their products. Nothing could be further from the truth. In almost every case, the process of decision is one of guesswork.” (2)
Good pricing strategy is usually based on sound assumptions made by marketers. It is also based on an understanding of the two other perspectives discussed earlier. Clearly, sale pricing may prove unsuccessful unless the marketer adopts the consumer’s perspective toward price. Similarly, a company should not charge high prices if it hurts society’s health. Hertz illustrates how this can be done in “Integrated marketing” below.
A pricing decision that must be made by all organizations concerns their competitive position within their industry. This concern manifests itself in either a competitive pricing strategy or a nonprice competitive strategy. Let us look at the latter first.
Nonprice competition
Nonprice competition means that organizations use strategies other than price to attract customers. Advertising, credit, delivery, displays, private brands, and convenience are all example of tools used in nonprice competition. Businesspeople prefer to use nonprice competition rather than price competition, because it is more difficult to match nonprice characteristics.
Student Example
Amazon uses creative methods to deliver an experience to consumers that makes them competitive rather than providing just a price advantage. More specifically, an example of this is the new Amazon Go stores. These stores feature a completely different approach than a regular retail store. Most stores feature the typical shop, wait in line, check out, and leave. At Amazon Go, you can simply pick up the items you want and walk out the door. All you need is the Amazon Go app downloaded on your phone which will process your order to your account. Through the use of carefully designed technology, there is little to no hassles for the end-user. Amazon really emphasizes the idea of no checkouts, no lines, no registers to persuade consumers on convenience. They are using other methods to make them competitive rather than price.
Mitchel Mertins
Class of 2020
Competing on the basis of price may also have a deleterious impact on company profitability. Unfortunately, when most businesses think about price competition, they view it as matching the lower price of a competitor, rather than pricing smarter. In fact, it may be wiser not to engage in price competition for other reasons. Price may simply not offer the business a competitive advantage (employing the value equation).
Competitive pricing
Once a business decides to use price as a primary competitive strategy, there are many well established tools and techniques that can be employed. The pricing process normally begins with a decision about the company’s pricing approach to the market.
Approaches to the market
Price is a very important decision criteria that customers use to compare alternatives. It also contributes to the company’s position. In general, a business can price itself to match its competition, price higher, or price lower. Each has its pros and cons.
Pricing to meet competition
Many organizations attempt to establish prices that, on average, are the same as those set by their more important competitors. Automobiles of the same size and having equivalent equipment tend to have similar prices. This strategy means that the organization uses price as an indicator or baseline. Quality in production, better service, creativity in advertising, or some other element of the marketing mix are used to attract customers who are interested in products in a particular price category.
The keys to implementing a strategy of meeting competitive prices are an accurate definition of competition and knowledge of competitor’s prices. A maker of hand-crafted leather shoes is not in competition with mass producers. If he/she attempts to compete with mass producers on price, higher production costs will make the business unprofitable. A more realistic definition of competition for this purpose would be other makers of handcrafted leather shoes. Such a definition along with a knowledge of their prices would allow a manager to put the strategy into effect. Banks shop competitive banks every day to check their prices.
Pricing above competitors
Pricing above competitors can be rewarding to organizations, provided that the objectives of the policy are clearly understood and that the marketing mix is used to develop a strategy to enable management to implement the policy successfully.
Pricing above competition generally requires a clear advantage on some nonprice element of the marketing mix. In some cases, it is possible due to a high price-quality association on the part of potential buyers. Such an assumption is increasingly dangerous in today’s information-rich environment. Consumer Reports and other similar publications make objective product comparisons much simpler for the consumer. There are also hundreds of dot.com companies that provide objective price comparisons. The key is to prove to customers that your product justifies a premium price.
Student Example
Starbucks is a great example of a company that prices above the competition. Although they are a high priced coffee shop, people will still buy from them. The company needs to provide a reason for people to pay more for their coffee over other businesses. They believe that because they are getting high-quality products, people are more likely to pay more for it. That is true since Starbucks is the leading coffee company and has the largest market share as well. In this case, pricing above competition works.
Taylor Stone
Class of 2020
Pricing below competitors
While some firms are positioned to price above the competition, others wish to carve out a market niche by pricing below competitors. The goal of such a policy is to realize a large sales volume through a lower price and profit margins. By controlling costs and reducing services, these firms are able to earn an acceptable profit, even though profit per unit is usually less.
Student Example
There are many airlines that operate in the United States, and each one has something different to offer. Spirit Airlines is one of the lesser-known airlines, but it is generally the cheapest. Their slogan is “Less Money. More Go.” By pricing their airline tickets extremely low, consumers can fly to their locations by ease. These discounts do not come without reduced services, though; purchasing a ticket through Spirit Airlines comes with a reduction in ‘luxury’ services such as carry-ons, checked baggage, and snacks. These services are reduced because Spirit Airlines has positioned itself in a market niche that is best for daily commuters or those making short trips without luggage.
Zach Harper
Class of 2020
Such a strategy can be effective if a significant segment of the market is price-sensitive and/or the organization’s cost structure is lower than competitors. Costs can be reduced by increased efficiency, economies of scale, or by reducing or eliminating such things as credit, delivery, and advertising. For example, if a firm could replace its field sales force with telemarketing or online access, this function might be performed at a lower cost. Such reductions often involve some loss in effectiveness, so the tradeoff must be considered carefully.
Historically, one of the worst outcomes that can result from pricing lower than a competitor is a “price war”. Price wars usually occur when a business believes that price-cutting produces increased market share, but does not have a true cost advantage. Price wars are often caused by companies misreading or misunderstanding competitors. Typically, price wars are overreactions to threats that either is not there at all or are not as big as they seem.
Another possible drawback when pricing below competition is the company’s inability to raise price or image. A retailer such as K-mart, known as a discount chain, found it impossible to reposition itself as a provider of designer women’s clothiers. Can you imagine Swatch selling a USD 3,000 watch?
How can companies cope with the pressure created by reduced prices? Some are redesigning products for ease and speed of manufacturing or reducing costly features that their customers do not value. Other companies are reducing rebates and discounts in favor of stable, everyday low prices (EDLP). In all cases, these companies are seeking shelter from pricing pressures that come from the discount mania that has been common in the US for the last two decades.
Price lines
You are already familiar with price lines. Ties may be priced at USD 15, USD 17, USD 20, and USD 22.50; bluejeans may be priced at USD 30, USD 32.95, USD 37.95, and USD 45. Each price must be far enough apart so that buyers can see definite quality differences among products. Price lines tend to be associated with consumer shopping goods such as apparel, appliances, and carpeting rather than product lines such as groceries. Customers do very little comparison-shopping on the latter.
Price lining serves several purposes that benefit both buyers and sellers. Customers want and expect a wide assortment of goods, particularly shopping goods. Many small price differences for a given item can be confusing. If ties were priced at USD 15, USD 15.35, USD 15.75, and so on, selection would be more difficult; the customer could not judge quality differences as reflected by such small increments in price. So, having relatively few prices reduces confusion.
From the seller’s point of view, price lining holds several benefits. First, it is simpler and more efficient to use relatively fewer prices. The product/service mix can then be tailored to selected price points. Price points are simply the different prices that make up the line. Second, it can result in a smaller inventory than would otherwise be the case. It might increase stock turnover and make inventory control simpler. Third, as costs change, either increasing or decreasing the prices can remain the same, but the quality in the line can be changed. For example, you may have bought a USD 20 tie 15 years ago. You can buy a USD 20 tie today, but it is unlikely that today’s USD 20 tie is of the same fine quality as it was in the past. While customers are likely to be aware of the differences, they are nevertheless still able to purchase a USD 20 tie. During inflationary periods the quality/price point relationship changes. From the point of view of salespeople, offering price lines will make selling easier. Salespeople can easily learn a small number of prices. This reduces the likelihood that they will misquote prices or make other pricing errors. Their selling effort is, therefore, more relaxed, and this atmosphere will influence customers positively. It also gives the salesperson flexibility. If a customer cannot afford a USD 2,800 Gateway system, the USD 2,200 system is suggested.
Price flexibility
Another pricing decision relates to the extent of price flexibility. A flexible pricing policy means that the price is bid or negotiated separately for each exchange. This is a common practice when selling to organizational markets where each transaction is typically quite large. In such cases, the buyer may initiate the process by asking for bidding on a product or service that meets certain specifications. Alternatively, a buyer may select a supplier and attempt to negotiate the best possible price. Marketing effectiveness in many industrial markets requires a certain amount of price flexibility.
Student Example
In car sales or furniture sales, the advertised price is not necessarily the final price because the customer can negotiate a better deal. Since the salespeople work on commission, they are also working to get the customer to make a purchase, and using price flexibility makes the customer more inclined to purchase. One thing that I often see with price flexibility is discounting and promotions, where a firm will advertise an item for \$13,999 with an automatic \$1,000 off, and even then, there is price flexibility because the customer can negotiate for a better deal. These firms will have a minimum price they can take, but the customer is unaware of what that price is. Pricing strategies can be combined and used together, but for car and furniture sales, one that is used most often is price flexibility.
Natalie Vazquez-Lopez
Class of 2020
Discounts and allowances
In addition to decisions related to the base price of products and services, marketing managers must also set policies related to the use of discounts and allowances. There are many different types of price reductions–each designed to accomplish a specific purpose.
Quantity discounts are reductions in base price given as the result of a buyer purchasing some predetermined quantity of merchandise. A noncumulative quantity discount applies to each purchase and is intended to encourage buyers to make larger purchases. This means that the buyer holds the excess merchandise until it is used, possibly cutting the inventory cost of the seller and preventing the buyer from switching to a competitor at least until the stock is used. A cumulative quantity discount applies to the total bought over a period of time. The buyer adds to the potential discount with each additional purchase. Such a policy helps to build repeat purchases. Building material dealers, for example, find such a policy quite useful in encouraging builders to concentrate their purchase with one dealer and to continue with the same dealer over time. It should be noted that such cumulative quantity discounts are extremely difficult to defend if attacked in the courts.
Seasonal discounts are price reductions given or out-of-season merchandise. An example would be a discount on snowmobiles during the summer. The intention of such discounts is to spread demand over the year. This can allow fuller use of production facilities and improved cash flow during the year. Electric power companies use the logic of seasonal discounts to encourage customers to shift consumption to off-peak periods. Since these companies must have the production capacity to meet peak demands, the lowering of the peak can lessen the generating capacity required.
Cash discounts are reductions on base price given to customers for paying cash or within some short time period. For example, a 2 percent discount on bills paid within 10 days is a cash discount. The purpose is generally to accelerate the cash flow of the organization.
Trade discounts are price reductions given to middlemen (e.g. wholesalers, industrial distributors, retailers) to encourage them to stock and give preferred treatment to an organization’s products. For example, a consumer goods company may give a retailer a 20 percent discount to place a larger order for soap. Such a discount might also be used to gain shelf space or a preferred position in the store.
Personal allowances are similar devices aimed at middlemen. Their purpose is to encourage middlemen to aggressively promote the organization’s products. For example, a furniture manufacturer may offer to pay some specified amount toward a retailer’s advertising expenses if the retailer agrees to include the manufacturer’s brand name in the ads.
Some manufacturers or wholesalers also give prize money called spiffs for retailers to pass on to the retailer’s sales clerks for aggressively selling certain items. This is especially common in the electronics and clothing industries, where it is used primarily with new products, slow movers, or high margin items.
Trade-in allowances also reduce the base price of a product or service. These are often used to allow the seller to negotiate the best price with a buyer. The trade-in may, of course, be of value if it can be resold. Accepting trade-ins is necessary for marketing many types of products. A construction company with a used grader worth USD 70,000 would not likely buy a new model from an equipment company that did not accept trade-ins, particularly when other companies do accept them.
Price bundling
A very popular pricing strategy, price bundling, is to group similar or complementary products and to charge a total price that is lower if they were sold separately. Comcast, Direct TV, and Telstra all follow this strategy by combining different products and services for a set price. Customers assume that these computer experts are putting together an effective product package and they are paying less. The underlying assumption of this pricing strategy is that the increased sales generated will more than compensate for a lower profit margin. It may also be a way of selling a less popular product by combining it with popular ones. Clearly, industries such as financial services and telecommunications are big users of this.
Student Example
Bath and Body Works is a business that sells candles, body sprays, and shower items. Individually shampoo, conditioner, body wash, scrubs, etc., are very expensive. However, this shop will bundle items and drop the price to ensure that all items are purchased from them. Ultimately, if you shop here, it does end up being cheaper for the customer. Most people want to buy both shampoo and conditioner from the same brand, so having some bundles on sale regarding this purchase is very helpful.
Jennika Bond
Class of 2020
Psychological aspects of pricing
Price, as is the case with certain other elements in the marketing mix, appears to have meaning to many buyers that goes beyond a simple utilitarian statement. Such meaning is often referred to as the psychological aspect of pricing. Inferring quality from price is a common example of the psychological aspect. A buyer may assume that a suit priced at USD 500 is of higher quality than one priced at USD 300. From a cost-of-production, raw material, or workmanship perspective, this may or may not be the case. The seller may be able to secure the higher price by nonprice means such as offering alterations and credit or the benefit to the buyer may be in meeting some psychological need such as ego enhancement. In some situations, the higher price may be paid simply due to lack of information or lack of comparative shopping skills. For some products or services, the quantity demanded may actually rise to some extent as the price is increased. This might be the case with an item such as a fur coat. Such a pricing strategy is called prestige pricing.
Products and services frequently have customary prices in the minds of consumers. A customary price is one that customers identify with particular items. For example, for many decades a five-stick package of chewing gum cost USD 0.05 and a six-ounce bottle of Coca-Cola cost USD 0.05. Candy bars now cost 60 cents or more, a customary price for a standard-sized bar. Manufacturers tend to adjust their wholesale prices to permit retailers in using customary pricing. However, as we have witnessed during the past decade, prices have changed so often that customary prices are weakened.
Another manifestation of the psychological aspects of pricing is the use of odd prices 3 We call prices that end in such digits as 5, 7, 8, and 9 “odd prices” (e.g. USD 2.95, USD 15.98, or USD 299.99). Even prices are USD 3, USD 16, or USD 300. For a long time marketing people have attempted to explain why odd prices are used. It seems to make little difference whether one pays USD 29.95 or USD 30 for an item. Perhaps one of the most often heard explanations concerns the psychological impact of odd prices on customers. The explanation is that customers perceive even prices such as USD 5 or USD 10 as regular prices. Odd prices, on the other hand, appear to represent bargains or savings and therefore encourage buying. There seems to be some movement toward even pricing; however, odd pricing is still very common. A somewhat related pricing strategy is combination pricing. Examples are two-for-one, buy-one-get-one-free. Consumers tend to react very positively to these pricing techniques. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/12%3A_Global_Pricing/12.01%3A_Global_Pricing_Summary.txt |
Learning Objectives
After reading this section, students should be able to …
1. define pricing
2. apply the basics of pricing to global pricing decisions
3. appreciate the global marketer’s view of price
Price is the value of a product offering that can be created through the different marketing mix elements, such as through product, distribution and communication decisions. Therefore, global pricing decisions are related to other marketing mix variables.
At its basic level, pricing is the process of determining what a company will receive in exchange for its products. As one of the four “Ps” in the marketing mix, pricing is the only revenue generating element. Several factors affect the global pricing of a product, e.g., manufacturing cost, market place, competition, market condition, and quality of product, distribution channels, country factors and company factors (Alon and Jaffe 2013). According to Clarke and Wilson (2009), international pricing decisions also need to take account of tariffs, quotas, local taxes, subsidies, grants, currency exchange, rates, local purchasing power, local business and consumer characteristics. Figure 12.1 shows the drivers of international pricing.
Prices can be used both to set values and provide signals in international markets (Eden and Rodriguez 2004). From a customer’s point of view, value is the sole justification for price. Many times customers lack an understanding of the cost of materials and other costs that go into the making of a product. But those customers can understand what that product does for them in the way of providing value. It is on this basis that customers make decisions about the purchase of a product.
Effective pricing meets the needs of consumers and facilitates the exchange process. It requires that marketers understand that not all buyers want to pay the same price for products, just as they do not all want the same product, the same distribution outlets, or the same promotional messages. Therefore, in order to effectively price products, markets must distinguish among various market segments. The key to effective pricing is the same as the key to effective product, distribution, and promotion strategies. Marketers must understand buyers and price their products according to buyer needs if exchanges are to occur. However, one cannot overlook the fact that the price must be sufficient to support the plans of the organization, including satisfying stockholders. Price charged remains the primary source of revenue for most businesses.
Although making the global pricing decision is usually a marketing decision, making it correctly requires an understanding of both the customer and society’s view of price as well. In some respects, price setting is the most important decision made by a business. A price set too low may result in a deficiency in revenues and the demise of the business. A price set too high may result in poor response from customers and, unsurprisingly, the demise of the business. The consequences of a poor pricing decision, therefore, can be dire. We begin our discussion of pricing by considering the perspective of the customer.
The customer’s view of price
A customer can be either the ultimate user of the finished product or a business that purchases components of the finished product. It is the customer that seeks to satisfy a need or set of needs through the purchase of a particular product or set of products. Consequently, the customer uses several criteria to determine how much they are willing to expend in order to satisfy these needs. Ideally, the customer would like to pay as little as possible to satisfy these needs. Therefore, for the business to increase value (i.e. create the competitive advantage), it can either increase the perceived benefits or reduce the perceived costs. Both of these elements should be considered elements of price. To a certain extent, perceived benefits are the mirror image of perceived costs. For example, paying a premium price (e.g. USD 650 for a piece of Lalique crystal) is compensated for by having this exquisite work of art displayed in one’s home. Other possible perceived benefits directly related to the price-value equation are status, convenience, the deal, brand, quality, choice, and so forth. Many of these benefits tend to overlap. Thus, providing value-added elements to the product has become a popular strategic alternative. Computer manufacturers now compete on value-added components such as free delivery setup, training, a 24-hour help line, trade-in, and upgrades.
Student Example
A great example of this concept is Sherwin-Williams. Our contractor segment (residential painters) wants the best product to use on their projects, yet they want to pay as little as possible. There are cases when they will use higher quality products if their customers want the best finish possible, however, once more everything comes down to cost. When the sales representative sets prices for individual contractors, they are not always the lowest. Whether a contractor purchases a low-grade, mid-grade, or high-grade product, we (store employees) try to add value to their purchase by providing exceptional services. This can range from many things such as carrying all of their paint out to their vehicles and loading it for them while having a small conversation; to reminding them about future sales; providing quick delivery services; and accepting orders by phone; or simply providing free-coffee all day. Expressing our appreciation by having cook-outs every few months also helps the contractors feel more at home with us, which is great because it helps build loyalty to our brand which is one of the main reasons why we have over 70% of the total paint and coatings market share in the world.
Silviano Espana Silva
Class of 2020
Perceived costs include the actual dollar amount printed on the product, plus a host of additional factors. As noted, these perceived costs are the mirror-opposite of the benefits. When finding a gas station that is selling its highest grade for USD 0.06 less per gallon, the customer must consider the 16 mile (25.75 kilometer) drive to get there, the long line, the fact that the middle grade is not available, and heavy traffic. Therefore, inconvenience, limited choice, and poor service are possible perceived costs. Other common perceived costs include risk of making a mistake, related costs, lost opportunity, and unexpected consequences, to name but a few. A new cruise traveler discovers he or she really does not enjoy that venue for several reasons–e.g. he or she is given a bill for incidentals when she leaves the ship, has used up her vacation time and money, and receives unwanted materials from this company for years to come. In the end, viewing price from the customer’s perspective pays off in many ways. Most notably, it helps define value–the most important basis for creating a competitive advantage.
Price from a societal perspective
Price, at least in dollars and cents, has been the historical view of value. Derived from a bartering system (exchanging goods of equal value), the monetary system of each society provides a more convenient way to purchase goods and accumulate wealth. Price has also become a variable society employs to control its economic health. Price can be inclusive or exclusive. In many countries, such as Russia, China, and South Africa, high prices for products such as food, health care, housing, and automobiles, means that most of the population is excluded from purchase. In contrast, countries such as Denmark, Germany, and Great Britain charge little for health care and consequently make it available to all.
The Global marketer’s view of price
Price is important to global marketing, because it represents marketers’ assessment of the value customers see in the product or service and are willing to pay for a product or service. A number of factors have changed the way marketers undertake the pricing of their products and services.
• Local competition puts pressure on the global firms’ pricing strategies. Many local-made products are high in quality and compete in global markets on the basis of lower price for good value.
• Local competitors often try to gain market share by reducing their prices. The price reduction is intended to increase demand from customers who are judged to be sensitive to changes in price.
• New products are far more prevalent today than in the past. Pricing a new product can represent a challenge, as there is often no historical basis for pricing new products. If a new product is priced incorrectly, the marketplace will react unfavorably and the “wrong” price can do long-term damage to a product’s chances for marketplace success.
• Technology has led to existing products having shorter marketplace lives. New products are introduced to the market more frequently, reducing the “shelf life” of existing products. As a result, marketers face pressures to price products to recover costs more quickly. Prices must be set for early successes including fast sales growth, quick market penetration, and fast recovery of research and development costs. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/12%3A_Global_Pricing/12.03%3A_Introduction_to_Global_Pricing.txt |
Learning Objectives
After reading this section, students should be able to …
1. list the alternative approaches to determining global prices
2. explain penetration and skimming in global pricing
Global pricing decisions can be based on a number of factors, including cost, demand, competition, value, or some combination of factors. However, while many marketers are aware that they should consider these factors, pricing remains somewhat of an art. For purposes of discussion, we categorize the alternative approaches to determining price as follows: (a) cost-oriented pricing; (b) demand-oriented pricing; and (c) value-based approaches.
Cost-oriented pricing: cost-plus and mark-ups
The cost-plus method, sometimes called gross margin pricing, is perhaps most widely used by marketers to set price. The manager selects as a goal a particular gross margin that will produce a desirable profit level. Gross margin is the difference between how much the goods cost and the actual price for which it sells. This gross margin is designated by a per cent of net sales. The per cent selected varies among types of merchandise. That means that one product may have a goal of 48 per cent gross margin while another has a target of 33.5 per cent or 2 per cent.
A primary reason that the cost-plus method is attractive to marketers is that they do not have to forecast general business conditions or customer demand. If sales volume projections are reasonably accurate, profits will be on target. Consumers may also view this method as fair, since the price they pay is related to the cost of producing the item. Likewise, the marketer is sure that costs are covered.
A major disadvantage of cost-plus pricing is its inherent inflexibility. For example, department stores have often found difficulty in meeting competition from discount stores, catalog retailers, or furniture warehouses because of their commitment to cost-plus pricing. Another disadvantage is that it does not take into account consumers’ perceptions of a product’s value. Finally, a company’s costs may fluctuate so constant price changing is not a viable strategy.
When middlemen use the term mark-up, they are referring to the difference between the average cost and price of all merchandise in stock, for a particular department, or for an individual item. The difference may be expressed in dollars or as a percentage. For example, a man’s tie costs USD 4.60 and is sold for USD 8. The dollar mark-up is USD 3.40. The mark-up may be designated as a per cent of selling price 0r as a per cent of cost of the merchandise. In this example, the mark-up is 74 per cent of cost (USD 3.40/USD 4.60) or 42.5 per cent of the retail price (USD 3.40/USD 8).
There are several reasons why expressing mark-up as a percentage of selling price is preferred to expressing it as a percentage of cost. One is that many other ratios are expressed as a percentage of sales. For instance, selling expenses are expressed as a percentage of sales. If selling costs are 8 per cent, this means that for each USD 100,000 in net sales, the cost of selling the merchandise is USD 8,000. Advertising expenses, operating expenses, and other types of expenses are quoted in the same way. Thus, there is a consistency when making comparisons in expressing all expenses and costs, including mark-up, as a percentage of sales (selling price).
Middlemen receive merchandise daily and make sales daily. As new shipments are received, the goods are marked and put into stock. Cumulative mark-up is the term applied to the difference between total dollar delivered cost of all merchandise and the total dollar price of the goods put into stock for a specified period of time. The original mark-up at which individual items are put into stock is referred to as the initial mark-up.
Maintained mark-up is another important concept. The maintained mark-up percentage is an essential figure in estimating operating profits. It also provides an indication of efficiency. Maintained mark-up, sometimes called gross cost of goods, is the difference between the actual price for which all of the merchandise is sold and the total dollar delivered cost of the goods exclusive of deductions. The maintained mark-up is typically less than the initial mark-up due to mark-downs and stock shrinkages from theft, breakage, and the like. Maintained mark-up is particularly important for seasonal merchandise that will likely be marked-down substantially at the end of the season.
Although this pricing approach may seem overly simplified, it has definite merit. The problem facing managers of certain types of businesses such as retail food stores is that they must price a very large number of items and change many of those prices frequently. The standard mark-up usually reflects historically profitable margins and provides a good guideline for pricing.
Certainly costs are an important component of pricing. No firm can make a profit until it covers its costs. However, the process of determining costs and then setting a price based on costs does not take into consideration what the customer is willing to pay at the marketplace. As a result, many companies that have set out to develop a product have fallen victim to the desire to continuously add features to the product, thus adding cost. When the product is finished, these companies add some percentage to the cost and expect customers to pay the resulting price. These companies are often disappointed, as customers are not willing to pay this cost-based price.
Break-even analysis
A somewhat more sophisticated approach to cost-based pricing is the break-even analysis. The information required for the formula for break-even analysis is available from the accounting records in most firms. The break even price is the price that will produce enough revenue to cover all costs at a given level of production. Total cost can be divided into fixed and variable (total cost = fixed cost + variable cost). Recall that fixed cost does not change as the level of production goes up or down. The rent paid for the building to house the operation might be an example. No cost is fixed in the long run, but in the short run, many expenses cannot realistically be changed. Variable cost does change as production is increased or decreased. For example, the cost of raw material to make the product will vary with production.
A second shortcoming of break-even analysis is it assumes that variable costs are constant. However, wages will increase with overtime and shipping discounts will be obtained. Third, break-even assumes that all costs can be neatly categorized as fixed or variable. Where advertising expenses are entered, break-even analysis will have a significant impact on the resulting break-even price and volume.
Target rates of return
Break-even pricing is a reasonable approach when there is a limit on the quantity which a firm can provide and particularly when a target return objective is sought. Assume, for example, that the firm with the costs illustrated in the previous example determines that it can provide no more than 10,000 units of the product in the next period of operation. Furthermore, the firm has set a target for profit of 20 per cent above total costs. Referring again to internal accounting records and the changing cost of production at near capacity levels, a new total cost curve is calculated. From the cost curve profile, management sets the desirable level of production at 80 per cent of capacity or 8,000 units. From the total cost curve, it is determined that the cost for producing 8,000 units is USD 18,000. 20 per cent of USD 18,000 is USD 3,600. Adding this to the total cost at 8,000 units yields the point at that quantity through which the total revenue curve must pass. Finally, USD 21,600 divided by 8,000 units yields the price of USD 2.70 per unit; here the USD 3,600 in profit would be realized. The obvious shortcoming of the target return approach to pricing is the absence of any information concerning the demand for the product at the desired price. It is assumed that all of the units will be sold at the price which provides the desired return.
It would be necessary, therefore, to determine whether the desired price is in fact attractive to potential customers in the marketplace. If break-even pricing is to be used, it should be supplemented by additional information concerning customer perceptions of the relevant range of prices for the product. The source of this information would most commonly be survey research, as well as a thorough review of pricing practices by competitors in the industry. In spite of their shortcomings, break-even pricing and target return pricing are very common business practices.
Demand-oriented pricing
Demand-oriented pricing focuses on the nature of the demand curve for the product or service being priced. The nature of the demand curve is influenced largely by the structure of the industry in which a firm competes. That is, if a firm operates in an industry that is extremely competitive, price may be used to some strategic advantage in acquiring and maintaining market share. On the other hand, if the firm operates in an environment with a few dominant players, the range in which price can vary may be minimal.
Value-based pricing
If we consider the three approaches to setting price, cost-based is focused entirely on the perspective of the company with very little concern for the customer; demand-based is focused on the customer, but only as a predictor of sales; and value-based pricing focuses entirely on the customer as a determinant of the total price/value package. Marketers who employ value-based pricing might use the following definition: “It is what you think your product is worth to that customer at that time.” Moreover, it acknowledges several marketing/price truths:
• To the customer, price is the only unpleasant part of buying.
• Price is the easiest marketing tool to copy.
• Price represents everything about the product
Still, value-based pricing is not altruistic. It asks and answers two questions : (a) what is the highest price I can charge and still make the sale? and (b) am I willing to sell at that price? The first question must take two primary factors into account: customers and competitors. The second question is influenced by two more: costs and constraints. Let us discuss each briefly.
Many customer-related factors are important in value-based pricing. For example, it is critical to understand the customer buying process. How important is price? When is it considered? How is it used? Another factor is the cost of switching. Have you ever watched the television program “The Price is Right”? If you have, you know that most consumers have poor price knowledge. Moreover, their knowledge of comparable prices within a product category —e.g. ketchup—is typically worse. So price knowledge is a relevant factor. Finally, the marketer must assess the customers’ price expectations. How much do you expect to pay for a large pizza? Color TV? DVD? Newspaper? Swimming pool? These expectations create a phenomenon called “sticker shock” as exhibited by gasoline, automobiles, and ATM fees.
A second factor influencing value-based pricing is competitors. As noted in earlier chapters, defining competition is not always easy. Of course there are like-category competitors such as Toyota and Nissan. We have already discussed the notion of pricing above, below, and at the same level of these direct competitors. However, there are also indirect competitors that consumers may use to base price comparisons. For instance, we may use the price of a vacation as a basis for buying vacation clothes. The cost of eating out is compared to the cost of groceries. There are also instances when a competitor, especially a market leader, dictates the price for everyone else. Weyerhauser determines the price for lumber. Kellogg establishes the price for cereal.
If you are building a picnic table, it is fairly easy to add up your receipts and calculate costs. For a global corporation, determining costs is a great deal more complex. For example, calculating incremental costs and identifying avoidable costs are valuable tasks. Incremental cost is the cost of producing each additional unit. If the incremental cost begins to exceed the incremental revenue, it is a clear sign to quit producing. Avoidable costs are those that are unnecessary or can be passed onto some other institution in the marketing channel. Adding costly features to a product that the customer cannot use is an example of the former. As to the latter, the banking industry has been passing certain costs onto customers.
Another consideration is opportunity costs. Because the company spent money on store remodeling, they are not able to take advantage of a discounted product purchase. Finally, costs vary from market-to-market as well as quantities sold. Research should be conducted to assess these differences.
Although it would be nice to assume that a business has the freedom to set any price it chooses, this is not always the case. There are a variety of constraints that prohibit such freedom. Some constraints are formal, such as government restrictions in respect to strategies like collusion and price-fixing. This occurs when two or more companies agree to charge the same or very similar prices. Other constraints tend to be informal. Examples include matching the price of competitors, a traditional price charged for a particular product, and charging a price that covers expected costs.
Ultimately, value-based pricing offers the following three tactical recommendations:
• Employ a segmented approach toward price, based on such criteria as customer type, location, and order size.
• Establish highest possible price level and justify it with comparable value.
• Use price as a basis for establishing strong customer relationships
Penetration and Skimming Pricing
Penetration pricing is usually used in the introductory stage of a new product’s life cycle, and involves accepting a lower profit margin and to price relatively low. Such a strategy should generate greater sales and establish the new product in the market more quickly. Price skimming involves the top part of the demand curve. Price is set relatively high to generate a high profit margin and sales are limited to those buyers willing to pay a premium to get the new product (see Figure).
Penetration pricing can be used to achieve market share as a competitive strategy to achieve market leadership. Other times, it can also be used to increase market and sales growth. For example, when Sony was developing the Walkman in 1979, although a retail price of ¥50,000 (\$249) was required to achieve breakeven. However, a price of ¥35,000 (\$170) was needed to attract the youth market segment. Although after a long processes of cost cutting, a breakeven price of ¥40,000 was achieved, Chairman Akio Morita insisted on a retail price of ¥33,000 (\$165) to commemorate Sony’s 33rd anniversary. Sony also used this approach when its camcorder market became very competitive with price competition from Samsung, Hitachi and Panasonic. Another example is Google’s penetration pricing strategy, where they offered their Google Checkout service at a break-even price or at a loss, trying to gain market share against Paypal.
Which strategy is best depends on a number of factors. A penetration strategy would generally be supported by the following conditions: price-sensitive consumers, opportunity to keep costs low, the anticipation of quick market entry by competitors, a high likelihood for rapid acceptance by potential buyers, and an adequate resource base for the firm to meet the new demand and sales.
A skimming strategy is most appropriate when the opposite conditions exist. A premium product generally supports a skimming strategy. In this case, “premium” does not just denote high cost of production and materials; it also suggests that the product may be rare or that the demand is unusually high. An example would be a USD 500 ticket for the World Series or an USD 80,000 price tag for a limited-production sports car. Having legal protection via a patent or copyright may also allow for an excessively high price. Intel and their Pentium chip possessed this advantage for a long period of time. In most cases, the initial high price is gradually reduced to match new competition and allow new customers access to the product.
A skimming strategy may be used when the company is the only marketer of a new or innovative product, so as to maximize profits until competition forces a lower price (Li and Li 2008). Several electronic products that were very innovative during their introduction, such as DVRs, CR payers, Flat Screen TVs, were priced very high during the initial introduction phase; then the prices dropped steeply. According to Cateora, Graham and Gilly 2016), this strategy can also be used when their markets have only two income levels: the super-rich and the very poor, as when Johnson & Johnson priced their diapers in Brazil before the arrival of P&G. As the company’s cost structure will not allow the setting of a low enough price for the low income segment, the company will cater to the wealthier segment using a premium price. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/12%3A_Global_Pricing/12.04%3A_Global_Pricing_Approaches.txt |
Learning Objectives
After reading this section, students should be able to …
1. explain the role of currency fluctuations and global pricing
2. outline what happens when home currency is weak and strong
Briefly, currency is any form of money in general circulation in a country. What exactly is a foreign exchange? In essence, foreign exchange is money denominated in the currency of another country or—now with the euro—a group of countries. Simply put, an exchange rate is defined as the rate at which the market converts one currency into another.
Any company operating globally must deal in foreign currencies. It has to pay suppliers in other countries with a currency different from its home country’s currency. The home country is where a company is headquartered. The firm is likely to be paid or have profits in a different currency and will want to exchange it for its home currency. Even if a company expects to be paid in its own currency, it must assess the risk that the buyer may not be able to pay the full amount due to currency fluctuations.
If you have traveled outside of your home country, you may have experienced the currency market—for example, when you tried to determine your hotel bill or tried to determine if an item was cheaper in one country versus another. In fact, when you land at an airport in another country, you’re likely to see boards indicating the foreign exchange rates for major currencies. For example, imagine you’re on vacation in Thailand and the exchange rate board indicates that the Bangkok Bank is willing to exchange currencies at the following rates (see the following figure). GBP refers to the British pound; JPY refers to the Japanese yen; and HKD refers to the Hong Kong dollar, as shown in the following figure. Because there are several countries that use the dollar as part or whole of their name, this chapter clearly states “US dollar” or uses US\$ or USD when referring to American currency.
Table \(1\): Foreign Exchange Rates: Bangcock Bank
Currancy/Baht Banknotes Buy Banknotes Sell
USC 31.67 32.32
GBP 50.19 51.80
Euro 41.74 43.00
JOY 36.56 39.01
HKC 4.03 4.22
This chart tells us that when you land in Thailand, you can use 1 US dollar to buy 31.67 Thai baht. However, when you leave Thailand and decide that you do not need to take all your baht back to the United States, you then convert baht back to US dollars. We then have to use more baht—32.32 according to the preceding figure—to buy 1 US dollar. The spread between these numbers, 0.65 baht, is the profit that the bank makes for each US dollar bought and sold. The bank charges a fee because it performed a service—facilitating the currency exchange. When you walk through the airport, you’ll see more boards for different banks with different buy and sell rates. While the difference may be very small, around 0.1 baht, these numbers add up if you are a global company engaged in large foreign exchange transactions.
Companies, investors, and governments want to be able to convert one currency into another. A company’s primary purposes for wanting or needing to convert currencies is to pay or receive money for goods or services. Imagine you have a business in the United States that imports wines from around the world. You’ll need to pay the French winemakers in euros, your Australian wine suppliers in Australian dollars, and your Chilean vineyards in pesos. Obviously, you are not going to access these currencies physically. Rather, you’ll instruct your bank to pay each of these suppliers in their local currencies. Your bank will convert the currencies for you and debit your account for the US dollar equivalent based on the exact exchange rate at the time of the exchange.
Understand How to Determine Exchange Rates
How to Quote a Currency
There are several ways to quote currency, but let’s keep it simple. In general, when we quote currencies, we are indicating how much of one currency it takes to buy another currency. This quote requires two components: the base currency and the quoted currency. The quoted currency is the currency with which another currency is to be purchased. In an exchange rate quote, the quoted currency is typically the numerator. The base currency is the currency that is to be purchased with another currency, and it is noted in the denominator. For example, if we are quoting the number of Hong Kong dollars required to purchase 1 US dollar, then we note HKD 8 / USD 1. (Note that 8 reflects the general exchange rate average in this example.) In this case, the Hong Kong dollar is the quoted currency and is noted in the numerator. The US dollar is the base currency and is noted in the denominator. We read this quote as “8 Hong Kong dollars are required to purchase 1 US dollar.” If you get confused while reviewing exchanging rates, remember the currency that you want to buy or sell. If you want to sell 1 US dollar, you can buy 8 Hong Kong dollars, using the example in this paragraph.
Direct Currency Quote and Indirect Currency Quote
Additionally, there are two methods—the American terms and the European terms—for noting the base and quoted currency. These two methods, which are also known as direct and indirect quotes, are opposite based on each reference point. Let’s understand what this means exactly.
The American terms, also known as US terms, are from the point of view of someone in the United States. In this approach, foreign exchange rates are expressed in terms of how many US dollars can be exchanged for one unit of another currency (the non-US currency is the base currency). For example, a dollar-pound quote in American terms is USD/GP (US\$/£) equals 1.56. This is read as “1.56 US dollars are required to buy 1 pound sterling.” This is also called a direct quote, which states the domestic currency price of one unit of foreign currency. If you think about this logically, a business that needs to buy a foreign currency needs to know how many US dollars must be sold in order to buy one unit of the foreign currency. In a direct quote, the domestic currency is a variable amount and the foreign currency is fixed at one unit.
Conversely, the European terms are the other approach for quoting rates. In this approach, foreign exchange rates are expressed in terms of how many currency units can be exchanged for a US dollar (the US dollar is the base currency). For example, the pound-dollar quote in European terms is £0.64/US\$1 (£/US\$1). While this is a direct quote for someone in Europe, it is an indirect quote in the United States. An indirect quote states the price of the domestic currency in foreign currency terms. In an indirect quote, the foreign currency is a variable amount and the domestic currency is fixed at one unit.
A direct and an indirect quote are simply reverse quotes of each other. If you have either one, you can easily calculate the other using this simple formula:
direct quote = 1 / indirect quote.
To illustrate, let’s use our dollar-pound example. The direct quote is US\$1.56 = 1/£0.64 (the indirect quote). This can be read as
1 divided by 0.64 equals 1.56.
In this example, the direct currency quote is written as US\$/£ = 1.56.
While you are performing the calculations, it is important to keep track of which currency is in the numerator and which is in the denominator, or you might end up stating the quote backward. The direct quote is the rate at which you buy a currency. In this example, you need US\$1.56 to buy a British pound.
Tip: Many international business professionals become experienced over their careers and are able to correct themselves in the event of a mix-up between currencies. To illustrate using the example mentioned previously, the seasoned global professional knows that the British pound is historically higher in value than the US dollar. This means that it takes more US dollars to buy a pound than the other way around. When we say “higher in value,” we mean that the value of the British pound buys you more US dollars. Using this logic, we can then deduce that 1.56 US dollars are required to buy 1 British pound. As an international businessperson, we would know instinctively that it cannot be less—that is, only 0.64 US dollars to buy a British pound. This would imply that the dollar value was higher in value. While major currencies have changed significantly in value vis-à-vis each other, it tends to happen over long periods of time. As a result, this self-test is a good way to use logic to keep track of tricky exchange rates. It works best with major currencies that do not fluctuate greatly vis-à-vis others.
Exchange fluctuations and global prices
The strengthening or weakening of a home (exporting) country’s currency vis-à-vis that of the host (foreign) country, can have far-reaching effects on the price setting in the foreign country, as well as other elements of the global marketer’s marketing strategy. For example, if the value of the U.S. dollar relative to the euro was U.S.\$1 to 1.8315 euros in 2001, and U.S.\$1 to 0.8499 euros in 2003, then the exchange rate U.S.\$1 to 1.8315 euros is said to be stronger for the US dollar, and the exchange rate U.S.\$1 to 0.8499 euros is said to be weaker for the US dollar. Similarly, if the value of the U.S. dollar relative to the Indian Rupee was U.S.\$1 to INR 50 in 2001, and U.S.\$1 to INR 70 in 2018, then the exchange rate U.S.\$1 to INR 50 is said to be weaker for the US dollar than the exchange rate U.S.\$1 to INR 70. A weaker exchange rate (e.g. U.S.\$1 to 0.8499 euros and U.S.\$1 to INR 50) will fetch lesser money in terms of the foreign currency, while a stronger exchange rate will fetch more money in terms of the foreign currency.
When the home currency of the global marketer weakens, the exchange rates are supposed be favorable to the global marketer, because the home currency will fetch lesser in terms of the foreign currency, and hence the prices of the exported product in the foreign country’s currency will come down. Therefore, the global marketer can cut prices in the foreign country, and hence, increase market share. On the other hand, the global marketer can also decide to maintain the higher prices, in which case the global marketer will see windfall revenue, and increased margins. Thus if the exchange rate of the US dollar relative to the Japanese Yen weakens (lesser Yen for each dollar), then it is good for US companies manufacturing their products in the US and selling them in Japan (e.g. Boeing, Caterpillar, GE). On the other hand, it is not a good pricing scenario for Japanese companies (e.g. Canon and Olympus) who manufacture and sell in Japan against their US competitors. This context is also unfavorable to American tourists who are shopping for cameras, because they would be paying in Yen, and their US dollars would get lesser Yen, relative to what it would have fetched if the US dollar was stronger.
When the domestic (home) currency of the US global marketer strengthens (e.g. U.S.\$1 to 1.8315 euros and U.S.\$1 to INR 70), where the US dollar will fetch more money in terms of the foreign currency, then this price situation is said to be bad for global marketers who manufacture their products in the US and sell them in the foreign (host) country, priced in the foreign currency. Although each dollar gets more in terms of the foreign currency, what it really means is that the US company will now get lesser dollars after conversion into the US dollar, for the same amount of foreign currency, after the exchange rate strengthening. Thus, the US company may not be able to cover its costs which are specified in US dollars. One strategy to overcome this effect is to manufacture or source their products in the host country, and maximize all expenditures in the local currency (remember, each dollar gets more local currency!).
Since the strengthening of the home (domestic) currency results in more foreign currency, this conversion results in higher prices, which are specified in the local currency. This is usually not a problem if the demand for a product is inelastic. Otherwise, the global marketer has to cut costs in his home country, or improve quality and service to make up for the increased price levels. A drastic strategy to counter this situation would be to absorb some of the costs, which will result in a reduced margin.
Table \(2\): Exchange fluctuations and global prices
1. Stress price benefits 1. Engage in nonprice competition by improving quality, delivery, and after-sale service.
2. Expand product line and add more costly features. 2. Improve productivity and engage in cost reduction.
3. Shift sourcing to domestic market. 3. Shift sourcing outside home country.
4. Exploit market opportunities in all markets. 4. Give priority to exports to countries with stronger currencies.
5. Use full-costing approach, but employ marginal-cost pricing to penetrate new or competitive markets. 5. Trim profit margins and use marginal-cost pricing.
6. Speed repatriation of foreign-earned income and collections. 6. Keep the foreign-eamed income in host country: slow down collections.
7. Minimize expenditures in local (host-country) currency. 7. Maximize expenditures in local (host-country ) currency.
8. Buy advertising, insurance, transportation, and other services in domestic market. 8. Buy needed services abroad and pay for them in local currencies.
9. Bill foreign customers in their own currency. 9. Bill foreign customers in the domestic currency.
Adapted from: Keegan and Green (2011)
Source
This page is licensed under a Creative Commons Attribution Non-Commercial Share-Alike License (Links to an external site) Links to an external site and contains content from a variety of sources published under a variety of open licenses, including:
• “What Do We Mean by Currency and Foreign Exchange?”, section 7.1 from the book Challenges and Opportunities in International Business (v. 1.0). under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/12%3A_Global_Pricing/12.05%3A_Currency_Fluctuations_and_Global_Pricing.txt |
Learning Objectives
After reading this section, students should be able to …
1. explain the effects of a tariff on global prices
As we learned in Chapter 2 (Section 2.3: Understanding Tariffs), a tariff is any tax or fee collected by a government. Two of the price effects of a tariff are worthy of emphasis. First, although a tariff represents a tax placed solely on imported goods, the domestic price of both imported and domestically produced goods will rise. In other words, a tariff will cause local producers of the product to raise their prices. Why?
When the price of imported goods rises due to the tariff, consumers will shift their demand from foreign to domestic suppliers. The extra demand will allow domestic producers an opportunity to raise output and prices to clear the market. In so doing, they will also raise their profit. Thus as long as domestic goods are substitutable for imports and as long as the domestic firms are profit seekers, the price of the domestically produced goods will rise along with the import price.
The average consumer may not recognize this rather obvious point. For example, suppose the United States places a tariff on imported automobiles. Consumers of U.S.-made automobiles may fail to realize that they are likely to be affected. After all, they might reason, the tax is placed only on imported automobiles. Surely this would raise the imports’ prices and hurt consumers of foreign cars, but why would that affect the price of U.S. cars? The reason, of course, is that the import car market and the domestic car market are interconnected. Indeed, the only way U.S.-made car prices would not be affected by the tariff is if consumers were completely unwilling to substitute U.S. cars for imported cars or if U.S. automakers were unwilling to take advantage of a profit-raising possibility. These conditions are probably unlikely in most markets around the world.
The second interesting price effect arises because the importing country is large. When a large importing country places a tariff on an imported product, it will cause the foreign price to fall. The reason? The tariff will reduce imports into the domestic country, and since its imports represent a sizeable proportion of the world market, world demand for the product will fall. The reduction in demand will force profit-seeking firms in the rest of the world to lower output and price in order to clear the market.
The effect on the foreign price is sometimes called the terms of trade effect. The terms of trade is sometimes defined as the price of a country’s export goods divided by the price of its import goods. Here, since the importing country’s import good will fall in price, the country’s terms of trade will rise. Thus a tariff implemented by a large country will cause an improvement in the country’s terms of trade.
Source
This page is licensed under a Creative Commons Attribution Non-Commercial Share-Alike License (Links to an external site) Links to an external site and contains content from a variety of sources published under a variety of open licenses, including:
• The book “International Trade: Theory and Policy” v. 1.0 published by Saylor Academy under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/12%3A_Global_Pricing/12.06%3A_Tariffs_and_Global_Pricing.txt |
Learning Objectives
After reading this section, students should be able to …
1. explain the effects of quotas and dumping on global prices
Quotas
A quota imposes limits on the quantity of a good that can be imported over a period of time. Quotas are used to protect specific industries, usually new industries or those facing strong competitive pressure from foreign firms. U.S. import quotas take two forms. An absolute quota fixes an upper limit on the amount of a good that can be imported during the given period. A tariff-rate quota permits the import of a specified quantity and then adds a high import tax once the limit is reached.
Sometimes quotas protect one group at the expense of another. To protect sugar beet and sugar cane growers, for instance, the United States imposes a tariff-rate quota on the importation of sugar—a policy that has driven up the cost of sugar to two to three times world prices.1 These artificially high prices push up costs for American candy makers, some of whom have moved their operations elsewhere, taking high-paying manufacturing jobs with them. Life Savers, for example, were made in the United States for ninety years but are now produced in Canada, where the company saves \$10 million annually on the cost of sugar.2
An extreme form of quota is the embargo, which, for economic or political reasons, bans the import or export of certain goods to or from a specific country. The United States, for example, bans nearly every commodity originating in Cuba.
Quotas reduce the quantity, and therefore increase the market price, of imported goods. Their economic effect is therefore similar to that of tariffs, except that the tax revenue gain from a tariff will instead be distributed to those who receive import licenses. This explains why economists often suggest that import licenses be auctioned to the highest bidder or that import quotas be replaced by an equivalent tariff.
Dumping
A common political rationale for establishing tariffs and quotas is the need to combat dumping: the practice of selling exported goods below the price that producers would normally charge in their home markets (country of origin), and often below the cost of producing the goods. Dumping is said to occur when imports sold in a foreign market are priced at either levels that represent less than the cost of production in that country plus an 8% profit margin or at levels below those prevailing in the producing countries. Usually, nations resort to this practice to gain entry and market share in foreign markets, but it can also be used to sell off surplus or obsolete goods. Dumping creates unfair competition for domestic industries, and governments are justifiably concerned when they suspect foreign countries of dumping products on their markets. They often retaliate by imposing punitive tariffs that drive up the price of the imported goods. For example, in 2003, the International Trade Commission allowed the U.S. Dept. of Commerce to raise duty rates on shrimp from India, China, Brazil, Vietnam, Ecuador, and Thailand, when the Southern Shrimp Alliance protested that the six countries were dumping shrimp in the U.S.
According to Clarke and Wilson (2009), there are considered to be three types of dumping activity: sporadic dumping, which occurs when unsold inventories are disposed of in export markets, while predatory dumping helps a global firm to gain market access and undercut the competition. Persistent dumping is a permanent approach that is undertaken when production and labor costs are much lower in the home country (Onkvisit and Shaw, 1993).
Source
This page is licensed under a Creative Commons Attribution Non-Commercial Share-Alike License (Links to an external site) Links to an external site and contains content from a variety of sources published under a variety of open licenses, including:
• “Doctrines”, section 1.1 (from appendix 1) from the book Global Strategy (v. 1.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor.
• “Trade Controls”, section 3.4 from the book An Introduction to Business (v. 2.0) under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work’s original creator or licensor. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/12%3A_Global_Pricing/12.07%3A_Quotas_and_Dumping.txt |
Learning Objectives
After reading this section, students should be able to …
1. outline the functions of a marketing plan.
2. explain how to write a marketing plan.
A marketing plan should do the following:
1. Identify customers’ needs.
2. Evaluate whether the organization can meet those needs in some way that allows for profitable exchanges with customers to occur.
3. Develop a mission statement, strategy, and organization centered on those needs.
1. Create offerings that are the result of meticulous market research.
2. Form operations and supply chains that advance the successful delivery of those offerings.
4. Pursue advertising, promotional, and public relations campaigns that lead to continued successful exchanges between the company and its customers.
5. Engage in meaningful communications with customers on a regular basis.
The Marketing Plan’s Outline
The actual marketing plan you create will be written primarily for executives, who will use the forecasts in your plan to make budgeting decisions. These people will make budgeting decisions not only for your marketing activities but also for the firm’s manufacturing, ordering, and production departments, and other functions based on your plan
In addition to executives, many other people will use the plan. Your firm’s sales force will use the marketing plan to determine its sales strategies and how many salespeople are needed. The entire marketing staff will rely on the plan to determine the direction and nature of their activities. The advertising agency you hire to create your promotional campaigns will use the plan to guide its creative team. Figure 13.2 “Marketing Plan Outline” shows a complete outline of a marketing plan (you may also want to go to http://www.morebusiness.com/ templates_worksheets/bplans/printpre.brc for an example).
Next, we will discuss the elements in detail so you will know how to prepare a marketing plan.
The Marketing Plan: An Outline
I. Executive Summary
II. The Business Challenge
a. A brief description of the offering and the goals of the plan. This section serves as an introduction.
III. The Market
1. Customers: Who are they, and what do they need?
2. Company analysis: Your firm's strengths and weaknesses relative to this market and the offering.
3. Collaborators: Your collaborators could include suppliers and/or distributors or retailers.
4. Competitors: Who are they, and what are they doing?
5. Business climate:The business climate includes the opportunities and threats created by environmental forces, such as government regulations and legislation, the economy, and social, cultural, and technological forces.
IV. The Strategy
1. The strategy: Why did you choose the strategy you did? Consider including a brief discussion of alternatives that were considered and discarded.
2. The offering: Provide details on the features and benefits of the offering, as well as its pricing options.
3. The communication plan: How will the offering be launched? What will the ongoing communication strategies be? This section is likely to be fairly broad and will require collaboration with communication partners such as your firm's advertising agency.
4. Distribution: How will the offering be sold? Who will sell it? Who will ship it? Who will service it?
V. Budget
1. Investment: Provide details about the budget needed to launch and maintain the offering.
2. Return: List both the short-term and long-term financial goals of the offering, including its projected sales, costs, and net income.
3. Other resources required.
VI. Conclusion
The Executive Summary
A marketing plan starts with an executive summary. An executive summary should provide all the information your company’s executives need to make a decision without reading the rest of the plan. The summary should include a brief description of the market, the product to be offered, the strategy behind the plan, and the budget. Any other important information, such as how your competitors and channel partners will respond to the actions your firm takes, should also be summarized. Because most executives will be reading the plan to make budgeting decisions, the budgeting information you include in the summary is very important. If the executives want more detail, they can refer to the “budget” section, which appears later in the plan. The executive summary should be less than one page long; ideally, it should be about a half page long. Most marketing plan writers find it easier to write a plan’s summary last, even though it appears first in the plan. A summary is hard to write when you don’t know the whole plan, so waiting until the plan is complete makes writing the executive summary easier.
The Business Challenge
In the “business challenge” section of the plan, the planner describes the offering and provides a brief rationale for why the company should invest in it. In other words, why is the offering needed? How does it fit in with what the company is already doing and further its overall business goals? In addition, the company’s mission statement should be referenced. How does the offering and marketing plan further the company’s mission?
Remember that a marketing plan is intended to be a persuasive document. You are trying not only to influence executives to invest in your idea but also to convince other people in your organization to buy into the plan. You are also trying to tell a compelling story that will make people outside your organization—for example, the director of the advertising agency you work with, or a potential supplier or channel partner—invest money, time, and effort into making your plan a success. Therefore, as you write the plan you should constantly be answering the question, “Why should I invest in this plan?” Put your answers in the business challenge section of the plan.
The Market
The market section of the plan should describe your customers and competitors, any other organizations with which you will collaborate, and the state of the market. We suggest that you always start the section by describing the customers who will purchase the offering. Why? Because customers are central to all marketing plans. After that, discuss your competitors, the climate, and your company in the order you believe readers will find most persuasive. In other words, discuss the factor you believe is most convincing first, followed by the second-most convincing factor, and so on.
Customers
Who does your market consist of? What makes these people decide to buy the products they do, and how do they fulfill their personal value equations? What is their buying process like? Which of their needs does your offering meet?
Break the market into customer segments and describe each segment completely, answering those questions for each segment. When you write your plan, begin with the most important segment first and work your way to the least important segment. Include in your discussion the market share and sales goals for each segment.
For example, Progresso Soups’ primary market segments might include the following:
• Families in colder regions
• People who need a good lunch but have to eat at their desks
• Busy young singles
• Older, perhaps retired, empty-nesters
These segments would be based on research that Progresso has completed showing that these are the groups that eat the most soup.
Your discussion of each segment should also include how to reach the customers within it, what they expect or need in terms of support (both presales and postsales support), and other information that helps readers understand how each segment is different from the others. After reading the section, a person should have a good grasp of how the segments differ yet understand how the needs of each are satisfied by the total offering.
Audio Clip
Katie Scallan-Sarantakes
http://app.wistia.com/embed/medias/4e5cbb5411
A marketing plan has to account for many factors: customers, competitors, and more. Listen as Katie Scallan-Sarantakes describes how she had to consider these factors when creating marketing plans for Toyota.
Company Analysis
Include the results of your analysis of your company’s strengths and weaknesses in this section. How is the company perceived by the customers you described earlier? Why is the company uniquely capable of capitalizing on the opportunity outlined in the plan? How sustainable is the competitive advantage you are seeking to achieve?
You will also need to identify any functional areas in which your company might need to invest for the plan to succeed. For example, money might be needed for new production or distribution facilities and to hire new marketing or sales employees and train existing ones.
One tool that is useful for framing these questions is the SWOT analysis. SWOT stands for strengths, weaknesses, opportunities, and threats. Strengths and weaknesses are internal, meaning they are conditions of the company. Either these conditions are positive (strengths) or negative (weaknesses). Opportunities and threats are external to the company, and could be due to potential or actual actions taken by competitors, suppliers, or customers. Opportunities and threats could also be a function of government action or changes in technology and other factors.
When working with executives, some consultants have noted the difficulty executives have in separating opportunities from strengths, weaknesses from threats. Statements such as “We have an opportunity to leverage our strong product features” indicate such confusion. An opportunity lies in the market, not in a strength. Opportunities and threats are external; strengths and weaknesses are internal. Assuming demand (an external characteristic) for a strength (an internal characteristic) is a common marketing mistake. Sound marketing research is therefore needed to assess opportunity.
Other factors that make for better SWOT analysis are these:
• Honest. A good SWOT analysis is honest. A better way to describe those “strong” product features mentioned earlier would be to say “strong reputation among product designers,” unless consumer acceptance has already been documented.
• Broad. The analysis has to be broad enough to capture trends. A small retail chain would have to look beyond its regional operating area in order to understand larger trends that may impact the stores.
• Long term. Consider multiple time frames. A SWOT analysis that only looks at the immediate future (or the immediate past) is likely to miss important trends. Engineers at Mars (makers of Skittles, M&Ms, and Snickers) visit trade shows in many fields, not just candy, so that they can identify trends in manufacturing that may take a decade to reach the candy industry. In this way, they can shorten the cycle and take advantage of such trends early when needed.
• Multiple perspectives. SWOT analyses are essentially based on someone’s perception. Therefore, a good SWOT should consider the perspective of all areas of the firm. Involve people from shipping, sales, production, and perhaps even from suppliers and channel members.
The SWOT analysis for a company, or for any organization, is both internal and external in focus. Some of the external areas for focus are collaborators (suppliers, distributors, and others), competitors, and the business climate.
Collaborators
Along with company strengths and weaknesses, identify any actual or potential partners needed to pull the plan off. Note that collaborators are more than just a list of suppliers and distributors. Collaborators are those organizations, either upstream or downstream in the value chain, you need to partner with to cocreate value.
For example, AT&T collaborated with Apple to develop the iPhone. AT&T is downstream in the value chain, providing the needed cell service and additional features that made the iPhone so revolutionary. At the same time, however, AT&T was a part of the development of the iPhone and the attendant marketing strategy; the partnership began well before the iPhone was launched.
Competitors
Your marketing plan, if it is any good at all, is likely to spark retaliation from one or more competitors. For example, Teradata and Unica operate in the same market. Both sell data-warehousing products to companies. Teradata primarily focuses on the information technology departments that support the data warehouse, whereas Unica focuses on the marketing departments that actually use the data warehouse. Nonetheless, Teradata is well aware of Unica’s marketing strategy and is taking steps to combat it by broadening its own market to include datawarehousing users in marketing departments. One step was to teach their salespeople what marketing managers do and how they would use a data warehouse as part of their job so that when these salespeople are talking to marketing managers, they can know what they’re talking about.
Teradata marketing planners also have to be aware of potential competitors. What if IBM or HP decided to enter the market? Who is most likely to enter the market, what would their offering look like, and how can we make it harder for them to want to enter the market? If your company captures their market before they can enter, then they may choose to go elsewhere.
Identify your competitors and be honest about both their strengths and weaknesses in your marketing. Remember that other people, and perhaps other organizations, will be using your plan to create their own plans. If they are to be successful, they have to know what competition they face. Include, too, in this section of the plan how quickly you expect your competitors to retaliate and what the nature of that retaliation will be. Will they lower their prices, create similar offerings, add services to drive up the value of their products, spend more on advertising, or a combination of these tactics?
A complete competitive analysis not only anticipates how the competition will react; it also includes an analysis of the competition’s financial resources. Do your competitors have money to invest in a competitive offering? Are they growing by acquiring other companies? Are they growing by adding new locations or new sales staff? Or are they growing simply because they are effective? Maybe they are not growing at all. To answer these questions, you will need to carefully review your competitors’ financial statements and all information publicly available about them. This can include an executive quoted in an article about a company’s growth for a particular product or an analyst’s projection for future sales within a specific market.
Business Climate
You may have already addressed some of the factors in the business environment that are creating the opportunity for your offering. For example, when you discussed customers, you perhaps noted a new technology they are beginning to use.
A complete coverage of the climate would include the following (the PEST analysis):
• Political climate
• Economic climate
• Social and cultural environment
• Technological environment
A scan of the political climate should include any new government regulations as well as legislation. For example, will changes in the tax laws make for more or less disposable income among our customers? Will the tightening of government regulations affect how salespeople can call on doctors, for example, hindering your marketing opportunity? Will federal policies that affect exchange rates or tariffs make global competitors stronger or weaker? For example, the government introduced the Cash for Clunkers program to encourage people to buy new cars. Within only a few weeks, 250,000 new cars were sold through the program and it ran out of money. Auto dealers were caught unprepared and many actually ran out of popular vehicles.
The economic climate is also important to consider. While 2008 saw tremendous swings in gas prices, other factors such as the subprime lending crisis and decline of the housing market affected everything from the price of corn to the sales of movie tickets. Such volatility is unusual, but it is important nonetheless to know what the economy is doing.
The social and cultural environment is also important to watch. Marketers, for example, may note the rise in the Hispanic population as a market segment, but it is also important to recognize the influence of the Hispanic culture. Understanding the Hispanic culture is important in reaching this market segment with the right marketing mix. In creating marketing campaigns for something such as a financial product, it’s very important to understand the history that Hispanics have had with financial institutions in their home countries. Understanding that culturally Hispanics might not trust financial institutions and developing campaigns that generate positive word of mouth, such as refer-a-friend and influencer tactics, can be explosive once the wall has been torn down.
Finally, the technological environment should be considered. Technology is the application of science to solve problems. It encompasses more than just information (computer) technology. For example, consider a pacemaker. New technology could be related to the battery used to power the pacemaker, the materials used in the leads (the wires that connect the pacemaker to the body), or even the material that encases the pacemaker. Understanding the technological environment can provide you with a greater understanding of a product’s life cycle and the direction the market is taking when it comes to newer technologies.
Many of the environmental factors we mentioned impact other factors. For example, technological changes are altering the social and cultural environment. Instead of writing letters to one another, families and friends use e-mail and social networking sites to communicate and maintain relationships. Online communication has affected any number of businesses, including the greeting card business and the U.S. Postal Service, which recently announced it was closing many facilities.
Likewise, the economic environment influences the political environment and vice versa. The huge bailout of the banks by the government is an example of how the economic environment affects the political environment. The laws passed as a result of the bank bailout, which include more-restrictive lending practices, are affecting banks, businesses, and consumers. Any looming changes in the business climate such as this need to be included in your marketing plan.
The Strategy
The next section of the plan details the strategy your organization will use to develop, market, and sell the offering. This section is your opportunity to create a compelling argument as to what you intend to do and why others should invest in the strategy. Your reader will be asking, “Why should we adopt this strategy?” To answer that question, you may need to include a brief discussion of the strategic alternatives that were considered and discarded. When readers complete the section, they should conclude that the strategy you proposed is the best one available.
The Offering
Provide detail on the features and benefits of the offering, including pricing options, in this section. For example, in some instances, your organization might plan for several variations of the offering, each with different pricing options. The different options should be discussed in detail, along with the market segments expected to respond to each option. Some marketing professionals like to specify the sales goals for each option in this section, along with the associated costs and gross profit margins for each. Other planners prefer to wait until the budget section of the plan to provide that information.
The plan for the offering should also include the plan for introducing offerings that will follow the initial launch. For example, when should Progresso introduce new soup flavors? Should there be seasonal flavors? Should there be smaller sizes and larger sizes, and should they be introduced all at the same time or in stages?
Part of an offering is the service support consumers need to extract the offering’s full value. The support might include presales support as well as postsales support. For example, Teradata has a team of finance specialists who can help customers document the return on investment they would get from purchasing and implementing a Teradata data warehouse. This presales support helps potential buyers make a stronger business case for buying Teradata’s products with executives who control their companies’ budgets.
Postsales support can include technical support. In B2B (business-to-business) environments, sellers frequently offer to train their customers’ employees to use products as part of their postsales support. Before you launch an offering, you need to be sure your firm’s support services are in place. That means training service personnel, creating the appropriate communication channels for customers to air their technical concerns, and other processes.
The Communication Plan
How will the offering be launched? Will it be like Dow Corning’s launch of a new silicon acrylate copolymer, a product used to add color to cosmetics? That product was announced at the In-Cosmetics trade show in Barcelona. Or will you invite customers, media, and analysts from around the globe to your company’s offices for the launch, as SAS did with its SAS 9 software product?
In addition to the announcement of the new product, the communication plan has to specify how ongoing customer communications will be conducted. The mechanisms used to gather customer feedback as well as how the offering will be promoted to customers need to be spelled out. For example, will you create an online community like Laura Carros did with the JCPenney Ambrielle line?
The discussion of the communication plan can be fairly broad. You can put additional details in a separate planning document that outlines the product’s advertising strategies, event strategies (such as trade shows and special events like customer golf tournaments that will be used to promote the product), and sales strategies.
Distribution
This section should answer questions about where and how the offering will be sold. Who will sell it? Who will ship it? Who will service and support it? In addition, the distribution section should specify the inventories that need to be maintained in order to meet customer expectations for fast delivery and where those inventories should be kept
Budget
The budget section is more than just a discussion of the money needed to launch the new offering. A complete budget section will cover all the resources, such as new personnel, new equipment, new locations, and so forth, for the launch to be a success. Of course, these resources have costs associated with them. In some instances, the budget might require that existing resources be redeployed and a case made for doing so.
The first portion of the budget will likely cover the investment required for the launch. The plan might point out that additional funds need to be allocated to the offering to make it ready for the market. For example, perhaps additional beta testing or product development over and above what the firm normally commits to new products is needed. Certainly, marketing funds will be needed to launch the offering and pay for any special events, advertising, promotional materials, and so forth. Funds might also be needed to cover the costs of training salespeople and service personnel and potentially hiring new staff members. For example, Teradata introduced a new offering that was aimed at an entirely new market. The new market was so different that it required a new sales force. Details for the sales force, such as how many salespeople, sales managers, and support personnel will be needed, would go in this section.
The budget section should include the costs associated with maintaining the amount of inventory of the product to meet customers’ needs. The costs to provide customers with support services should also be estimated and budgeted. Some products will be returned, some services will be rejected by the consumer, and other problems will occur. The budget should include projections and allowances for these occurrences.
The budget section is also the place to forecast the product’s sales and profits. Even though the plan likely mentioned the sales goals set for each market segment, the budget section is where the details go. For example, the cost for advertising, trade shows, special events, and salespeople should be spelled out. The projections should also include timelines. The sales costs for one month might be estimated, as well as two months, six months, and so forth, as Figure 13.7 “A Marketing Plan Timeline Illustrating Market Potential, Sales, and Costs” shows.
Note that Figure 13.7 “A Marketing Plan Timeline Illustrating Market Potential, Sales, and Costs” shows that the product’s costs are high early on and then decrease before leveling out. That cost line assumes there is a heavy upfront investment to launch the offering, which is usually true for new products. The sales of the offering should grow as it gathers momentum in the market. However, the market potential stays the same, assuming that the potential number of customers stays the same. That might not always be the case, though. If we were targeting mothers of babies, for example, the market potential might vary based on the projected seasonality in birth rates because more babies tend to be born in some months than others.
Conclusion
In the conclusion, repeat the highlights. Summarize the target market, the offer, and the communication plan. Your conclusion should remind the reader of all the reasons why your plan is the best choice.
Of course, the written plan is itself a marketing tool. You want it to convince someone to invest in your ideas, so you want to write it down on paper in a compelling way. Figure 13.8 “Tips for Writing an Effective Marketing Plan” offers some tips for effectively doing so. Also, keep in mind that a marketing plan is created at a single point in time. The market, though, is dynamic. A good marketing plan includes how the organization should respond to various scenarios if the market changes. In addition, the plan should include “triggers” detailing what should happen under the scenarios. For example, it might specify that when a certain percentage of market share is reached, then the price of the product will be reduced (or increased). Or the plan might specify the minimum amount of the product that must be sold by a certain point in time—say, six months after the product is launched—and what should happen if the mark isn’t reached. Also, it should once again be noted that the marketing plan is a communication device. For that reason, the outline of a marketing plan may look somewhat different from the order in which the tasks in the outline are actually completed.\
Tips for Writing an Effective Marketing Plan
• Be brief—executives are busy.
• Anticipate and answer questions your organization's executives might have.
• Use active (not passive) voice when you write your plan.
• Use visuals and bullet points. Some people are visual learners and others are verbal. Meet the needs of both types of people.
• Read, proofread, and have someone else proofread the plan.
Review
• A marketing plan’s executive summary should include a brief summary of the market, the product to be offered, the strategy behind the plan, and the budget, as well as any other important information.
• In this section of the plan, the planner describes the offering and a brief rationale for why the company should invest in it.
• The market section of the plan should describe a firm’s customers, competitors, any other organizations with which it will collaborate, and the climate of the market.
• The strategy section details the tactics the organization will use to develop, market, and sell the offering.
• When readers complete the strategy section, they should conclude that the proposed strategy is the best one available.
• The budget section of the marketing plan covers all the resources, such as new personnel, new equipment, new locations, and so forth, needed to successfully launch the product, as well as details about the product’s costs and sales forecasts.
Source
Section 13.1 Marketing Plan Basics is adapted from the chapter ‘Chapter 13: The Marketing Plan’ from the textbook ‘Principles of Marketing,’ authored by University of Minnesota Libraries Publishing edition, 2015 – this book was adapted from a work originally produced in 2010 by a publisher who has requested that it not receive attribution.
The following changes were made to the most recent edition: Combined Sections ‘The Marketing Plan’ and ‘Marketing Planning Roles’ were combined into one section titled ‘Section 13.1 The Marketing Plan’; Created new title for Figure 13.1: Marketing plans at the division level; Created new title for Figure 13.3: Convincing stakeholders; Created new title for Figure 13.4: Customer segments; Created new title for Figure 13.5: The economic climate; Created new title for Figure 13.6: Service support; Created new title for Figure 13.9: Market dynamics; Created new title for Figure 13.10: Test markets; Added learning objectives. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/13%3A_The_International_Marketing_Plan/13.01%3A_Marketing_Plan_Basics.txt |
Learning Objectives
After reading this section, students should be able to …
• outine the decision sequence in international marketing
• explain how the marketing mix elements are integrated in the international marketing plan
The International marketing plan
It should be apparent by now that companies and organizations planning to compete effectively in world markets need a clear and well-focused international marketing plan that is based on a thorough understanding of the markets in which the company is introducing its products. The challenge, then, of international marketing is to ensure that any international strategy has the discipline of thorough research, and an understanding and accurate evaluation of what is required to achieve the competitive advantage. As such, the decision sequence in international marketing is much larger than that of domestic markets. As noted in the next “Integrated marketing”, it is also more complicated.
The corporate level
We begin at the corporate level, where firms decide whether to become involved in international markets and determine the resources they are willing to commit. Thus, this stage is primarily concerned with the analysis of international markets. Decisions here will be dependent on matching the results of that analysis with the company’s objectives. These objectives, in turn, will be determined by the many motivating factors we have discussed in the earlier sections. The level of resources that the company is willing to commit should be determined by the strategy that is needed to achieve the objectives that have been set.
The business level
Business-level considerations begin with the assessment of the stakeholders involved in the business. It is important to clearly identify the different stakeholder groups, understand their expectations, and evaluate their power, because the stakeholders provide the broad guidelines within which the firm operates. In the case of international marketing, it is particularly important to address the concerns of the stakeholders in the host company.
The situation analysis concerns a thorough examination of the factors that influence the businesses’ ability to successfully market a product or service. The results lead to a realistic set of objectives. Conducting a situation analysis in an international setting is a bit more extensive. It not only includes the normal assessment of external environmental factors and resources /capabilities, it also includes a determination of the level of commitment exhibited by the business, as well as possible methods of entry. These last two factors are interrelated in that a company’s level of commitment to international markets will directly influence whether they employ exporting, a joint venture, or some other method of entry.
In turn, level of commitment and method of entry are influenced by the evaluation of environmental factors as well as resources and capabilities. The latter audits not only the weaknesses of the company, but also the strengths of the company, which are often taken for granted. This is particularly important in international markets; for example, customer brand loyalty may be much stronger in certain markets than others, and products may be at the end of their life in the domestic market but may be ideal for less sophisticated markets. It is important, too, to evaluate the capacity of the firm to be flexible, adaptable, and proactive, as these are the attributes necessary, for success in a highly competitive and rapidly changing world.
Undoubtedly, environmental factors have received the most attention from marketers considering international markets.
Going Global takes Coordination
Importing technology and the evolution of a global economy has made global marketing a reality for many American companies. Larger corporations are not alone in their pursuit of business abroad: the US Department of Commerce reports that 60 per cent of American firms exporting products today have fewer than 100 employees. American businesses have plenty of reasons to market their products in other countries. According to consulting firm Deloitte and Touche, about 95 per cent of the world’s population and two-thirds of its total purchasing power are currently located outside the US.
Moreover, the decision to distribute products in other countries not only opens new markets, but can also greatly expand a company’s business. For example, if a US bicycle manufacturer focuses only on the US market, it loses the opportunity to increase revenues in countries where bicycles are a primary mode of transportation. Global marketing can also breathe life into a foundering product, and may even extend its lifespan. Additionally, a foreign product often can command a higher price simply because consumers around the world expect foreign items to cost more.
However, implementing a global strategy requires a great deal of coordination. For example, many companies that have successfully built a strong brand in the US have found that their domestic identity has little, if any, impact in markets where they are relatively unknown. An advertising campaign is one way to deal with this problem. Attaching your corporate identity to a known, respected entity in your target market is another. When FedEx, for example, wanted to increase its name recognition in Europe, the company teamed with clothing manufacturer Benetton, an established name there. FedEx sponsors one of Benetton’s formula racing cars in Europe.
Karen Rogers, manager of key customer marketing at FedEx, added that sponsoring events domestically or internationally also gives a company the opportunity to meet with perspective customers in a social setting and affords a series of spin-offs, such as promotions and product giveaways.
In distributing products globally, many American corporations team with large multinational companies that do not offer competitive products but have the resources and expertise to distribute and market those goods. This can be a cost-effective alternative to setting up operations outside the US.
Many small and mid-sized companies that are uncertain whether to open operations in another country investigate the possibility of using an export management company. These companies typically provide services that range from research to negotiating contracts with overseas distributors.(21)
The functional level
Having set the objectives for the company, both at the corporate level and the business level, the company can now develop a detailed program of functional activities to achieve the objectives. Following the integrated approach employed throughout this text, each of the functional elements (e.g. finance, human resources, research) must be considered jointly. The best international marketing strategy is doomed to failure if human resources can not find and train the appropriate employees, or research cannot modify the product so that it is acceptable to consumers in another country. Ultimately, this coordination between business functions is contingent on the market entry strategy employed as well as the degree of standardization or customization deemed.
Having integrated at the function level, we next consider integration of the marketing mix elements.
Product/promotion
Keegan (11) has highlighted the key aspect of marketing strategy as a combination of standardization or adaptation of product and promotion elements of the mix and offers five alternative and more specific approaches to product policy:
• One product, one message, worldwide. While a number of writers have argued that this will be the strategy adopted for many products in the future, in practice only a handful of products might claim to have achieved this already.
• Product extension, promotion adaptation. While the product stays the same this strategy allows for the adaptation of the promotional effort either to target new customer segments or to appeal to the particular tastes of individual countries.
• Product adaptation, promotion extension. This strategy is used if a promotional campaign has achieved international appeal, but the product needs to be adapted because of local needs.
• Dual adaptation. By adapting both products and promotion for each market, the firm is adopting a totally differentiated approach.
• Product invention. Firms, usually from advanced nations, that are supplying products to less well-developed countries adopt product invention.
Another critical element that is closely aligned with the product and promotion is the brand. Anthony O’Reilly, Chairman of H J Heinz, believes that the communications revolution and the convergence of cultures have now set the stage for truly global marketing. The age of the global brand is at hand. For example, Heinz was looking to expand its 9 Lives cat food brand and Morris the Cat logo into Moscow. Although it is a stable and successful brand in the US, testing and research done by Dimitri Epimov, a local marketing manager in Moscow, led Heinz executives to make a marketing change to ensure the product’s success in Russia. Namely, a fatter-looking Morris was created for packaging. Another discovery: while Americans tend to treat their kitties with tuna, Russian cat lovers prefer to serve beef-flavored food.
As discussed earlier, product positioning is a key success factor and reflects the customer’s perceptions of the product or service. However, in countries at different stages of economic development, the customer segments that are likely to be able to purchase the product and the occasions on which it is bought may be significantly different.
For example, while Kentucky Fried Chicken (KFC) and McDonald’s restaurants aim at everyday eating for the mass market in the developed countries, in less-developed countries they are perceived as places for special-occasion eating, and are beyond the reach of the poorest segments of the population. The product positioning, therefore, must vary in some dimensions. In confirming the positioning of a product or service in a specific market or region, it is therefore necessary to establish in the consumer perception exactly what the product stands for and how it differs from existing and potential competition by designing an identity that confirms the value of the product.
Pricing
Pricing products in foreign nations is complicated by exchange rate fluctuations, tariffs, governmental intervention, and shipping requirements. A common strategy involves a marketer setting a lower price for their products in foreign markets. This strategy is consistent with the low income levels of many foreign countries, and the lower price helps to build market share. Pricing strategies are also strongly influenced by the nature and intensity of the competition in the various markets.
For these reasons, it is important to recognize at the outset that the development and implementation of pricing strategies in international markets should follow the following stages:
1. Analyzing the factors that influence international pricing, such as the cost structures, the value of the product, the market structure, competitor pricing levels, and a variety of environmental constraints.
2. Confirming the impact the corporate strategies should have on pricing policy.
3. Evaluating the various strategic pricing options and selecting the most appropriate approach.
4. Implementing the strategy through the use of a variety of tactics and procedures to set price.
5. Managing prices and financing international transactions.
Perhaps the most critical factor to be considered when developing a pricing strategy in international markets, however, is how the customers and competitors will respond. Nagle (12) has suggested nine factors that influence the sensitivity of customers to prices, and all have implications for the international marketer. Price sensitivity reduces:
The more distinctive the product is;
• the greater the perceived quality;
• the less aware consumers are of substitutes in the market;
• if it is difficult to make comparisons;
• if the price of a product represents a small proportion of total expenditure of the customer;
• as the perceived benefit increases;
• if the product is used in association with a product bought previously;
• if costs are shared with other parties;
• if the product cannot be stored.
Finally, there are several inherent problems associated with pricing in international markets. Often companies find it difficult to coordinate and control prices across their activities in order to enable them to achieve effective financial performance and their desired price positioning. Simply, how can prices be coordinated by the company across the various markets and still make the necessary profit? Difficulty answering this question has led to two serious problems.
Dumping (when a firm sells a product in a foreign country below its domestic price or below its actual costs) is often done to build a company’s share of the market by pricing at a competitive level. Another reason is that the products being sold may be surplus or cannot be sold domestically and are therefore already a burden to the company. When companies price their products very high in some countries but competitively in others, they engage in a gray market strategy.
A gray market, also called parallel importing, is a situation where products are sold through unauthorized channels of distribution. A gray market comes about when individuals buy products in a lower-priced country from a manufacturer’s authorized retailer, ship them to higher-priced countries,and then sell them below the manufacturer’s suggested price through unauthorized retailers.
Considerable problems arise in foreign transactions because of the need to buy and sell products in different currencies. Questions to consider are: What currency should a company price its products? How should a company deal with fluctuating exchange rates?
Finally, obtaining payment promptly and in a suitable currency from less developed countries can cause expense and additional difficulties. How should a company deal with selling to countries where there is a risk of nonpayment? How should a company approach selling to countries that have a shortage of hard currency?
Distribution and logistics
Distribution channels are the means by which goods are distributed from the manufacturer to the end user. Logistics, or physical distribution management, is concerned with the planning, implementing, and control of physical flows of materials and final goods from points of origin to points of use to meet customer needs at a profit.
Essentially there are three channel links between the seller and buyer. The first link is the seller’s headquarters organization, which is responsible for supervising the channel, and acts as part of the channel itself. Channels between countries represent the second link. They are responsible for getting products to overseas markets and payment in return. Finally, the third link is the channel structure (logistics) within countries, which distributes the products from their point of entry to the final consumer.
Distribution strategies within overseas markets are affected by various uncontrollable factors. First, wholesaling and retailing structure differs widely from one nation to the next. So, too, does the quality of service provided. Differences in the size and nature of retailers are even more pronounced. Retailers more closely reflect the economic conditions and culture of that country; many small retailers dominate most of these countries. Physical distribution to overseas markets often requires special marketing planning. Many countries have inadequate docking facilities, limited highways, various railroad track gauges, too few vehicles, and too few warehouses. Managing product inventories requires consideration of the availability of suitable warehousing, as well as the costs of shipping in small quantities.
Review
1. The international marketing plan includes concern for:
a. corporate level considerations-determining the resources to be allocated
b. business level considerations, including:
i. assessment of stakeholders
ii. the situation analysis
c. functional level considerations that delineate the various activities that will achieve objectives
Source
Section 13.2 Writing the International Marketing Plan is adapted from the chapter ‘Chapter 2 Marketing in global markets’ from the textbook ‘Introducing Marketing, First Edition, 2011’ authored by John Burnett – this book was published under The Global Text Project, funded by the Jacobs Foundation, Zurich, Switzerland.
The following changes were made to the most recent edition: Divided ‘Chapter 2: Marketing in Global Markets’ into three sections; Removed Case application Unilever’s global brand at end of Chapter 2; Added learning objectives. | textbooks/biz/Marketing/Core_Principles_of_International_Marketing_(Mariadoss)/13%3A_The_International_Marketing_Plan/13.02%3A_Writing_the_International_Marketing_Plan.txt |
• 1.1: Introduction to Digital Marketing
In this chapter, we discuss how digitalization is changing the ecosystem in which we conduct marketing activities. We start by defining what marketing, and what is value and how it is created. We then move on to see how the media ecosystem and digital channels are transforming the logic through which we create value, moving away from representing the company to representing the customer. We conclude by briefly discussing the consumer journey to set up the next chapter.
• 1.2: Understanding the Digital Consumer
In this chapter, we discuss how digitalization is transforming the journey of consumers. To better understand how to do marketing online, we also cover basic marketing tools (i.e., persona and consumer journey) to help us create digital marketing campaigns. We conclude the section by discussing journey maps.
• 1.3: Planning for a Digital Marketing Campaign
In this chapter, we discuss how to use keywords to create pages and content to respond to consumers’ needs and goals and how keywords can help us understand how our competitors are positioned online. We start with a brief introduction to search engine optimization (SEO) and why SEO is important online. We then turn our attention to ranking factors in order to emphasize why designing pages for people, by keeping people’s needs and goals in mind is what makes pages rank high. We then cover custome
• 1.4: Introduction to Digital Strategy
• 1.5: Reach - Generating Awareness and Attracting Visitors
In this chapter, we cover the strategic bases associated with the reach stage. We start by covering the main objectives of the Reach stage and some KPIs associated with goals for consumers. We then move our attention to discussing paid media activities. To do so, we first emphasize the necessity to build landing pages whenever we are creating marketing campaigns and describe what landing pages are.
• 1.6: Act - Creating Content
In this chapter, we cover some central activities associated with content creation. We introduce the chapter by explaining the importance of content creation and how content creation should resemble what your competitors are doing but also be different from them because of your own unique brand voice. We then turn our attention to structuring content creation activities by examining how content creation can be guided by the RACE framework.
• 1.7: Act - Lead Generation and Lead Nurturing
In this chapter, we cover the basics of lead generation and lead nurturing activities. We define what is a lead and lead stages, present a few ways to generate leads and different types of opt-ins, explain how to score leads, and discuss email marketing.
• 1.8: Convert - Conversion Optimization
In this chapter, we cover what conversion is and how to optimize web pages to convert better. To do so, we discuss conversion rate optimization, how to identify what to optimize when people move one web page to another, some conversion-centered principles, A/B testing, and retargeting.
• 1.9: Engage - Building Loyalty and Co-Creating with Customers
Understand the concepts of engagement and loyalty, how to calculate customer lifetime value and its importance in marketing strategy, how to measure engagement, and how to create value with consumers.
01: Chapters
Learning Objectives
Understand what the main goal of marketing is (to create value), and how the changing ecosystem is transforming the ways we have to achieve this goal
In this chapter, we discuss how digitalization is changing the ecosystem in which we conduct marketing activities. We start by defining what marketing, and what is value and how it is created. We then move on to see how the media ecosystem and digital channels are transforming the logic through which we create value, moving away from representing the company to representing the customer. We conclude by briefly discussing the consumer journey to set up the next chapter.
What is Marketing?
According to the American Marketing Association—marketing’s top association—marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large. (American Marketing Association 2013).
From this definition, and of importance for our reconceptualization of the ecosystem in which consumers and firms operates, and to better understand transformation in the consumer experience and why it is necessary to adopt a drastically different perspective on how to perform marketing online, we concentrate on the following elements of this definition: processes for creating, communicating, delivering, and exchanging offerings that have value.
In other words, the role of marketing is to create value for a broad range of stakeholders. In this textbook, we concentrate on value creation for consumers. We concentrate on value creation because consumers “do not buy products or services, they buy offerings which … create value” in their lives (Gummesson 1995, p. 250). Hence, our focus will be to understand how firms can create value in consumers’ lives and how they can do so online.
Firms create value for consumers in many different ways. If we rewind back a few decades, our understanding of value creation was tainted by the work of economists, and value was mostly thought of being based on products’ utility. Utilitarian value, therefore, denotes the value that a customer receives based on a task-related and rational consumption behavior (Babin et al. 1994). Since then, our understanding of value has vastly broadened to other types of value, such as hedonic value—value based on the subject experience of fun and playfulness (Babin et al. 1994) or linking value—value based on the creation of interpersonal links between consumers (Cova 1997). This is important for digital marketers because it means that there are numerous avenues to contribute to consumers’ lives through value creation that expand beyond the use of a product by a consumer to achieve a specific task.
Another important transformation that happened in the last decade for our understanding of value creation has been the idea that value is always co-created (Vargo and Lusch 2004). Value is co-created through the meeting of consumers, with their own resources such as skills, expertise, and existing sets of stuff they possess, with that of firms and their resources, such as brand campaign, service delivery models, and the products they sell.
Let’s see these notions concretized through an example: Before, we would have conceptualized a consumer buying a car because they wanted to extract the utilitarian value associated with this product (i.e., moving from point A to point B). Value resided in the car and was transferred to a consumer when they put that product in use. Nowadays, we understand the purchase of a car as conceptually very different. First, consumers can buy a car for reasons different from going from point A to point B. Maybe they want to belong to a community of other consumers, or what is referred to as a consumption community, and buying this car allows them to do so. This community-oriented strategy is employed by iconic brands such as Harley Davidson. Maybe they see the car as a recreational object, where the end is not important (i.e., where they are going), but how they get there is. This has lead to many ads that emphasize the pleasure of driving, rather than more utilitarian characteristics such as fuel economy. And we now understand the value created by a car as emerging from the interaction of a consumer and the car. For example, creating value by consuming a sports car can be limited by the skills of the driver. The car has a set of characteristics from which consumers can create value, but they can only maximize value co-creation if they possess the expertise to do so. Similarly, a consumer can co-create value when buying a Harley Davidson while riding it, but they might leave undeveloped value when they do not participate in the worldwide community of Harley Davidson driver throughout the world.
To sum up, value exists in many different ways, and it is always the result of the interaction between a consumer and a firm (and its products and services). This has important implications for digital marketing, one of them being the creation of content. Many firms participate in creating value in consumers’ lives by offering free content. This content can have hedonic value, such as a humorous YouTube video. It can also help consumers better their skills and knowledge, such as online tutorials. By bettering consumers’ expertise, firms allow consumers to expand their resources, which can lead them to create more value when consuming products. We will come back to this idea in the conclusion of this chapter.
How do firms create value? For the last 30 years, the dominant paradigm to understand how firms create value for consumers has been market orientation. Market orientation refers to the “the organization-wide generation of market intelligence, dissemination of the intelligence across departments and organization-wide responsiveness to it” (Kohli and Jaworski 1990, p. 3). By this, we mean that organizations create value by generating information and disseminating this information throughout the firm in order to properly respond to it. This is done by generating and responding to information about customers, or what is referred to as customer orientation, and generating and responding to information about competitors, or what is referred to as competitor orientation. For this reason, marketing academics and practitioners typically aim at identifying and responding to customer needs, as well as examining and responding to their competitors’ efforts. Being market-oriented has been found to be a necessary firm characteristic in order to compete in markets effectively (Kumar et al. 2011). For this reason, we will cover both customers and competitors in the first few chapters, and the strategic framework offered in this textbook is centered around answering customers’ needs, goals, and desires, ideally more effectively than the competition.
Now that we have defined the bases of marketing, we turn our attention to change brought about by the Internet, and how this transformed the ways that firms create value for consumers.
Creating Value in the Digital Age
Canadian media scholar Marshall McLuhan famously wrote that “the medium is the message” (McLuhan 1964). By this, he meant to emphasize that the characteristics of a medium (e.g, TV vs. print vs. Internet) played an important role in communications, in addition to the message. We conclude this chapter by showing how the Internet, as a medium, has had a transformative role in shaping the message, and what this means for marketing.
The ways messages are diffused to consumers have vastly been transformed since the 1950s. In reviewing word-of-mouth models, Kozinets and co-authors (2010) identify three periods that are useful to conceptualize how the diffusion of messages from firms to consumers have evolved.
In the 1950s, the diffusion of messages echoed a view found in the very successful series Mad Men: advertising firms would create what they believe to be a message that could sell products, and used mass media such as TV, newspaper, magazines, and the radio to diffuse these messages. Word-of-mouth was organic, in the sense that it happened between consumers without interventions from firms.
In the 1970s, theories started to recognize that some individuals held more power in influencing other consumers. These influential consumers and celebrities would begin to be increasingly leveraged by firms to diffuse their messages. In these earlier efforts, such influencers were believed to faithfully diffused the message created by firms and their advertising agencies.
The emergence of the Internet led to a third transformation in how we understand message diffusion and word-of-mouth, and a movement towards a network coproduction model. In this last model, consumers like you and I, online communities, and other types of networked forms of communication (such as publics created through hashtags, see Arvidsson and Caliandro 2015), have an increasing role to play not only in diffusing messages but also in transforming them.
Marketers have capitalized on this new mode of diffusion for messages by directly targeting influencers that are part of consumer networks and communities, which has resulted in the explosion of influencer marketing and the rising influence of micro-influencers. They have also developed capacities, such as social media monitoring, to identify emergent discourses on and around their brands, which sometimes completely reinterpret brand meanings.
The increased power of consumers in creating, modifying, and diffusing messages on and around brands has led, for example, to the creation of doppelgänger brand images, “a family of disparaging images and meanings about a brand that circulate throughout popular culture” (Thompson, Rindfleisch, and Arsel 2006). Or, to simplify, consumers now create alternative campaigns that tarnish the intended image initially created by brands. Consumers using Twitter to diffuse alternative brand meanings or groups of consumers such as 4chan coopting advertising campaign, can be seen as such examples. The increased role of consumers in the creation and diffusion of messages has important implications for firms for value creation: firms have to now consider both how their messages can be amplified by consumers, but also how they can be coopted, reshaped, and resisted.
Another transformation brought about by the Internet is media and audience fragmentation. In 1970s, All in the Family was for a few years the top watched TV show. At its peak, it was watched by a fifth of the U.S. The 1980 finale of the hit series Dallas was watched by 90 million viewers, or more than 75% of the U.S. television audience, while the last episode of M*A*S*H was watched by 105 million people. The last finale to make the top 10 list was Friends, in 2004, as the adoption of broadband Internet accelerated.
Consumers have an increasing amount of options for media-based entertainment. Traditional media companies are now competing against user-generated content found on social media websites such as Instagram, Facebook and Tik Tok. Younger consumers have moved en masse to these new media, complicating the creation of advertising campaigns. Media fragmentation and the rise of Internet in the lives of consumers has led to the emergence of the concept of the attention ecomomy.
This is not a new concept. In 1971, Simon was already discussing how “information consumes … the attention of its recipients,” and Bill Gates was stating in 1996 that “content is king.” The implication for digital marketing has been recognized as early as the mid-1990s when Mandel and Van der Leun mentioned in their book Rules of the Net how “attention is the hard currency of the cyberspace.” Goldhaber (1997) would add that “as the Net becomes an increasingly strong presence in the overall economy, the flow of attention will not only anticipate the flow of money but eventually replace it altogether.” This has led to a drastic rethinking of how to do marketing online, and is intrinsically tied to the rise of inbound marketing and content marketing.
To recap, a few decades back, information was rather scarce, people, for the most part, consumed information from only a few sources, and companies could rather easily target consumers to diffuse their advertising messages. Nowadays, information is plentiful, consumers are diffused over a largely fragmented media ecosystem, and it has become more difficult for companies to diffuse their advertising messages to a mass, which can also work against them. This, and the development of targeting technologies that have transformed how we can send messages to consumers. It has led to two important transformations for marketers and how we understand value creation for consumers.
Finding Consumers vs. Being Found
A first transformation is a movement away from finding consumers towards being found by consumers.
What does this mean?
If we rewind history, it used to be that marketers would ‘find’ consumers: They would use market research reports in order to understand where consumers hang out so to place advertising, what they watched so that they could run ads during their favorite shows, and understand their movement in a city so to put ads and billboards at the right place. Although this still functions online—you can ‘find’ consumers through online targeting in order to place your ads on relevant websites—there has been an important switch towards consumers finding companies.
Consumers find companies through their normal everyday searches. In the chapter on consumers and their journey, we are going to see how finding companies expand the sets of brands that consumers consider before making a purchase.
How does this work?
Think of a need or a problem you might have. How do you usually go about answering this need, or resolving this problem? Maybe you will ask a friend. Maybe you will go to a store and trust the salesperson. Or perhaps, as millions of consumers do every day, you will turn to the Internet to do a search about your need or your problem. This is how thousands of consumers discover new brands and products every day! This has strong implications for digital marketers, one of the most important being content creation: In order to be found by consumers, you need to create content that addresses their problems. This is a topic we will explore in more detail when discussing content creation.
In short, it used to be that companies would find consumers and try to attract them to their stores or choose their brands through traditional media and advertising. Nowadays, our job has moved to create content that informs, educates, and entertains consumers so that they can find us when they are searching for the needs they have, or issues they are facing.
Representing the Company vs. Representing the Customer
A second important difference is representing yourself as a company vs. representing the customer.
What does this mean?
It used to be that, when finding consumers, companies would talk about themselves. Take, for example, this ad from Home Depot, which emphasizes how “Home Depot is more than a store … it is everything under the sun … all at a guaranteed low price” where you can save on flooring and where they have everything for your needs. In short, the ad is presenting the company and explaining why the company and its product is the best choice for the consumer. The ad represents the company.
Representing the customer means switching the focus to the needs, goals, and problems consumers are experiencing and helping consumers addressing these. There are numerous ways to do so. Companies often create resources, such as tutorials and infographics, to help consumers answer their needs and problems or help them achieve their goals. For example, Nike has developed an extensive set of videos to help consumers work out at home, train for running, or eat better (which can all be found on their YouTube channel). This obviously represents opportunities for Nike to talk about their brand in every tutorial and connect with consumers, but the main goal is not to talk about how great Nike and its products are: It is to help consumers achieve their goals of training, running, and eating. It still serves the company well, though: when a consumer is searching for at-home exercises, they might come across Nike, consume their tutorials, and when it is time to purchase a new pair of sneakers or a tee to exercise, be more likely that the consumer will buy Nike rather than a competitor.
Some brands have taken this a step further, by offering tutorials tied with products they sell in-store, with a readily available shopping list for do-it-yourself projects. Home Depot, for example, offers tens of tutorials on their YouTube channel: This makes sense since the home improvement store sells products for such projects. By going a step further and representing the needs of the consumer, Home Depot can bring potential customers on their website when they want, for example, to build a fire pit. Within these tutorials, Home Depot presents the “Materials You Will Need,” which directly brings consumers to sections of their websites where they sell such products. The tutorial has thus become a great resource to create sales!
A Transformed Consumer Journey
What is a consumer journey? It is the experience of a consumer across the different stages of their buying process, which then extends to phases of relationships with a company. For example, let’s imagine you want a new pair of sneakers. You might have an existing pair. How satisfied were you with that pair? If you were highly satisfied and you still love the brand, you might go buy the same pair. This is partly why companies try to build loyal customers: to foster repeat sales. If you were unsatisfied, or if this model is not available anymore, or if you want some variety, you might go and look for another pair of sneakers. You will then go through different stages: You just recognized a need you want to answer, you will move to discover options to answer your need, you will then evaluate these options, you will make a choice and buy a new pair of sneakers, and you will then evaluate how much you like or dislike this pair.
Pre-empting the next chapter, these transformations and the new digital ecosystem in which consumers evolve have led to a drastically different way to enter in relationships with brands: Consumers now discover brands, rather than be discovered by them, and they start their relationships often with online searches aligned with their needs, goals, and problems. The objective of companies doing marketing online is thus to be there when consumers need them. We will talk in the next chapter about how we can conceptualize such changes in transformations in the journey consumers take when buying products they want. | textbooks/biz/Marketing/Digital_Marketing_Strategy_(Dolbec)/1.01%3A_Introduction_to_Digital_Marketing.txt |
Learning Objectives
• Understand what are personas, journeys, and maps, how to calculate customer lifetime value, and why this is important.
In this chapter, we discuss how digitalization is transforming the journey of consumers. To better understand how to do marketing online, we also cover basic marketing tools (i.e., persona and consumer journey) to help us create digital marketing campaigns. We conclude the section by discussing journey maps.
Understanding Consumers Through Personas
There exist two grand approaches to conducting marketing: mass marketing (i.e., an undifferentiated approach where products are simply sold to the masses) or targeted marketing (click here for more information on these approaches). In the latter approach, firms practice segmentation and tailor marketing communications and products to segments. The digital ecosystem makes it quite easy to address segments, even segments of one. Although it is possible to practice mass marketing online, many processes unique to digital marketing, such as web analytics, A/B testing, or the use of online targeting platform, work best when firms have defined segments. For this reason, we are going to emphasize a targeted approach in this course.
To practice targeted marketing, firms use segmentation to create groups of consumers that are homogeneous (i.e., they have similar characteristics) but are heterogeneous from the rest of the population (i.e., they are different from the rest of people based on their shared characteristics).
A useful tool to help create and represent segments are personas. A persona is a semi-fictional, generalized representation of a customer segment. They help you better understand your customers (and prospective customers), and make it easier for you to tailor content to the specific needs, behaviors, and concerns of different segments.
Personas are important because they help you understand who your ideal consumers, what their characteristics are, and how to talk to them. The needs, desires, and problems of your personas (or segments, more generally) should be the starting point of any marketing strategy. As a reminder from chapter 1, our goal as marketers is to create value, and in digital marketing campaigns, we create value by representing the customer. The only way possible to do so is to understand how this customer is and what they need. Personas can assist a wide variety of marketing activities, from creating campaigns and ads to guiding product and service development to helping with customer support. We will see how shortly.
Firms develop personas the same way they develop segment: through market research and the use of internal data. Firms typically segment consumers based on their behaviors (which are also now trackable online!), demographics, lifestyles, or psychographics (see the table below for a brief summary).
From University of Minnesota ‘Principles of Marketing’
Segmenting based on these variables are highly useful to inform online targeting strategies. For example, on the Facebook Ads platform, you can easily select to deliver an ad to people aged between 18 to 25 years old living within a kilometer of the Mile End who like cycling.
Yet, this provides less information as to how to talk to these consumers. For this reason, we emphasize the importance of intersecting segments with their goals, wants, needs and motivators, and the challenges they face. This provide key information to create your digital marketing campaigns.
In her Introduction to Consumer Behaviour, Andrea Niosi explains these as follows:
A goal is the cognitive representation of a desired state, or, in other words, our mental idea of how we’d like things to turn out (Fishbach & Ferguson 2007; Kruglanski, 1996). This desired end state of a goal can be clearly defined (e.g., stepping on the surface of Mars), or it can be more abstract and represent a state that is never fully completed (e.g., eating healthy). Underlying all of these goals, though, is motivation, or the psychological driving force that enables action in the pursuit of that goal (Lewin, 1935).
Motivation can stem from two places. First, it can come from the benefits associated with the process of pursuing a goal (intrinsic motivation). For example, you might be driven by the desire to have a fulfilling experience while working on your Mars mission. Second, motivation can also come from the benefits associated with achieving a goal (extrinsic motivation), such as the fame and fortune that come with being the first person on Mars (Deci & Ryan, 1985). One easy way to consider intrinsic and extrinsic motivation is through the eyes of a student. Does the student work hard on assignments because the act of learning is pleasing (intrinsic motivation)? Or does the student work hard to get good grades, which will help land a good job (extrinsic motivation)?
Consumer behavior can be thought of as the combination of efforts and results related to the consumer’s need to solve problems. Consumer problem solving is triggered by the identification of some unmet need. A family consumes all of the milk in the house; or the tires on the family car wear out; or the bowling team is planning an end-of-the-season picnic: these present a consumer(s) with a problem which must be solved. Problems can be viewed in terms of two types of needs: physical (such as a need for food) or psychological (for example, the need to be accepted by others).
Although the difference is a subtle one, there is some benefit in distinguishing between needs and wants. A need is a basic deficiency given a particular essential item. You need food, water, air, security, and so forth. A want is placing certain personal criteria as to how that need must be fulfilled. Therefore, when we are hungry, we often have a specific food item in mind. Consequently, a teenager will lament to a frustrated parent that there is nothing to eat, standing in front of a full refrigerator.
Most of marketing is in the want-fulfilling business, not the need- fulfilling business. Apple does not want you to buy just any watch; they want you to want to buy an Apple Watch. Likewise, Ralph Lauren wants you to want Polo when you shop for clothes. On the other hand, a non-profit such as the American Cancer Association would like you to feel a need for a check-up and do not care about which doctor you go to. In the end, however, marketing is mostly interested in creating and satisfying wants. Often discussion around needs are further explained in the context of those which are utilitarian (practical and useful in nature) and hedonic (luxurious or desirable in nature).
To this list, we add the notion of challenges. By challenge, we refer to an obstacle faced by a consumer in wanting to resolve a need or fulfill a want. This is important because consumers turn to the Internet everyday to help them answer challenges they face in their everyday life, whether it is how to change a tire, how to have the perfect Friday night make up, or how to paint a room. Resolving challenges drive the consumption of online content.
Hence, when creating a persona, you create a semi-fictional representation of a segment by bringing together the following information:
• Basic behavioral, demographic, geographic, and psychographic information to facilitate targeting
• Needs, and/or wants, and/or goal, and/or challenges to facilitate the creation of your campaign
• Information that makes your persona ‘feel’ real, such as
• Picture
• Quote from interviews with real consumers
• A name
• Examples of ‘real’ problems
Take the following example of RV Betty:
Can you find the information mentioned above in this short persona?
Rethinking the Consumer Journey
A consumer journey is the trajectory of experiences through which a consumer goes from not knowing they want something, to buying this something, to performing postpurchase activities (the most obvious being consuming the product). More theoretically put, it is “an iterative process through which the consumer begins to consider alternatives to satisfy a want or a need, evaluates and chooses among them, and then engages in consumption” (Hamilton et al. 2019). The journey is composed of pre-purchase activities, i.e., activities consumers take prior to buying a product; purchase activities, or what people do to acquire a product; and postpurchase activities, what happens once consumers have bought a product (Lemon and Verhoef 2016).
As a side note, we make a distinction in this course between customer journey, which would focus on the journey of a customer with a specific firm and would include, for example, touchpoint solely associated with that firm, and consumer journey, which is a broader perspective on consumers who “undertake [a journey] in pursuit of large and small life goals and in response to various opportunities, obstacles, and challenges” (Hamilton and Price 2019, p. 187). By touchpoint, I refer to “any way a consumer can interact with a business, whether it be person-to-person, through a website, an app or any form of communication” (Wikipedia).
Understanding the consumer journey is important because it strongly contributes to firm performance. For example, a survey by the Association of National Advertisers in 2015 found that top performers in a market understood the journey better than their peers, and had better processes to capture journey-related insights and use them in their marketing efforts (McKinsey 2015).
The journey varies greatly depending on which market a firm evolves in. It also varies depending on personas and their specific goals. For example, a survey by Google found that some markets, such as banking, voting, and finding a credit card, will have a typically longer journey than others, such as groceries or personal care products. And variation exists within markets. Google found, for example, three types of journeys for restaurants: one where consumers pick a restaurant within the hour; one where consumers pick a restaurant a day before; and a last one where consumers pick restaurants 2 to 3 months before.
Can you think of what these relate to?
We can hypothesize: If you’re at work and looking for a place to have lunch, chances are, you won’t dedicate much time to it and will pick a restaurant within the hour before going. If you are going out with friends or a Tinder date, you might be a bit more involved in the process and will pick the restaurant one or two days before. Lastly, if you are going to travel (and are a foodie!) or you want to make a marriage proposal, this will require more planning, and you might start your journey much, much before. This also has implications for restaurants! Some restaurants who cater to downtown lunchers might be better off pushing Instagram ads with the menu of the day, or some daily sale, around 11AM before lunch. Restaurants catering to groups or dates might want to start campaigns on Wednesdays to capture restaurants Friday and Saturday restaurant-goers. And restaurants that target the marriage proposal or foodie crowds might need longer, ‘always-on,’ continuous marketing activities to bring in patrons.
Understanding Consumer Journeys
Our understanding of consumer journeys has greatly evolved over the last two decades, and there exists a number of ways to conceptualize journeys. It is important to understand that these are not perfect representations of reality. Rather, they are thinking tools that help us create marketing campaigns. In real life, people tend not to be so linear in their decisions.
A common conceptualization found in marketing textbooks is one where consumers move between different stages, initially being aware of a large number of brands, and slowly refining their understanding of the options in the market to make their purchase. McKinsey represents such a typical model here. In this model, the consumer goes through 5 stages:
1. Awareness: the consumer is aware of a large number of products or brands in the market that might help address their need
2. Familiarity: From this large number of brands or products they are aware of, the consumer will make some initial research and become familiar with a subset of brands.
3. Consideration: From this smaller number of familiar brands, the consumer will continue their research efforts, eliminate some brands that do not fit their criteria, and narrow to a smaller number of considered brands (i.e., a ‘consideration-set’).
4. Purchase: Once ready to buy, the consumer might try out, or seek in-depth information on an even smaller subset, based on their consideration-set, from which they will purchase a product or a brand.
5. Loyalty: Assuming their consumption experience goes well, the consumer can become loyal to the product or the brand.
This understanding of the journey is based on a funnel model, where consumers start with being aware of a large number of brands, and over time, reduce their options as they go through each of the stages. This has a number of implications for marketers.
A first, central assumption is that, to be ultimately chosen by consumers, companies need to make sure that consumers are aware of them. This partly helps explain the prevalence of mass marketing: it serves to create awareness.
A second, central assumption is that consumers start with a large set of brands that are aware of, and over time, reduces this set to a smaller and smaller set of brands as they search and evaluate options.
McKinsey introduced in 2009 a competing model for the consumer journey, based on the purchase decisions of close to 20 000 consumers across five industries. They found that these two assumptions did not hold:
First, consumers do not start with a large set of brands they are aware of. Second, consumers do not reduce their options as they go through the stages of the funnel. Rather, the number of options they consider increase throughout their journey.
If you think of some recent purchases you made, this makes sense. Let’s say I want a pair of running shoes. I might be aware of some brands and model, probably the ones that do the most mass advertising: Nike, Adidas, Reebok. Then, I turn to the Internet to perform some searches. I’ll use general key terms like “What running shoes should a beginner get” or “Reviews for running shoes 2020.” Throughout my search efforts, I will encounter new brands I had not considered originally, for example, Asics, Brooks, and Saucony.
In this example, rather than following the funnel metaphor, where the set of brands I was aware of reduced to a smaller set of familiar brands and an even smaller set of considered brands, I added brands to my consideration-set.
This has important implications for digital marketers: First, traditional, push, mass marketing media activities are not necessary. Second, consumers broaden the set of products or brands they consider when they do research. We will see how this has led to the rapid growth of inbound marketing activities that help consumers with their problems and help consumers evaluate their options. This is because brands now understand that by supporting consumers throughout their journey, they can enter consumers’ consideration-set and ultimately make a sale.
McKinsey thus proposes a competing model, a circular model for the consumer journey. The model is circular because consumers enter a loyalty loop, where they move between using a product or brand, buying this product or brand again, participating in postpurchase activities, and so on. The McKinsey model has the following stages:
1. Trigger: The consumer experiences a need, problem, or want to achieve a goal, which initiates their journey
2. Initial consideration-set: The consumer considers an initial set of brands, based on their experiences, brand perceptions, and exposure to recent touch points. For the initial consideration-set, the most influential touchpoint is company-driven marketing, such as advertising, direct marketing, sponsorship, and the likes. See a graphic representation here.
3. Active-evaluation: This is a new stage introduced by McKinsey. At this stage, the consumer actively evaluates their options through information gathering and shopping. Often, consumers will do information gathering online. It is at this stage that consumers add brands to their consideration-set. We are not in a funnel model anymore. This is a first difference of importance for digital marketers: It means we can enter consumers’ consideration-set without having to do awareness-generating campaigns. If we help consumers make their decision, or if we have reviews online, for example, we can be considered by them. McKinsey finds that the most influential touchpoint for this stage is consumer-driven marketing, such as word-of-mouth, the information found during online searches, and reviews.
4. Moment of purchase: The consumer selects a brand, which they purchase.
5. Postpurchase experience: After purchasing a product or a service, the consumer builds expectations based on their experience. This will inform the loyalty loop. A second important difference with the funnel journey happens at this stage: Consumers start creating content for brands (i.e., the ‘consumer-driven marketing’ efforts I refer to at stage ‘3’). Think about products or services you bought recently: Maybe you posted a picture about it on Instagram, maybe you wrote a review on Yelp!, or maybe you participated in some company-supported marketing activities.
These two important revisions to the journey—the expansion of the consideration-set during active-evaluation and the importance of consumers in participating in consumer-driven marketing at the postpurchase stage—open up many content-based possibilities for digital marketers. As we remember, our goal in digital marketing is to represent the customer: What are their needs? Goals? Problems? How can we support them in addressing these? Our objectives are not to sell products or talk about our brand. Rather, we will see that we make sales online by supporting consumers throughout their journey—helping them understand their problem, helping them evaluate solutions, helping them better understand our product.
Zero-Moment of Truth (ZMOT)
In a great content marketing for themselves (i.e., this concept helps sell Google products!), Google introduced in 2011 the concept of zero-moment of truth, “a new decision-making moment that takes place a hundred million times a day on mobile phones, laptops, and wired devices of all kinds … that moment when you grab your laptop, mobile phone or some other wired device and start learning about a product or service (or potential boyfriend) you’re thinking about trying or buying.” Yet, it is quite a useful concept to think about how consumers make purchases in the digital era.
A moment of truth is a contact with a brand or a product when a consumer forms an impression (Carlzon 1989). To understand the ZMOT, it is important to contextualize it historically. Why is it called the ‘Zero’ moment of truth? Quite simply, prior to Google introducing his concept, there exists already two moments of truth:
• First moment of truth (FMOT): When a shopper notices a product in a shopping environment which influences their buying decision
• Second moment of truth (SMOT): When a consumer experiences a product following their purchase decision
The ZMOT is the moment of truth—the context between a consumer and a brand—that happens prior to a shopper notices a product in a shopping environment. Concretely, ZMOT ‘moments’ could appear during
• Online searches, talking with family and friends, comparison shopping, seeking information from a brand, reading product reviews, reading comments online, or starting to follow a brand
In contrast, the first moments of truth happen during
• Looking at a product on a shelf, reading a brochure at the store, talking to a salesperson, looking at a store display, talking with a customer service representative, using a sample in-store.
According to Google, characteristics of ZMOT are that: they happen online, when the consumer is in charge (and this relates to inbound marketing), during multi-way conversations. To capitalize on ZMOTs, Google recommends to be present in moments that matters. By this, the marketing juggernaut means that you should have content and ads that respond to the needs, problems, and goals that consumers are typing in the form of search queries on search engine. All of this requires, you might now have guessed, a deep understanding of your consumers and their journey.
Google identified four ZMOTs, and briefly explain how it interacts with journeys here:
• I want to know moments, where consumers turn to a search engine for a knowledge-based query
• I want to go moments, when consumers turn to search to go somewhere (e.g., “restaurant near me”)
• I want to do moments, when consumers want help to achieve something (Fun fact! For a while there, the most search ‘how-to’ video was ‘how-to kiss.’ Now, isn’t that sweet!)
• I want to buy moments, when consumers turn to search to help them make a purchase
These are important conceptual tools. They represent opportunities for companies online to create content. These are not simply ways to understand how consumers use search engines and interact online. Rather, they are tools to help us create better content. What kind of content would you create for these four different ZMOTs?
Journey Mapping
Now that we have identified the conceptual vocabulary, it is time to turn our attention to using this in practice. The journeys and ZMOTs are generic ways to understand how consumers go about buying products. Knowing how consumers conceptually move from a trigger to make a purchase to become loyal to a brand or product might be interesting in itself, but it is much more useful if we can actually use this in real-life campaigns. Effective strategies demand a tailored understanding. We cannot stay at a conceptual level. We need to translate them to real-life experiences. To do so, we can perform journey mapping.
A journey map is a visual representation of the journey of consumers. It brings together the conceptual tools we have seen in this chapter: persona, consumer journey, and moments of truth. They vary based on segments/personas. Each persona represents a different consumer segment. They should go about buying products differently. Think about, for example, how you and your parents go about buying products.
Journey maps exist in a wide range of shapes and forms. They do, though, share some comment elements:
• The persona
• Conceptual stages from a journey (e.g., Trigger, active-evaluation, purchase, postpurchase; or Awareness, consideration, purchase, loyalty)
• Concrete actions consumers take at each of these stages
• Touchpoints that they encounter (in this course, I strongly encourage you to include yours and that of others, i.e., this is a consumer journey, you should be thinking more broadly than only your firm)
• Opportunities associated with afore-mentioned actions
• This page presents a clear example of this kind of journey template
Journey maps are useful. They help you understand how consumers move through their journey to address their needs and problems. Each action they make represent an opportunity for your brand to create a connection with a consumer. A clear understand of the concrete steps that consumers take to buy products should be the starting point of the creation of your marketing campaigns. What do consumers do at the awareness stage? How can your brand support their actions? Do consumers search for specific things? What about at the active-evaluation stage? In the next chapter, we examine how firms can position websites on specific searches. This will help create a bridge between what consumers are doing online, and how we can answer their search queries.
Exercises
How to use a persona
Let’s take as an example the following persona ‘RV Betty:’
Betty lives in a suburb of a city. Her husband is also retired. They have been talking about traveling in an RV upon retirement for years – this is a long-time dream of theirs. The kids are self sufficient and have been out of the house for long enough that Betty doesn’t have to worry. She’s been retired just long enough to be bored. While she doesn’t consider herself as wealthy, she and her husband have a substantial savings and are prepared to enjoy their retirement.
Betty is worried about the logistics of travelling in an RV – how easy will it be to find utility hookups, where are the best places to stay if you have one, etc. She also wants something comfortable; she plans on spending a lot of time in it. She has other retired friends so she wants additional sleeping space and she wants to make sure they have plenty of room for food and even cooking. She wants as much ease as possible when traveling.
Based on this persona, briefly sketch 3 pieces of content. More precisely, concentrate on the general idea of what this piece of content would be about and draft:
1. A first piece that addresses a problem or a need she is facing
2. A second piece that helps her evaluate her options
3. A last piece that sells your product
Tip: Make sure that your three pieces of content directly address the RV Betty persona!
Creating a persona
Sketch up a persona for a Montreal real estate company specializing in first-time house buyers. To do so:
• Identify a few socio-demographic characteristics (e.g., age, revenue)
• Find one general need or problem they are facing
Tip: Ask yourself why would these people need a house. For example:
• Why would people move to a house in Montreal?
• Are there different groups of first-time house buyers? What differentiate them? Which one are you concentrating on?
• Can you find one need or problem that unite that group?
Moving from persona to journey map
• Sketch a journey map for your real estate persona using the following journey stages
• Awareness
• Consideration
• Purchase
• Post-purchase
• Identify 2 concrete activities that your persona are doing for each stage
• Identify 2 touchpoints that your persona are entering in contact with for each stage
• Identify one opportunity for your company per activity | textbooks/biz/Marketing/Digital_Marketing_Strategy_(Dolbec)/1.02%3A_Understanding_the_Digital_Consumer.txt |
Learning Objectives
• Understand SEO and keywords, and why they matter for your firm, for consumers, and for competitor analysis.
Search Engine Optimization
Search engine optimization, or SEO, is “the process of affecting the online visibility of a website or a web page in a web search engine’s unpaid results” (Wikipedia). This differentiates SEO from the use of paid ads in order to appear at the top of search engine result pages (SERPs). Take the following two screenshots, for example. On the left-hand side, we have results that appear at the top of the SERP because the company has bid on certain keywords used in a search query (‘car rental montreal’). On the right-hand side, we have organic search results that appear because the company has practiced SEO on similar keywords. In other words, they have optimized certain pages of their websites to maximize the chances that these pages would rank high when people search for specific keywords (e.g., ‘car rental montreal’).
Why is SEO Important?
Keywords are used by people interact with content online, and most online experiences start with a search (Forbes 2017). As we will soon see, people turn to search engines for a wide variety of reasons, and these give opportunities for your firm to show up when people are searching for something.
Ranking high on search engines also gives a competitive advantage. In 2015, the first spot on Google received 35% of the traffic for a specific search. More than 50% of the traffic went to results located on the first result page (Advanced Web Ranking 2015). Search matters for physical stores, too, and local searches lead 76% of mobile visitors to visit stores within the day. 28% of these resulted in a purchase (Google 2016). SEO also matters because most people ignore paid ads (User Centric 2011). Clearly, ranking high can benefit a firm: Being well-ranked provides a clear advantage over competitors.
In order to understand how to rank high, it is important to understand how Google works. Let’s watch the following video from Google:
So, How Do You Rank High?
The main job of a search engine is to serve results that best address people’s search queries. Let’s say you want to know how to clean your cat, such as what kind of soap to use, how warm the temperature should be, and how to wash their paws. You can turn to a search engine to learn how to do so. People turn to search engines and use search queries, the “query based on a specific search term that a user enters into a web search engine to satisfy their information needs” (Wikipedia). For example, you might turn to Google and type in ‘How to bathe my cat’, or ‘easiest way to wash my cat’, or ‘wash a cat,’ or ‘cat wash soap.’
We will use the term keyword to talk about the key terms people use in search queries. Keywords are central for digital marketers. They are what we use to both talk to search engine in order to ‘tell’ them what search query a specific webpage is supposed to respond to (and we are going to see shortly how to do so), but it is also what we use to talk to consumers and make sure our webpage shows up when they search for something. Keywords link consumers’ search queries and whether or not our webpages show up when they search for something specific. It is thus important for us to think ahead when creating pages about what are the keywords and search queries this webpage answers?
The search queries above are all slightly different in terms of keywords, which might indicate that they are looking for slightly different things: the first user seems to want a tutorial, the second an easy way to wash a cat, the third is rather undefined, and the last one has more specificity on soap. As a result, search engines will deliver slightly different result to best address what they think the person wants in terms of information, i.e., what exactly they are looking for.
The role of search engines is thus to deliver the best result possible for people who are doing a specific search. In order to rank high on search engines, thus, you need to create pages that best answer specific search queries.
You do so by creating specific pages for specific search queries. Each page should have content that best matches that query, and keywords that are ideally perfectly aligned with the query you believe people will be making. This reflects the importance of representing (and understanding) the customer, i.e., your pages need to address questions, needs, wants, challenges that people have. In addition, you should ideally write about topics you are knowledgeable about (or you are an expert in), in which your site has authority, and your information should be honest, accurate, and trustworthy. This is summarized in the EAT acronym (Expert-Authoritative-Trustworthy).
Understanding Search Algorithms to Rank High
As the video explaining how Google works showed, there are more than 200 variables that get taken into account when ranking websites. Some of them, though, are more important than others. Namely, we can identify three grand categories of highly important ranking factors:
• User experience
• Direct visits
• Time on site
• Page per session
• Bounce rate
• Backlinks
• Total referring domains
• Total referring IPs
• Total follow-backlinks
• Keywords
• Keywords in anchor, body, density, in total, in meta
Note: A backlink is a link back to your website from another domain. For example, www.othersite.com has a link somewhere on their website that links to www.yoursite.com
Search engines use these three grand types of factors because they are trying to evaluate: For a specific search query, which website should I show first? Which should I show second? Etc. Again, as a reminder, their goal is to show websites in the order they believe will best answer the search query. As presented in the video, the role of search engines is to make users happy: If you can easily and rapidly find an answer to what you are looking for, you will be continuing to use this search engine. Your job, as a digital marketer, is thus to create pages that best answer the needs people have when they do specific search queries. This is the key general idea behind search engine optimization.
But search engines cannot read the whole Web to evaluate how well a web page answers a search query. Rather, they based themselves on a set of variables to rank webpages. Web pages are ranked for each and every independent search query.
Let’s look at these three sets of factors one-by-one to understand how this affects our work as digital marketers.
User Experience
The first and most important set of factors related to user experience, or “a person’s perceptions and responses that result from the use or anticipated use of a product, system or service” (ISO 9241-210, 2010). Put in very simple terms: Do your visitors like the experience of your page, and does it meet their expectations? Since we are looking at ranking pages, we can see expectations as answering the need associated with the search people are doing. Hence, the first set of factors on user experience relate to whether or not your page answers the search that people are doing, and does so in a way that is enjoyable for visitors.
This is a crucial element in understanding SEO: We are not optimizing pages for the sake of optimizing pages. We are optimizing pages in order to answer specific search queries by people. Optimizing a page should thus be about creating the best page possible to answer a specific search query. We should optimize pages with users in mind.
This approach makes sense if we look at the specific factors above. Direct visits mean that people click on your link when they are on the SERP. We can optimize our page to maximize site visits by creating page titles and meta descriptions that incite people to click on our links. Let’s look at the screenshot below, which is a result of the search ‘how to bathe my cat.’
If, as a user, I am searching for ‘how to bathe my cat,’ my goal is to ideally find information that will help me achieve this task. As a website owner (and perhaps, a brand that sells bath products for cats), your objective is to provide me with a page that will help me achieve my goal. By doing so, you are creating value in my life. We will discuss later on when introducing conversion-based marketing how this type of value creation by offering free content to people brings visitors and offer opportunities to turn these visitors into leads.
When creating webpages and positioning them on specific search queries, we have only a few options to communicate with consumers. Three of these are the page URL, the page title (which shows up on SERPs, and also is what you read in your tabs next to the website icon), and the page description. These are resources that you create when creating webpages. They are part of what is called ‘meta element.’
Ideally, you want to write your page title and page description in a way that will incite people to click on your link rather than the links of your competition. Your title and description so thus directly address a specific search query, show that the page has the information required, and provide a call-to-action to incite people to click on your link. In this case, the page title repeats the exact same keywords I used in my search. This is great because it makes me feel like this page is exactly what I am looking for! The description could be optimized, but it provides me with first-hand experience and the start of a tutorial on how-to bath my cat. At least, I know that, if I click this link, I’ll be given instructions on how to bathe my cat. Perhaps a better description could have been (keeping in mind that description should be about 150 to 160 characters so that they fully fit in SERPs):
Learn how to bath your cat easily! Your cat will love it! No scratches! Easy 5 steps tutorial so that you and your feline buddy have a fun time.
Let’s break this down: [Start with a call-to-action] Learn how to bath your cat easily! [Express some benefit associated with your content] Your cat will love it! No scratches! [Tell people what’s on your page]Easy 5 steps tutorial so that you and your feline buddy have a fun time.
In short, optimizing for users means having people in mind when creating your pages: What are they searching for, how can you best answer their needs and goals, and how can you easily tell them that you are doing so.
This will help address the rest of the user experience factors: time on site, page per session, and bounce rate.
Time on site is the time a user spent on your site. If your page is well-designed and readily answers a query, we can assume that users will stay and will spend time on your site.
Bounce rate is the “percentage of visitors who enter the site and then leave rather than continuing to view other pages within the same site” (Wikipedia). Again, if people have a nice experience, this should lower the bounce rate.
Since bounce rate and page per session (the average number of pages a person views in a given session, where session here can be substituted to a website visit, i.e., the average number of pages a person views once they clicked your link on a SERP) are associated with moving between pages on your website, it helps if you provide incentives for people to do so.
Typically, this is done by practicing cross-linking, or linking pages of your own website with one another. We often see two ways through which websites do this.
A first way is to insert links within your pages that bring visitors to other pages of your website. Take this example for this page. The page is on ‘How to do a mask,’ and it provides a link to a face mask within the text sold by the website. If you click on this link, you will be visiting another page on the same website, increasing the average number of pages visited per session.
Another way that websites invite you to go through multiple pages is through recommended articles. Having a lot of content is quite important in maximizing your ranking for many reasons, one of which is to keep people on your site for a longer period of time and having them visit many pages. For example, at the end of each page for blog posts, Zoella invites visitors to related articles that might interest them.
Backlinks
The second most important set of factors relates to backlinks, or links back to your website from other websites. Backlinks can be thought of as votes of confidence from other websites. It’s like a popularity contest: The more people endorse you, the more others think you are relevant in a given domain. Or, applied to the Web, the more backlinks to your website, the more relevant search engines think you are in a given domain.
This is important for search engines because if you are providing a good user experience and other sites heavily link back to yours, chances are you are doing something that people like. People liking you/voting for you/linking back to you thus become a good proxy to know how high you should be ranking for specific searches.
The list of factors above offers three important backlink-related factors, two of which we will discuss:
• Total referring domains represents the total number of domains (e.g., domain1.com, www.domain2.com, etc.) linking back to your domain.
• Total follow-backlinks represents the total number of links that are allowed for web referencing that link back to your page. Without getting technical, search engines differentiate between types of links on websites so that they only consider ‘real’ votes of confidence. They thus exclude, for example, links back to your website done as part of promotions. Follow-backlinks represents these ‘real’ votes of confidence, while nofollow-backlinks represents links that are not taken into account for referencing.
Importantly, backlinks need to be earned organically, meaning that they cannot be incentivized. Paid promotions with bloggers, where bloggers link back to your website, for example, should be tagged as nofollow links. This means that, to create backlinks, firms need to think of strategies that will create links back to their websites without paying people to do so. Other types of backlinks that should be nofollow include links in: blog comments, press releases, most social media and forums, as well as links on all of the following social media platforms: Quora, Reddit, YouTube, Wikipedia, Reddit, Twitch, and Medium. Interestingly, although social media backlinks do not directly contribute to the ranking of a website or webpage, it can indirectly do so by increasing web traffic. Google is notoriously secretive about its algorithm and how it ranks websites. Recently, it indicated that it may follow certain nofollow backlinks, and several examples exist of backlink strategies where webpages shot up in ranking even if the links that contribute to this increase were nofollow links.
In addition to these two factors, which generally represent the quantity of backlinks to your sites (i.e., the total number of domains and the total number of links), it is also acknowledged that your website ranking will also depend on the quality of the backlinks.
High-quality backlinks are ‘natural,’ meaning that the referring website (the website that links back to you) links back to your website in a way that naturally makes sense in the context. For example, it might use a relevant, natural anchor text. Anchor text is the clickable text that is underlined for a given link. Most of the hyperlinks in this chapter give examples of natural anchor text. The closer the anchor text to the keywords on which you want to rank your web page, the better. For example, if you want to rank a web page on how to bathe a cat, it will help if websites link back to your web page with the anchor text how to bathe a cat. High-quality links come from authoritative pages, i.e., pages that rank high on search engines. They also come from sources that are topically relevant to your web page. For example, if you are creating a web page on fitness routines, backlinks from sites on fitness will have a greater impact on your ranking.
Keywords
The last set of factors are keywords. Keywords are terms you include on your web pages to communicate with search engines and people. They help you clearly identify the ideas and topics that your webpage is on. Keywords are what link your webpage to the search engine result page to the search query of people. Keywords need to represent your content well and naturally, but also address what people you want to attract to your website are searching for.
The central implication of this is that you should be creating webpages to rank on specific search queries that people you want as customers are searching for. This is why representing the customer and understanding the need, goals, and challenges of personas are so important!
For example, for the search query ‘how to bathe a cat,’ the webpages that are positioned on these keywords are likely to rank first. This is because these webpages are ‘telling’ search engines: “Look at our keywords, we have created a webpage specifically for this search query.” As a result, search engines can assume that these webpages will be better at answering the need of people for a specific search query. People who get good search results that answer their needs are happier about the search engine, which they will continue to use. The goal of search engine is to have people coming back to using them. By helping search engines answer exactly what people are searching for, you are making sure you rank higher.
How do you position webpages on keywords? Basically, by putting keywords in a few key places on your website to ‘talk with’ a search engine and indicate what search query a certain webpage is meant to rank on. To ‘talk’ to a search engine, you want to put the keywords on which you want your webpage to rank on in the following few specific places:
Take the webpage of Moz.com on ‘What are Keywords’ as an example: https://moz.com/learn/seo/what-are-keywords
This page clearly aims at positioning itself on search queries related to keywords, and more specifically ‘what are keywords.’ Why? It has these specific keywords repeated over and over again in the five afore-mentioned places:
• The page title is “Keywords – SEO Best Practices [2020].” You can easily find any page title by looking at the page source (right click within a web page and click on the option ‘view page source’ in the menu of your web browser).
• The meta description is: ‘In terms of SEO, “keywords” are the words and phrases that searchers enter into search engines, also called “search queries” to find what they are looking for. A well-optimized website will have keywords and related topics in their content to make it possible for people to find their website via…’ (emphasis added)
• The page URL is ‘https://moz.com/learn/seo/what-are-keywords
• The phrase ‘What are keywords’ is repeated three times in the first four headings:
• ‘What are Keywords?’
• ‘Why are keywords important?’
• What are long-tail keywords?’
• Keywords, and related words, are repeated over and over again in the body.
The top factors associated with keywords are: Keywords in anchor, body, density, in total, in meta.
Keywords in anchor are not controlled by the owner of a website. Rather, as explained just above, they are controlled by whoever is linking to your site. We thus won’t be considering them in this section.
The rest of the keywords factors are controlled by the website owner.
• Keywords in body refers to the keywords used throughout your text in a given web page. Ideally, you want to create a tight semantic network of keywords that relate to one another. For example, let’s say you are creating a page to rank on the keywords ‘best dresses at the 2020 Oscar.’ You can put these main keywords to indicate to search engines that this is what you what to rank on in the URL, page title, and one or a few headings. But repeating these keywords over and over again in the body of the text won’t feel natural and will hinder user experience. As a result, you can come up with synonym to use in the body:
• Best: Top, talked about, fashionable
• Dresses: attire, robes, outfits
• Oscar: academy awards, red carpet, statuette
Using this approach will not only help you create a webpage that fares better for user experience, but it will also help you have keywords in the body, in high density (i.e., highly represented in ratio vs. the total number of words), and a lot of them in total.
• Keywords in meta refers to having the keywords in the meta elements of your webpage, which for the sake of this course will be represented by page title and meta description.
To recap, search engines consider more than 200 factors, but the top factors used to rank website can be grouped into three categories
• User experience
• Backlinks
• Keywords
When doing search engine optimization, your role is to create webpage that directly addresses specific search queries. This will help you craft content that will provide a great user experience and tie your webpage to specific keywords associated with a search query. In the world of search optimization, this is referred to as on-page optimization, which is achieved by making changes to the page code, content, or structure of the website to make it more accessible for search engines and improve the user experience.
The other type of optimization talked about is off-page optimization, which is focused on building backlinks. Strategies to improve backlinks might have to do with creating highly shareable content and public relations activities to bring attention to the content you have created. For example, a strategy we used in a firm I worked in was to create benchmark studies (studies that compare competitors based on a set of variables and provide some baseline). These were heavily shared by firms and discussed in the media, which drove a lot of traffic to our website. Companies like McKinsey are continuously producing free content in website sections like their “Featured Insights” in order to generate discussions around their firm.
Understanding How Consumers Use Keywords
Since user experience is central to ranking high, it becomes quite important to understand how people search for stuff online. We are going to talk about three ways of thinking about this.
A first way to think about how people search is to link is with the objective of their search. Three types of searches are typically referred to by SEO professionals (e.g., Moz 2016):
• Consumers perform informational searches when they are looking for information about a specific topic.
• Consumers perform transactional searches when they are looking to perform a transaction. Transactions have been narrowly defined (i.e., buying a product) and more broadly defined (i.e., perform an interaction).
• Consumers perform navigational searches when they are looking to go on a specific website.
The objectives that people are trying to achieve when performing search queries are helpful for us as digital marketers because they allow us to create webpages to answer these specific objectives. The kind of keywords on each page will be vastly different.
These objectives can also be placed in a process of moving from needing information about a specific need or challenge to wanting to perform interactions (or a transaction) to address this need to want to go on a specific website. This is exemplified in the figure below, which also provides search examples for each objective. The key idea here is that, as digital marketers, by knowing why people are searching for something, it helps you create pages that more directly align with their searches. This helps you improve user experience and choose the right keywords, both of which should allow your webpages to rank higher:
A second way to think about why people are searching is to start with their needs, challenges, and goals. This has a few implications: First, as we have seen with RV Betty, different segments/personas have different needs, challenges, and goals. That means that you will need to create different webpages to attract different personas to your website, where each webpage should address a specific need, challenge, or goal (and, perhaps, could do so by targeting different search objectives). Thus, when creating webpages, the first question that should come to your mind is: What are the needs of my persona? What goal are they trying to achieve? What challenges are they facing when trying to address their need or achieve their goal? Answering these questions should allow you to generate many different content ideas, from which you can think of specific search queries. We will cover this in more detail when we talk about content marketing. To foreshadow what will come up, in this course, we will emphasize how consumers’ searches vary depending on where they are in their journey:
• Early on in their journey, consumers are looking to find information about a problem they are facing or a need they are trying to address (e.g., ‘How to run a 5K,’ ‘treating acne fast,’ ‘easy ways to gain muscle,’ ‘getting a job after college’)
• As consumer move to actively-evaluate options they have to address their need, they will start to weigh different options (e.g., ‘best training plan for 5k,’ ‘retinol vs. benzoyl vs. salicylic,’ ‘is creating that good,’ ‘should I register to linkedin’)
• Lastly, once they are closer to making a purchase, they will look at evaluating or accessing the specific product they choose (e.g., ‘sales brooks ghost 12,’ ‘where to buy benzoyl,’ ‘creatine online cheap,’ ‘linkedin promo code’)
Similarly to the three objectives of searches, knowing that consumers first concentrate on problems, then on potential solutions, then on the product or service they are interested in is the first step to start creating marketing campaign. Keeping in mind that our goal is to create value for consumers by representing them (rather than talking about our company), this means that we will need to create ads and content that (1) inform consumers about their problems, (2) help them evaluate their options, (3) position ourselves as the best product / create product or service-specific information. When we introduce the conversion-based framework in the next chapter, we will see how each of these stages can also be used for different strategic goals (namely, attracting visitors, converting visitors to leads, and converting leads to customers). This is visually represented below:
We will cover the last way to think about searches very briefly since we discussed it in the last chapter: Google ZMOTs. As we saw, Google proposes four ZMOTs: I want to know, I want to go, I want to do, and I want to buy. Some of these overlap with what we just saw. I want to know are informational searches. I want to buy can be thought of as transactional searches (within a broader definition of transactional searches, I want to do could also be thought of in that sense). These moments again present numerous opportunities to create content. Google presents numerous ways how marketers can capitalize on I want to do moments here.
Using Keywords to Analyze Competitors
We conclude this chapter by examining how keywords can be used to analyze your competition. To frame what follows, we will assume that competitors know and follow the same rules as you should when creating webpages and choosing keywords:
• Your competitors are creating specific webpages to rank on specific search queries
• They know where to put the keywords to communicate with people and search engines
• Page title
• Meta description
• Page URL
• Headings (the titles) in the webpage
• The ‘body’ (the text)
• They write their page title, URL, and meta descriptions to ‘sell’ their webpage to people on SERPs
This is useful from a competitive analysis because it means you can easily study your competition based on specific keywords. It is also important to understand here that you should think of ranking on search queries in a way that is similar to selling products: you need to find a positioning that optimal for your webpage. That means finding a search query that is not overly competitive, and on which you believe it is likely that you will rank high. Hence, a first step is to understand how to analyze the competitiveness of specific keywords and associated search queries
Keyword competitive analysis
We should understand well, at this point, that we are creating webpages with the goal of ranking high on specific search queries. We also understand that not all consumers will use the exact same search query to address a specific need. Let’s go back to the search queries we introduce this chapter with and assume we are trying to create a webpage that will address the consumer need of wanting to know how to bathe a cat:
• how to bathe my cat
• easiest way to wash my cat
• wash a cat
• cat wash soap
These are different search queries, and how competitive they are will thus be different. A few easy steps can help you understand how likely it is to rank high on a specific search query. The first step is to understand how old the domains that show up on the first SERP are. This is because the older the domain, the more time they had to build content and backlinks, and the harder they will be to displace from the first SERP. The more older domains show up on the first SERP, the more competitive the search query.
To know how old domains are, pick the keywords you want to rank on. Search these keywords on a search engine (e.g., Google). Then, use a whois service (e.g., who.is) and check the “registered on” date. For example, for the search ‘how to bathe my cat,’ the first websites are:
• .com, registered on 2004
• .com, registered on 1999
• .com, registered on 2000
It seems that most domains for this search query have been registered prior to 2010, which makes it a likely competitive search query. Additionally, most of these webpages seem to have been created to rank on this exact search query, on something closely related:
• Wikihow page title is: How to bathe a cat
• Bhg page title is: How to bathe a cat
• .com page title is: How to bathe a cat
This combination of webpages clearly positioned on specific keywords that compete against yours and older domains means that trying to rank a webpage on ‘how to bathe my cat’ might thus be a rather hard exercise. It doesn’t mean it is not possible to do, but it will require a lot of work to create backlinks and a page that answers consumer needs better than other pages. Trying to position the webpage on other keywords might be an easier path. You can repeat this exercise with new keywords until you find a search that you believe consumers will be using, and that is not overly competitive.
Another approach to study keywords is to search for webpages that are exactly positioned on the keywords you are aiming for. A few Booleans search operators can help you here:
• Allintitle (e.g., allintitle:how to bathe a cat) returns results where the keywords are in the page title
• Allinurl (e.g., allinurl:how to bathe a cat) returns results where the keywords are in the page URL
• Allinanchor (e.g., allinanchor:how to bathe a cat) returns results where webpages are linked to with the keywords in the anchor text
These are useful because, as we just covered, search engine optimization should lead webmasters to put the keywords for which they want to rank on in the page title and page URL, and because being linked to keywords in anchor text helps our rankings. In short, by using these Boolean search operators, you can get a clear list of exactly who your competition is for a specific search query. This becomes useful, for example, if you want to understand what kind of content pages offer, how they pages are structured, whether they have multiple types of media, and so on. Or, put differently, you can analyze the webpages of your competition to create a general benchmark to beat and create a better webpage that will more clearly and fully answer consumers’ needs.
Exercise \(1\)
Background persona
You are a real estate company located in Montreal that specializes in first-time buyers.
Let’s assume a quick draft of a persona.
Bill and Jane are newly wed and are looking to start a family. They want to have some space because they are planning to have two kids, and ideally a backyard. They would also like their house to become the family house. In other words, they would like the family to ‘grow’ in the house. Ideally, that means finding a family friendly neighborhood, where the schools are good and accessible. Their budget is somewhat limited, because they are quite young, which can be a problem when wanting to find a home. Lastly, they are also first-time house buyers, and they are quite unaware of the whole process of buying a home. Understanding searches
You are a real estate company located in Montreal that specializes in first-time buyers.
• Identify an informational search your target market might do.
• Identify a transactional search your target market might do.
• Identify a navigational search your target market might do.
Creating content with SEO in mind
Pick one search out of the three searches you have identified prior. For this search, come up with an idea for a webpage, concentrating on:
• Page title
• Meta description
• Headings
• URL
• Keyword synonyms in body
Backlinks How can we boost backlinks for our real estate company?
• Identify 5 concrete ways to do so
Competitive analysis
Reverse engineer the SEO efforts and content marketing strategy of competitors
• Title, page description, URL, headings, keywords in content, alt tags
Go to news.shupilov.com
• Pick 3 blog articles
• Identify
• The keywords on which these articles are suppose to rank
• Who you think they are targeting
Finding novel competitive spaces
• Based on the searches we previously talked about, find 5 alternative, less competitive searches to rank on. | textbooks/biz/Marketing/Digital_Marketing_Strategy_(Dolbec)/1.03%3A_Planning_for_a_Digital_Marketing_Campaign.txt |
Learning Objectives
• Understand key terms associated with online strategy, the objectives of the four stages of the RACE framework, how it links to personas and journeys, and how to use it to support competitive analysis.
In this chapter, we discuss some key vocabulary associated with digital marketing, covering concepts such as inbound and outbound marketing, and paid, owned, and earned media activities. We then turn our attention to the framework we are going to cover for the rest of the semester, the RACE framework. We briefly cover the four stages of the framework before turning out attention to how to link persona, journey, and strategy. We conclude the chapter by understanding how the RACE framework can support competitive analysis.
Inbound and Outbound Marketing
Inbound and outbound marketing represent two grand approaches to connect with consumers. Inbound marketing aims at bringing visitors ‘in,’ drawing them to your company via, typically, content marketing, social media, and well-optimized websites. In this first approach, consumers find you because you represent them. I
Outbound marketing is what we typically think about when we think of advertising: the promotion of products or services through advertising and promotions. In this case, a message goes ‘out’ from your company and stops consumers in whatever they were doing (e.g., a consumer is ‘stopped’ by an ad when scrolling on Instagram or reading their Facebook feed; they are ‘stopped’ by an ad at the start of a YouTube video; they are ‘stopped’ by an ad which cuts a newspaper article or a blog post in two).
Inbound marketing is associated with a few other concepts, such as
• Permission marketing, where advertising is welcomed because permission to be advertised to has been given prior, and advertising is anticipated (e.g., email marketing)
• Two-way communication, meaning that there can be an interaction between consumers and the brand (e.g., consumers can comment on social media posts and on blog articles)
• It is sought, meaning that consumers find you
• It has been one of the fastest-growing strategies to do marketing online for the last decade
• It is seen as cheaper to perform since companies do not need to invest in ads (although there are costs associated with content creation)
• Aimed at customer acquisition
Outbound marketing is associated with concepts such as,
• Interruption marketing, where marketing efforts such as ads interrupt what a consumer is doing
• One-way communication, because consumers cannot talk to ads
• Imposed, because consumers do not agree to be advertised to
• Decreasing, although this is debated
• Expensive, because fees are associated with putting ads online
• And aimed at awareness creation, as it has typically been the case with traditional advertising
Examples of inbound marketing include: blog posts, infographic, ebooks, white papers, social media posts, tutorials, and the likes
Examples of outbound marketing include advertising of any sort, which we are going to cover in more detail in the next chapter.
Paid, Owned, and Earned Media
We differentiate between three types of media online: paid, owned, and earned.
Paid media are media activities you pay for. These media activities are typically performed on a third party channel (i.e., not your own website), and is paid by your company to conduct the activity. Your company controls the content, but the third party control where this content is shown. Examples include search ads, display ads, paid influencers, paid content promotion, social media ads, product placements, and the likes.
Owned media activities are media activities that are hosted on channels that you own, i.e., on your own platforms. They include your web properties (e.g., blog posts on your website) and social media channels.
Earned media activities are media impressions that you earn because your content is shared. Here, consumers (and sometimes professionals) become the channel. Shared posts on social media, reviews, and other consumer-generated content, such as content created on wikis, ratings, social recommendations, or forum discussions, are examples of earned media activities. The coverage of your company by journalists is also earned media activities.
Very importantly, albeit these are conceptually distinct types of media activities, ideally, you want to create campaigns that will integrate these together. For example, you can create content on your website and social media channels that you will also push by advertising on social media websites and other websites using banner ads, and you are making these efforts in the hopes that your content will be widely shared by others. This is the typical strategy underlying viral marketing campaigns.
Take, for example, the widely successful ad for Doritos during the 2020 Superbowl. Doritos created this ad that they hosted on their website and social media channels (e.g., YouTube). The ad was pushed as a paid media activity during the Superbowl at the tune of several million. It was also associated with a Tik Tok hashtag campaign, #coolranchdance, fueling earned media impressions. It is this intersection of paid, owned, and earned media activities that lead to the creation of successful online marketing campaigns!
Objectives, Goals, and KPIs
Objectives, goals, and KPIs are the next set of concepts. Objectives represent what you want to achieve for your company. Ideally, objectives should be SMART:
• Specific
• Measurable
• Attainable
• Realistic
• Time-bounded
Goals are an action that you want users to take. We use the vocabulary of goal to designate user’s actions since this is typically how goals are positioned in web analytics (e.g., Google Analytics). Distinguishing between objectives (what you want to achieve) and goals (what you want your users to achieve) just makes things clearer.
KPIskey performance indicators—are metrics used to evaluate the performance of your company based on a particular objective or activity. KPIs typically have targets—specific values that your company is aiming to achieve within a time period.
These concepts work together to help you plan campaigns, as exemplified in the figure below: Objectives can be used to identify goals for users to achieve, which can be measured using KPIs.
For example, an objective for your company might be to increase product awareness. In order to achieve this objective, you might set up goals for your users, such as subscribing to email updates and engaging in some key features you believe will help raise product awareness. It is then possible to identify KPIs to measure your success for these user goals, such as ‘number of contact forms submitted’ or ‘use of the key feature of the virtual mirror.’ The figure below exemplifies this.
Strategy and Tactics
Strategic and tactics are the last key terms we need to move to better understand the RACE framework. Strategy represents the path you intend to take to achieve a specific objective. This aligns with Jain’s (1993) understanding of strategy as “the pattern of major objectives, purposes and goals, and essential policies and plans for achieving those goals, stated in such a way as to define what business the company is in or is to be in.”
In this course, we are going to emphasize how, to implement a strategy and achieve specific objectives, a company deploys tactics—tools used to meet objectives. Examples of tools we will discuss include banner advertising campaigns, search ad campaigns, or the use of content marketing on social media.
Let’s combine the vocabulary we just introduced in an example:
Objective:
• Increase sales through our eCommerce platform by 10% within the next six months.
Tactics:
• Search advertising / PPC campaign using specific keywords, with a budget, time frame, …
• Social media campaign using the Facebook brand page, with marketing material
KPIs per tactic:
• Search advertising – clickthrough rate, bounce rate
• Social media campaign – clickthrough rate, share ratio/amplification rate
Targets per tactic:
• Search advertising – CTR of XX%, bounce rate of XX%
• Social media campaign – CTR of XX%, share ratio of XX%
We can now turn our attention to the RACE framework.
RACE Framework
Chaffey’s RACE framework is a conversion-based framework. Conversion marketing is a strategic approach that explicitly aims at increasing customers. The framework we study is part of a greater set of strategic approaches, such as Hubspot original ‘attract-convert-close-delight’, which transformed into their “flywheel business model,” or the grandfather of conversion marketing approaches, the ‘pirate metrics’ AARRR model (acquisition-activation-retention-referral-revenue).
These different frameworks propose stages with different names, but the central idea of this strategic approach is the same. To convert, you need to move people through four stages:
• Visitors (people come to your website)
• Lead (visitors are converted into a qualified potential customer i.e., somebody who is interested in your product and is also somebody you are interested in selling to)
• Customer
• Repeat customer
Visitors: Briefly, you create campaigns to attract people to your website.
Leads: Once they are on your website, you want to (1) find ways to see if they are interested in you, (2) find out if you are interested in them, i.e., whether they can be a customer of yours (because not all visitors are people who can buy your product or service, and, if they fit these two categories, and, if there is a mutual interest, (3) find a way to continue the conversation with them (usually, collecting their email address or making sure they follow you on social media).
Leads: Once you have identified a mutual interest, you move to accompany people in their journey so that you can convert them from a lead to a customer of yours.
Repeat customers: After their purchase, you capitalize on their (hopefully) positive experience with your company so that they can co-create on your behalf (e.g., write reviewers) and continue their journey as a customer of yours.
The RACE framework presents four stages that help us plan for and coordinate different marketing activities to achieve these objectives:
R stands for REACH:
During the Reach stage, your company has two objectives:
• Build awareness about your brand, products, and services through offline and online media activities and
• Drive traffic using inbound and outbound marketing activities and paid earned and owned media touchpoints.
At this stage, you will mostly concentrate on addressing people’s problems.
A stands for interACT:
During the Act stage, your company has two objectives:
• Generate positive interactions on your owned media
• Create leads, i.e., identify potential customers and make sure they can be your customer (we will call this ‘qualifying’ leads, later on in the semester)
At this stage, we are going to emphasize how we should focus on addressing consumers’ problems as well as helping them evaluate their options.
C stands for CONVERT:
During the Convert stage, your company has one objective:
• Converting leads into sale
At this stage, we are going to emphasize how we should focus on talking about why your brand, product, or service is the best option for consumers. We will also touch on how to optimize our owned media order to maximize conversions, a process that is called ‘conversion rate optimization.’
E stands for ENGAGE:
During the Engage stage, your company has two objectives:
• Build customer advocacy
• Foster repeat visits and sales
At this stage, the idea is to build long-term engagement by continuously contributing to consumers’ lives by creating value. We also want to identify engaged customers in order to foster their participation and engage them in co-creation activities to participate in our campaigns and support our marketing efforts.
The figure below presents how these objectives evolve over time with each of the stages:
From Persona and Journey to Strategy
As we discussed during the last two chapters, the goals, needs, motivations, and challenges of consumers give the raw material from which to create content for each persona. Journeys tell you what your content should be about (problem, solutions, and your product), and how it addresses different stages of the journey. From week three below:
Let’s take the example of making content and associated search ads, i.e., creating a blog post and then deciding to advertise this blog post on Google SERPs. As we discussed last week, your goal when optimizing your webpages is to identify consumers will be used to perform searches online. The idea behind making search ads is similar. As we briefly covered, we saw a few ways to help us to do:
• Who they are/what they need (Persona)
• How they go about solving their needs (Journey)
• What do they search in order to do so (Journey, ZMOT, types)
• Benchmark against competition
Once you’ve identified keywords that your consumers are using throughout their journey, you can start creating content or ads based on these keywords so that you show up on a search engine when a consumer does this search.
Persona helps identify general keywords based on their needs, motivations, challenges. Journey helps identify specific keywords based on how users go about answering needs, motivations, challenges throughout their journey
• For example, if a consumer has pain in their lower back, they might go on google to find how to address this pain. This presents an opportunity to create awareness around a back pain-related product you are selling (e.g., a pair of sneakers)
• For example, if a consumer wants to compare sneakers to understand which one offers the best support to address back pain, this provides you with an opportunity to compare your product to those of your competitors
From a Journey Map to a Conversion Path
A journey map is a visual representation of the journey of consumers, which brings a rather abstract way of understanding how consumers purchase products (e.g., awareness, consideration, purchase, and loyalty) to something concrete, with specific actions and touchpoints, that a brand can use to create a marketing strategy.
A conversion path is how a brand is thinking of enacting this strategy. It ties together multiple tactical activities (e.g., search ad and content marketing). It can be defined as a description of the steps that a company wants consumers to take so that they achieve a desired goal. In the digital vocabulary, a conversion occurs when a consumer achieved a goal you wanted them to achieve. Goals are widely varied: it can be visiting a page, clicking on a link, sending you their email address, buying a product, spending more than a specific amount of time on our of your pages, viewing a certain number of pages during a session, using a key feature, and the list goes on. To create a conversion path, companies pre-plan a set of steps that they want consumers to take in order to achieve that goal. The shortest conversion path that is typically presented in digital marketing is ad to content to landing page (see below):
The planning of the steps consumers are going to take to achieve what you want them to achieve is central to create digital marketing campaigns. We do not simply create content and ads in the hopes that consumers are going to visit our website or click on our ads, without any idea of what will happen next. Rather, the best-strategized campaigns always answer the question ‘What comes next?’ For example, if you’re creating an ad to appear at the top of a SERP, what comes next? What are you expecting people to do? Where are you leading them? What should they be doing once they get on this page? Why? Answering these questions is how you can create highly-converting campaigns because you have a clear idea of the goal consumers should achieve, and you can therefore create pages and ads that will lead them to achieve these goals.
Depending on who you ask, it takes between 5 and 13 touchpoints (or interactions with your brand) to generate a qualified, sales-ready lead (Salesforce 2015; Online Marketing Institute 2013). We will come back to the notion of qualified lead (i.e., a lead that you believe can be your customer) and sales-ready (i.e., a lead that is at the purchase stage) later during the semester. For this chapter, what is important to understand is that, without planning ahead in advance what these 5 to 13 touchpoints will be, it will be quite difficult to create sales. The task of a digital marketer is thus understanding how to bring people through a set of smaller goals, like visiting a blog post, spending 3 minutes reading the post, giving the company an email address, opening the first email (and so on), that will lead them to achieve certain milestones towards making a purchase. Otherwise, a company will be flying in the dark, with no clear strategy as to how to make sales, apart from putting ads online and creating content.
For your term project, your goal is to create a clear conversion path composed of three inbound and three outbound marketing activities. They can be part of the same path (see figure 1) or part of different paths (see figure 2), but you need to think ahead of a set of tactics and associated marketing activities that are clearly linked to make people ‘walk’ through the path you’ll have created for them. Ideally, your path should indicate what you are doing (i.e., your tactic) and what you expect consumers to do (i.e., a goal).
RACE for Competitive Analysis
The RACE framework is highly useful in creating a strategy for digital marketing campaigns. It helps answers questions such as:
• Reach: How do I bring visitors to my website?
• Act: How do I create a positive user experience? How do I transform visitors into leads?
• Convert: How do I convert leads into customers?
• Engage: Once I have customers, how do I ensure repeat purchases? How can I leverage my customers to participate in my marketing campaigns?
The strategic value of the RACE framework also makes it a great tool to guide competitive analysis. You can turn these questions around to better understand the digital marketing strategy of your competitors:
• Reach: How is my competition bringing visitors to their site?
• Act: Once on their web properties, how do they create positive interactions? How do they transform visitors into leads?
• Convert: How do they convert leads into customers?
• Engage: How do they ensure repeat purchases? How do they foster word-of-mouth and other co-creation activities?
Reach
Understanding how your competitors bring in visitors can be of great use to craft your own strategy to attract people to your web properties. Questions to ask include:
• How frequently are they running promotions? What benefits do those promotions provide to their customers and potential shoppers, as well as their business?
• Are they running contests online? What kind?
• How are they using their social media channels? How do they drive people from their social media channels to their website?
• What information is included in their marketing banners and callouts
Act
Similarly, an analysis of your competition should include a better understanding of the user experience on their website. For this stage, you can answer questions such as:
• How are they creating positive interactions on their properties and transforming visitors into leads?
• Where are their calls to action throughout the browsing experience? What are the calls to action about?
• Do they have a blog? How frequently do they post? What type of information do they tackle?
• What is the role of content on their website? How does their content differ?
Convert
Then, the next stage is to better understand how your competition converts their leads into customers. To understand this, it is important to take steps like customers would: register to your competitors’ newsletters, understand what happens once a cart is abandoned, analyze persuasion attempts within webpages. To assist you, questions you should be able to answer include:
• How do they display their products and help communicate details?
• How detailed are their product descriptions? What information do they include? What information is missing?
• Where are their calls to action throughout the browsing experience? What are the calls to action about?
• What happens in newsletters? Are there a clear, pre-planned path created to maximize sales? What is that path?
• Do they have an abandoned cart saver feature? If so, at what point do they send the emails and what are the messages for these emails?
• Is your competition retargeting visitors? Based on what variables?
Engage
To conclude your competitive analysis, become a customer of your competitors! Understand what happens once you buy a product. See whether there exist forums on your competitors’ brands, services, or products. How are consumers of your competitors interacting online? What are your competitors doing to foster such interactions? You can ask here:
• What happens once you bought a product?
• Do they have some sort of a club? Membership program? Online forum?
• Do they request reviews? Are there consumer-generated content (CGC) campaigns?
• Do they have consumer appreciation campaigns?
• Does their content always talk to new consumers, or to existing ones as well?
Bringing Competitor Analysis Together
A great approach to try to better understand your competitors is to approach them as you would if you were a persona-related consumer going through the motions of their journey. This is a different logic to evaluate your competition when compared to other strategic frameworks, such as SWOT. SWOT, indeed, can be used to understand the strengths and weaknesses of your competition as it relates to their digital marketing resources. But never before were we able to analyze exactly how our competitors are operating. Because everything is archived online, and because you can readily have access to marketing efforts, such as ads and content, understanding your competitors’ strategic efforts has perhaps never been more accessible. To conclude, To gather as much (targeted) information as possible, be sure to:
• Subscribe to their newsletter/blog
• Follow them on social media
• Purchase a product: packaging, buying experience, shipping time
• Put an item in your cart and abandon the checkout process
• Check their reviews
• Hunt their ads
• Follow their publicity
• Understand their backlinks
Exercise \(1\)
You are a fitness center creating a campaign for people who want to get back into shape
One of the personas you are targeting is Avery:
• Avery is a person living in a major Canadian city center. They are their late 20ies-early 30ies and are in the top 20% in revenues in their city. With increased responsibilities at work and a newborn, exercising had been put aside. For a few years. Avery feels sluggish, lacks energy, and miss having a stronger connection with their body. With age, their body has also started to transform and they started to feel conscious about it. To remediate, they want to get back into exercising weekly. They don’t have much time, and they also don’t know much about working out or the market, for example, where to work out or how to work out.
Social media analysis using RACE
Using the RACE framework, analyze and compare the following three Instagram fitness center accounts:
• @achievefitnessboston
• @lifetime.life
• @goodlifefitness
Can you group the posts into RACE stages? What are the objectives of these themes? What are the goals for consumers?
Think of the implications to generate awareness, attract visitors, create leads, convert leads into customers, and generate engagement.
Creating a (digital) journey map
Integrating paid, owned, and earned marketing activities for a campaign for your fitness center based on the journey map provided
For one or two stages:
• Start with the concrete actions of consumers
• Identify opportunities
• Translate the opportunities into concrete marketing activities
• Find how to make each activity a paid, owned, and earned media activity | textbooks/biz/Marketing/Digital_Marketing_Strategy_(Dolbec)/1.04%3A_Introduction_to_Digital_Strategy.txt |
Learning Objectives
• Understand the reach stage, landing pages, different paid media activities, and key terms associated with payment models and targeting approaches.
In this chapter, we cover the strategic bases associated with the reach stage. We start by covering the main objectives of the Reach stage and some KPIs associated with goals for consumers. We then move our attention to discussing paid media activities. To do so, we first emphasize the necessity to build landing pages whenever we are creating marketing campaigns and describe what landing pages are. When then turn our attention to the online ecosystem, discussing elements such as types of paid media activities, such as banner advertising, search advertising, affiliate marketing, and influencer marketing, and expand on payment models and types of targeting that the new online ecosystem allows.
Reach
Reach is the first stage in the RACE framework. It entails the publication and promotion of content in order to draw visitors to our website. The two main objectives at this stage are to (1) build awareness (about your website, brand, products, and/or services) and to bring visitors in. We do so by using both inbound and outbound marketing activities (although we will concentrate on the latter in this chapter), and through paid, owned, and earned media touchpoints.
The kind of goals we can have in mind for people at this stage are to: come to our website from a SERP, stay on our website once there, or click on our ads. Internally, we can have objectives like creating high-ranking pages and ads with a good ad score (briefly, an ad quality score can lead to lower prices for your ads and better placements on SERPs).
Accordingly, examples of KPIs important at this stage are: number of unique visitors, bounce rate, clickthrough for ads, page authority, page rank, ad quality score.
In the rest of this chapter, we cover outbound marketing activities. Since you should Never Start A Marketing Campaign Without a Dedicated Landing Page (NSAMCWADLP), we start our review of paid marketing activities by digging deeper into landing pages.
Landing Pages
A landing page is a campaign-specific page distinct from your main website that has one goal and one link (ideally, a call-to-action).
• It is campaign-specific because it is associated with a specific campaign. Ideally, you might also want to create specific landing pages for specific ads. This allows you to better optimize conversion rates by practicing some strategies we will cover during the Convert stage.
• It is distinct from your main website in the sense that you cannot access it from any page from your main website. It is still hosted on your domain (e.g., www.yourdomain.com/landing-page-campaign-A)
• It has one goal: Visitors should only be able to achieve one and one thing only. We will see shortly that landing pages can either have as an objective to acquire leads or to redirect visitors to some specific section of your website.
• It has one link: There is only one link that consumers can click on that page.
Types of Landing Pages:
Two main types of landing pages exist:
• Clickthrough landing page:
• The goal of this landing page is to have visitors visit a specific section of your website
• It is generally a sales pitch to warm up visitors to what is coming up
• Lead generation landing page:
• Your objective here is to generate leads, and the goal for people on this landing page is to give you their personal information (e.g., email address).
• It is thus typically a form-based page.
• Sometimes, an email address is offered in exchange for some piece of content or a free service, like a white paper, a webinar, a free consultation, a discount, a contest, a free trial, or the opportunity to order a product before others.
Examples of a clickthrough landing page
Examples of a lead generation landing page
Why Use Landing Pages?
Ad campaigns can aim at building awareness, but they are typically associated with making consumers achieving specific goals, such as trying out software for free, registering for an account, sending an email to a company, or downloading a free piece of content.
When running ads that have such goals, sending visitors to a website is counter-productive: a website is not meant to convert, i.e., to make consumers achieve a specific goal. If consumers are directed to a website, they will be faced with hundreds of potential actions (associated with the links available on a website), one of which is the action they should be performing. It becomes easy for consumers to get lost.
Inc comparison, landing pages are focused on help consumers achieve only one goal. They facilitate conversion. They do so by allowing to tailor the page to the exact goal that users should accomplish. This can be achieved, for example, by offering a clearer message to consumers (vs. bringing consumers to a website), by minimizing the potential actions they can perform on the page, and by matching the visuals of an ad with that the landing page. We will delve in depth into some of these benefits of landing pages when discussing conversion optimization in chapter 10.
Take, for example, the following ad for Shopify:
The goal for consumers associated with this ad is to try Shopify for free and create an online store today. How can we maximize the chances that consumers will do so?
When creating this ad, the question that a digital marketer faces is: where do I bring visitors? Ideally, you want to bring visitors to a place that will ensure that they will achieve the goal of trying Shopify.
A first option could be the homepage of Shopify. This is what it looks like:
Although this page has a box at the very top that incites people to try out Shopify for free, visitors are also offered a wide array of competing actions. They can click any of the links at the top of the page (start, sell, market, manage, pricing, learn); they can scroll down to learn more about Shopify, and at the very bottom, they can also access information such as ‘about’ Shopify and Terms and Conditions. In short, they can do a lot more than simply trying Shopify for free.
Over time, digital marketers have learned that one of the easiest ways to ensure that visitors will do what you want them to do is to limit the possibilities to only the one action visitors should be achieving, in this case, signing up to try Shopify for free. The chart below exemplifies this by linking the conversion rate with the number of links on a page:
For this reason, Shopify is not redirecting consumers to their homepage. Rather, they created a dedicated landing page where the only thing possible for visitors to do, after they clicked the ad, is to start their free trial. This is what the landing page looks like:
By focusing visitors’ attention to the task at hand (i.e., trying Shopify for free), we can maximize the conversion rate, i.e., the number of visitors who will achieve the goal we want them to achieve. A metric created to better understand the relationship between the number of possible actions on a website and the number of goals for consumers is the attention ratio. The figure below visually explains how a website has a much high attention ratio (i.e., many more possible actions vs. what consumers should be doing) and why a landing page is ideal for pushing visitors to perform the action we want them to perform. Landing pages should have an attention ratio of 1:1, meaning 1 possible action to 1 goal.
Building a Landing Page
A landing page has 5 basic elements:
1. AUnique Selling Proposition (USP): A ‘unique’ benefit offered by the product or the service. I put unique in between quotation marks because companies usually present a benefit, without it being unique.
1. The USP is typically communicated throughout a headline and a sub-headline that explains the value and purpose of the product or service
2. It is sometimes reinforced in a mid-page statement
3. And in a closing argument at the bottom of the page.
2. A hero shot: a visual associated with the product or service
3. A benefit statement that explains how the product or brand helps consumers
1. Typically done using bullet points or small paragraphs
4. Social proofing, such as testimonials, awards, client list, or media logos
5. And one link, typically a call-to-action
Let’s see these five elements in a recent Shopify landing page.
Paid Media Activities
Digital marketers typically advertise online through advertising networks (such as Google Adsense) and advertising exchanges (such as Google AdX) (differences between these two are summarized succinctly here, but outside of the scope of this course). Although these two approaches to providing advertising space to advertisers differ, from an advertiser perspective, both provide an entry-point where advertising space can be purchased. Networks, for example, aggregate ad space across websites and sells this inventory to advertisers.
Nowadays, much of advertising space is sold through programmatic buying, i.e., the automated purchasing of digital advertising space. When marketers purchase space through the Facebook Ads or Google Ads platform, for example, they are making use of programmatic buying. These platforms have been transformed in recent years through the use of algorithms and predictive analyses to help advertising identify the optimal placement of ads to reach specific objectives. Facebook Ads, for example, give advertisers options, such as reach, awareness, or lead generation campaigns. Choosing a specific objective will influence where ads will be placed (i.e., who will see the ads) to maximize the effectiveness of the ad campaign.
We now turn our attention to different ways that exist to reach customers. More precisely, we will briefly cover banner advertising, search advertising, social media advertising, affiliate marketing, and influencer marketing.
Banner Advertising
Banner ads are images or animations that advertise brands, products, and services on websites. They can be likened to the types of ads one would find in newspapers and magazines. Many types of banner ads exist, such as:
• Standard banners: standard sizes (measured in pixels) for static, animated, and rich media banner adverts
• Interstitial banners: shown between pages on a website or, more often, between screens on an app.
• Pop-up ads: pop up, or under, the web page being viewed. They open in a new, smaller window.
• Floating adverts: appears in a layer over the content, but is not in a separate window.
• Wallpaper adverts: changes the background of the web page being viewed. Maybe clickable.
• Map adverts: placed on an online map, such as Google Maps, usually based on keywords.
• Native content ads: the online version of Advertorials. This is where the advertiser produces content that is in line with the editorial style of the site, but is sponsored or in some way product endorsed by the brand
Banner ad
Interstitial
Pop-up
Floating ad
Wallpaper
Map
Native
Search Advertising
In comparison to search engine optimization, search advertising entails gaining traffic on SERPs by bidding on keywords. Search advertising is also referred to as ‘pay-per-click’ (PPC) advertising because of the mode of payment: advertisers typically pay search engines per click their ad receives.
Search ads are sold and delivered on the basis of keywords: Advertisers decide on sets of keywords they would like their ad to show up for, and when users search for these terms, their ad might show up. Keywords are sold through an auction process. As a result, industries with very high customer lifetime value, such as insurance or mortgage firms, can pay upward of \$50 per click.
To better understand how to bid for keywords, let’s watch the following video that explains how the Google Search ad auction works:
Using search ads entail combining three main elements: the keywords you want your ad to show for, your ad (i.e., a headline or two, a URL, and description), and a landing page. In short, you buy keywords that will be used by a search engine to display your ad when people search for those keywords. Your ad needs to be relevant to the search and attractive to the consumer. When your ad is clicked, you direct consumers to your landing page.
To write effective search ads, it is ideal to follow similar guidelines as to when writing effective page titles and meta descriptions. This is the only element that users will see on SERPs, and it is therefore important to make it as attractive as possible. First, the ad should ideally target a clear need or goal that consumers have, dependent on where they are in their journey. Is the consumer looking for information? Comparison tools? To purchase something? How can your ad help the consumer achieve their goal? Second, the ad should have a clear call-to-action.
Searches follow a long-tail distribution. This has implications when doing search ads: most consumers might be using generic, high volume keywords, while others might be using hyper-precise, low volume keywords. Although bidding on high volume keywords might seem like a good strategy, it comes with drawbacks: first, it is likely that these keywords will be more expensive. Second, it is less likely that these keywords will bring quality traffic. By quality traffic, I refer to visitors who can eventually become your customer. This is particularly important for search advertising because each visitor is associated with a specific cost. Devising effective search advertising campaigns thus entail balancing volume and quality: Bringing in enough visitors that can buy your product or service, but making sure that visitors who would not buy it won’t click on your ad.
To do so, firms typically combine high-volume and low-volume keywords to tailor their search ad to visitors who can potentially be customers. This help lead generation efforts down-the-line while ensuring more cost-effective search ad campaigns.
After deciding on keywords, it is possible to choose how keywords will be matched to specific searches. Four main types of matches exist: broad match, phrase match, exact match, and negative match.
Broad match shows your ad for any search that contains the keyword(s) you are bidding on, and any other keyword in any order, as well as variations on your keywords such as misspellings, synonyms, singular and plural forms, stemming (e.g., flooring -> floor), related search and other variations.
For example, let’s assume you are bidding on the keyword ‘kitten’ using a broad match, any search that contains kitten would show your ad, such as ‘kittens,’ ‘kitten photos,’ or ‘adopt a kitten.’
Associated with broad match are broad match modifiers, which allows giving more control to matches by including some other necessary keyword. For example, if you want your ad to be shown only for search that concomitantly has adopt AND kitten, you can specify as such. In this case, your ad could show for searches such as: ‘adopt a kitten,’ ‘how to adopt a kitten,’ or ‘best kitten to adopt.’
Phrase match shows your ad only for searches that include the exact phrase, or close variations of that exact phrase, with additional words before or after. For example, let’s assume you are bidding on the key phrase ‘how to adopt a kitten,’ your ad could show for searches such as ‘how to adopt a kitten now’ or ‘best ways how to adopt a kitten.’
Exact match only shows your ad for searches that use the exact phrase, or close variations, and no other words. For example, let’s assume ‘adopt a kitten:’ Your ad will show for the search ‘adopt a kitten’ and potential misspellings (e.g., ‘adopt a kiten’).
Negative match prevents your ad to be shown when certain keywords are included, such as keywords that “might cater to customers searching for a different product. For example, let’s say you’re an optometrist who sells eyeglasses. In this case, you may want to add negative keywords for search terms like “wine glasses” and “drinking glasses.”
A few metrics that are important to evaluate your success when doing search advertising include:
• Clickthrough rate (CTR) = Clicks/Impressions
• the percentage of impressions that turn into clicks
• Conversion Rate = Conversions/Clicks
• the percentage of clicks that turn into conversions
• Cost per click: CPC = Spend/Clicks
• the amount of money you’re spending on each click
• Cost per acquisition: CPA = Spend/Conversions
• the amount of money you’re spending on each conversion
Social Media Advertising
Social media has become central to most consumers’ lives. In some countries, social media networks have become synonymous with the Internet, to the point where “many use the Internet without realizing it” (Pew 2019). Social media has also fueled consumer content co-creation efforts (or ‘user-generated content’), and we can now publish our own content and share the content of others. Many social media businesses rely on the work of consumers (e.g., without us posting content and images, there would be no reason to use Instagram or Facebook).
There exist many platforms to advertise on social media, with new ones accumulating millions of users in ever-shortening periods of time. Tik Tok is a prime example. In order to favor a strategic outlook, a review of all existing social media platforms is outside of the scope of this chapter, but the following link will give precise instructions as to how to post an ad on each of the major ones:
The variety of social platforms has an important implication when using them to advertise: the importance of understanding the social and visual norms in order to create impactful campaigns. Social norms refer to what is considered acceptable behavior on a social platform. Online, understanding social customs, the shared actions, and behaviors that are standards for a platform is also important. Marketers that understand these have been able to create successful campaigns around them, such as Guess #inmydenim that used the ‘transformation’ trend, #JLoTikTokChallenge that used the challenge customs, and Doritos #CoolRanchDance that leveraged Tik Tok dances and the capabilities of the platform of using songs.
This approach of capitalizing on norms and customs is found throughout social media platforms. Old Spice, for example, tailored advertising efforts to eachi. It offers many good examples. The brand created one of the first iconic ad campaigns by emphasizing two-way interactions and video sharing capabilities on YouTube, with a response campaign associated with their ad “The Man your Man could Smell Like.” They translated the Twitch Plays Pokemon phenomenon, where thousands of users direct videogamers to perform certain actions to create a campaign where Twitch users could control the actions of a man for three days for the Nature Adventure campaign. And they used the idea of gif wars on imgur and the platform’s upvote capability to create the Smellmitment campaign.
These campaigns all followed the same precepts: They engaged with the norms and customs of the platform they used. They created ads that aimed at generating a conversation with users (rather than ad solely talking about the product). And they leveraged the technological specificities of each platform (e.g., songs for Tik Tok, turning comments into controller inputs for Twitch, using upvotes on imgur).
Social Media and RACE
Social media has also become one of the main pillars for advertising, and it can support most of the objectives of the different stages of the RACE framework, i.e., using social media for advertising can help with increasing awareness, bringing visitors, creating leads, converting leads to customers, foster loyalty, and engage customers in co-creation activities. This is well exemplified with the social media ad objectives that most platforms ask you to choose from when starting an advertising campaign. Take, for example, Facebook ad objectives:
Facebook has divided its ad objectives into three categories that almost perfectly align with the RACE framework: Awareness is associated with Reach, Consideration with Act, and Conversion with Convert. Let’s see each objective in more detail:
Brand awareness “increases overall awareness for your brand by showing ads to people who are more likely to pay attention to them.”
Reach “shows ads to the maximum number of people in your audience while staying within your budget.”
What is the difference? While both align with Reach objectives:
Brand awareness is designed to help advertisers find the audiences most likely to recall their ads. The goal is to increase brand recall, and this ties to Facebook “Estimated ad recall lift.”
Reach maximizes the number of unique people who will see your ad while capping the frequency of impressions (e.g., one a day).
Consideration objectives overlap all three stages. For example:
Traffic addresses a Reach objective as it aims at growing “the number of people who are visiting your site, app or Messenger conversation,” but it is also associated with Act because it aims at “increasing the likelihood they’ll take a valuable action when they get there.”
Engagement can be seen as both an Act, and an Engage activity: it wants to “get more people to follow your page or engage with your posts through comments, shares and likes. You can also choose to optimize for more event responses or offer claims.”
App installs can be seen as both an Act or a Convert activity (depending on the strategic goal of having people install your app; if the app is free and purchases happen within, it’s a lead generation activity; if it is a paid app, it’s a convert activity).
Lead generation includes a menu where users can directly enter their personal information. It is an Act activity that aims at creating leads.
Lastly, Conversion ads align with the convert stage by helping advertising convert users into customers.
In addition to using Facebook ad delivery algorithm differently, where Awareness objectives will target ads to people more likely to respond to Awareness generation and Conversion objectives to people more likely to convert, some objective also offer specific types of ads, such as a catalog (catalog sales), a form (lead generation), or a redirection to app installs (app installs).
The last important strategic piece to cover associated with social media is their targeting capabilities, or how they allow you to display ads to specific groups of people. All platforms will allow you to target your ads based on key customer variables, such as demographics, location, and interests, and each also has some specific targeting capabilities. For example:
LinkedIn allows using LinkedIn audience segments to programmatically reach professional audiences based on their company size, seniority, professions, and other key professional variables.
Most platforms allow for behavioral targeting, where ads are delivered based on purchase behaviors or intents, or people who have a specific kind of connection to your page, app, group, or event. For example, advertisers could target any users that have engaged with their content across the Facebook family of apps and services.
Facebook introduced the highly useful Lookalike audience option in 2013, which was followed by other major advertisers such as Google. Lookalike audiences use platforms’ algorithms to create groups on social networks that resemble other groups. This is a new and unique way to target that was never before possible and can help companies unearth some group of consumers who would be highly-qualified but have not yet been identified by the company. A lookalike audience could be based on a previously highly engaged audience (i.e., finding another group of consumers who share some commonalities that will also make them highly engaged) or an existing segment of customers.
The typical payment structures for social media advertising are:
• CPM: Cost per thousand: pay every time 1000 users view your ad
• CPC: Cost per click: pay when a user clicks on your ad
• CPA: Cost per action/Cost per acquisition: pays only when an advert delivers an acquisition after the user clicks on the advert. Definitions of acquisitions vary depending on the site and campaign. It may be a user filling in a form, downloading a file or buying a product.
Influencer and Affiliate Marketing
Influencer marketing—a form of social media marketing that capitalizes on people or organizations with large followings who exert some sort of influence over others because of their expertise or charisma—has become both a marketing and a societal phenomenon. There were more than 3.7 million ads by influencers on the platform in 2018, and some estimate that the market will reach 10B\$ business by 2020 (Wired 2019). 90% of Instagram campaigns in 2018 used micro-influencers—influencers that have somewhere between 1000 and 100 000 followers (HubSpot 2019). Micro-influencers represent about 25% of the Instagram user base, or about 250 million people (Mention.com 2018). If micro-influencers charge a few hundred dollars per post, top ones can charge upwards of \$50 000.
Although influencers can be used throughout all RACE stages, they historically have been used as an awareness generation channel. Even today, most of the main objectives reported by brands for the use of influencers relate to the Reach stage, such as improving brand awareness, share of voice, reaching new audiences, and managing reputation (Fipp 2017). Over the last few years, a trend has been the movement of marketing budget away from top influencers to micro-ones who, it is believed, have a stronger connection with their followers and can generate stronger engagement (Wired 2017).
Ideally, when planning for an influencer campaign, firms should aim at choosing influencers that correspond to the size of their business. It is easier for smaller firms to create relationships with micro-influencers, and these individuals might support the firms’ goals if a trusting relationship can be established. To facilitate the internal management of influencer campaigns, it can be useful to create influencer personas, i.e., personas that represent the kind of influencer the firm should aim at recruiting for their campaigns. Firms should aim to find influencers that align with their brand identity, can resonate with the brand’s customers, and can help the firm achieve their objectives (i.e., perhaps different influencers can help achieve different objectives, whether it is reaching a wide number of consumers, generating leads, or converting leads to customers). Firms should also support influencers’ efforts by providing marketing materials. Some influencers might want to work with firms to align the firm’s interests and objectives with theirs. For example, many influencers report only taking on clients that represent their values or which products they already like. When choosing influencers, ask yourself:
• Who is following them? Are these my targets?
• Are they real?
• Do they release quality content?
• That can be matched with your product?
• Have they worked with your category? With a competitor?
• Do they promote products often? How do their followers react?
• What platforms?
• Can you use their content?
• How long does the content stay online?
Two main routes exist to recruit influencers: use influencer agencies, networks, or platforms, which centralize interactions between a firm and many influencers, or contact influencers directly. If reaching out directly, make sure to send personalized messages that clearly show that you understand who the influencer is and why you see a fit between your brand and the influencer’s brand. Influencers have different goals: some might want to push products they strongly believe in, some might want to be a positive influence on their followers, and some might be in for the money (Kozinets et al. 2010). This should play a role in how you ‘sell’ your campaign to an influencer.
The main payment structure for influencers is pay per post, which varies depending on the domain or the influencer. In 2017, according to influence.co, payments were as follow:
• Average is 271\$ per post
• Less than 1000 followers: 83\$ per post
• More than 100 000 followers: 763\$ per post
• The Influence Agency posts hire costs
• 2000\$ to 10 000\$ for more than 100 000 followers
• Blog collaborations
• 10,000 monthly impressions: 175\$
• 100,000 to 500,000 monthly impressions: 500\$
• 500,000+ monthly impressions: 1000\$ to 5000\$
Other payment structure can be pay per lead, pay per engagement (when a user perform an action associated with a post, such as a click, a comment, or a share), or pay per view.
Although there exists many types of websites and people who do so, such as comparison shopping websites, coupon websites, email lists, or reward websites (Authority Hacker 2020), influencers like Zoella often create a revenue stream by participating in affiliate programs, an ‘agreement in which a business pays another business or influencer (“the affiliate”) a commission for sending … sales their way” (Hubspot). Affiliate marketing differs from influencer marketing in that it is overwhelmingly focused on the Convert stage: since pay is typically associated with making sales, affiliates aim at converting people to sales (there are, though, affiliate programs that pay-per-lead [and hence participate in the Act stage] and others that pay-per-visit [and hence participate in the Reach stage]).
Affiliate marketing works as follows: An advertiser, a company that sells a product or a service, offers to pay a third-party (e.g., a blogger or a coupon website) to help them promote and sell products and services. The affiliate conducts online activities in order to sell products or services. For example, in the following example, Zoella presents her “10 scary reads” for Halloween.” Each book is associated with the affiliate program Reward Style. Let’s say a reader reads this blog post, likes a book, click on the link of that book, and purchase it: Zoella will then receive a small percentage of the sale for helping make this sale happen.
You can typically easily identify whether a link is part of an affiliate program or not. For example, for Zoella, the link looks like this: https://rstyle.me/+U7XZh4aYDVf0s7elU5SykA. We can thus see that it is associated with the Reward Style program. Affiliate programs will create different types of link, which typically include the publisher (affiliate) website ID (or PID), the ad id (AID), and the shopper (or visitor) ID (or SID). This allows for tracking sales across publishers, ads, shoppers, and reward affiliates accordingly.
The two main payment structures that exist for affiliates are:
• PPS: Pay per Sale: Advertiser pays the publisher a percentage of the sale that was created by a customer referred by the publisher (revenue sharing model)
• CPA: Cost per Acquisition/Cost per Action/Cost per Lead: pays only when an advert delivers an acquisition after the user clicks on the advert. Definitions of acquisitions vary depending on the site and campaign. It may be a user filling in a form, downloading a file or buying a product.
Exercise \(1\)
Your are a fitness center creating a campaign for people who want to get back into shape
One of the personas you are targeting is Avery:
• Avery is a person living in a major Canadian city center. They are their late 20ies-early 30ies and are in the top 20% in revenues in their city. With increased responsibilities at work and a newborn, exercising had been put aside. For a few years. Avery feels sluggish, lacks energy, and miss having a stronger connection with their body. With age, their body has also started to transform and they started to feel conscious about it. To remediate, they want to get back into exercising weekly. They don’t have much time, and they also don’t know much about working out or the market, for example, where to work out or how to work out.
Create a search ad (headline, description, and display URL, with a choice of keywords) for the awareness stage. Use long-tail keywords
• Then, for this ad, sketch a landing page, using the five main elements we covered
• You should first be thinking about:
• What is the objective associated with awareness for consumers? How does this influence my search ad?
• What stage of the RACE framework does awareness align with? What are the objectives for my firm at this stage? How does that influence my landing page design?
Using the ad you created in the first part of this exercise, think of two ways to transform this ad to fit the following social media platforms.
• Instagram
• Linkedin
• Identify which type of payment approach (e.g., CPC, CPA) you should go for and provide a reason why
• Find a couple of influencers on Instagram that could help you with this campaign. Explain how you’d find these influencers and why they are ideal for your campaign. Decide which payment model to adopt to create a campaign with them. | textbooks/biz/Marketing/Digital_Marketing_Strategy_(Dolbec)/1.05%3A_Reach-_Generating_Awareness_and_Attracting_Visitors.txt |
Learning Objectives
• Understand the basics of content creation, how it ties in with the RACE framework, gated and ungated content, pillar pages, and content creation calendars.
In this chapter, we cover some central activities associated with content creation. We introduce the chapter by explaining the importance of content creation and how content creation should resemble what your competitors are doing but also be different from them because of your own unique brand voice. We then turn our attention to structuring content creation activities by examining how content creation can be guided by the RACE framework, the difference between gated and ungated content, and when to use each, why, and how to build topical relevance, and how pillar pages can help us do so. We then conclude the chapter by discussing what a content creation calendar is and how it supports content creation efforts.
The Importance of Creating Content
Content creation is important for two main reasons. First, it helps build a website’s relevance and authority, contributing to its ranking on search engines and, according to most marketers, content marketing is the most efficient search engine optimization tactic (Ascend2 2015, cited in marketingprofs.com). Websites with blogs also have 4 times more pages indexed on search engines, making it more likely to show up during searches (Forbes).
Content is also a cornerstone of customer acquisition strategies, and it is one of the most powerful tools to use in the RACE framework. According to Hubspot, a consumer consults 3 to 5 pieces of content during their journey to make a purchase. Leads generated using inbound marketing efforts are also less costly by about half of the cost of leads generated using outbound efforts. Inbound leads are also 10 times more likely to convert (vs. outbound ones), and studies showed that content marketing efforts boost company revenues by an average of 40% (Hubspot).
Creating Content
Before starting content creation efforts, a company should have a clear persona and associated journey, understand its own website, and ideally how its competitors are positioning themselves on search engines (i.e., competitive keyword analysis).
Creating content is a balancing act. First, it is a balance between being similar enough to competitors to address the general needs of the market and look like a trustworthy organization while being different enough to attract customers. This idea, standing out while fitting in, is termed optimal distinctiveness.’
Second, it is a balance between what you can offer and what consumers want. When creating content, firms need to keep in mind that they should represent the customer. This entails understanding what customers are looking for based on their needs and challenges and how what they need evolves throughout their journey.
Creating unique and relevant content thus entails understanding the market to know what are the codes that organize content production while knowing what the specificities of your brand that gives it a unique voice are (or ‘brand voice), and combining this to create something unique that will interest consumers based on your capabilities (i.e., what you are able to do).
Let’s take the example of creating content on Instagram.
Understanding the Competition and the Market
Something to keep in mind when creating content for social media platforms is associated with prototype and exemplar theories. Without getting too much into details, the central idea here is that in order to stand out, you first must fit in.
The idea goes as follow: Each category has some sort of a ‘standard’ member, a ‘prototype’ that people measure whatever is in this category against (or, from an exemplar perspective, each category has ‘dominant examples,’ or exemplars, that are used to evaluate whatever is in this category; see the figure below). In order to fit in, such as be considered legitimate as an Instagram account on cosmetics, or cars, or tattoos, you must share attributes with the prototype or exemplar. This allows you to fit in.
For example, fitness accounts tend to share characteristics in terms of what influencers look like (dressed in fitness attire, looking fit or really, really fit), the setting in which they create their video (typically, a gym), the kind of post they do (how-to exercise, diet posts, motivational posts), and so on.
Yet, within the fitness category, there exist sub-categories orchestrated around different sub-types of fitness influencers. A first example is the fitness therapy profile, a type of fitness account exemplify by influencers such as achievefitnessboston, squatuniversity, and joetherapy. This type of account typically emphasizes science-based knowledge and instructionals on how-to properly practice fitness and recovery.
A strikingly different type of profile, still within the fitness category, is the ‘fitness motivational’ account, exemplified in accounts such as zacaynsley, joesthetics, mssannamaria, and anna_delyla.
Knowing which sub-category a firm wants to participate in is important because not all personas will be reading all sub-categories of fitness accounts. It also allows a better understanding of the category as a whole and how to potentially mix-and-match approaches, as exemplified by massy.arias.
Once you have gained membership by fitting in, your job is to find ways to distinguish yourself from others. In short, you want to fit in just enough that you are part of the category, but you also want to differentiate enough that people will want to follow your Instagram account and not one of your competitors. This is where the uniqueness of your brand comes into play.
Using Your Brand to Create Unique Content
A brand is a name, term, design, symbol, and/or other features (e.g., Off-White and Off-White “quotes,” Coca-Cola and the Coke red, Bottega Venetta and its weave design) that identifies a company’s products or services and differentiates them from those of other companies.
Over the last three decades, practitioners and academics have developed many terms to help us better understand brands. For example, we now know what brands are more or less generally understood in the same way by consumers who have a certain image of the brands in their minds (brand image). The descriptive features that consumers use to describe these images are called brand attributes. We also know that marketers can play on assigning certain attributes—personality traits—to brands (brand personality). Marketers also strive to position their brand in a market in a way that is distinct and valued by consumers (brand positioning).
The main message here is that brands serve to differentiate products and services, and in our case content created online, from other companies, that consumers form images of brands in their minds, and that, as digital marketers, we should strategically think of how to use brands to position ourselves, our products, our services and, importantly, our content.
Hence, once you have developed an understanding of the codes used around content creation in a market and how your competitors are uniquely positioned, the next step is to create content that will uniquely speak to consumers. Ideally, you will want this content to reflect who you are as a company, i.e., to reflect your brand.
Let’s take the example of brand personalities. Aaker (1997) identified five dimensions to the personality of brands:
• Sincerity (honest, genuine, cheerful)
• Excitement (daring, spirited, imaginative)
• Competitive (reliable, responsible, dependable, efficient)
• Sophistication (glamorous, pretentious, charming)
• Ruggedness (tough, strong, outdoorsy, rugged)
We would expect that brands that aim at showing a ‘rugged’ image would create content differently from those aiming for a sophisticated one. Think of, for example, the latest Jeep ad that you might have watched and how it compares with the latest Mercedes ad that you have seen. Over time, interactions between consumers and touchpoints lead them to develop an image of your brand. Representing your brand in ways that align with the image you want to create in consumers’ minds is thus central.
Hence, to create unique content, ask yourself: What does my brand stand for? What do I want consumers to think of when they hear my brand name? How can my content properly showcase my brand?
Take Wendy’s, for example, which has become infamous for its sassy, cheeky, in-your-face, bordering on trolling social media presence. It, for example, challenged a teen to get a million retweets in exchange for a lifetime of chicken nuggets(the #nuggsforcarter campaign). It created a Spotify playlist taking shots at its competitors (as the company regularly does on Twitter). All of which, according to Wendy’s Chief Marketing Officer Kurt Kane, “is a natural extension of the Wendy’s brand Dave Thomas founded in 1969” (Fast Company).
Keeping Consumers in Mind
Last, and to reaffirm what has been said throughout the last chapters, your main role as a company when creating content is to represent the customer. That means to understand their needs and challenges, how what people look for varies throughout their journey, the types of searches they do (e.g., information, transaction, navigational; associated with ZMOTs; linked with their needs and challenges), and how you can answer consumers by providing them with content that is educating and entertaining.
Structuring Content Creation
In this second section, we are going to touch on a few key terms and approaches to help structure content creation: gated vs. ungated content and their role in marketing campaigns, how-to build topical relevance, and pillar pages.
Gated and Ungated Content
Gated content is “any type of content that viewers can only access after exchanging their information. Essentially, the content is hidden behind a form. Companies use gated content to generate leads and, ultimately, sales” (Hubspot). In contrast, ungated content is any content that users can freely access without having to exchange information.
An example of gated content
Gated content should be more extensive than ungated content, harder to find, rather unique, so as to entice users to exchange their personal information. Examples include a white paper, an ebook, a report (such as the one above), a template, a webinar, in other words, high value and rarer content.
You might ask why to gate content, and the typical answer is to generate leads, such as in a lead generation landing page. Gated content should be thought of as the endpoint of a lead generation campaign, where consumers will provide their personal information, which will then allow a firm to enter into lead nurturing efforts, which we cover in the next chapter.
Typically, a firm will create ungated pieces of content (e.g., social media posts, blog posts) that will drive consumers to a piece of gated content. In other words, the content supporting the campaigns is ungated, and the endpoint where a visitor is converted into a lead is gated (see the figure below where a blog post is linked to an ebook).
Building Topical Relevance
Over the last few chapters, we covered the basics of SEO, how to think about content creation and ads based on consumers’ needs and challenges, how to identify opportunities based on the concrete actions during their journey, and how to respond with ad-hoc marketing activities.
Building topical relevance is part of a longer-term strategy for a firm to position itself and its web properties. It entails breaking down the general needs and challenges that consumers are experiencing into key topics that will orient our marketing efforts.
For example, if we wanted to build topical relevance on the topic of ‘content marketing,’ we would come up with potential searches and areas of interest that users are interested in to create many blog posts, social media posts, and pieces of gated content on this topic (see the figure below).
To start building a web presence around certain key topics of interest to your consumers, the first step is to identify which topic you are interested in. A first way to do so is customer-driven, by looking at the type of searches consumers are doing. To do so, firms can use tools such as Google Trends or Search Reports in Google Analytics. They can also survey and interview consumers to better understand what is relevant for them, what are their key needs and challenges, and how they turn to the Web to help address these. A second way to do so is through keyword analysis, as we discussed in chapter 3.
Once a topic has been identified (e.g., content marketing), firms will plan their strategy to slowly build their relevance on that topic. Viewed from this perspective, each piece of content (e.g., a blog post) aims at addressing one targeted search. For example, a blog post positioned on the keywords ‘better writing skills’ will answer a piece of the puzzle of content marketing, how to better one’s writing skills. These might be hundreds of sub-topics associated with a specific topic, opening opportunities for content marketing efforts. A topic is thus a general domain that can tie together many specific searches (as exemplified in the figure above).
Over time, building topical relevance will help a website, as a whole, to show up higher on SERPs. This is because it helps address the main factors on which websites are ranked that we covered in chapter 3: It facilitates the creation of cross-links, will help consumers spend more time on a website, will boost page views, and so on. Consumers might enter on how to better their writing skills, for example, and once they are done reading their blog post, see a recommended post on how to generate blog posts ideas, increasing page views and time spent on site.
RACE and Content Marketing
As we have briefly covered, the RACE framework helps our content strategy by informing the type of content we should be creating for each stage of the framework.
Content marketing professionals typically talks about three types of content: top of the funnel (ToFu) content, middle of the funnel (MoFu) content, and bottom of the funnel (BoFu) content. The funnel represents the purchase funnel, or what we have referred to as the consumer journey (awareness, active-evaluation, purchase, post-purchase) so far.
We can easily map each stage of the funnel with RACE stages and stages of the consumer journey:
• ToFu content activities target the awareness stage of the consumer journey and align with the Reach stage
At the awareness stage, consumers are experiencing and expressing symptoms of a need, problem, or challenge they are facing. The content aims at educating them. The need, problem, or challenge that consumers are experiencing can vary in abstractness. For example, they might have low back pain and are looking for a solution. Or they might need a pair of new running shoes. Content should thus address problems in ways that match what consumers are experiencing.
• MoFu content activities target the active-evaluation stage of the consumer journey and align with the Act stage
At the active-evaluation stage, consumers are looking to evaluate solutions. Content should thus speak directly to the solutions that consumers can use to solve their needs, problem, or challenge. The goal of the content is to facilitate active-evaluation and to serve as a bridge from education to your product or service. It is still important to represent the customer and limit persuasion efforts, but to balance this with slowly warming consumers to what you have to offer.
• BoFu content activities target the purchase stage and align with the Convert stage
At the convert stage, consumers are looking to buy a product. Content at this stage should help consumers evaluate your product or service to persuade them to buy what you are offering over the offer of competitors.
The figure below exemplifies searches from consumers throughout the funnel.
Content from a firm (e.g., Bissell) to match these searches could be.
1. ToFu: Everything you need to know about getting dog hair out of carpets and furniture
2. MoFu: Why vacuums are superior to sticky rolls
3. BoFu: Save on the Price of Bissell Dog Hair Eraser
Top of the Funnel
At the top of the funnel, content should educate and entertain consumers based on the need, problem, or challenge they are facing. If people don’t know they need your product or understand what their problem is, it is crucial to educate them on it!
The type of content that typically helps here (although this is not a comprehensive nor an exclusive list) includes blog posts, webinars, pillar pages, and longer-form content, comprehensive guides, videos, and infographics.
Middle of the Funnel
In the middle of the funnel, content should help consumers evaluate their options and facilitate evaluation by educating and entertaining them on possible solutions. The firm objective at this stage is to start generating leads.
The type of content that typically helps here (although this is not a comprehensive nor an exclusive list) includes lists (e.g., top 10 solutions for lower back pain), case studies, how-to, descriptions of multiple products (aimed at educating, not selling), quizzes to help consumers discover solutions, and other types of templates to help consumers identify solutions for their problem.
Bottom of the Funnel
At the bottom of the funnel, content should inform and persuade consumers about your product or service. The firm objective at this stage is to convert leads into customers.
The type of content that typically helps here (although this is not a comprehensive nor an exclusive list) includes testimonials and reviews, product offers, trials, coupons, samples, demos, free assessment or consultation, persuasive product descriptions, and sales-oriented webinars.
Beyond the Purchase Funnel
Content strategy should not stop at the purchase stage. Beyond the purchase funnel, firms should strive to create content that helps retain and engage customers. This could entail, for example, motivating social sharing, testimonials, and reviews, and encouraging loyalty through online customer events.
The type of content that typically helps here (although this is not a comprehensive nor an exclusive list) includes customer support and help documentation, contests, and giveaways based on product use, community forums, and strategies to encourage user-generated content. We will cover strategies to use at this stage in the last chapter of this textbook.
Pillar Pages
A pillar page is a comprehensive resource page that covers a core topic in-depth and links to high-quality content created for the supporting subtopics.
It helps achieve two important digital marketing objectives:
• Building topical relevance and
• Support content strategy RACE objectives, such as
• Attract visitors
• Convert visitors to leads
• Convert leads to customers
Pillar pages come in all shapes and forms. The Content Marketing Institute, for example, differentiate between 10x content pillars, resource pillars, and service pillars. Let’s see a few examples of pillar pages on a wide variety of topics:
What do these pages have in common?
Typically, they are very, very long. They tend to use multiple types of media (e.g., text, images, videos). They are well-integrated within their domain and have many cross-links. They answer many problems around a topic of interest for consumers. As a result, they help boost SEO efforts. Remember the main factors on which websites are ranked?
• Direct visits
• Time on site
• Pages per session
• Bounce rate
• Referring domains, backlinks, follow-backlinks, and referring IPs
• Content length
• Keywords in body, density, in title, and meta
• Video on page
Pillar pages can help with all of these factors! By being long and answering many problems and needs associated with a single topic, they are more likely than ‘normal’ pages to become references on these topics. This should allow the reduction of bounce rate since consumers are almost certain to find what they are looking for! They are also more likely to increase time on site because they give so many resources for consumers to go through. By allowing many cross-links, they can favor many pages per session. They allow writing extensive content with many keywords and multiple types of media.
The main idea behind the creation of a pillar page is to identify a core topic of interest for consumers and break down this topic into topic clusters (or sub-topics).
Take the stronglifts ‘squat’ pillar page, for example. The core topic of interest is ‘how-to squat,’ an often asked question by people interesting in exercising, bodybuilding, powerlifting, and the likes.
When you enter this pillar page, you find a short summary on the squat and a few cross-links to guide consumers to other pages on the website, favoring higher page views. The summary is also useful because it can be used to hook people in, encouraging them to read on. The page then continues with several topic clusters organized around ‘how-to squat:’
1. Introduction
2. Safety
3. Technique
4. Common issues
5. Common squat pains
6. Stretches
7. Equipment
8. Variations
9. FAQs
Each of these sub-topics effectively represent sub-sections of the pillar page and address different needs, all grouped into the same pillar page.
A pillar page can thus help build topical relevance because it provides a central and extensive resource on a major topic that can be well-referenced (linked to) by other websites. It helps organize a website content around a core topic. If done well, this problem should be one that a persona or multiple personas care about. Lastly, it helps people easily navigate throughout multiple pieces of content on the same topic on the same webpage, providing great user experience.
This is quite different from a typical content marketing approach that would have favor separate blog posts on all of these different sub-topics and sub-sections of each sub-topic!
Traditional content marketing approach:
Pillar approach:
From Hubspot
Pillar pages can also be used to support lead creation and sales.
A first way to do so is to use pillar pages themselves. For example, a pillar page could include gated content, opt-ins (forms on the pillar page that asks for consumers’ email address), and call to action. Examples of pillar pages that follow such an approach include:
Take Wild We Wander, for example, and the pillar page on ‘how-to DIY a truck camper.’ This page has all of the characteristics of a pillar page. Within it, it redirects consumers to a content asset (a free resource to become a digital nomad) that is a piece of gated content:
Second, pillar pages can also be thought of in a longer-term strategy that includes other pieces of content. It often happens that companies will initially gate a pillar page and use it to generate lead. For example, the two pillar pages we presented so far could have been initially offered as ebooks, offering all information regarding ‘how to squat’ and ‘how to DIY a truck camper.’ The firms could have used these two gated content assets as part of a greater content marketing strategy, breaking down the ebook into smaller digestible pieces. Example of this could include short blog posts (‘3 tips for a better squat,’ ‘3 reasons why squats hurt your knees’), short videos (‘the right squat position’), short social media posts (e.g., statistics, quotes from the ebook), and the likes. Then, once the lead generation campaign is over, the ebook is turned into an ungated pillar page. Visually, this strategy can be represented as follow, where all ‘smaller’ pieces of content link back to the gated ebook to generate leads:
In fact, this is exactly the strategy that Unbounce.com used with their ‘Conversion Centered Design’ ebook. Originally an ebook, the firm used it as a piece of gated content with supporting pieces of ungated content, such as:
1. A blog post highlight the main lines
2. A Slideshare deck explaining the main principles
3. A guest blog post on Hubspot
These ungated pieces of content drove consumers to the ebook. They also supported the launch of the ebook through other pieces of gated content to help further generate leads, such as:
1. webinar about Conversion Centered Design that captured leads for registration (gated)
2. A landing page to watch the webinar recording after the event.
Then, Unbounce used their ebook and transformed it into a pillar page (https://unbounce.com/conversion-centered-design/). It broke down its webinar and made it accessible on Youtube in 6 different videos.
Hence, if a firm plans to create pillar pages, it might be useful to think of how it can first be embedded in a lead generation strategy before being made accessible more freely as a piece of ungated content.
A few tips to strategize to do so include:
• Find core problems of your persona
• Group these problems into core topics
• Build each topic with subtopics
• Identify content ideas for subtopics
• Write an extensive piece of content
• Fragment this piece of content into multiple ones
• Different formats
• Different parts
• Aimed at bringing people to the gate or fostering interactions
• Extend the reach of these parts on owned media and using paid activities
Content Calendar
We conclude this chapter by discussing content calendars. Although pillar pages are a great long-term investment for web referencing and lead creation, most of the day-to-day content activities, whether they be posts on Facebook and Instagram or blog posts, are ad-hoc activities. Also, these are ad-hoc activities, they should still be thought of from a mid-term perspective and integrated in a strategic approach to content marketing. This strategy should think of ways to build topic relevance over time, address many personas and stages in the journey process, and address all objectives of the RACE framework.
A great way to think of how to do so is through a content calendar. A content calendar maps future content creation activities, indicating, for example:
• Who is this content for (personas)?
• Which stage of the journey does this content address?
• What topic is it on?
• What keywords does it cover?
It can also help operationalize content marketing by providing information such as:
• Date when it is supposed to go online
• Author responsible to create the content asset
• Content type
• Channel
• Headline
• Copy
• CTA
Here’s an example of a content calendar:
Creating a content calendar should be done with reflexive intent. A firm should make sure that they are creating content for all stages of the journey, all personas, and all objectives of the RACE framework. By planning a month or two in advance, and clearly mapping the personas, topic, journey stage, and RACE objectives that content addresses, a firm make sure to create distributed efforts that do not privilege personas, stages, or objectives over others!
Exercise \(1\)
Your are a fitness center creating a campaign for people who want to get back into shape
One of the personas you are targeting is Avery:
• Avery is a person living in a major Canadian city center. They are their late 20ies-early 30ies and are in the top 20% in revenues in their city. With increased responsibilities at work and a newborn, exercising had been put aside. For a few years. Avery feels sluggish, lacks energy, and miss having a stronger connection with their body. With age, their body has also started to transform and they started to feel conscious about it. To remediate, they want to get back into exercising weekly. They don’t have much time, and they also don’t know much about working out or the market, for example, where to work out or how to work out.
Using the #fitness hashtag on Instagram, identify 2 exemplars of fitness account
• Out of the 4 exemplars that you have identified in fitness (i.e. the two in the textbook, and the two that you found), find the one that is the most appropriate for Averys
• Then think of a topic that would be important to write about on social media for Avery
• Break down this topic into 3 potential IG posts that you would create
• Try to target each post for a different stage of Averys’ journey
Think of an idea for a gated piece of content that you can transform into a pillar page for your fitness website
• Sketch a short campaign where you support your gated piece of content with three ungated pieces of content
• Explain in a short sentence what each idea is about
• Sketch (map in boxes and arrows) how these three ungated pieces of content relate to the gated piece
• E.g., Where are they hosted? How are they linked together? | textbooks/biz/Marketing/Digital_Marketing_Strategy_(Dolbec)/1.06%3A_Act_-_Creating_Content.txt |
Learning Objectives
• Understand what is a lead, and how to generate, score, and nurture leads.
In this chapter, we cover the basics of lead generation and lead nurturing activities. We define what is a lead and lead stages, present a few ways to generate leads and different types of opt-ins, explain how to score leads, and discuss email marketing.
ACT
InterAct is about encouraging positive interactions on a website and social media. Positive interactions facilitate the generation of leads, which leads to acquiring customers. The two objectives at the Act stage are thus to (1) encourage positive interactions and (2) generate leads. The kind of goals we can set up for consumers have to do with these two objectives. For encouraging positive interactions, we can set up goals such as spending a certain amount of time on our website or viewing a certain number of pages. When consumers achieve these goals, we can assume we are answering this first objective. For generating leads, the kinds of goals we can set up for consumers are to register as a member or sign up for a newsletter. Again, when consumers achieve these goals, we end up achieving our objectives, i.e., acquiring leads. The KPIs to measure these goals would then be time spent on site, page views, number of members and newsletter subscribers (increase quarter-over-quarter), cost per lead, and percentage of visitors converted to leads.
Leads and Lead Generation
The grand majority of visitors to your website, some say up to 96%, will not buy anything. Given all the resources that go into bringing visitors, from writing content to publishing ads, simply trying to get visitors to a website without having a strategy of what to do once they get on there will lead to many missed opportunities.
In order to address this conundrum, digital marketers have turned to lead generation to answer the question: How do we turn a visitor into a potential customer?
Marketo defines lead generation as “the marketing process of stimulating and capturing interest in a product or service for the purpose of developing sales pipeline.” During lead generation, our goal is to gather visitors’ personal information so that we can start to market to them personally in the future and to identify whether or not we want to market to them. Not all visitors that we gather information on is worth marketing to.
A lead is (1) a qualified potential buyer (2) who shows some level of interest in purchasing a firm’s product or service. Note that this definition has two components. First, the visitor who provided their information is a qualified potential buyer. This means that they could eventually purchase our product. Of all visitors on a website, this is often not the case.
Take, for example, this lead generation activity by Ferrari, which is quite common in the automobile industry, a car configurator. During car configuration, visitors are invited to build their own car based on a car model, for example choosing between options, such as interior and exterior colors, engine, wheels, and so on. At the end of the configuration, the visitor is asked to create an account or fill out a short form and provide their email address to receive more information about this model or save the configuration. Doing so indicates to the firm that the consumer is potentially interested in this vehicle.
But are all visitors who build their own Ferrari potential Ferrari customers? Probably not.
Car configurators are probably used by many consumers who either have no interest in buying the car and are doing this for fun or, in the case of Ferrari, who have an interest in buying the car but do not correspond to the Ferrari customer (e.g., they lack the financial resources to buy a Ferrari). These visitors are not qualified. A qualified lead is a lead that has been deemed likely to become a customer. Firms qualify leads through lead scoring, which we are going to discuss a bit further.
Second, the visitor who provide their email address also needs to be interested in becoming a buyer. Since many lead generation activities provide, for example, hard to access information such as market reports of extensive guides on topics, it often happens that visitors will provide their email address without wanting to become a customer. They do so because they want to have access to the gated content or feature of a website. Lead scoring also helps differentiate between these two types of potential leads.
Hence, a lead is a visitor that is interested in a company and that the company is also interested in.
In the process of becoming a customer, a visitor will thus go through different stages, from visitor to lead to qualified lead to customer (an alternative to this model that you might come across is lead, prospect, and opportunity). Two types of qualification exist: marketing qualified lead (MQL) and sales qualified lead (SQL). Marketing qualified leads are viable leads that should be marketed to. In other words, they are visitors who gave a firm their email address that the firm has established could be potential customers. They are visitors that the firm is interested in. A sales qualified lead is a lead that is sales-ready. In other words, it is a lead that is moving close to the purchase stage. This is important because it gives an indication of what kind of marketing activities should be conducted with these leads. As we have seen, we talk differently to consumers who are at the awareness, active-evaluation, or purchase stage. Knowing which is the stage that consumers are in is highly useful to create the right marketing message.
How do You Get Leads?
There exist many, many ways to get leads. Generally speaking, any marketing activity that leads consumers to give a firm a piece of personal information qualifies as a lead generation opportunity. A non-exhaustive list is provided below:
• Content with lead magnet, such as a whitepaper, ebook, checklist, demo, course, presentation, tools, webinars, etc.
• Online contests, giveaways, etc.
• Lead generation on social media, either through dedicated options such as lead generation ads on Facebook or Instagram or by redirecting users to a lead generation landing page
• Combined with traditional marketing initiatives
• Collect emails at trade shows
• URLs or QR on direct mailing campaigns that direct to lead generation landing page
• Collect emails at a showroom
• Opt-ins everywhere: on scroll down, in the footer, or mid-way through blog posts
You can find a few more ideas here and here, and Hubspot lead generation guide here.
Lead generation is typically associated with lead forms. Lead forms are web forms that allow firms to capture consumers’ email addresses and, sometimes, other information. They are a great tool to build a mailing list and when correctly done, help scoring leads. We turn our attention to lead scoring later on in this chapter.
Designing lead forms, and most importantly, how many form fields you decide to use is a balancing act. It is generally argued that consumers take less than 10 seconds to decide whether or not to give their email address to a firm. There is, though, a trade-off between collecting many email addresses and collecting email addresses from qualified leads.
Take the following study from Marketo (see figure below), which found that moving from 5 to 7 to 9 form fields diminished the conversion rate (in this case, the rate of visitors that gave their email address and became a lead) from 13.4% to 12% to 10%, and increased the cost per lead from \$31.24 to \$34.94 to \$41.90. Clearly, choosing how many form fields play an important role in pricing and devising lead generation campaigns. (Note: The cost per lead increases because it costs a certain amount of money to run the ads associated with this lead generation campaign. Hence, the lower the conversion rate, the higher the cost per lead).
Now, if asked “how many form fields should you use as a firm in a lead generation campaign,” it might be tempting to answer “one.” Clearly, the fewer form fields, the more leads! Yet, fewer form fields also preclude us from getting important information about our potential customers. In the case above, the 5 fields form did not get the number of employees of the firm, the industry they are in, the type of CRM system they use, or their job function. These pieces of information are important because not all email addresses are equal. If, for example, a firm specializes in a specific industry and in companies of a specific size (e.g., SMEs in the fashion industry), then collecting these pieces of information might be worth the additional \$3.70 that the lead costs. This is because collecting this information will help qualify leads and will save money in the long run when running a lead nurturing campaign. We discuss this idea in greater detail in lead scoring later in this chapter.
Apart from longer lead generation forms, leads are also often obtained when short opt-in forms are used in concert with ungated content marketing efforts. We see this very often on blogs, for example. See a few examples below:
Scroll-down pop-up opt-in on Zoella.co.uk
Bottom of content opt-in on fastcompany.com
Lead opt-ins exists in many forms: They can be found in the footer of web pages, in the middle of a blog post, at the bottom of a content page, as a welcome gate (a pop-up at the first start of your web browsing experience on a specific site, such as when you get on Neil Patel’s website for the first time), or lightbox pop-up (overlay boxes that pop up) that appear depending on certain actions (such as a specific amount of time spent on a site, when you scroll to a specific section of a page [such as when you scroll all the way down on Zoella’s blog posts], when you enter a specific page, or when you have viewed a specific number of pages on a website).
Opt-ins can be characterized based on two dimensions: whether consumers explicitly know that giving their email address will enter them in lead nurturing campaigns or not, and whether the opt-in in confirmed by the firm once done or not, as follows (from Marketo’s Definitive Guide to Email Marketing):
• Implicit opt-in: “When a website visitor fills out a form on your site such as to download a content asset or register for a webinar. Your website’s privacy policy must state that performing this action automatically opts the user into email marketing. This option is low effort, but also has the lowest level of engagement.”
• Explicit opt-in: They “require the user to voluntarily sign up and give their persona information. Often this takes the form of a registration box or page that reads something like “I want to receive news and updates.”
• Single opt-in: “When a new subscriber enters his email address and possibly other information (demographics, preferences, etc.). He is immediately subscribed and will automatically receive the next email in your nurture campaign.”
• Double opt-in: “These occur when a new subscriber enters his email address and, depending on your needs, other information and content preferences. A post-subscribe thank you page may alert him to look for an email conformation. Once he receives that email, he’ll need to click on a link or button to confirm.”
Increasingly, transparency has become the name of the game when practicing online marketing, and an explicit, double opt-in is often seen as a best practice. This is because consumers are more likely to open emails that they receive when they clearly know that they had signed up to receive them. Additional, double opt-ins ensure that consumers want to receive an email and that the email address they give is valid.
Lead Scoring
Lead scoring is an approach to rank leads based on their value to a firm, which supports marketing and sales activities. It helps qualify leads and indicate whether efforts should be devoted to market to a lead, as well as the movement of the lead throughout their journey and, potentially, if and when they reach the purchase stage.
Many approaches exist to score leads, such as:
• BANT: Budget, Authority, Need, Timeline
• MEDDIC: Metrics, Economic buyer, Decision criteria, Decision process, Identify pain, Champion
• CHAMP: Challenges, Authority, Money, Priority
• GPCTBA/C&I: Goals, Plans, Challenges, Timeline, Budget, Authority, Negative Consequences and Positive Implications
• ANUM: Authority, Need, Urgency, Money
• FAINT: Funds, Authority, Interest, Need, Timing
Lead scoring approaches use data collected by the firm (e.g., using forms) as well as behavioral data collected during the interactions of leads with the firm (e.g., whether or not the lead opens an email, requests a call, or views a product). We will group these types of data under ‘observable or explicit characteristics’ and ‘behaviors or implicit characteristics.’ Either type of data helps the firm know whether a consumer is interested in you and whether you should devote efforts marketing to them.
Observable or explicit characteristics represent data that a firm can readily collect by asking consumers or observing them (e.g., on their LinkedIn profile). This data is typically collected by asking consumers, for example, by using a form or during a phone call or looking them up online. Examples of such characteristics include:
• Job title
• Firm size
• Personal or firm revenue
• Company size
Marketo offers more than 50 observable/explicit characteristics in their lead scoring guide (p. 18)
Behavioral or implicit characteristics represent data acquire through the tracking of online activities to measure the interest of a lead in a firm’s product or service. This data is typically collected when a lead visits the firm’s website, interacts with its emails, and respond to offers. Examples of such data points include:
• Clicking on a link in an email
• Viewing a product page
• Watching a video demoing a product
• Viewing multiple pages during a session
Marketo offers more than 200 behavioral/implicit characteristics in their lead scoring guide (p. 19-20).
Lead scoring entails first identifying the data that a firm believes is relevant to score leads. This process will greatly vary depending on the firm. Questions such as: who is responsible for making purchases, does my consumers need a certain revenue to buy my product, or what kind of actions can make consumers take that show interest in my product can help identify how to score leads. Once the right characteristics have been identified, firms will typically assign a weight to them. For example, having the right job title might be ‘worth’ less than viewing a product demo or requesting a sales call. It is by assigning points to each characteristic that a firm can establish whether a lead is qualified or not and how a lead is moving in their journey. Leads reading a certain score can be identified as marketing qualified, while leads that reach later a higher score can be identified as sales qualified.
An example of a lead scoring framework that has been heavily used historically by firms throughout the world is the BANT (Budget-Authority-Need-Timeline) framework. We use this framework to exemplify how to perform lead scoring when focusing on observable or explicit characteristics. For example, to create a lead score, a firm could create forms or collect data during calls with potential customers and ask questions such as:
• Budget: What is the budget of the potential customer? How does it align with my product or service?
• Questions to ask the lead:
• Do you have a budget set aside for this purchase? What is it?
• Is this an important enough priority to allocate funds toward?
• What other initiatives are you spending money on?
• Does seasonality affect your funding?
• Authority: Who makes the decision to purchase?
• Questions to ask the lead:
• Whose budget does this purchase come out of?
• Who else will be involved in the purchasing decision?
• How have you made purchasing decisions for products similar to ours in the past?
• What objections to this purchase do you anticipate encountering? How do you think we can best handle them?
• Need: What is the need of the lead? Can my product or service answer this need?
• Questions to ask the lead:
• What challenges are you struggling with?
• What’s the source of that pain, and why do you feel it’s worth spending time on?
• Why hasn’t it been addressed before?
• What do you think could solve this problem? Why?
• Timeline: What is the purchase timeline of the lead? How does this align with my sales process?
• How quickly do you need to solve your problem?
• What else is a priority for you?
• Are you evaluating any other similar products or services?
• Do you have the capacity to implement this product right now?
Last, it is important to emphasize the role of progressive profiling, the idea that you should collect information with potential customers throughout their interactions with your firm. As we saw earlier, you cannot ask a lot from visitors when they fill out a form without hindering the conversion of visitors to leads. How do you then collect this information? By slowly collecting bits and pieces over time. This can be done, for example, through the use of progressive profiling technologyand dynamic forms, where a firm sets up ahead of time many forms that iteratively collect information based on what a consumer will have provided on a previous form. Put differently, if consumers give their name and email in the first form, the second form will move to ask pieces of information that have yet to be obtained. Another approach is to combine explicit and implicit scoring and score a lead over time as they interact with a firm’s website.
Lead Nurturing
Once a firm has acquired leads and qualified them (i.e., marketing qualified leads), it enters in a process of lead nurturing. Lead nurturing represents the “purposeful process of engaging a defined target group by providing relevant information at each stage of the buyer’s journey, positioning your company as the best (and safest) choice to enable them to achieve their objectives” (Hubspot).
Let’s examine some of the key aspects of this definition. First, lead nurturing is a purposeful process. In this chapter and the next, we are going to emphasize how this intent translates in always having a clear idea of ‘what comes next’ for the consumer. What happens when you receive an email address from a consumer? What comes next? What email should you send them? What should be in this email? What action should they be asked to perform then? What should the lead be achieving there? This ties closely to the idea of having clearly defined conversion paths. When doing lead nurturing, the firm is interacting with the lead, but it has a clear script in mind. It knows the steps the lead should go through so that they are converted into customers.
Second, lead nurturing looks at engaging a defined target group. That has a few implications. First, a firm should have clearly defined personas that they want to engage. Second, lead nurturing campaigns are persona-specific. They are persona specific because what might make a persona tick will probably vary between personas. They are also specific because of the third aspect of the definition.
Third, lead nurturing aims at providing relevant information at each stage of the buyer’s journey. The only way to achieve this, i.e., creating relevant content for leads that varies depending on the stage they are at in their journey, is to have a clear persona and a clear understanding of their journey.
Last, firms practice lead nurturing in order to sell products. Yet, as we have seen over the course of the chapters, this should ideally come at the end of the lead nurturing process, i.e., when the firm believes that the lead has reached the purchase stage.
Four main activities relate to lead nurturing:
• Get permission to market to consumers, or what we achieve during lead generation
• Educate and entertain leads with relevant information that aligns with their stage in their journey
• Monitor the progress of leads through lead scoring
• Promote your product once the lead has reached the purchase stage
On average, consumers who provided you with their email addresses receive ten marketing touches from the time they enter the top of the sales funnel until they become a customer.
To facilitate segmentation for lead nurturing activities, firms typically create extensive email marketing lists. These lists should provide the information necessary to create campaigns that correctly address the needs, challenges, and motivations of consumers and the stage of the journey they are. Useful information to include in such lists could be:
• Socio-demographic information, which facilitates targeting activities
• Acquisition date, which helps to know whether the lead aligns with how long it typically takes a firm to sell a product to that specific persona
• Frequency: How often the lead has indicated they would like to receive emails
• Lead score & assumed journey stage: This should help tailor which email to send to which lead depending on their stage in the journey
• How/Where did you acquire them: This is helpful to continue the conversation a firm started with a consumer. For example, let’s assume that a consumer signed up to an email list from a blog post or a pillar page on the topic of ‘back pain’ from the website of a shoe manufacturer specialized in back pain. Ideally, this consumer should receive information that is different from another consumer who signed up after clicking a search ad that offered ‘comfortable shoes.’ The more information a firm provides to leads that caters well to their needs, motivations, and challenges, the more likely they are to engage in a conversation and ultimately buy a product.
• Persona: This, similar to above, helps tailor the message
The main idea here is that one size does not fit all. Lead nurturing campaigns should be clearly tailored to personas and the stages they are in.
To analyze marketing campaigns, metrics exist such as:
• Bounce rate: The number of email addresses that had a bounce back from the ISPs
• Open rate: The percentage of emails opened out of the total number of emails sent.
• Clickthrough rate: The number of subscribers that have clicked on at least one link in your email
• Click to open rate percentage (CTO): the percentage of recipients who opened the email message and also clicked on any link in the email message.
• Unsubscribe rate: The percentage of subscribers who opted out from your list (Unsubscribed number/Emails delivered x 100 = Unsubscribed rate %)
These metrics should help gauge the level of engagement of leads with our email marketing campaigns, and where there might be issues. For example, if our open rate is great but our clickthrough rate is abysmal, this probably indicates that there is something wrong with the way the email is crafted, or that the content does not align with the subject title of the email.
What Happens Once You Get a Lead?
Ideally, getting an email address should start a sequence of pre-planned emails and other marketing activities (such as ad retargeting, which we will cover in the next chapter). This sequence of pre-planned emails should aim at transforming a marketing qualified lead to a sales qualified lead (MQL to SQL), using targeted content to move the lead from informing them about their problem to helping them evaluate their solution to explain why a firm’s product is the best solution.
The first email in an email marketing campaign should be an onboarding email. An onboarding email should guide leads and educate them about what is about to come. They should help make a lead takes the next step in the series of pre-planned activities a firm has sequenced. Often, onboarding emails will tell leads what to expect, such as the content of future emails and how often they will be sent.
Let’s take a look at Instagram’s onboarding email.
First, Instagram asks whether we indeed create an account with them, i.e., they practice double opt-in.
Second, they push you to take the next step in order to maximize your engagement on their platform. In the case of social media networks, a threshold effect has been found to maximize engagement, where following a minimum number of people greatly boosts the chances of users coming back. It thus makes sense for this to be the first action that Instagram proposes users to engage in.
Last, Instagram offers users to start using the product, which is also quite well-aligned with what we would expect people to want to do once they have signed up for an Instagram account.
Here is another example, this time from a lead obtained from a content opt-in newsletter subscriber who was reading a blog article on Christmas decorations on the Crate & Barrel blog. Importantly, we can see how Crate & Barrel continues the conversation that started on a Christmas-related blog post by offering more information on Christmas decorations.
First, the onboarding email congratulates the lead for signing up for the newsletter and explains what the lead should be receiving in the future. Then, the first action offered to consumers is to explore the new articles relating to Christmas decorations. The email then breaks down product categories that a user might be interested in.
The onboarding email should be the first email in a sequence of emails meant to convert leads to customers, which should ideally follow consumers in their journey (i.e., moving from problem to solution to product). This email sequence is often referred to as a drip email sequence or drip email campaign. Here is how Hubspot explains a email drip campaign:
An email drip campaign is a form of automated sales outreach. It’s comprised of a series of emails automatically sent to a specific audience after they take a specific action. For example, if a lead downloads a whitepaper on recruiting best practices, they might be placed in a drip campaign sharing relevant recruiting content. The final email might include a CTA to request a demo for your recruiting software.
This is (very simply) represented in the figure below. The exact steps and content would depend on the stage at which a consumer signed up. For example, were they reading an awareness post or reading about potential solutions for their problem?
We can see how each email serves a dedicated function. The first email is an onboarding email explaining the value of signing up for the newsletter. The following email could be a problem or solution-focused email depending on where the consumer is in their journey (Since we are at the lead generation stage, generally the consumer should be further down the funnel, e.g., weighting their options). The third email is a promotional product email to conclude a sale, the fourth email is a reminder (if the sale hasn’t been concluded), and the last email makes sure that the consumer still wants to receive emails (since the sale still hasn’t been concluded).
A simplified application of this sequence is provided by dripscripts below:
• Email 1: Bryan, All I can say is THANK YOU! (Thank you email)
• Email 2: Content w/ P.S. Mention of offer (Content email)
• Email 3: Did you get your Cup of Joe? (Promo email)
• Email 4: 1 DAY LEFT) Does anyone else have these questions? (Q&A persuasion email)
• Email 5: [Disappears @ Midnight] 80% off my new Self Publishing Course (…plus 5 free
• bonuses) (Promo email)
• Email 6: LAST CALL – Self-Publishing Training Bundle Closing in 4 hours (Closing email)
Real-life, though, is not as straightforward. Based on what we learned in lead scoring, we could also leverage here the idea of behavioral scoring and create decision trees to help strengthen our chances to convert leads. Did they open the email? Click on the link we provided? Read the blog post? Emails and other marketing activities should be informed by what the consumer has done with the last activity they interacted with. Marketing automation has helped create more complex marketing campaigns based on how a user will have interacted with a previous marketing activity. Here’s a simple example from Jacobs Levenger / Smart Insights:
A Few Tips for Writing Emails
The information should be well-hierarchized, with the main message and the call-to-action associated with the goal you want consumers to accomplish should be located above the fold (i.e., before any scrolling happens). Emails should be short, with little to no scrolling. The subject line should include a call to action and be transparent about the content of the email. Emails aiming at conversion with a clear goal for consumers after the click can benefit from being associated with a landing page (i.e., the click leads the user to a landing page), and other landing pages tips, such as maintaining a low attention-ration, can be useful to create highly-converting emails. Mailchimp provides its top tips and advice as well as design ideas in their email design guide here.
Exercise \(1\)
You are Paperlike, a company that specializes in an iPad screen protector that replicates the paper experience
One of the personas you are targeting is Alister and Alice:
• A&As are illustrators eagerly awaiting their new iPad Air 2020, with the Pencil 2. They intend to use the Procreate app to start doing digital drawings and designs. They are new to illustrating in a digital environment and they have never used a device like this to draw before. They are reticent to move away from pen and paper, but believe that this might help move their work online more easily.
Scoring leads
• What are two different marketing activities you could do to gather leads?
• You are creating a form associated with a piece of gated content. How would you score potential leads?
• What would be the first 3 questions you would ask?
• What would be an additional 2 questions?
• What could be a few ways to score leads behaviorally (i.e., based on implicit characteristics)?
Email campaigns
You have created leads with A&As using a bottom-of-content opt-in. The blog post was problem-oriented. The title of the post was ‘Becoming a digital artist,’ and it addresses some of the problems illustrators face when moving to a digital environment.
• •Think a series of 5 emails
• What will be the general idea of each email?
• How can you score the lead behaviorally?
• How do you nurture the lead towards a sale? | textbooks/biz/Marketing/Digital_Marketing_Strategy_(Dolbec)/1.07%3A_Act_-_Lead_Generation_and_Lead_Nurturing.txt |
Learning Objectives
• Understand what conversion rate optimization is and some approaches to optimize webpages and websites.
In this chapter, we cover what conversion is and how to optimize web pages to convert better. To do so, we discuss conversion rate optimization, how to identify what to optimize when people move one web page to another, some conversion-centered principles, A/B testing, and retargeting.
Convert
The convert stage is focused on increasing conversions to maximize sales. It emphasizes both maximizing conversions across the journey of consumers and improving conversion from lead to customer. Since our main objective is to increase conversions, any indicator associated with measuring and improving conversion can serve as a KPI here, depending on what we exactly are trying to achieve. Examples of KPIs include: Sales, % conversion lead to sale, average order, cost per conversion (per channel), average conversion time, abandoned carts, and sales per source.
Conversion Rate Optimization
Conversion rate optimization is the process of improving webpages and websites to increase conversions. A conversion refers to a user achieving a goal by taking a desired action. Conversions can therefore happen on any webpage of a website that has a goal that a firm wants users to achieve.
Conversion rate is the percentage of people that visit a page and achieve a desired goal or action. It is calculated as follows:
Although we might tend to think of conversion as a consumer completing a purchase, many other goals can be set up for them, such as submitting a form, clicking on a link, reaching a particular page, spending an amount of time on a website, or viewing a certain number of pages on a website. A distinction tends to be made between goals that lead consumers to achieve certain critical actions set up by a firm and goals that consumers complete in their journey to do so. Optimizely talks about common and ultimate goals. Google discusses micro and macro conversions.
Conversion rate optimization is important because it helps firms improve the number of users who might achieve specific goals. It can lead to a higher number of leads, lower acquisition costs, and increased revenue, for example. It is also usually cheaper to convert more visitors than to attract more visitors, making conversion rate optimization more cost-effective to improve a business.
A useful way to think about micro and macro goals or conversions is to ask the question: What are the little actions along their journey that consumers need to take (micro goal/conversion) in order for them to achieve what I ultimately want them to do (macro goal/conversion)?
These can vary depending on the type of website that a firm is running. For e-commerce websites, purchases are the main indicator of whether the site is performing well. Because social media websites mostly make revenue based on ads and by making sure that users are participating and returning, time spent on site and engagement-related goals might be more important. News websites might have a mix of both. Thus, goals for visitors vary depending on the type of website and the business model of a firm.
Since conversions are calculated based on whether users achieve a goal or not, the first question to ask, then, to practice conversion rate optimization is: what are the goals I want users to achieve on my website? What are the goals users should achieve on specific webpages to do so? Many such goals can be achieved, and as a result, conversion rate optimization might touch many elements of websites, such as forms, carts, and content on webpages. Other types of online properties, such as apps and emails, can also be optimized. Last, conversion paths can be optimized by identifying whether there are movements between parts of a path (e.g., moving from an ad to a landing page or from a landing page to a cart) that seem to be hindered.
Understanding What to Optimize
To take to manage optimization, firms should first examine the general path of a specific persona as they move from visitor to lead to customer. This gives an overview of the strategic picture of our overall conversion efforts. Trew Marketing provides us with an abstract funnel below:
When we look at a the journey of consumers this way, we see how, out of all of the visits that we receive on our website, we convert only a percentage to leads. Then, out of all of these leads, only a percentage will be marketing qualified. We then market to these leads and engage in lead nurturing, and only a percentage will move forward in their journey and become sales qualified. Lastly, from these sales qualified leads, only a percentage will become our customers. Each of these moments, where a person moves from one stage to another, might need our attention. Is our conversion rate from visitor to lead good? What about our conversion rate from sales qualified lead to customer?
Looking at the performance of a firm throughout its efforts associated with the consumer journey and what happens between the difference stages a consumer goes through (i.e., visitor, lead, customer, engaged customer) is a good first step to identify exactly where a firm should deploy optimization efforts.
Once a firm understands what steps in the journey seem to be a bottleneck to acquiring customers, it can concentrate on optimizing the specific elements of that step (e.g., a landing page, a shopping cart, a product page). Using software such as Google Analytics, firms can set up steps for users to achieve on specific pages and measure whether users are going through these steps. For each goal, firms can link a series of steps to create conversion funnels (here is an example for cart abandonment). An example of a funnel for the goal of buying a product could be:
Home page > [Step: Click on shop now] > Product categories page > [Step: Click on a category] > Specific product category > [Step: Click on a product] > Product page > [Step: Click ‘buy now’] > Check-out page > [Step: Fill out form] > [Step: Buy product]
Analytics solutions then give output that shows the percentage of people that achieve each step. For example, Google’s conversion funnel looks like this (from Neil Patel):
As Patel indicates in this figure, the information provided helps identify potential areas ripe for optimization. For example, only 54% of visitors to the tour catalog complete the first goal and move to the tour description, which in this funnel seems to be the place where the firm is ‘losing’ most of its potential customers. This seems like a good place to start conversion optimization efforts.
A/B Testing
One of the main tools in the arsenal of conversion optimization is A/B testing. A/B tests:
“consist of a randomized experiment with two variants, A and B. It includes the application of statistical hypothesis testing or “two-sample hypothesis testing” as used in the field of statistics. A/B testing is a way to compare two versions of a single variable, typically by testing a subject’s response to variant A against variant B, and determining which of the two variants is more effective” (Wikipedia).
In plain English language, an A/B test compares two versions of the same webpage where one element differs (e.g., a different call-to-action, or a different background image, or a different heading). Using software solutions, half the traffic to this webpage over a specific period of time is sent on version A and the other half of the traffic is sent on version B. Then, the performance of both pages on whatever goal consumers were supposed to achieve on this page is compared.
Let’s take the following landing page, for example. The signup rate is lower than expected, and the firm wants to test different elements. Their first hypothesis is that the headline is not convincing enough. They thus decide to test a different headline with a clearer call-to-action:
They test both pages over a period of a week. After the week ends, they compare version A and version B and finds out that version B performed better. They thus keep version B and move on to either test other elements of the landing page.
Optimizing through A/B testing typically leads to marginal gains, meaning that it is rare to see a massive difference between two versions. But, over time, these marginal gains can add up to important differences. Let’s, for example, compare a website that does not do any A/B testing on a landing page to one that does A/B testing every week and make small gains, improving their conversion rate a factor of one percent a week (e.g., moving from 8% to 8.08% in the first week). The second website, at the end of the year, will have a page that performs 1.39% better. At the end of the second year, 2.97%. At the end of the third year, 4.76%. While the first landing page still converts, let’s say, 10% of visitors, the second landing page now converted 14.76%. If the improvements are by a factor of 2% per week, this difference moves to 21.77%. Like compound interests, small differences add up to large differences over time:
Anything can be A/B tested. If you want more information on how A/B tests can be used in practice, I highly encourage you to read one of the following three cases from Optimizely:
• – How Secret Escapes A/B tested a mandatory signup for an app
• – How Sony Vaio A/B tested a banner ad and a cart
• – How ComScore tested social proofing (testimonials on product pages) (note: ComScore used multi-variate testing rather than an A/B test by testing three variations of their page)
Conversion-Centered Principles
We will next cover principles for conversion-centered design proposed by Unbounce. The main idea behind these principles is to help create highly converting webpages by concentrating on key design ideas that have less to do with creating aesthetically pleasing websites and more with creating websites that help marketers achieve their objectives.
The principles are:
1. Create focus: Design pages for a single goal, minimize attention ratio
2. Draw attention: Use design tips such as color, directional cues, and white space to direct visitors’ attention
3. Build structure for clarity: Use visual/information hierarchy to facilitate rapid reading
4. Stay consistent: Match your ads with your landing page through design and message matches
5. Build trust: Using testimonials and social proofing to create trustworthy pages
6. Congruence: Align all elements of a webpage towards achieving its goal
7. Think continuity: Always know what the next step is
For example, let’s apply these principles to the optimization of a landing page:
1. Does the page have one goal and one associated link/call-to-action?
2. Am I using visuals to clearly indicate what users should do?
3. If I scan the page quickly, is it clear and obvious what I should be doing?
4. Are my ad and page visually and rhetorically aligned?
5. Would I believe this page is trustworthy if it was a competitor’s page?
6. Do all elements work together towards helping visitors achieve the page’s goal?
7. Is it clear what users should be doing once they are done with completing the goal on this page?
Let’s see each principle in-depth.
Create Focus
Although we think of choice as a great thing, more options are associated with a breadth of negative consequences. According to leading psychologist Barry Schwartz, offering more choices make people less likely to pick an option and more likely to be dissatisfied with the option they picked (TED Talk). Think of the last time you tried to pick a Netflix movie, for example. How long did it take you to choose a movie? How long would it have taken you if you only had two options? On web pages, more choices also mean more options offered to visitors, and more chances that they will not do what they should be doing on a certain page.
For this reason, the first principle asks to create focus on your web pages. On landing pages, we saw that the lower the attention ratio (the ratio between goals and links on a page), the higher the conversion rate. In 2013, Unbounce analyzed more than 20 000 lead generation landing pages and found the following relationship for attention ratio (see the figure below). Clearly, the more links on a lead generation landing page, the less likely a firm is to create a lead. Thus, to create focus on landing pages, firms should focus on a 1 to 1 attention ratio. In order to do this, landing pages should aim at making visitors accomplish one and one goal only.
How does focus translate on other pages? Often, this is achieved by drawing people’s attention to the goal they are the more likely wanting to accomplish by positioning this goal above the fold on a firm’s page. Concretely, this often translates on having only one call-to-action above the fold, where the call-to-action is associated with the goal that consumers should be achieving.
Let’s see a few examples of top websites in three domains: Optimizely (b2b), Mint and Discord (b2c-app), and retailers.
Optimizely offers visitors a personalized option depending on their role. Engineers are asked to create a free account, product managers are invited to watch a demo, marketers can try a visual editor, data scientists are offered a white paper, and team leaders are guided to read a guide to experimentation. In short, what Optimizely has done is (1) identify the main goal that each persona is likely to want to accomplish when going on the firm’s website and (2) put this goal front-and-center.
Discord and Mint employ the same tactic: They offer visitors one option above the fold, that is, to use or sign up for their product. Below the fold, the strategy of both websites is also the same. They expand on the benefits of their products, what users should expect when they sign up, provide social proofing, and conclude this sales pitch with, again, an option to sign up or use the product. This is a typically home page design strategy for firms that sell one or a few products, such as Paperlike, which we discussed in our exercise for the last chapter.
Altitude-Sports, an online retailer, employs a strategy typical for this type of website: They offer the visitor to move to shop to a section of the website (see also FARFETCH). There are different approaches to doing this. Mr. Porter invites consumers to different product categories that align with the season, such as rain jackets for Fall, as well as a link to new items. END Clothing pursues a strategy typical of the niche menswear market and invites consumers to register to drops. An alternative for retailers that have content-heavy websites is to drive visitors to content articles (SSENSE follows this strategy), probably in a bid to become a privileged source of information for high fashion and turn readers into customers.
Importantly, for retailers and other types of websites, the number of links that visitors can click above the fold is limited. In all these examples, visitors are offered a maximum of three options above the fold (not including the menu).
Draw Attention
Once a firm has identified what goal visitors are supposed to achieve, it can use visual elements to draw the attention of visitors to elements of the website that should lead them to achieve this goal. A few visual principles can help us here (images from Unbounce):
• Encapsulation: Practice encapsulation by bounding an element you want to draw attention to in a box or a figure. A typical example of encapsulation is the introduction sequence of old James Bond movies, where the gun barrel draws our focus to James Bond. On a webpage, this can be done, for example, by putting an element that visitors should focus on in a box. See the following two figures for examples:
• Contrast and color: They similarly draw the attention of the visitors to the contrasting and colorful design elements, like a button, a specific sentence, a title, or a form. Many sites now help with color theory and finding the best contrasting colors, such as Coolors.
• Directional cues serve two purposes. First, they help direct visitors’ attention to the elements that are pointed to. Second, they help create a reading pattern for your users to follow (reading patterns should also be supported by the rest of your website structure, i.e., how your images and text are positioned, which is beyond the scope of this course).
• Lastly, white space is also a design tool that is useful to draw the attention of visitors to specific webpage elements, as exemplified below:
Build Structure for Clarity
Building structure for clarity is all about matching sure the message of a page gets across clearly and quickly. To do so, it is useful to follow basic principles of information and visual hierarchy, where the more important the information, the better positioned, bigger, brighter, more colorful it is on the page (see figure below).
Follow the principle of Sullivan (the “father of skyscrapers”): Form follows function. Gone are the days when we designed webpages for purely aesthetic reasons. Webpages now have clear goals for visitors to achieve. Our objective as digital marketers is to make sure consumers achieve these goals. Design should support the achievement of goals rather than serve solely aesthetic purposes (i.e., designing a pretty website is not something we should solely strive for).
A useful, quick test to see if a page achieves a clear structure is the 5-seconds test. From 5secondstest.com:
Five second tests are a method of user research that helps you measure what information users take away and what impression they get within the first five seconds of viewing a design. They’re commonly used to test whether web pages are effectively communicating their intended message.”
Stay Consistent
By consistency, we are talking about how all the elements of a campaign work together. Ideally, these elements should match. A few questions to answers that can help to do so:
• What was the search that the consumer did that lead them to see my ad or search result?
• Is my ad or search result well-aligned to answer that search?
• Do I create expectations with my page title and description, or headline and description that I thoroughly answer on the page?
• Is this information repeated on the page that they arrive on?
These ideas are expressed in the figure below:
Message and Design Matching
Ensuring consistency can be supported by practicing message and design matching.
Message matching entails repeating the copy or phrasing of your ad or search page result in the web page where users land. This ensures that the user knows that the page they ended up on will answer their query. We are kind of lazy and stupid when it comes to navigating and looking for information online. The easier we can the lives of consumers, the more likely they are to convert.
Take the following example, where the first image doesn’t practice message match and the second does.
Does not practice message match because the search ad headline differs from the landing page headline
In contrast, the ad and landing page here are clearly aligned:
A similar idea has to do with matching the design of an ad and the page on which users land, or design matching. Here, we want to repeat the visual elements of the ad on the page. This can be done, for example, by repeating the visuals, colors, and structure of the ad.
Take the following example, where the first image doesn’t practice design match and the second does.
The following page does not repeat the elements of the ad (and it also does not repeat the copy!)
In comparison, here the ad and landing page are clearly aligned:
Build Trust
At an age where fake news is rampant, almost half of Amazon reviews are unreliable (AdAge), and when anybody, anywhere can create an online shop, instilling trust is a key component to make sales. This is especially true for smaller brands that consumers might not have heard of. Some website elements can help us build trust, such as:
• Testimonials and reviews
• Client logos
• Numbers, such as number of clients, downloads, or sales
• Awards and accolades
• Media mentions
Most of these elements are considered social proofs. Originally, social proof relates to the idea that we copy others, especially in situations of uncertainty (fun fact, organizations do the same thing, a concept called mimetic isomorphism). Online, this translates into proving to visitors that something is noteworthy or trustworthy because it has been adopted by others.
A couple of tricks provided by Unbounce when creating testimonials:
• Use a headshot to indicate that the testimonials come from a real person
• Use that person’s full name because using names like ‘Andre H.’ might raise doubts as to whether Andre is real
• Highlight some key feature of your product or software in the testimonial
• Use multiple testimonials
And, importantly, use some of the principles we just covered to have social proofing stand out so that it is easier for visitors to quickly grasp that other people already believe in the brand.
Congruence
Congruence is particularly relevant when designing landing pages, but its driving principles can be used when designing pages throughout a website. It refers to
The alignment of every landing page element with your single campaign goal. Congruence is a high-level conversion-centered design principle. If a piece of copy or image on your page isn’t aligned with your campaign, it’s going to cause friction and hurt your conversion rate. (Unbounce)
When designing landing pages, Unbounce proposes to score a page based on the congruence of its individual elements with the goal that consumers should achieved. We saw that landing pages typically possess some core elements, i.e., a unique selling proposition, a hero shot, a benefit statement, social proofing, and a link which is typically a call-to-action. These core elements are usually implemented into page elements, such as headline, subheadline, picture, introduction paragraph, bullet points, and link. An easy way to evaluate the congruence of a webpage to its goal is to build a scoring sheet for each of these elements. Take the following landing page as an example:
Now let’s see how each element of the landing page is performing. The first question to ask is: What is the goal that consumers need to achieve on that page? In this case, it is to download the white paper. Hence, all elements of this page should be talking about the white paper. The headline and sub-headline should offer some unique selling proposition associated with the white paper. The hero shot should be white paper related. The benefits, in this case explained in a short paragraph and bullet points, should explain what the consumer will get by downloading the white paper. The call-to-action should be white paper-related. And so on. How are each of these elements performing?
Generally, pretty badly: The headline is not aligned with the white paper, the intro and benefits are not white paper-related, the testimonial relates to the product rather than the white paper, and so on.
To optimize this page, the firm should transform each individual element to better represent the goal of this page.
Think Continuity
Ensuring that a persona achieves its macro conversion (e.g., making a sale) entails having well-defined, pre-planned paths through which it will go. This idea can be broken down into two main components.
First, every conversion is an opportunity for another conversion. This is the principle of continuance, as defined by Unbounce:
“A conversion centered design technique that uses the momentum of one conversion to drive a secondary conversion request, like a social share or a newsletter signup. Confirmation pages and thank you emails are prime channels for continuance.”
Second, this emphasizes the importance of clearly defined conversion paths. In order to know what to optimize in a sequence of steps, such as we have covered at the start of this chapter, it is necessary to know in advance what is the series of steps the consumers should take to complete an overarching goal or macro conversion such as making a purchase.
To do so, it is important to ask: What comes next? If I have consumers signup for a newsletter, it should be because I exactly know what I will be doing next and what the consumer who signed up will be asked to do. Optimizing conversion is about creating these clearly defined paths so that we can analyze each step, and the relationship between these steps, to boost our conversion rate over time both for specific steps and for the path as a whole.
Remarketing and Retargeting
Remarketing (sometimes called list-based retargeting) and retargeting (also called pixel or behavioral retargeting) are forms of targeting that serve ads to specific consumers, albeit differently. Online, you might find varying terms for these two activities. For example, Google places both under their remarketing tools.
Both strategies help during lead nurturing to maximize opportunities for conversion by serving ads to the right lead at the right stage of their journey. Remarketing and retargeting typically target qualified leads (MQL or SQL).
Although we discuss these two practices at the conversion stage, they can be used to convert for any goal (e.g., having consumer signup for a webinar or visit a blog post, as well as making a purchase). In short, these approaches can be used to generate leads, qualify leads, or convert to purchase.
The main difference between the two approaches is how targeting is put into action. Remarketing uses emails collected during lead generation activities to target leads, while retargeting target consumers based on previous behaviors. In both cases, ads are displayed to consumers.
To practice remarketing, a firm first needs to create an email list. Then, using targeting options on advertising platforms, such as Facebook Custom Audience or Google Customer Match, a firm can create an ad campaign that will only be seen by consumers with these email addresses.
Remarketing can be useful for many strategic purposes, although it is often used during retention strategies (i.e., when customers have already been acquired). This is, though, not the only use of remarketing. Remarketing can be used as part of a greater lead nurturing campaign to engage leads at any stage of their journey. For example, as long as a firm is properly keeping track of the stage at which the lead is located, it can use the emails associated with a large number of leads at a specific stage to personalize an ad campaign.
A plus of remarketing is that it is highly customizable to specific customers since you are targeting based on their email addresses. Two downsides, though, are that mismatch of email addresses happen (e.g., a lead might have given you an email address they do not use for their Facebook or Google accounts) and that it is not automatic (when compared to retargeting).
Instead of targeting ads based on an email list, retargeting uses previous behaviors, such as clicking a link, putting a product in a cart, or liking or commenting on a post. This is why, sometimes, after putting an item in a cart and abandoning your purchase, you might see the same article in the ads shown to you in numerous website, over and over again:
Because retargeting is automatic, and because it works on any pre-defined goal that has been accomplished by a visitor or a lead (e.g., viewing a specific page, clicking a link, spending time on a site, commenting on a Facebook post), it is a great tool to master to perfect lead nurturing campaigns. Although retargeting is often used to push consumers to complete purchases, its uses are much wide-ranging. Retargeting is a great tool to engage leads to perform the next action in a pre-planned path. For example, a firm could create a blog post or a piece of gated content to generate leads and retarget anybody who gave their email address on either in order for them to accomplish the next goal the path set up for that specific persona.
Retargeting can also be used for lead generation, where a company could target people interested in a specific product category. For example, car companies do retargeting campaigns by advertising product reviews on social media, of their cars and that of their competitors, and by retargeting anybody who clicks on the ads to read the reviews. Such campaigns help generate leads by identifying consumers who seem to be looking to make a purchase in a specific product category, and then targeting them to engage in lead generation activities.
Because it is highly customizable and automatic, the options when using retargeting are almost limitless. A firm simply needs to identify behavior that they deem interesting for, for example, scoring leads or identifying their stage in the journey, and use retargeting to serve ads to the specific consumers who will have performed that behavior. Retargeting campaigns work best when firms have a clear idea of the path their persona should take to make a purchase because they can then be used to maximize the chances that a persona at a specific step in that path will continue on and perform the next step.
Lastly, it is important, though, to ensure to identify the right actions! To finish this chapter on some laughs (or at least a smile):
Exercise \(1\)
Conversion optimization
• Based on this week’s chapter, optimize the landing page located at: bit.ly/34muGIR
• Explain your reasoning
Retargeting and remarketing
Assuming the following path, where could use you retargeting ads? | textbooks/biz/Marketing/Digital_Marketing_Strategy_(Dolbec)/1.08%3A_Convert_-_Conversion_Optimization.txt |
Learning Objectives
• This last chapter covers activities associated with the Engage stage: how to evaluate and encourage customer engagement and loyalty and foster co-creation by engaged customers. To do so, we discuss the importance of customer engagement, customer lifetime value, ways to measure engagement, consumption communities, and co-creation activities.
Understand the concepts of engagement and loyalty, how to calculate customer lifetime value and its importance in marketing strategy, how to measure engagement, and how to create value with consumers.
Engage
A widespread definition of engagement attributed to Forrester is the “creation of deep connections with customers that drive purchase decisions, interaction, and participation, over time creating deep connections with customers that drive purchase decisions, interaction, and participation, over time.” Accordingly, the two objectives of the Engage stage are to (1) foster loyalty, and (2) co-create value with customers.
Key performance indicators at this stage help measure a firm’s success in attaining these objectives and the achievement by consumers of associated goals. KPIs include the number of shares, brand mentions, referrals, repurchases, and reviews, and the ratio of comments on posts, comments on likes, and reviews on sales.
The Engage stage is central for many reasons. First, recent research shows how loyalty leaders “grow revenues roughly 2.5 times as fast as their industry peers and deliver two to five times the shareholder returns over the next 10 years” (HBR). Working on increasing engagement is thus profitable. There are a few reasons that explain this.
Acquiring customers is much more costly than retaining and selling to existing ones, and repeat consumers tend to spend more than new ones (Forbes). Engaged consumers are also more willing to interact with you, facilitating market research, and leading to groundbreaking insights. This is particularly true since you can develop winning engagement strategies by identifying what makes your loyal customers loyal. Last, engage customers to work on your behalf, co-creating content that, as we’ve seen, is used by other consumers throughout their journey.
To better understand the value of customers over their lifetime with a company, we turn our attention to the concept of customer lifetime value. We then see two tools that help better understand and measure customer loyalty. We conclude the chapter by examining value co-creation.
Customer Lifetime Value
Customer lifetime value (CLV) represents a customer’s profitability over its entire relationship with the business. A straightforward approach to help calculate CLV and understand the concept better is:
CLV=Average profit per sale (AP) *number of repeat transaction in a period (RTP)*retention time(RT)
(Please note that this is a simplistic approach used to understand this concept and not something we would recommend in a real-life setting.)
Example $1$
For example, let’s assume the following monthly-based subscription business (i.e., period = 1 month). The business has a churn rate of 2%. Churn rate represents the rate of customers leaving a company per period (Wikipedia). In this case, the company is losing 2% of its customer base every month. Churn rate is useful to calculate the average retention time of customers: By dividing 1 by the churn rate, we obtain the retention time. In this case, customers stay with the business for an average of 50 months (or 1 divided by 0.02).
The average profit per sale is $30 The number of repeat transactions per period is 1, because customers are making one transaction per month and the period we are looking at here is one month. The CLV is thus: $CLV = AP \times RTP \times RT \nonumber$ where $AP = 30$, $RTP = 50$, and $RT = 1$. $CLV = 30 \times 50 \times 1 = 1500. \nonumber$ Over their lifetime, each customer brings to the business$1500.
CLV draws our attention to the importance of catering to the lifetime of a customer with a business. The first sale to a customer is not what typically brings revenue to a firm. Acquisition costs for a customer generally are much higher than the revenue a firm will make on its first sale. The objective of firms, thus, is to engage customers to increase their lifetime value.
More concretely, CLV can play many roles for a firm. For example, it helps firms price their customer acquisition strategies and calculate their return on investment. This is important because it helps evaluate whether acquisition strategies are profitable and manage marketing efforts more generally.
Example $2$
Continuing with the example above, let’s assume the firm is running the following pay-per-click search ad campaign to acquire customers. In this simple example, let’s further assume that people search for something, click on an ad which leads them to a landing page, and convert to customers from this landing page.
The total campaign cost is $20 000, including all campaign elements (e.g., developing the landing page, all costs related to ads, etc.). The campaign gets 2500 visitors on their landing page. The conversion rate is 5%, meaning that the firm converted 5% of the 2500 visitors to their landing page, or 125 customers (2500*5%=125). The cost per acquisition is thus$160, or $20 000 / 125. The question that firms would ask at this stage is: Is this profitable? What is my return on investment? Should I continue running this acquisition strategy campaign? CLV becomes useful at this stage. As a reminder, this firm earns$1500 per customer on average throughout their lifetime with the company. Even if the company only makes $30 on the first sale (meaning that they just “lost”$95, since it costs them $160 to acquire the customer), two rules of thumb help us see that this is a profitable customer acquisition strategy over time. The two rules of thumb to quickly gauge whether a customer acquisition strategy is profitable is: 1. Am I recovering my cost per acquisition over the next 12 months of the life of the customer with my business? In this case, the answer is yes: The company will make$360 per customer (or AP*12, $30*12, for$360).
2. Is my CLV more than 3 times my cost per acquisition (CAC) (or CLV/CAC > 3)? In this case, the answer is also yes. CAC is $160 while CLV is$1500, and CLV/CAC = 9.375. In fact, the firm should be happy to pay up to $500 per acquisition. Among many other uses that CLV serves, it can also support retention and customer support strategies central to the Engage stage. By knowing the lifetime value of customers, firms can more easily price retention and support strategies, i.e., how much to put into trying to retain customers. CLV varies per persona, where some persona will be worth more over their lifetime than others. This helps know where to spend some extra resources and which persona to pamper a bit more. It can also help a firm see whether it should ‘fire’ a persona, i.e., minimize the efforts dedicated to customers already acquired and stop acquisition strategies for a specific persona if their CLV is drastically lower than that of other personas. Lastly, it is important to keep in mind that, apart from subscription businesses such as the example above, customers rarely bring in the same amount to a firm throughout their lifetime. The relationship between a customer and a firm evolves over time, and it is important to recognize that the journey of customers expands beyond their first purchase with a firm. Not only this varies between personas, but it might also vary between markets. In some markets, such as videogame consoles or eyewear, products are seldomly sold with an extended period in-between that might encourage churn. In other markets, like groceries, consumers are continuously making purchases over their lifetime. As the market for diapers, other markets might see a significant uptick at the start of the customer’s life with a company and then declining sales over time as the baby ages into a child. Although the new approach is predictive analysis, some earlier analytical tools, such as RFM analysis, provide information regarding some of these aspects. They also help us understand the basics of analyzing customer behavior to make strategic decisions. RFM Analysis RFM is a long-standing analytical method that helps analyze and segment customer behavior based on the Recency of their last purchase, the Frequency of their purchase, and their Monetary value, i.e., how much they spend with the firm. By helping understand the purchase behavior of acquired customers, RFM analysis can help increase retention and purchase per customer, identify which customers are not so great, better, and best, whether we are experiencing issues with a specific persona in terms of repurchase behavior, and so on. To conduct an RFM analysis, a firm starts with its customer database. The first step is to assign value to customers associated with their recency, frequency, and monetary value. Since RFM analyses can be done by operationalizing these variables differently, let’s assume here that recency refers to the recency of the last purchase in days, frequency to the frequency of purchases over 3 months (or a quarter), and monetary value to the total amount spent during this period. To do so, firms will often start by indicating the exact number associated with each variable and move to create categories for each. They will perform their analysis with these categories, such as: Recency Frequency Monetary value 1 Very recent Very frequent High value 2 Recent Frequent Medium value 3 Not recent Infrequent Low value We can then create segments by combining these together. Examples of segments could include: • Where a segment is the value for R, F, and M (RFM): • Best customers: 111 • Loyal customers: x1x • Big spenders: xx1 • Lost or almost lost customers: 311 • Thrifters: 331 • And so on. Then, each customer will be coded based on the categories created above, as follows: This allows categorizing customers into the categories just created (e.g., best customers, loyal customers, etc.). These categories of customers can help decide which segments to concentrate on, and what kind of strategy to use to engage its customers. Examples could include performing retention campaigns with big spenders, recuperating almost lost customers, or moving loyal customers to increase their monetary value over time. A firm could also target its best customer segment, send an appreciation letter, analyze their personal preferences for more personalized offers, and generally develop strategies to keep this segment highly satisfied. Although simple, RFM analysis is a useful tool to foster engagement. A more thorough analysis could combine RFM with personas, and evaluate whether personas also share commonalities or differences in their purchasing behaviours, leading to the creation of even more personalized campaigns. Net Promoter Score Another approach to measuring customer satisfaction and engagement that is usedwidely is the net promoter score. Described by the Harvard Business Review as “The one number you need to grow,” NPS is associated with a single, one question survey based on customer engagement that has shown over time to be a great predictor of firm success. To calculate the NPS, a firm first asks the following question to its customers: “How likely is it that you would recommend our company/product/service to a friend or colleague?” (Note: NPS has also been used in the past with other types of respondents, such as employees or resellers, depending on which population a companies aims at measuring). Respondents are asked to answer using a 0 to 10 scale, with 10 being “extremely likely” and 0 being “not at all likely.” The NPS is then calculated using the formula % of promoters – % of detractors. The result ranges from -100% (all detractors) to 100% (all promoters) (see figure below). Promoters are who answer 9 and 10. They are satisfied and loyal customers that will definitely recommend a brand to others. They are considered to exhibit value-creating behaviors, such as repeat buying, higher average basket, longer retention time. They account for most referrals for a brand. Firms are advised to learn from promoters: What makes them so satisfied and engaged? Do they belong to a specific persona? How were they acquired? Promoters can be used to identify a winning formula that can potentially be replicated with other customers. Passives are those who answer 7 and 8. They are satisfied customers who mostly neutral about their experience with a brand. Firms are advised to work towards converting passives to promoters. Detractors are those who answer 6 or less. They are generally unhappy customers that will not recommend a brand to others. They might engage in value destructive behaviors, such as negative word of mouth. They have a high churn rate. Firms are advised to recover detractors. They can also ask themselves questions similar to those for promoters: What makes them unsatisfied with the brand? Do they belong to a specific persona? How were they acquired? Firms could learn, for example, that a persona is responsible for most detractors, which should affect its future strategy in terms of where to dedicate customer acquisition efforts. Engaging Customers in Co-Creation Activities Co-creation refers to the joint creation of value by a company and its customers (Prahalad and Ramaswany 2004). Nowadays, most marketing activities can be co-created with consumers, whether market research, product innovation, advertising campaigns, or customer support. We can categorize consumers into two grand categories of co-creators. The first category is composed of user innovators or lead users, highly involved and highly competent consumers who participate in co-creation activities to answer their own needs or desires. This is the kind of co-creator that MIT professor Eric Von Hippel has been studying since the mid-1980s. Lead users have been found to co-create value with firms in diverse markets, such as 3M and surgeon in the medical industry, amateur and professional athletes in sports as varied as windsurfing, rollerblading, snowboarding, and rodeo kayaking (e.g., Shah 2003), or computer geeks and open source software in IT (Von Hippel 2005). The second category of co-creators is everyday consumers. This kind of co-creators is constituted of people who are not particularly involved in a product category or particularly competent. They will probably not benefit from their co-creation activities. They participate in co-creation activities because it serves their needs (e.g., taking on the role of a clerk when using an ATM or self-checkout), because it is part of their activities with a company (e.g., co-creating content when we post social media content), or because it is fun (e.g., participating in a contest where we can choose the name of a product or redesign an ad). A useful tool to think about how consumers can participate in co-creation activities is the value chain. The value chain is a tool that helps conceptualize where value is created in firm activities. For example, the marketing function can be thought of as the following set of activities through which a firm creates value for itself and customers: Each of these activities can create value. For example, market research creates value by better understanding consumers and their needs. Innovation helps create products that address these needs. Production creates value by turning a concept into reality. Marketing creates value by attracting sales and customers, and sales create value by making these sales happen and distributing products to consumers. Customer support creates value by maximizing retention and satisfaction. The value chain helps understanding how to co-create value with consumers by emphasizing where they can create value. Let’s see how value can be co-created during each of these activities. For market research, one of the most obvious ways that consumers co-create value is by sharing their opinions with firms. For some companies, this mechanism has been formalized outside of ad-hoc research efforts. For example, DeWalt set up an “Insight Community,” which they use to send several surveys per week to interact with consumers. Using this community rather than traditional market research firms, they estimated to have saved in 2016 alone about$5 million in market research costs. Another example of value co-creation in market research is crowd-sourced market research firms such as Trendwatching. Trendwatching publishes regular reports on emerging trends in different markets. To create these reports, they rely on an international community of trendwatchers that are part of its TrendWatching Global Insight Network (tw:in) who are tasked with spotting emerging trends and sharing it with the company.
For design and innovation, there exist many examples of companies who have tasked consumers with coming up with innovative ideas. Examples include initiatives where everyday consumers discuss new product ideas with firms, such as Lego Ideas and BMW Co-Creation Lab. Other initiatives pitch lead users in competition against one another, such as the Heineken Open Design and the Anheuser-Busch ‘King of Beers.
At the production stage, examples vary. In our everyday lives, we all contribute to co-producing social media content, which we then consume from one another. Social media is mostly a co-created activity. Although we all follow celebrities with audiences of varying sizes, content producers are often other consumers like you and me. The business model of social media firm aims at providing a platform for co-creation (and monetizing this platform with ads), but users are those who produce what is consumed. For material products, there is some hope that the rise of 3D printing will lead to consumers being able to co-produce products at home. Even today, designs can be downloaded online, and consumers are responsible for manufacturing the product at home. This echoes other ‘maker’ activities, such as sewing or knitting, where making something is the consumption activity (e.g., making a shirt from a pattern). Product customization, such as NikeID, is also an example of the co-production of products since consumers are tasked with making design decisions.
For marketing, any marketing campaign based on word of mouth, such as viral marketing, is a co-created marketing activity. In such campaigns, consumers become co-creators of the campaign by participating in its diffusion. Shareable content, such as Spotify yearly “Wrapped” or more traditional entertaining advertisements such as Dietz & Watson Dietz Nuts recruit consumers who become channels through which ads are diffused. In other campaigns, such as hashtag campaigns, consumers’ role as co-creator is heightened as they also co-produce content. One of the most successful campaigns of the last several years is probably the #blacklivesmatter campaign, which had been used more than 40 million times by the 2020 summer.
Similarly, sales can co-created by consumers when they share product links or promo codes or when they contribute to companies’ sales pitches by writing testimonials or positive reviews
Lastly, consumers regularly co-create customer support. Forums where consumers answer each other questions, such as Apple Support Communities or Tesla Forums, co-create customer support. Consumers similarly answer one another questions in different ways, such as communities not directly owned by brands. They also create content on blogs and social media channels such as YouTube to explain how they address some issues they might have faced.
Learning Objectives
You are Spikeball
A video element has been excluded from this version of the text. You can watch it online here: https://opentextbooks.concordia.ca/digitalmarketing/?p=155
We want to create co-creation activities along the value chain
Lead users
1. Who could be lead users?
2. Find two co-creation activities that lead users can participate in
For the remaining four co-creation activities
1. Find a way to identify everyday customers who are most likely to participate with you in co-creation activities
2. Find activities to integrate everyday consumers
Note: These 6 activities (2 for lead users and 4 for everyday consumers) should target the 6 marketing activities of the value chain independently, i.e., one activity for market research, one for design and innovation, etc. | textbooks/biz/Marketing/Digital_Marketing_Strategy_(Dolbec)/1.09%3A_Engage_-_Building_Loyalty_and_Co-Creating_with_Customers.txt |
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01: Introducing Marketing
It is Elvis week in Memphis, Tennessee in the United States and all over town they have banners: ''20 years/Still Rocking.” Is it just us, or is it weird to wax so upbeat about the twentieth anniversary of a death? You cannot help but feel that the world's got the Elvis Presley it wanted: a changeless, ageless object of contemplation and veneration. Elvis Week culminates in an event called Elvis-The Concert 2000 in which the man himself, resurrected by video technology, will sing with his living ex-band mates and the Memphis Symphony Orchestra. Who would not secretly prefer this fail-safe digitized spectacle to a weary 62-year-old grinding out "If I Can Dream" one more time?
Twenty years ago, no one close to Elvis could have imagined that his fans would spend over USD 250 million annually on Elvis dolls, plates, key chains, towels, and wigs—to name just a few items. Two years after Elvis's death, his estate was worth less on paper than it owed in taxes. Then, in 1979, Priscilla Presley, Elvis's ex-wife, was named an executor of the estate for her daughter. The family's crown jewels—Elvis's recordings—had been sold off years earlier and Priscilla had just one chance to save the legacy. She gambled that Elvis's name, image, and likeness were worth something. She turned his home into a roadside attraction to finance a legal war, fighting for control of all that was Elvis.
Priscilla concluded that there was only one way to save Graceland: sell tickets to the hundreds of gawkers who daily pressed their faces against Elvis's gates. Meanwhile, why not sell some gewgaws to the fans that were already buying cheesy trinkets at the strip mall across the street? Buoyed by an initial investment of USD 560,000, Graceland's doors were opened to the public in 1982. It took 38 days to recoup their investment; 350,000 visitors walked through the house the first year. "I felt I was betraying Elvis", says Priscilla, recalling her decision to enter the amusement business. "Graceland was his pride and joy. But it came down to the reality that I had to open it up for my daughter's future."
Today 750,000 people visit Graceland each year—52 per cent of them under 35, which suggests this is a business with a future. The mansion has upgraded its public facilities many times over the years, but there still are no vending machines on the grounds and the lawns have never been turned into a parking lot. The original 24 acres (97,125 meters) have been expanded into an 80-acre (323,749-meter) compound and Priscilla intends to add a hotel to the complex. There are also plans for a casino in Las Vegas—perhaps with an Elvis wedding chapel and an international chain of Hard Rock Cafe-style restaurants called Elvis Presley's Memphis. Finally, a staff of 10 lawyers is employed full-time by Elvis Presley Enterprises simply to protect Elvis's image from interlopers[1].
1. [1]Sources: Corie Brown, "Look Who's Taking Care of Business," Newsweek, August 18, 1997, p. 62. Karen Schoemer, "Burning Love," Newsweek, August 18, 1997, pp. 58—61. G. Brown, "More Early Elvis Unearthed," The Denver Post, August 15, 1997, p. 9F. Greg Hassell, "King of Trees Rises From Graceland," Houston Chronicle, Dec. 8,1999, p. 11. Duncan Hughes, "Elvis is Back From the Dead Financially," Sunday Business, August 15, 1999, p. 23.
1.02: Introduction
The success of Elvis Presley Enterprises was a result of the insights and courage of Priscilla Presley. Despite her lack of formal training in marketing, she exhibited a creative approach toward doing business that will become more and more necessary as the twenty-first century continues. Innovative thinking has become a prerequisite for success in today's global environment, which is saturated with near clone products being sold by millions of comparable competitors. The status quo will no longer suffice. The need for constant change paired with clear strategies is now essential.
Marketing constitutes just one of the functions available to every business. Along with research, production, finance, accounting, and a myriad of other functions, marketing contributes to the ability of a business to succeed. In many businesses, marketing may be deemed of highest importance; in others, it may be relegated to a lesser role. The very existence of business depends upon successful products and services, which in turn rely on successful marketing. For this reason, every business person will benefit from even basic marketing knowledge. Moreover, marketing principles have been effectively applied to several nonbusiness institutions for more than 30 years. Bankers, physicians, accounting firms, investment analysts, politicians, churches, architectural firms, universities, and the United Way have all come to appreciate the benefits of marketing.
A word of warning: there is a long-standing myth that marketing is easy. After going through this book you may conclude that marketing is interesting, fun, challenging—even vague—but it is not easy. Whether you like numbers or hate numbers, like people or hate people, like doing the same thing every day or like constant change there are opportunities for you in marketing. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/01%3A_Introducing_Marketing/1.01%3A_Elvisalive_and_well.txt |
This task of determining the appropriateness of marketing for a particular business or institution serves as a major justification for learning about marketing. Although marketing has clearly come of age during the decades of the 1970s, 1980s, and 1990s, there is still a great deal of misunderstanding about the meaning and usefulness of marketing. For most of the global public, marketing is still equated with advertising and personal selling. While marketing is both of those, it is also much more.
The business community can attribute a partial explanation for this general lack of understanding about marketing to the uneven acceptance and adoption of marketing. Some businesses still exist in the dark ages when marketing was defined as "the sales department will sell whatever the plant produces". Others have advanced a bit further, in that they have a marketing officer and engage in market research, product development, promotion and have a long list of marketing activities. More and more businesses firmly believe that the aim of marketing is to make selling superfluous, meaning that the marketer knows and understands the customer so well that the product or service is already what is wanted and sells itself. This does not mean that marketers ignore the engineering and production of the product or the importance of profits. It does suggest, however, that attention to customers—who they are and who they are going to be—is seen to be in the best long-term interest of the company. As a student interested in business, it is beneficial for you to have an accurate and complete comprehension of the role marketing can and should play in today's business world.
There are also several secondary reasons to study marketing. One we have already alluded to in our discussion on definitions: The application of marketing to more nonprofit and nonbusiness institutions is growing. Churches, museums, the United Way, the US Armed Forces, politicians, and others are hiring individuals with marketing expertise. This has opened up thousands of new job opportunities for those with a working knowledge of marketing.
Even if you are not getting a degree in marketing, knowing about marketing will pay off in a variety of careers. Consider the following individuals:
• Paul Moore, an engineer specializing in earth moving equipment, constantly works with product development and sales personnel in order to create superior products.
• Christy Wood, a certified public accountant (CPA), is a top tax specialist who spends much of her time maintaining customer relationships, and at least three days a month seeking new customers.
• Steve Jacobson, a systems analyst and expert programmer, understands that his skills must be used to find the right combination of hardware and software for every one of his customers.
• Doris Kelly, a personnel manager, must be skilled at finding, hiring, and training individuals to facilitate her organization's marketing efforts.
• Craig Roberts, an ex-Microsoft engineer, has recently started a dot-com company and is in the process of raising capital.
There are two final factors that justify the study of marketing for nearly every citizen. First of all, we are all consumers and active participants in the marketing network. Understanding the rudiments of marketing will make us better consumers, which in turn will force businesses to do their jobs better. Second, marketing has an impact on society as a whole. Concepts such as trade deficit, embargo, devaluation of a foreign currency, price fixing, deceptive advertising, and product safety take on a whole new meaning when we view them in a marketing context. This knowledge should make you a more enlightened citizen who understands what such social and political issues mean to you and to our society.
Marketing capsules (like the one below) summarize the information throughout this text. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/01%3A_Introducing_Marketing/1.03%3A_Justification_for_Study.txt |
Noted Harvard Professor of Business, Theodore Levitt, states that the purpose of all business is to "find and keep customers". Furthermore, the only way you can achieve this objective is to create a competitive advantage. That is, you must convince buyers (potential customers) that what you have to offer them comes closest to meeting their particular need or want at that point in time. Hopefully, you will be able to provide this advantage consistently, so that eventually the customer will no longer consider other alternatives and will purchase your product out of habit. This loyal behavior is exhibited by people in the US who drive only Fords, brush their teeth only with Crest, buy only Dell computers, and have their plumbing fixed only by "Samson Plumbing—On Call 24 hours, 7 days a week". Creating this blind commitment, without consideration of alternatives, to a particular brand, store, person, or idea is the dream of all businesses. It is unlikely to occur, however, without the support of an effective marketing program. In fact, the specific role of marketing is to provide assistance in identifying, satisfying, and retaining customers.
While the general tasks of marketing are somewhat straightforward, attaching an acceptable definition to the concept has been difficult. A textbook writer once noted, "Marketing is not easy to define. No one has yet been able to formulate a clear, concise definition that finds universal acceptance". Yet a definition of some sort is necessary if we are to layout the boundaries of what is properly to be considered "marketing". How do marketing activities differ from non-marketing activities? What activities should one refer to as marketing activities? What institutions should one refer to as marketing institutions?
Marketing is advertising to advertising agencies, events to event marketers, knocking on doors to salespeople, direct mail to direct mailers. In other words, to a person with a hammer, everything looks like a nail. In reality, marketing is a way of thinking about business, rather than a bundle of techniques. It is much more than just selling stuff and collecting money. It is the connection between people and products, customers and companies. Like organic tissue, this kind of connection or relationship is always growing or dying. It can never be in a steady state. Like tissue paper, this kind of connection is fragile. Customer relationships, even long-standing ones, are contingent on the last thing that happened.
Tracing the evolution of the various definitions of marketing proposed during the last 30 years reveals two trends: (1) expansion of the application of marketing to non-profit and non-business institutions; e.g. charities, education, or health care; and (2) expansion of the responsibilities of marketing beyond the personal survival of the individual firm, to include the betterment of society as a whole. These two factors are reflected in the official American Marketing Association definition published in 1988.
“Marketing is the process of planning and executing the conception. pricing, promotion, and distribution of ideas, goods, and services to create exchanges that satisfy individual (customer) and organizational objectives.”1
While this definition can help us better comprehend the parameters of marketing, it does not provide a full picture. Definitions of marketing cannot flesh out specific transactions and other relationships among these elements. The following propositions are offered to supplement this definition and better position marketing within the firm:
The overall directive for any organization is the mission statement or some equivalent statement of organizational goals. It reflects the inherent business philosophy of the organization.
• Every organization has a set of functional areas (e.g. accounting, production, finance, data processing, marketing) in which tasks that are necessary for the success of the organization are performed. These functional areas must be managed if they are to achieve maximum performance.
• Every functional area is guided by a philosophy (derived from the mission statement or company goals) that governs its approach toward its ultimate set of tasks.
• Marketing differs from the other functional areas in that its primary concern is with exchanges that take place in markets, outside the organization (called a transaction).
• Marketing is most successful when the philosophy, tasks, and manner of implementing available technology are coordinated and complementary.
Perhaps an example will clarify these propositions: L.L. Bean is an extremely successful mail order company. The organization bases much of its success on its longstanding and straightforward mission statement: "Customer Satisfaction: An L.L. Bean Tradition" (Proposition 1). The philosophy permeates every level of the organization and is reflected in high quality products, fair pricing, convenience, a 100 per cent satisfaction policy and, above all, dedication to customer service (Proposition 2). This philosophy has necessitated a very high standard of production, efficient billing systems, extensive and responsive communication networks, computerization, innovative cost controls, and so forth. Moreover, it has meant that all of these functional areas have to be in constant communication, must be totally coordinated, and must exhibit a level of harmony and mutual respect that creates a positive environment in order to reach shared goals (Proposition 3). The L.L. Bean marketing philosophy is in close harmony with its mission statement. Everything the marketing department does must reinforce and make real the abstract concept of "consumer satisfaction" (Proposition 4). The price-product-quality relationship must be fair. The product must advertise in media that reflects this high quality. Consequently, L.L. Bean advertises through its direct-mail catalogue and through print ads in prestigious magazines (e.g. National Geographic). It also has one of the most highly regarded websites.(AD 1) Product selection and design are based upon extensive research indicating the preferences of their customers. Since product delivery and possible product return is critical, marketing must be absolutely sure that both these tasks are performed in accordance with customers' wishes (Proposition 5). While one might argue that the marketing function must be the most important function at L.L. Bean, this is not the case. L.L. Bean is just as likely to lose a customer because of incorrect billing (an accounting function) or a flawed hunting boot (a product function) as it is from a misleading ad (a marketing function).
Admittedly, marketing is often a critical part of a firm's success. Nevertheless, the importance of marketing must be kept in perspective. For many large manufacturers such as Proctor & Gamble, Microsoft, Toyota, and Sanyo, marketing represents a major expenditure, and these businesses depend on the effectiveness of their marketing effort. Conversely, for regulated industries (such as utilities, social services, or medical care or small businesses providing a one-of-a-kind product) marketing may be little more than a few informative brochures. There are literally thousands of examples of businesses—many quite small that have neither the resources nor the inclination to support an elaborate marketing organization and strategy. These businesses rely less on research than on common sense. In all these cases, the marketing program is worth the costs only if it fits the organization and facilitates its ability to reach its goals. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/01%3A_Introducing_Marketing/1.04%3A_Defining_Marketing.txt |
As noted earlier, the application of marketing in a particular organization varies tremendously, ranging from common-sense marketing to marketing departments with thousands of staff members and multimillion-dollar budgets. Yet both may have a great deal in common in respect to how they view the activity called marketing. We refer to these common characteristics as the Cs of Marketing. They are your clues that a business understands marketing.
Capsule 1: Review
1. The purpose of marketing is to help find and keep customers by creating a competitive advantage.
2. Marketing, one of several functions operating in an organization, is directed by the mission statement of the organization and provides certain tools to reach objectives.
3. The value of marketing must be kept in perspective: it must contribute to the growth of the firm.
4. The primary reasons for studying marketing are:
a. It is important to assess the role marketing should play in the firm.
b. Marketing offers growing career opportunities.
c. Marketing enhances our chances of becoming more effective consumers and citizens.
Consumer content
What makes the existence of any organization possible is that there are a significant number of people who need the product or service offered by that organization. As soon as that group becomes too small, or the need no longer exists, or some other organization can satisfy that need better, the organization will be eliminated. That is the way of a free economy. Thus, a politician does not get re-elected, an inner-city church closes its doors, the money needed to cure AIDS is not allocated, and the Colorado's Vail Ski Resort in the US files for bankruptcy.
In the case of business organizations, and marketing organizations in particular, the people with the needs are called consumers or customers. In marketing, the act of obtaining a desired object from someone by offering something of value in return is called the exchange process. Moreover, the exchange between the person with the need (who gives money or some other personal resource) and the organization selling this need-satisfying thing (a product, service, or idea) is inherently economic, and is called a transaction. There tends to be some negotiation between the parties. Individuals on both sides attempt to maximize rewards and minimize costs in their transactions so as to obtain the most profitable outcomes. Ideally, all parties achieve a satisfactory level of reward.
In each transaction, there is an underlying philosophy in respect to how the parties perceive the exchange. Sometimes deception and lying permeate the exchange. Other exchanges may be characterized as equitable, where each party receives about the same as the other—the customer's need is satisfied and the business makes a reasonable profit. With the emergence of the Internet and e-commerce during the 1990s, the nature of the exchange for many businesses and customers has changed dramatically. Today's consumers have access to far more and far better information. They also have many more choices. Businesses must provide a similar level of information and must deal with new competitors that are quicker, smarter, and open 24 hours a day.
An organization that employs marketing correctly knows that keeping customers informed is easier if they keep in constant contact with the customer. This does not necessarily mean that they write and call regularly, although it could. Rather, it more likely means that a marketing organization knows a great deal about the characteristics, values, interests, and behaviors of its customers, and monitors how these factors change over time. Although the process is not an exact science, there is sufficient evidence that marketers who do this well tend to succeed.
When this attempt to know as much about the consumer as possible is coupled with a decision to base all marketing on this information, it is said that the organization is consumer-oriented or has adopted the marketing concept. It means working back from the customers' needs, rather than forward from the factory's capabilities.
Both historically and currently, many businesses do not follow the marketing concept. Companies such as Texas Instruments and Otis Elevator followed what has been labeled a production orientation, where the focus is on technology, innovation, and low production costs. Such companies assume that a technically superior or less expensive product sells itself. There are also companies, such as Amway, where sales and marketing are essentially the same thing. This sales orientation assumes that a good salesperson has the capability to sell anything. Often, this focus on the selling process may ignore the consumer or view the consumer as someone to be manipulated. Insightful businesses acknowledge the importance of production and sales, but realize that a three-step process is most effective: (1) continuously collect information about customers' needs and competitors' capabilities; (2) share the information across departments; and (3) use the information to create a competitive advantage by increasing value for customers. This is true marketing.
Company capabilities
All marketing organizations try to objectively compare their existing capabilities with their ability to meet the consumer's needs now and in the future. Moreover, when deficiencies are found, a good marketing organization must be willing to make changes as quickly as possible. When Toyota realized that their products were not connecting with consumers aged 35 and younger, it decided to take direct action. In 1999, it gathered eight people in their 20s and 30s from around the company into a new, ethnically diverse marketing group called "genesis". Their first assignment was to launch three cars meant to pull in younger buyers: the entry-level ECHO subcompact, a sporty new two-door Celica, and the MR2 Spyder, a racy convertible roadster.
Although assessing company capabilities often begins in the marketing area, all the business functions must be assessed. Do we have the technical know-how to produce a competitive product? Do we have the plant capacity? Do we have the necessary capital? Do we have good top management? A "no" to any of these questions may stymie the marketing effort. Conversely, a strong advantage in cost control or dynamic leadership may provide the company with a competitive marketing advantage that has little to do with marketing, but everything to do with the business succeeding.
Communication
Few doubt that the secret of success in any relationship is communication. This is especially true in a marketing relationship, where the attitude of both parties is frequently skeptical, the nature of the contact is hardly intimate, and the message delivery system tends to be impersonal and imprecise. It is because of these factors that communication plays such an important role in a marketing organization.
Marketers know that consumers are constantly picking up cues put out by the organization, or about the organization, that they use to form attitudes and beliefs about the organization. Many of these message-laden cues are controlled by the organization, including factors such as product design, product quality, price, packaging, outlet selection, advertising, and the availability of coupons. In this case, marketers follow basic communication principles that are discussed throughout this book. Most notably, there is a constant attempt to make sure that all of these elements deliver a consistent message, and that this message is understood and interpreted in the same way by the various consumers.
On the other hand, there are many message-laden cues that are not under the control of the marketer, yet may be more powerful in the minds of consumers, and that must be anticipated and dealt with by the marketers. A recent report that United Airlines had the worst customer satisfaction scores created a downturn in both United's stock and customer reservations. Although there are many sources delivering such information, the three most prominent are employees, competitors, and the media.
Employees, from the president on down, are all considered representatives of the organization for which they work. Consumers often assume that the behavior, language, or dress of an employee is an accurate reflection of the entire organization. Making employees—and possibly even former employees—positive ambassadors of the organization has become so important that a new term has emerged—internal marketing.
Competitors say a great deal about one another, some truths, some boldface lies. A marketing organization must be cognizant of this possibility and be prepared to respond. The automobile industry has used comparison messaging for over thirty years. Coke and Pepsi have been attacking and counter-attacking for about the same length of time. Negative political messages appear to be very effective, even though few politicians admit to the strategy.
Finally, the media (editors and reporters working for newspapers, TV and radio stations, and magazines) looms as one of the greatest communication hurdles faced by marketers. In a large marketing organization, the responsibility of communicating with the media is assigned to a public relations staff. Public relations people write press release stories about their organization that they hope the media will use. If the press releases are not used, the marketer attempts to ensure that whatever the media says about the organization is accurate and as complementary as possible. For smaller companies, dealing with the media becomes everyone's responsibility. Many businesses now face a new media, the Internet: chat rooms, websites, and propaganda campaigns intended to destroy a business have become commonplace. Companies that are willing to focus on communication as a means of doing business engage in relationship marketing—a type of marketing that builds long-standing positive relationships with customers and other important stakeholder groups. Relationship marketing identifies "high value" customers and prospects and bonds them to the brand through personal attention.
Competition
We have already mentioned the importance that competition plays in a marketing organization. At a minimum, marketing companies must thoroughly understand their competitors' strengths and weaknesses. This means more than making sweeping generalizations about the competitors. It means basing intelligent marketing decisions on facts about how competitors operate and determining how best to respond. Often the identification of competitors is fairly straightforward. It is the supermarket on the next block, or the three other companies that manufacture replacement windshields. There are instances, however, when the identification of a competitor is not clear. Marketing expert Theodore Levitt coined the term "marketing myopia" several years ago to describe companies that mis-identify their competition.3 Levitt argued, for example, that the mistake made by the passenger train industry was to restrict their competition to other railroads instead of all mass transit transportation alternatives, including automobiles, airlines, and buses. Today we see the same mistake being made by companies in the entertainment industry (movie theaters, restaurants, and resorts), who assume that their only competition is like-titled organizations.
Since practically no marketer operates as a monopoly, most of the strategy issues considered by a marketer relate to competition. Visualize a marketing strategy as a huge chess game where one player is constantly making his or her moves contingent on what the other player does. Some US partners, like Coke and Pepsi, McDonald's and Burger King, and Ford and General Motors, have been playing the game so long that a stalemate is often the result. In fact, the relative market share owned by Coke and Pepsi has not changed by more than a percentage or two despite the billions of dollars spent by each on marketing.
The desire of companies to accurately gauge competitors has led to the growing popularity of a separate discipline—competitive intelligence. This field involves gathering as much information about competitors through any means possible, usually short of breaking the law. More is said about this process in the integrated marketing box that follows.
Cross-functional contact
One of the first mistakes an organization might make is to allow the various functional areas to become proprietary. Whenever a marketing department considers itself most important to the success of the organization and self-sufficient without need for accounting, manufacturing, or human resources, it ceases to be a reliable marketing group. True marketers know that they cannot be any better than their weakest link. Lack of understanding and trust between marketing and manufacturing, for instance, could mean that a product sold by marketing is not delivered when promised or with the right features. Marketers should consider their peers in engineering, who might not be able to produce an ambitious product requested by marketing at the cost desired. Likewise, human resources might not be able to locate the individual "with ten years of experience in package goods marketing" requested by the marketing manager.
The point is that marketing is far more likely to be successful if its staff relate intelligently and honestly with members of the other functional areas. In some organizations, the walls of parochialism have been standing so long that tearing them down is almost impossible. Nevertheless, creating inter-departmental connections is critical.
With downsizing and other cost-cutting activities prevalent during the 1990s, the need for inter-related and harmonious business functions has become even more important. In the field of marketing, the term integrated marketing has been coined, suggesting that individuals working in traditional marketing departments are no longer specialists, but must become knowledgeable about all the elements of the business that currently or potentially have an impact on the success of marketing. At the corporate level, all managers should share a corporate vision, and there should be an organizational structure that makes it possible for departments or divisions to share information and participate in joint planning.
This approach represents the direction in which many companies are moving, including US giants like Kraft and Disney. To be truly integrated, though, every decision at each level of the business should support decisions made at all the other levels. To illustrate, let us say that the corporate goal is to maximize profit. A marketing plan objective to increase sales by marketing new products matches the goal.
Integrated marketing
Spying to stay competitive
Most corporate detectives avoid terms like spying and espionage, preferring the more dignified label "competitive intelligence", but whatever they call it, snooping on business rivals has become an entrenched sub-industry.
Nearly every large US company has an intelligence office of some kind. Some, like Motorola, Inc., have units sprinkled in almost all of their outposts around the world. Their assignment is to monitor rivals, sniff out mergers or new technologies that might affect the bottom line, even to keep tabs on morale at client companies. A veteran of the Central Intelligence Agency formed Motorola's intelligence unit, viewed as a model in the business, in 1982.
Corporate intelligence relies on a slew of tools—some sophisticated, many quite basic. On the simpler end of the spectrum, business sleuths do everything from prowling trade show floors to combing through rivals' web sites and patent office filings. They keep their ears open in airports and aboard flights. Sometimes they go further. They take photographs of competitive factories, and, increasingly, they rely on new data-mining software that permits them to scan the Internet at high speeds for snippets about their rivals. [1]
Community contact
Most marketers are curious; they enjoy observing and noting what's happening in their community. Although the word "community" usually denotes a city, town, or neighborhood, we use the word here in a much broader sense. "Community" refers to the environment in which the marketer operates. For Esther and Jim Williams, who operate an A&W drive-in in Mattoon, Illinois in the US, community is quite small. For Verizon Communication, community encompasses practically the entire world, extending even to outer space.
Regardless of the scope of the marketer's community, maintaining contact with it is essential. Contact could mean reading the local newspaper and listening to the local gossip. Or it could mean subscribing to information releases of several marketing research firms that monitor world events 24 hours a day, every day. Either might do the job, although the differences in financial costs would be great. In the chapter “Marketing research: an aid to decision making” we discuss some of the more important trends in the world community. Esther and Jim would find this discussion interesting, but not very useful.
Ultimately, to be considered a responsible citizen in the environments in which a company operates, marketers have the ongoing task of engaging in only pro-societal activities and conducting business in an ethical manner. There are many marketing companies that donate millions of dollars or land to communities, clean lakes and rivers, revamp deteriorating neighborhoods, give free products to the needy, manage recycling activities, and so forth. There is no doubt that the need for marketing to continue such activities will increase.
1. [1]Sources: Neil King, Jr. and Jess Bravin, "Call It Mission Impossible Inc.—Corporate Spying Firms Thrive," The Wall Street Journal, Monday, July 3, 2000, pp. B1, B4; Norm Brodsky, "The First Step," Inc., August, 2000, pp. 37—38; "Spy Practice," Sunday Times (London), July 23, 2000, p. 89; "Competitive Intelligence is Not Corporate Espionage,” Financial News, June 30, 2000, p. A6. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/01%3A_Introducing_Marketing/1.05%3A_Characteristics_of_a_marketing_organization.txt |
Marketing is an individualized and highly creative process. Despite the availability of high-powered computers and sophisticated software capable of analyzing massive amounts of data, marketing is still more of an art rather than a science. Each business must customize its marketing efforts in response to its environment and the exchange process. Consequently, no two marketing strategies are exactly the same.
This requirement of marketing to play slightly different roles, depending upon some set of situational criteria, has in turn provided us with a division of marketing into a number of different categories. This is not to imply, however, that there are not general marketing principles that work in most businesses—there are. There is a right and wrong way to design a package. There are certain advertising strategies that tend to work more often than others. Rather, we are saying that because of certain factors, a business's approach toward marketing and the ensuing strategy will require some modification from the basic plan.
Shown in Table 1 are the most common types of marketing categories. Since these various types of marketing will be discussed throughout this text, a brief introduction is provided at this point.
Macromarketing versus micromarketing
The division of marketing into macromarketing and micromarketing is a fairly recent one. Initially, the division was a result of the controversy concerning the responsibility of marketing. Should marketing be limited to the success of the individual firm, or should marketing consider the economic welfare of a whole society? Accepting the later, or "macro", point of view dramatically changes the way marketing is carried out. In this light, every marketing decision must be evaluated with regard to how it might positively or negatively affect each person and institution operating in that society. In 1982, Bunt and Burnett surveyed the academic community in order to define more precisely the distinction between macro- and mircomarketing.4 Their findings suggest that the separation depends upon "what is being studied", "whether it is being viewed from the perspective of society or the firm", and "who receives the consequences of the activity". Examples of macromarketing activities are studying the marketing systems of different nations, the consequences on society of certain marketing actions, and the impact of certain technologies on the marketing transaction.
The use of scanners in supermarkets and automatic teller machines in banking illustrates the last example. Micromarketing examples include determining how Nikon Steel should segment its market, recommending how Denver Colorado’s National Jewish Hospital in the US should price their products, and evaluating the success of the US "Just Say No" anti-drug campaign.
AD 2: The pharmaceutical industry tries to maintain contact with consumers.
Service marketing versus goods marketing
The distinction between services and goods products is not always clear-cut. In general, service products tend to be intangible, are often consumed as they are produced, are difficult to standardize because they require human labor, and may require the customer to participate in the creation of the service product.
Goods products tend to be just the opposite in terms of these criteria. Consequently, marketers of service products usually employ a marketing strategy quite different from that of goods marketers. For example, a local family physician creates tangibility by providing an environment: waiting room examination rooms, diplomas on the walls, that convinces patients that they are receiving good health care. Conversely, coffee producers create intangibility in order to appear different from competitors. This is done through colorful packaging and advertisements showing people who are successful because they start each day with a cup or two or ten of Starbuck's coffee.
AD 3: Hot dogs are goods products and, as such, are marketed differently.
Table 1: Kinds of marketing
Classification
Example
Factors
Macromarketing
The devaluation of the yen
Emphasis of study
Micromarketing
A pricing strategy for Wal-Mart
Perspective, receiver of consequences
Goods Marketing
Nabisco International
Tangibility, standardization, storage, production, involvement
Service marketing
Chase Manhattan Bank
For-profit marketing
Otis Elevator
Concerns for profits
Nonprofit marketing
New York Museum of Art
Tax status
Mass marketing
Sony
Nature of contact information, process for purchasing and delivery
Direct marketing
Time Magazine
Internet marketing
trip.com
Local marketing
Imperial Garden Restaurant
Proximity of customers, geographic area, extent of distribution, network, marketing, variation commitment to country
Regional marketing
Olympia Brewery
National marketing
American Red Cross
International marketing
Ford Motor Company
Global marketing
Qwest
Consumer goods marketing
Kraft Foods
Nature of consumer
Business-to-business marketing
IBM
Product function
For-profit marketing versus nonprofit marketing
As the terms connote, the difference between for-profit and nonprofit marketing is in their primary objective. For-profit marketers measure success in terms of profitability and their ability to pay dividends or pay back loans. Continued existence is contingent upon level of profits.
Nonprofit institutions exist to benefit a society, regardless of whether profits are achieved. Because of the implicit objectives assigned to non-profits, they are subject to an entirely different additional set of laws, notably tax laws. While they are allowed to generate profits, they must use these monies in specific way in order to maintain their non-profit status. There are several other factors that require adjustments to be made in the marketing strategies for nonprofits.
Mass marketing, direct marketing, and Internet marketing
Mass marketing is distinguished from direct marketing in terms of the distance between the manufacturer and the ultimate user of the product. Mass marketing is characterized as having wide separation and indirect communication. A mass marketer, such as Nike, has very little direct contact with its customers and must distribute its product through various retail outlets alongside its competitors. Communication is impersonal, as evidenced by its national television and print advertising campaigns, couponing, and point-of-purchase displays. The success of mass marketing is contingent on the probability that within the huge audience exposed to the marketing strategy there exist sufficient potential customers interested in the product to make the strategy worthwhile.
Direct marketing establishes a somewhat personal relationship with the customer by first allowing the customer to purchase the product directly from the manufacturer and then communicating with the customer on a first-name basis. This type of marketing is experiencing tremendous growth. Apparently, marketers have tired of the waste associated with mass marketing and customers want more personal attention. Also, modern mechanisms for collecting and processing accurate mailing lists have greatly increased the effectiveness of direct marketing. Catalogue companies (Spiegel, J.C. Penney), telecommunications companies (Sprint), and direct mail companies (Publishers Clearing House) are example of direct marketers. A modified type of direct marketing is represented by companies that allow ordering of product by calling a toll-free number or mailing in an order card as part of an advertisement.
Although, officially, Internet marketing is a type of direct marketing, it has evolved so quickly and demanded the attention of so many companies that a separate section here is warranted. Essentially, Internet technology (which changes by the moment) has created a new way of doing business. In the Internet age, the way consumers evaluate and follow through on their purchase decisions has changed significantly. "Call now!" is no longer an effective pitch. Consumers have control over how, when, and where they shop on the Internet. The Internet has all but eliminated the urgency of satisfying the need when the opportunity is presented. Internet marketing will be discussed in detail in a later chapter.
AD 4: An example of Internet marketing.
Local, regional, national, international, and global marketers
As one would expect, the size and location of a company's market varies greatly. Local marketers are concerned with customers that tend to be clustered tightly around the marketer. The marketer is able to learn a great deal about the customer and make necessary changes quickly. Naturally, the total potential market is limited. There is also the possibility that a new competitor or environmental factor will put a local marketer out of business.
Regional marketers cover a larger geographic area that may necessitate multiple production plants and a more complex distribution network. While regional marketers tend to serve adjoining cities, parts of states, or entire states, dramatic differences in demand may still exist, requiring extensive adjustments in marketing strategy.
National marketers distribute their product throughout a country. This may involve multiple manufacturing plants, a distribution system including warehouses and privately owned delivery vehicles, and different versions of the marketing "mix" or overall strategy. This type of marketing offers tremendous profit potential, but also exposes the marketer to new, aggressive competitors.
International marketers operate in more than one country. As will become clear later in this book, massive adjustments are normally made in the marketing mix in various countries. Legal and cultural differences alone can greatly affect a strategy's outcome. As the US market becomes more and more saturated with US-made products, the continued expansion into foreign markets appears inevitable.
Global marketing differs from international marketing in some very definite ways. Whereas international marketing means a company sells its goods or services in another country, it does not necessarily mean that the company has made any further commitments. Usually the product is still manufactured in the home country, sold by their people, and the profits are taken back to that country. In the case of Honda Motors, for example, it means building manufacturing plants in the US, hiring local employees, using local distribution systems and advertising agencies, and reinvesting a large percentage of the profits back into the US
Consumer goods marketing and business-to-business (industrial) marketing
Consumer goods marketers sell to individuals who consume the finished product. Business-to-business marketers sell to other businesses or institutions that consume the product in turn as part of operating the business, or use the product in the assembly of the final product they sell to consumers. Business-to-marketers engage in more personal selling rather than mass advertising and are willing to make extensive adjustments in factors such as the selling price, product features, terms of delivery, and so forth.
For the consumer goods marketer, the various marketing components are relatively fixed. In addition, consumer goods marketers might employ emotional appeals and are faced with the constant battle of getting their product into retail outlets.
Strategic components of marketing
A necessary and useful starting point for the study of marketing is consideration of the management process. The management of marketing serves as the framework for the process of marketing. Marketing management also serves as a central link between marketing and the societal level and everyday consumption by the general public. Although there are many variations of the marketing process, the one shown in Exhibit 1 will be employed in this book. Our process begins with corporate-level considerations, which dictate the direction the entire organization will take. The three corporate-level considerations listed here (mission, objectives, and strategy) are more precisely basic management topics, but are addressed in passing in the following sections.
Functional-level considerations
If a marketing firm is to adopt the customer-centered orientation discussed earlier, it must also extend this philosophy to the other functions/institutions with which it must interact. These functions, and the institutions that perform the functions can be categorized as non-marketing institutions and marketing institutions.
Nonmarketing institutions can exist within the organization or outside the organization. The former include accounting, financial planning, human resources, engineering, manufacturing, research and development, and so on. Marketing must be familiar with the capabilities of each of these functions and plan accordingly. Establishing and maintaining rapport with leaders in these other functional areas is a challenge for every marketer. Non-marketing institutions outside the firm facilitated the marketing process by providing expertise in areas not directly related to marketing. Examples include financial institutions that lend marketers necessary funds; regulatory institutions that pass laws to allow marketers to perform an activity; and the press, which tells the public about the activities of the marketer.
The marketing plan
To a great extent, the same sequence of activities performed at the corporate level is repeated at the marketing level. The primary difference is that the marketing plan is directly influenced by the corporate plan as well as the role of the other functions within the organization. Consequently, the marketing plan must always involve monitoring and reacting to changes in the corporate plan.
Apart from this need to be flexible to accommodate the corporate plan, the marketing plan follows a fairly standardized sequence. The marketing plan begins with a mission. A mission reflects the general values of the organization. What does it stand for? How does it define integrity? How does it view the people it serves? Every organization has an explicit or implicit mission. The corporate mission might contain words such as "quality", "global", "profitability", and "sacrifice". The marketing-level mission should extend the corporate mission by translating the latter into a marketing context. For example, a corporate mission that focuses on technology might be accompanied by a production-oriented marketing mission. A corporation that stresses stockholders/dividends may result in a sales-orientation in marketing. A corporate mission that concentrates on value or quality reflects a consumer oriented marketing mission. Once the mission is established, the situation analysis follows.
Capsule 2: Review
The characteristics of a marketing organization include:
1. maintenance of contact with consumers
2. objective comparison of existing capabilities with ability to meet present and future consumer need
3. maintenance of a consistent message from all marketing elements to all consumer groups
4. thorough understanding of strengths and weaknesses of competitors
5. understanding of the capabilities of other non—marketing marketing functions
6. attempts at familiarity with the community
The types of marketing:
1. macromarketing and micromarketing
2. service marketing and goods marketing
3. for-profit marketing and nonprofit marketing
4. mass marketing, direct marketing, and internet marketing
5. local, regional, national, and international marketing
6. consumer goods marketing and business-to-business marketing
Exhibit 1: The marketing process.
A marketing plan's situation analysis identifies factors, behaviors, and trends that have a direct bearing on the marketing plan. Much of this information is usually collected simultaneously with the corporate information. However, collecting information about potential and actual customers tends to be the concern of marketers. This is an ongoing activity and represents a great deal of the marketer's time and money. (The understanding and approaching the market chapter describes the process of marketing research.)
The situation analysis helps produce a relevant set of marketing objectives. At the corporate level, typical objectives include profitability, cost savings, growth, market share improvement, risk containment, reputation, and so on. All these corporate objectives can imply specific marketing objectives. "Introducing a certain number of new products usually" may lead marketers to profitability, increased market share, and movement into new markets. Desire to increase profit margins might dictate level of product innovation, quality of materials, and price charged.
The marketing mix
Once the objectives are established, the marketer must decide how to achieve these objectives. This produces a set of general strategies that must be refined into actionable and achievable activities. The marketing mix-product, price, promotion, and distribution—represents the way in which an organization's broad marketing strategies are translated into marketing programs for action.
Product. Products (and services)—the primary marketing mix element that satisfied customer wants and needs—provide the main link between the organization and its customers. Marketing organizations must be ready to alter products as dictated by changes in competitive strategies or changes in other elements of the organization's environment. Many organizations have a vast array of products in their mix. Ideally, each of the products is profitable. This is often not the case, so some tough decisions must be made concerning the length of time an unsuccessful product is kept on the market.
Distribution. The organization's distribution system moves the product to the final consumer. Because there are many alternatives when selecting a distribution channel, marketing management must have a clear understanding of the types of distributors, of the trends influencing those distributors, and of how those distributors are perceived by customers.
Communication (Promotion). The product's benefits must be communicated to the distributors and to the final customers. Therefore, the marketing organization must provide marketing information that is received favorably by distributors and final customers. Marketing organizations, through promotion, provide information by way of advertising, sales promotions, salespeople, public relations, and packaging.
Price. Finally, marketers must price their products in such a way that customers believe they are receiving fair value. Price is the primary means by which customers judge the attractiveness of a product or service. Moreover, price is a reflection of all the activities of an organization. Finally, price is a competitive tool, in that it is used as a basis for comparison of product and perceived value across different organizations.
Decisions about the marketing mix variables are interrelated. Each of the marketing mix variables must be coordinated with the other elements of the marketing program. Consider, for a moment, a situation in which a firm has two product alternatives (deluxe and economy), two price alternatives (USD 6 and USD 3), two promotion alternatives (advertising and couponing), and two distribution alternatives (department stores and specialty stores). Taken together, the firm has a total of 16 possible marketing mix combinations. Naturally, some of these appear to be in conflict, such as the "deluxe" product/low price combination. Nevertheless, the organization must consider many of the possible alternative marketing programs. The problem is magnified by the existence of competitors. The organization must find the right combination of product, price, promotion, and distribution so that it can gain a differential advantage over its competitors. (All the marketing mix elements will be discussed in more detail in later chapters of this book.)
Nintendo Co., Ltd. (NTDOY) provides a good example of a multinational organization that has effectively implemented their marketing strategy. As a pioneer in the interactive entertainment industry, Nintendo has succeeded in branding their productions as social icons. The company produces innovative products, redefines traditional markets within the industry, and connects with its customers as a social experience.[1]
Even a well-designed marketing program that has been through a thorough evaluation of alternatives will fail if its implementation is poor. Implementation involves such things as determining where to promote the product, getting the product to the ultimate consumer, putting a price on the product, and setting a commission rate for the salespeople. Once a decision is made, a marketing manager must decide how to best implement the terms of the plan.
Scandinavian Airlines (SAS) provides a good example of an organization that has successfully implemented their marketing strategy. SAS had good on-time performance, a good safety record, and many services designed to make flying easier for its customers. However, these were not enough to improve SAS revenue. Other things had to be done to attract business-class customers. The approach taken by SAS was largely symbolic in nature. They put everyone who bought a full-price ticket in "Euroclass", entitling them to use a special boarding card, an executive waiting lounge, designer steel cutlery, and a small napkin clip that could be taken as a collector's item. These and other values were provided at no extra cost to the customer. The approach was very successful; business class passengers flocked to SAS, since they appreciated the perceived increase in value for the price of a ticket.
The budget
Marketing mix components must be evaluated as part of an overall marketing strategy. Therefore, the organization must establish a marketing budget based on the required marketing effort to influence consumers. The marketing budget represents a plan to allocate expenditures to each of the components of the marketing mix. For example, the firm must establish an advertising budget as part of the marketing budget and allocate expenditures to various types of advertising media—television, newspapers, magazines. A sales promotion budget should also be determined, allocating money for coupons, product samples, and trade promotions. Similarly, budgets are required for personal selling, distribution, and product development.
How much should be spent? Consider the following example. A common question that marketers frequently ask is: "Are we spending enough (or too much) to promote the sale of our products?" A reasonable answer would revolve around another consideration: "What do we want to accomplish? What are our goals?" The discussion should next turn to the methods for achievement of goals and the removal of obstacles to these goals. This step is often skipped or avoided.
Usually, when the question is asked, "Are we spending enough?" an automatic answer is given, in terms of what others spend. Knowing what others in the same industry spend can be important to an organization whose performance lags behind the competition or to an organization that suspects that its expenditures are higher than they need to be. But generally, knowing what others spend leads to an unproductive "keeping-up-with-the-Joneses" attitude. It also assumes that the others know what they are doing.
Evaluating results
No marketing program is planned and implemented perfectly. Marketing managers will tell you that they experience many surprises during the course of their activities. In an effort to ensure that performance goes according to plans, marketing managers establish controls that allow marketers to evaluate results and identify needs for modifications in marketing strategies and programs. Surprises occur, but marketing managers who have established sound control procedures can react to surprises quickly and effectively.
Marketing control involves a number of decisions. One decision is what function to monitor. Some organizations monitor their entire marketing program, while others choose to monitor only a part of it, such as their sales force or their advertising program. A second set of decisions concerns the establishment of standards for performance; e.g. market share, profitability, or sales. A third set of decisions concerns how to collect information for making comparisons between actual performance and standards. Finally, to the extent that discrepancies exist between actual and planned performance, adjustments in the marketing program or the strategic plan must be made.
Once a plan is put into action, a marketing manager must still gather information related to the effectiveness with which the plan was implemented. Information on sales, profits, reactions of consumers, and reactions of competitors must be collected and analyzed so that a marketing manager can identify new problems and opportunities.
1. [1]Burnett's update for 2009 publication. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/01%3A_Introducing_Marketing/1.06%3A_The_role_of_marketing_in_the_firm_-_a_basis_for_classification.txt |
A prime guideline for marketing success is to realize that establishing customer satisfaction should be the company's number-one priority. The only people who really know what customers want are the customers themselves. A company that realizes this will develop a marketing mentality that facilitates information gathering and maintains effective communication with the primary reason for the company's existence: the customer.
A second guideline is to establish a company image that clearly reflects the values and aspirations of the company to employees, customers, intermediaries, and the general public. Philips Petroleum has done this for years with their advertising campaign that focuses on how their company benefits society.
Third, while marketing requires work that is clearly distinct from other business activities, it should be central to the entire organization. Marketing is the aspect of the business that customers see. If they see something they do not like, they look elsewhere.
Fourth, the business should develop a unique strategy that is consistent with the circumstances that it faces. The marketer must adapt basic marketing principles to the unique product being sold. This means that what General Foods does may not work for General Telephone & Electronics Corporation (GTE) because one is inherently a goods product and the other a service product. Neither will work for the US State of Kentucky's Parks and Recreation Department, because that is a public, nonprofit organization. In other words, imitating what other organizations do without fully understanding one's own situation is a dangerous strategy.
Finally, technological progress dictates how marketing will be performed in the future. Because of computer technology inventiveness, both consumers and businesses are better informed. Knowledge is the most important competitive advantage. The world is one market, and information is changing at light-speed.
Capsule 3: Review
1. The components of marketing management are as follows:
(a) corporate—level considerations include the organization's mission and objectives
(b) functional—level considerations include non—marketing institutions and marketing institutions.
(c) marketing—level considerations include the mission, the situation analysis, objectives, strategy, implementation, budget, and evaluation
(d) the marketing mix includes the primary tools available to the marketer: product, distribution, promotion, and price
2. The keys to marketing success are:
(e) satisfy the customer
(f) establish a clear company image
(g) make marketing central to the organization
(h) be proactive
(i) develop a strategy consistent with the situation
The Wall Street Journal
wsj.com
In practice
Marketing plays a critical role in the success of business organizations: it helps them create a competitive advantage. By continuously collecting information about customers' needs and competitors' capabilities and by sharing this information across departments, business organizations can create a competitive advantage by increasing value for customers.
Individuals working in marketing departments must be knowledgeable about all the elements of the business that impact the success of marketing efforts. Marketing objectives are directed by an organization's mission statement, and marketers use a set of strategies to achieve these objectives.
Implementation is critical to a marketing plan's success; therefore, the marketing budget allocates expenditures for each of the components of the marketing mix. Marketing success depends on several factors, the most important of which is establishing customer satisfaction as the number one priority.
Take a tour
The Front Section of the Interactive Journal (wsj.com) is similar to the front page of the newspaper version of The Wall Street Journal. The left column displays the menu selection, with the five major sections listed at the top. These five sections are:
1. Front Section
2. Marketplace
3. Money & Investing
4. Tech Center
5. Personal Journal
The menu remains on the page as you navigate through the site, allowing you to return to the Front Section at any time.
Articles related to marketing are typically found in the Marketplace section. Click on Marketplace now to view today's articles. Just below the main menu on the left side, a smaller menu titled In this Section appears, listing main header topics in Marketplace. One of the topics is Marketing/Media. Visit this section now to read today's articles.
The chapter, “Introducing marketing”, provides and overview of the importance and functions of marketing in business organizations. Marketing takes many forms, and evolves with new technologies. Marketing on the Internet, also known as e-commerce marketing, provides challenges and opportunities for marketers. Visit Volkswagen's website, www.vw.com to see how the company has extended its marketing efforts from television and print to its website.
Deliverable
Search the Interactive Journal for articles about e-commerce marketing. Under Journal Atlas, click on Search to conduct a search using key words like e-commerce, Internet, and marketing. Use the Business Index feature to search for articles on specific companies. Search the Business Index now to find articles on Volkswagen. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/01%3A_Introducing_Marketing/1.07%3A_Keys_to_Marketing_Success.txt |
This introductory chapter described marketing as one of the major strategic tools available to the business organization. It began with a basic definition and expanded to a set of propositions of marketing. Simply, marketing is based on the mission statement of the organization; is dependent on the effective management of other functional areas; contains a functional area guided by its own philosophy; is the functional area that is concerned with market exchanges; and is likely to be successful when the philosophy, tasks, and manner of implementing available technology are coordinated and complimentary.
The chapter also discussed several characteristics shared by organizations that correctly implement marketing. Referred to as the Cs of marketing, they include consumer contact, company capabilities, communication, cross-functional contact, and community contact. Companies share these characteristics; the following factors divide marketing into specific types: macromarketing and micromarketing; services and goods marketing; for-profit and nonprofit marketing; mass and direct marketing; local, regional, national, and international marketing; and consumer goods and business-to-business marketing.
The chapter concluded with a discussion of the four levels of strategic management with considerations applicable to marketing: corporate functional, marketing, and marketing mix.
Key terms
Marketing The process of planning and executing the conception, pricing, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives.
Consumer/customers Individuals who have needs/wants that can be satisfied by the marketer's product or service.
Transaction An exchange between the person with the need and the organization selling the need-satisfying thing, inherently economic-based.
Internal marketing Attempting to ensure that all employees are positive ambassadors of the organization.
Competitive advantage Convince buyers (potential customers) that what you have to offer them comes closest to meeting their particular want or need at that point in time.
Marketing concept Understanding the consumer and working from the customer back rather than factory forward.
Questions
➢ Some marketers believe the Internet will become the most effective avenue for marketing products to consumers. Do you agree or disagree?
➢ Recently, the effectiveness of online marketing efforts has been questioned. What can marketers do to measure the success of online marketing?
➢ What advantages does receiving the Wall Street Journal online provide for users? Specifically, marketers?
➢ How would you have defined marketing before you read this chapter? How does that definition differ from the definition provided?
➢ Can you think of another organization that demonstrates the propositions of marketing as well as L.L. Bean? Provide a similar discussion using that organization.
➢ What are the factors to consider in maintaining consumer contact? Community contact?
➢ Why is it so important to understand your competition? Company functions?
➢ Contrast macro- and micromarketing. Contrast services and goods marketing.
➢ Demonstrate how the corporate mission can directly influence marketing.
➢ What is the difference between the internal and external environment? Provide five examples of each.2
➢ What is a competitive advantage? How does marketing contribute to the creation of a competitive advantage?
➢ Discuss the reasons for studying marketing.
➢ Give examples of how marketing communication differs from personal communication.
➢ Identify the ways in which Harley-Davidson exhibits the propositions discussed in this chapter.
➢ Would you consider Harley to be a marketing organization? Why or why not?
Project
Survey 10 nonbusiness students and ask them to provide a definition of marketing. Analyze these answers with respect to how they differ and why people differed in their understanding of this topic. Write a five page report explaining.
Case application
The hog is alive and well
After making a remarkable comeback in the 1980s, motorcycle manufacturer Harley-Davidson had two-year-long waiting lists all over the country. But the success placed the company in a familiar quandary. Should Harley expand and risk a market downturn or should it stay the course, content with its good position in the industry?
“To invest or not to invest, that was the question", notes Frank Cimermancic, Harley's Director of Business Planning. "Dealers were begging us to build more motorcycles. But you have to understand our history. One of the things that caused past problems was lack of quality, and that was the result of a too-rigid expansion. We did not want to relive that situation.”
In 1989, the reputation of Harley-Davidson was excellent. Harley shipped 30,000 motorcycles in 1985; just four years later it shipped 44,000. Harley's market share in the heavyweight bike category went from 27 per cent to 57 per cent during the same time period. It was regularly turning a profit—USD 53 million in 1989.
At the same time, however, the market for heavyweight bikes was shrinking. Harley-Davidson needed to know whether its growth could continue. "We were doing fine, but look at the market", said Cirnermancic. "Maybe, we thought, we could reverse these trends and become an industry leader, something we had not been for years."
A new kind of customer seemed to hold the key to market growth. White-collar motorcycle enthusiasts, or "Rubbies" (rich urban bikers), started to shore up Harley sales in the mid-1980s, adding to the company's success and image. But whether these people were reliable, long-term customers was another question. Harley also needed to know if it should market its product differently to different audiences. A core clientèle of traditional "bikers" had kept Harley afloat during its leanest years, and they could not be alienated.
From their research, Harley identified seven core customer types: the Adventure-Loving Traditionalist, the Sensitive Pragmatist, the Stylish Status-Seeker, the Laid-Back Camper, the Classy Capitalist, the Cool-Headed Loner, and the Cocky Misfit. All of them appreciated Harley-Davidson for the same reasons: independence, freedom, and power constituted the universal Harley appeal. Also, owners were very loyal.
Loyalty meant the company could build and sell more motorcycles without having to overextend itself. In 1990, Harley expanded to build 62,800 bikes; in 2000, it built more than 180,000. Based on research and the still-expanding waiting lists, Harley expects its phenomenal growth to continue. In addition, Harley is expanding its product line. In early 2000, the company introduced a USD 4,400 bike called the Blast, aimed at first-time riders and women.[1]
1. [1]Sources: Ian P. Murphy, "Aided by Research, Harley Goes Whole Hog," The Marketing News, December 2, 1996, p. 16; Richard A. Melcher, "Tune-up Time for Harley," Business Week, April 8, 1996, pp. 90. 94; Kelly Barron, "HogWild," Forbes, May 15, 2000, pp. 68—70. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/01%3A_Introducing_Marketing/1.08%3A_Summary_and_Review_Questions.txt |
Thumbnail: www.pexels.com/photo/custome...or-wheel-6231/
02: Understanding and approaching the market
Knowing your market accurately and completely is a prerequisite for successful marketing. This task is made even more difficult for companies trying to advertise on the Web. Yet, as noted earlier, this trend toward using the Internet will continue. Three important concepts related to the topic of markets are presented in this chapter: defining the nature of markets, identifying the types of markets, and a discussion of product differentiation and market segmentation.
Defining the market
The market can be viewed from many different perspectives and, consequently, is impossible to define precisely. In order to provide some clarity, we provide a basic definition of a market: a group of potential buyers with needs and wants and the purchasing power to satisfy them. Rather than attempting to cut through the many specialized uses of the term, it is more meaningful to describe several broad characteristics and use this somewhat ambiguous framework as the foundation for a general definition.
The market is people
Since exchange involves two or more people, it is natural to think of the market as people, individuals, or groups. Clearly, without the existence of people to buy and consume goods, services, and ideas, there would be little reason for marketing. Yet this perspective must be refined further if it is to be useful.
People constitute markets only if they have overt or latent wants and needs. That is, individuals must currently recognize their need or desire for an existing or future product, or have a potential need or desire for an existing or future product. While the former condition is quite straightforward, the latter situation is a bit more confusing, in that it forces the marketer to develop new products that satisfy unmet needs. Potential future customers must be identified and understood.
When speaking of markets as people, we are not concerned exclusively with individual ultimate consumers. Although individuals and members of households do constitute the most important and largest category of markets, business establishments and other organized behavior systems also represent valid markets. People, individually or in groups, businesses, and institutions create markets.
However, people or organizations must meet certain basic criteria in order to represent a valid market:
• There must be a true need and/or want for the product, service, or idea; this need may be recognized, unrecognized, or latent.
• The person/organization must have the ability to pay for the product via means acceptable to the marketer.
• The person/organization must be willing to buy the product.
• The person/organization must have the authority to buy the product.
• The total number of people/organizations meeting the previous criteria must be large enough to be profitable for the marketer.
All five criteria must be met for an aggregate group of people or organizations to equate to a market. Failure to achieve even one of the criteria may negate the viability of a market. An interesting example is the pharmaceutical industry. There are several serious human diseases that remain uncured only because they have not been contracted by a large enough number of people to warrant the necessary research. The excessive research costs required to develop these drugs necessitates that companies are assured a certain level of profitability. Even though the first four criteria may be met, a small potential customer base means no viable market exists.
The market is a place
Thinking of the market as a place,"the marketplace", is a common practice of the general public. Such locations do exist as geographical areas within which trading occurs. In this context, we can think of world markets, international markets, American markets, regions, states, cities, and parts of cities. A shopping center, a block, a portion of a block, and even the site of a single retail store can be called a market.
While not as pervasive as the "people" component of the market, the "place" description of a market is important too. Since goods must be delivered to and customers attracted toward particular places where transactions are made, this identification of markets is useful for marketing decision-making purposes. Factors such as product features, price, location of facilities, routing salespeople, and promotional design are all affected by the geographic market. Even in the case of unmeasurable fields, such as religion, a marketplace might be Yankee Stadium in the state of New York in the United States, where Billy Graham is holding a revival. Finally, a market may be somewhere other than a geographical region, such as a catalogue or ad that allows you to place an order without the assistance of a marketing intermediary or an 800 number.
The market is an economic entity
In most cases, a market is characterized by a dynamic system of economic forces. The four most salient economic forces are supply, demand, competition, and government intervention. The terms buyer's market and seller's market describe different conditions of bargaining strength. We also use terms such as monopoly, oligopoly, and pure competition to reflect the competitive situation in a particular market. Finally, the extent of personal freedom and government control produces free market systems, socialistic systems, and other systems of trade and commerce.1
Again, placing these labels on markets allows the marketer to design strategies that match a particular economic situation. We know, for instance, that in a buyer's market, there is an abundance of product, prices are usually low, and customers dictate the terms of sale. US firms find that they must make tremendous strategy adjustments when they sell their products in Third World markets. The interaction of these economic factors is what creates a market.
There is always the pressure of competition as new firms enter and old ones exit. Advertising and selling pressure, price and counter price, claim and counterclaim, service and extra service are all weapons of competitive pressure that marketers use to achieve and protect market positions. Market composition is constantly changing.
2.02: Types of market
Now that we have defined markets in a general sense, it is useful to discuss the characteristics of the primary types of markets: (1) consumer markets, (2) industrial markers, (3) institutional markets, and (4) reseller markets. It should be noted that these categories are not always clear-cut. In some industries, a business may be in a different category altogether or may even encompass multiple categories. It is also possible that a product may be sold in all four markets. Consequently, it is important to know as much as possible about how these markets differ so that appropriate marketing activities can be developed.
Consumer markets
When we talk about consumer markets, we are including those individuals and households who buy and consume goods and services for their own personal use. They are not interested in reselling the product or setting themselves up as a manufacturer. Considering the thousands of new products, services, and ideas being introduced each day and the increased capability of consumers to afford these products, the size, complexity, and future growth potential of the consumer market is staggering. The next chapter, “Marketing research: an aid to decision making”, touches on many of these issues.
Industrial markets
The industrial market consists of organizations and the people who work for them, those who buy products or services for use in their own businesses or to make other products. For example, a steel mill might purchase computer software, pencils, and flooring as part of the operation and maintenance of their business. Likewise, a refrigerator manufacturer might purchase sheets of steel, wiring, shelving, and so forth, as part of its final product.2 These purchases occur in the industrial market.
There is substantial evidence that industrial markets function differently than do consumer markets and that the buying process in particular is different.
Institutional markets
Another important market sector is made up of various types of profit and nonprofit institutions, such as hospitals, schools, churches, and government agencies. Institutional markets differ from typical businesses in that they are not motivated primarily by profits or market share. Rather, institutions tend to satisfy somewhat esoteric, often intangible, needs. Also, whatever profits exist after all expenses are paid are normally put back into the institution. Because institutions operate under different restrictions and employ different goals, marketers must use different strategies to be successful.
Reseller markets
All intermediaries that buy finished or semi-finished products and resell them for profit are part of the reseller market. This market includes approximately 383,000 wholesalers and 1,300,000 retailers that operate in the US. With the exception of products obtained directly from the producer, all products are sold through resellers. Since resellers operate under unique business characteristics, they must be approached carefully. Producers are always cognizant of the fact that successful marketing to resellers is just as important as successful marketing to consumers.
AD 1: The Olympus camera is part of the consumer market. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/02%3A_Understanding_and_approaching_the_market/2.01%3A_Introduction_and_Defining_market.txt |
All the parties in an exchange usually have the ability to select their exchange partner(s). For the customer, whether consumer, industrial buyer, institution, or reseller, product choices are made daily. For a product provider, the person(s) or organization(s) selected as potential customers are referred to as the target market. A product provider might ask: given that my product will not be needed and/or wanted by all people in the market, and given that my organization has certain strengths and weaknesses, which target group within the market should I select? The process is depicted in Exhibit 2.
For a particular product, marketing organizations might follow an undifferentiated, segmentation, or combination approach toward a market. These concepts are explained in the following sections.
The undifferentiated market (market aggregation)
The undifferentiated approach occurs when the marketer ignores the apparent differences that exist within the market and uses a marketing strategy that is intended to appeal to as many people as possible. In essence, the market is viewed as a homogeneous aggregate. Admittedly, this assumption is risky, and there is always the chance that it will appeal to no one, or that the amount of waste in resources will be greater than the total gain in sales.
For certain types of widely consumed items (e.g. gasoline, soft drinks, white bread), the undifferentiated market approach makes the most sense. One example was the campaign in which Dr. Pepper employed a catchy general-appeal slogan, "Be A PEPPER!", that really said nothing specific about the product, yet spoke to a wide range of consumers. Often, this type of general appeal is supported by positive, emotional settings, and a great many reinforcers at the point-of-purchase. Walk through any supermarket and you will observe hundreds of food products that are perceived as nearly identical by the consumer and are treated as such by the producer—especially generic items.
Identifying products that have a universal appeal is only one of many criteria to be met if an undifferentiated approach is to work. The number of consumers exhibiting a need for the identified product must be large enough to generate satisfactory profits. A product such as milk would probably have universal appeal and a large market; something like a set of dentures might not. However, adequate market size is not an absolute amount and must be evaluated for each product.
Two other considerations are important: the per unit profit margin and the amount of competition. Bread has a very low profit margin and many competitors, thus requiring a very large customer base. A product such as men's jockey shorts delivers a high profit but has few competitors.
Success with an undifferentiated market approach is also contingent on the abilities of the marketer to correctly identify potential customers and design an effective and competitive strategy. Since the values, attitudes, and behaviors of people are constantly changing, it is crucial to monitor these changes. Introduce numerous cultural differences, and an extremely complex situation emerges. There is also the possibility that an appeal that is pleasing to a great diversity of people may not then be strong or clear enough to be truly effective with any of these people.
Finally, the competitive situation might also promote an undifferentiated strategy. All would agree that Campbell's dominates the canned soup industry, and that there is little reason for them to engage in much differentiation. Clearly, for companies that have a very large share of the market undifferentiated IT market coverage makes sense. For a company with small market share, it might be disastrous.3
Product differentiation
Most undifferentiated markets contain a high level of competition. How does a company compete when all the product offerings are basically the same and many companies are in fierce competition? The answer is to engage in a strategy referred to as product differentiation. It is an attempt to tangibly or intangibly distinguish a product from that of all competitors in the eyes of customers. Examples of tangible differences might be product features, performance, endurance, location, or support services, to name but a few. Chrysler once differentiated their product by offering a 7-year/70,OOO-mile warranty on new models. Pepsi has convinced many consumers to try their product because they assert that it really does taste better than Coke. Offering products at a lower price or at several different prices can be an important distinguishing characteristic, as demonstrated by Timex watches.
Some products are in fact the same, and attempts to differentiate through tangible features would be either futile or easily copied. In such cases, an image of difference is created through intangible means that may have little to do with the product directly. Soft drink companies show you how much fun you can have by drinking their product. Beer companies suggest status, enjoyment, and masculinity. Snapple, an American beverage company owned by Dr. Pepper, may not taste the best or have the fewest calories, but may have the funniest, most memorable commercials. There tends to be a heavy emphasis on the use of mass appeal means of promotion, such as advertising, when differentiated through intangibles. Note the long-term use of Bill Cosby by Jell-O to create an image of fun. Microsoft has successfully differentiated itself through an image of innovation and exceptional customer service.
There are certain risks in using product differentiation. First, a marketer who uses product differentiation must be careful not to eliminate mention of core appeals or features that the consumer expects from the product. For example, differentiating a brand of bread through its unique vitamin and mineral content is valid as long as you retain the core freshness feature in your ad. Second, highlighting features that are too different from the norm may prove ineffective. Finally, a product may be differentiated on a basis that is unimportant to the customer or difficult to understand. The automobile industry has learned to avoid technical copy in ads since most consumers do not understand it or do not care.
However, there is a flip-side to product differentiation, an approach toward the market called market segmentation.4
The segmented market
While product differentiation is an effective strategy to distinguish your brand from competitors', it also differentiates your own products from one another. For example, a company such as Franco-American Spaghetti has differentiated its basic product by offering various sizes, flavors, and shapes. The objective is to sell more product, to more people, more often. Kraft has done the same with their salad dressings; Xerox with its multitude of office products. The problem is not competition; the problem is the acknowledgment that people within markets are different and that successful marketers must respond to these differences.
This premise of segmenting the market theorizes that people and/or organizations can be most effectively approached by recognizing their differences and adjusting accordingly. By emphasizing a segmentation approach, the exchange process should be enhanced, since a company can more precisely match the needs and wants of the customer. Even the soft drink manufacturers have moved away from the undifferentiated approach and have introduced diet, caffeine-free, and diet-caffeine-free versions of their basic products.5
While it is relatively easy to identify segments of consumers, most firms do not have the capabilities or the need to effectively market their product to all of the segments that can be identified. Rather, one or more target markets (segments) must be selected. In reality, market segmentation is both a disaggregation and aggregation process. While the market is initially reduced to its smallest homogeneous components (perhaps a single individual), business in practice requires the marketer to find common dimensions that will allow him to view these individuals as larger, profitable segments. Thus, market segmentation is a twofold process that includes: (1) identifying and classifying people into homogeneous groupings, called segments, and (2) determining which of these segments are viable target markets. In essence, the marketing objectives of segmentation analysis are:
• to reduce risk in deciding where, when, how, and to whom a product, service, or brand will be marketed
• to increase marketing efficiency by directing effort specifically toward the designated segment in a manner consistent with that segment's characteristics | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/02%3A_Understanding_and_approaching_the_market/2.03%3A_Approaching_the_market.txt |
Segmentation strategies
There are two major segmentation strategies followed by marketing organizations: a concentration strategy and a multisegment strategy.
An organization that adopts a concentration strategy chooses to focus its marketing efforts on only one market segment. Only one marketing mix is developed. For example, the manufacturer of Rolex watches has chosen to concentrate on the luxury segment of the watch market. An organization that adopts a concentration strategy gains an advantage by being able to analyze the needs and wants of only one segment and then focusing all its efforts on that segment. This can provide a differential advantage over other organizations that market to this segment but do not concentrate all their efforts on it. The primary disadvantage of concentration is related to the demand of the segment. As long as demand is strong, the organization's financial position will be strong. If demand declines, the organization's financial position will also decline.
The other segmentation strategy is a multisegment strategy. When an organization adopts this strategy, it focuses its marketing efforts on two or more distinct market segments. The organization does so by developing a distinct marketing mix for each segment. They then develop marketing programs tailored to each of these segments. Organizations that follow a multisegment strategy usually realize an increase in total sales as more marketing programs are focused at more customers. However, the organization will most likely experience higher costs because of the need for more than one marketing program.6
Bases of segmentation
There are many different ways by which a company can segment its market, and the chosen process varies from one product to another. Further, the segmentation process should be an ongoing activity. Since markets are very dynamic, and products change over time, the bases for segmentation must likewise change. (See Capsule 4.)
Capsule 4: Review
1. Defining the market
• the market is people
• the market is a place
• the market is an economic entity
2. Types of markets
• consumer markets
• industrial markets
• institutional markets
• reseller markets
• 3. Approaching the market
• the undifferentiated market (market aggregation)
• product differentiation
• the segmented market
(a) strategies: concentration, multisegment
In line with these basic differences we will first discuss the bases for segmenting ultimate consumers followed by a discussion of the factors used to segment industrial users.
Segmenting ultimate consumers
Geographic segments. Geography probably represents the oldest basis for segmentation. Regional differences in consumer tastes for products as a whole are well-known. Markets according to location are easily identified and large amounts of data are usually available. Many companies simply do not have the resources to expand beyond local or regional levels; thus, they must focus on one geographic segment only. Domestic and foreign segments are the broadest type of geographical segment.
Closely associated with geographic location are inherent characteristics of that location: weather, topography, and physical factors such as rivers, mountains, or ocean proximity. Conditions of high humidity, excessive rain or drought, snow or cold all influence the purchase of a wide spectrum of products. While marketers no longer segment markets as being east or west of the Mississippi River in the US, people living near the Mississippi river may constitute a viable segment for several products, such as flood insurance, fishing equipment, and dredging machinery.
Population density can also place people in unique market segments. High-density states in the US such as California and New York and cities such as New York City, Hong Kong, and London create the need for products such as security systems, fast-food restaurants, and public transportation.
Geographic segmentation offers some important advantages. There is very little waste in the marketing effort, in that the product and supporting activities such as advertising, physical distribution, and repair can all be directed at the customer. Further, geography provides a convenient organizational framework. Products, salespeople, and distribution networks can all be organized around a central, specific location.
The drawbacks in using a geographic basis of segmentation are also notable. There is always the obvious possibility that consumer preferences may (unexpectedly) bear no relationship to location. Other factors, such as ethnic origin or income, may overshadow location. The stereotypical Texan from the USA, for example, is hard to find in Houston, where one-third of the population has immigrated from other states. Another problem is that most geographic areas are very large, regional locations. It is evident that the Eastern seaboard market in the US contains many subsegments. Members of a geographic segment often tend to be too heterogeneous to qualify as a meaningful target for marketing action. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/02%3A_Understanding_and_approaching_the_market/2.04%3A_Under_Segmented_market.txt |
Demographic segments. Several demographic characteristics have proven to be particularly relevant when marketing to ultimate consumers. Segmenting the consumer market by age groups has been quite useful for several products. For example, the youth market (approximately 5 to 13) not only influences how their parents spend money, but also when they make purchases of their own. Manufacturers of products such as toys, records, snack foods, and video games have designed promotional efforts directed at this group. More recently, the elderly market (age 65 and over) has grown in importance for producers of products such as low-cost housing, cruises, hobbies, and health care.
AD 2: The focus in on the pre-teen to young adult segment, assuming they test product features at the store.
Gender has also historically been a good basis for market segmentation. While there are some obvious products designed for men or women, many of these traditional boundaries are changing, and marketing must apprise themselves of these changes. The emergence of the working women, for instance, has made determination of who performs certain activities in the family (e.g. shopping, car servicing), and how the family income is spent more difficult. New magazines such as Food & Wine, Men's Vogue, Marriage Partnership, and Father's Quarterly indicate how media is attempting to subsegment the male segment. Thus, the simple classification of male versus female may be useful only if several other demographic and behavioral characteristics are considered as well.
Another demographic trait closely associated with age and sex is the family life cycle. There is evidence that, based on family structure (i.e. number of adults and children), families go through very predictable behavioral patterns. For example, a young couple who have one young child will have far different purchasing needs than a couple in their late fifties whose children have moved out. In a similar way, the types of products purchased by a newly married couple will differ from those of a couple with older children.7
Income is perhaps the most common demographic oasis for segmenting a market. This may be partly because income often dictates who can or cannot afford a particular product. It is quite reasonable, for example, to assume that individuals earning minimum wage could not easily purchase a USD 25,000 sports car. Income tends to be a better basis for segmenting markets as the price tag for a product increases. Income may not be quite as valuable for products such as bread, cigarettes, and motor oil. Income may also be helpful in examining certain types of buying behavior. For example, individuals in the lower-middle income group are prone to use coupons. Playboy recently announced the introduction of a special edition aimed at the subscribers with annual incomes over USD 45,000.
Several other demographic characteristics can influence various types of consumer activities. Education, for example, affects product preferences as well as characteristics demanded for certain products. Occupation can also be important. Individuals who work in hard physical labor occupations (e.g. coal mining) may demand an entirely different set of products than a person employed as a teacher or bank teller, even though their incomes are the same. Geographic mobility is somewhat related to occupation, in that certain occupations (e.g. military, corporate executives) require a high level of mobility. High geographic mobility necessitates that a person (or family) acquire new shopping habits, seek new sources of products and services, and possibly develop new brand preferences. Finally, race and national origin have been associated with product preferences and media preferences. African Americans have exhibited preferences in respect to food, transportation, and entertainment, to name a few. Hispanics tend to prefer radio and television over newspapers and magazines as a means for learning about products. The following integrated marketing box discusses how race may be an overlooked segment.8,9
Even religion is used as a basis for segmentation. Several interesting findings have arisen from the limited research in this area. Aside from the obvious higher demands for Christian-oriented magazines, books, music, entertainment, jewelry, educational institutions, and counseling services, differences in demand for secular products and services have been identified as well. For example, the Christian consumer attends movies less frequently than consumers in general and spends more time in volunteer, even non-church-related, activities.
Notwithstanding its apparent advantages (i.e. low cost and ease of implementation), considerable uncertainty exists about demographic segmentation. The method is often misused. A typical misuse of the approach has been to construct "profiles" of product users. For example, it might be said that the typical consumer of Mexican food is under 35 years of age, has a college education, earns more than USD 10,000 a year, lives in a suburban fringe of a moderate-size urban community, and resides in the West. True, these characteristics do describe a typical consumer of Mexican food, but they also describe a lot of other consumers as well, and may paint an inaccurate portrait of many other consumers.
Usage segments. In 1964, Twedt made one of the earliest departures from demographic segmentation when he suggested that the heavy user, or frequent consumer, was an important basis for segmentation. He proposed that consumption should be measured directly, and that promotion should be aimed directly at the heavy user. This approach has become very popular, particularly in the beverage industry (e.g beer, soft drinks, and spirits). Considerable research has been conducted with this particular group and the results suggest that finding other characteristics that correlate with usage rate often greatly enhances marketing efforts.10
Four other bases for market segmentation have evolved from the usage-level criteria. The first is purchase occasion. Determining the reason for an airline passenger's trip, for instance, may be the most relevant criteria for segmenting airline consumers. The same may be true for products such as long-distance calling or the purchase of snack foods. The second basis is user status. It seems apparent that communication strategies must differ if they are directed at different use patterns, such as nonusers versus ex-users, or one-time users versus regular users. New car producers have become very sensitive to the need to provide new car buyers with a great deal of supportive information after the sale in order to minimize unhappiness after the purchase. However, determining how long this information is necessary or effective is still any body's guess. The third basis is loyalty. This approach places consumers into loyalty categories based on their purchase patterns of particular brands. A key category is the brand-loyal consumer. Companies have assumed that if they can identify individuals who are brand loyal to their brand, and then delineate other characteristics these people have in common, they will locate the ideal target market. There is still a great deal of uncertainty as to how to correctly measure brand loyalty. The final characteristic is stage of readiness. It is proposed that potential customers can be segmented as follows: unaware, aware, informed, interested, desirous, and intend to buy. Thus if a marketing manager is aware of where the specific segment of potential customers is, he/she can design the appropriate market strategy to move them through the various stages of readiness. Again, these stages of readiness are rather vague and difficult to accurately measure.
Integrated marketing
Seeking the African-American Web community
Silas Myers is a new millennium African-American. He is 31, holds an MBA from Harvard University, works as an investment analyst for money manager Hotchkeo & Wiley, and pulls in a salary close to six figures. He spends about 10 hours a week online, buying everything from a JVC portable radio to Arm & Hammer deodorant. "Maybe I am nuts," he says,"but shopping online is so much easier to me.”
Millions of African-Americans are online. They are younger, more affluent, and better educated than their offline kin. They are not tiptoeing onto the Internet. They are right at home. Five million blacks now cruise through cyberspace, nearly equaling the combined number of Hispanic, Asian, and Native American surfers, according to researcher Cyber Dialogue.
True, Internet use among African-Americans continues to lag behind the online white population: 28 per cent of blacks as opposed to 37 per cent for whites. It is time to take a closer look at the digital divide. While those who do not have Internet access tend to be poor and undereducated, there is a large group of African Americans who are spending aggressively on the Web. "We are looking at a tidal wave coming of African-American-focused content and online consumers," says Omar J. Wasow, executive director of BlackPlanet.com, a black-oriented online community. "You ignore it at your peril."
With good reason, African-Americans have become smitten with the ability to compare prices and find bargains online. Melvin Crenshaw, manager of Kidpreneurs magazine, recently used the Travelocity website to save USD 300 on a ski trip to Denver. "I really liked the value," he says.
It's a shame, then, that so few sites market to such an attractive group. Almost every bookstore on the street has a section in African-American or ethnic literature. So it is shocking that e-commerce giants like Amazon.com do not have ethnic book sections? The solution is easy. Web merchants can create what the National Urban League's B Keith Fulton calls "micro bundles”, web categories within a site's merchandise that resemble the inner-city black bookstore or clothier. "You want blacks to click on a button and feel like they are in virtual Africa or virtual Harlem," says Fulton, the Urban League's director of Technology programs and policy. To attract blacks, he recommends decorating that corner of the site in kinte cloth patterns. [1]
Psychological segments Research results show that the concept of segmentation should recognize psychological as well as demographic influences. For example, Phillip Morris has segmented the market for cigarette brands by appealing psychologically to consumers in the following way:
• Marlboro: the broad appeal of the American cowboy
• Benson & Hedges: sophisticated, upscale appeal
• Parliament: a recessed filter for those who want to avoid direct contact with tobacco
• Merit: low tar and nicotine
• Virginia Slims: appeal based on "You've come a long way, baby" theme
Evidence suggests that attitudes of prospective buyers towards certain products influence their subsequent purchase or non-purchase of them. If persons with similar attitudes can be isolated, they represent an important psychological segment. Attitudes can be defined as predispositions to behave in certain ways in response to given stimulus.11
Personality is defined as the long-lasting characteristics and behaviors of a person that allow them to cope and respond to their environment. Very early on, marketers were examining personality traits as a means for segmenting consumers. None of these early studies suggest that measurable personality traits offer much prospect of market segmentation. However, an almost inescapable logic seems to dictate that consumption of particular products or brands must be meaningfully related to consumer personality. It is frequently noted that the elderly drive big cars, that the new rich spend disproportionately more on housing and other visible symbols of success, and that extroverts dress conspicuously.12
Motives are closely related to attitudes. A motive is a reason for behavior. A buying motive triggers purchasing activity. The latter is general, the former more specific. In theory this is what market segmentation is all about. Measurements of demographic, personality, and attitudinal variables are really convenient measurements of less conspicuous motivational factors. People with similar physical and psychological characteristics are presumed to be similarly motivated. Motives can be positive (convenience), or negative (fear of pain). The question logically arises: why not observe motivation directly and classify market segments accordingly?
Lifestyle refers to the orientation that an individual or a group has toward consumption, work, and play and can be defined as a pattern of attitudes, interests, and opinions held by a person. Lifestyle segmentation has become very popular with marketers, because of the availability of measurement devices and instruments, and the intuitive categories that result from this process.13 As a result, producers are targeting versions of their products and their promotions to various lifestyle segments. Thus, US companies like All State Insurance are designing special programs for the good driver, who has been extensively characterized through a lifestyle segmentation approach.14, 15
Lifestyle analysis begins by asking questions about the consumer's activities, interests, and opinions. If a man earns USD 40,000-USD 50,000 per year as an executive, with a wife and four children, what does he think of his role as provider versus father? How does he spend his spare time? To what clubs and groups does he belong? Does he hunt? What are his attitudes toward advertising? What does he read?
AIO (activities, interests, opinions) inventories, as they are called, reveal vast amounts of information concerning attitudes toward product categories, brands within product categories, and user and non-user characteristics. Lifestyle studies tend to focus upon how people spend their money; their patterns of work and leisure; their major interests; and their opinions of social and political issues, institutions, and themselves. The popularity of lifestyles as a basis for market segmentation has prompted several research firms to specialize in this area. However, few have achieved the success of VALS and VALS 2 developed by SRI International.
Introduced in 1978, the original VALS (Values, Attitudes, and Lifestyle) divided the American population into nine segments, organized along a hierarchy of needs. After several years of use, it was determined that the nine segments reflected a population dominated by people in their 20s and 30, as the US was ten years ago. Moreover, businesses found it difficult to use the segments to predict buying behavior or target consumers. For these reasons, SRl developed an all-new system, VALS 2. It dropped values and lifestyles as its primary basis for its psychographic segmentation scheme. Instead, the 43 questions ask about unchanging psychological stances rather than shifting values and lifestyles.
The psychographic groups in VALS 2 are arranged in a rectangle (see Exhibit 3) They are stacked vertically by their resources (minimal to abundant) and horizontally by their self-orientation (principle, status, or action-oriented).
An annual subscription to VALS 2 provides businesses with a range of products and services. Businesses doing market research can include the VALS questions in their questionnaire. SRl will analyze the data and VALS-type the respondents.
1. [1]Sources: Roger O. Crockett, "Attention Must Be Paid," Business Week e-biz, February 7, 2000, p. 16; Kate Fitzgerald, "Connection Confirmation," Advertising Age, November 29, 1999, p. S-3; "African-Americans Online," Advertising Age, November 29,1999, p. S-14. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/02%3A_Understanding_and_approaching_the_market/2.05%3A_Under_Segmenting_ultimate_consumers.txt |
It is also important for the marketing manager to understand how business or organization customers can be segmented. Many firms sell not to ultimate consumers but to other businesses. Although there are many similarities between how consumers and businesses behave, there are also several differences, as mentioned earlier. Recall that business buyers differ as follows: (a) most business buyers view their function as a rational (problem-solving) approach; (b) the development of formal procedures, or routines, typifies most business buying; (c) there tend to be multiple purchase influences; (d) in industrial buying it is necessary to maintain the correct assortment of goods in inventory; and (e) it is often the responsibility of the purchasing executive to dispose of waste and scrap.
A number of basic approaches to segmenting organizational markets exist. An industrial marketing firm must be able to distinguish between the industries it sells to and the different market segments that exist in each of those industries. There are several basic approaches to segmenting organizational markets: (a) types of customers; (b) the Standard Industrial Classification; (c) end use; (d) common buying factors; and (e) buyer size and geography.2,16
Type of customer. Industrial customers, both present and potential, can be classified into one of three groups,
• Original Equipment Manufacturers (OEMs), such as Caterpillar in the road equipment industry
• end-users, such as farmers who use farm machinery produced by John Deere and OEMs
• after market customers, such as those who purchase spare parts for a piece of machinery
Similarly, industrial products can be classified into one of three categories, each of which is typically sold to only certain types of customers:
• Machinery and equipment (e.g. computers, trucks, bulldozers): these are end products sold only to OEM and end user segments.
• Components or subassemblies (e.g. switches, pistons, machine tool parts):these are sold to build and repair machinery and equipment and are sold in all three customer segments.
• Materials (e.g. chemicals, metals, herbicides): these are consumed in the end-user products and are sold only to OEMs and end users.
The Standard Industrial Classification (SIC). A second industrial segmentation approach employs the Standard Industrial Classification (SIC) codes published by the US Government. The SIC classifies business firms by the main product or service provided. Firms are classified into one of ten basic STC industries. Within each classification, the major groups of industries can be identified by the first two numbers of the SIC code. For example, SIC number 22 are textile mills, SIC number 34 are manufacturers of fabricated metals, and so on. An industrial producer would attempt to identify the manufacturing groups that represent potential users of the products it produces and sells. Exhibit 4 takes the two digit classification and converts it to three-, four-, five-, and seven-digit codes. As you can see in Exhibit 4, use of the SIC code allows the industrial manufacturer to identify the organizations whose principal request is, in this case, pliers. Based upon this list of construction machinery and equipment products, it is possible to determine what products are produced by what manufacturers by consulting one of the following sources:
• Dun's Market Identifiers—computer-based records of three million United States and Canadian business establishments by four-digit SIC.
• Metalworking Directory—a comprehensive list of metalworking plants with 20 or more employees, as well as metal distributors, by four-digit SIC.
• Thomas Register of American Manufacturers—a directory of manufacturers, classified by products, enabling the researcher to identify most or all of the manufacturers of any given product.
• Survey of Industrial Purchasing Power—an annual survey of manufacturing activity in the United States by geographic areas and four-digit SIC industry groups; reports the number of plants with 20 or more and 100 or more employees, as well as total shipment value.
End uses Sometimes industrial marketers segment markets by looking at how a product is used in different situations. When employing end-use segmentation, the industrial marketer typically conducts a cost/benefit analysis for each end-use application. The manufacturer must ask: What benefits does the customer want from this product? For example, an electric motor manufacturer learned that customers operated motors at different speeds. After making field visits to gain insight into the situation, he divided the market into slow speed and high speed segments. In the slow-speed segment, the manufacturer emphasized a competitively priced product with a maintenance advantage, while in the high-speed market product, superiority was stressed.
Common buying factors. Some industrial marketers segment markets by identifying groups of customers who consider the same buying factors important. Five buying factors are important in most industrial buying situations: (1) product performance, (2) product quality, (3) service, (4) delivery, and (5) price.2 Identifying a group of customers who value the same buying factors as important is difficult, as industrial organizations' and resellers' priorities often change.
Buyer size and geography. If organizations' markets cannot be easily segmented by one of the previous approaches, market advantages may still be realized by segmenting based on account size or geographic boundaries. Sales managers have done this for years, but only recently have organizations learned to develop several pricing strategies for customers that are both close and far away geographically. Similarly, different strategies can be developed for large, medium, and small customers. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/02%3A_Understanding_and_approaching_the_market/2.06%3A_Segmenting_organizational_markets.txt |
Single-base and multi-base segmentation
So far, we have talked about the use of individual bases for market segmentation. The use of a single-base segmentation strategy is a simple way to segment markets, and is often very effective. Clearly, the use of bases such as sex (cosmetics), or age (health care products, music), or income (automobiles), provides valuable insights into who uses what products. But the use of a single base may not be precise enough in identifying a segment for which a marketing program can be designed. Therefore, many organizations employ multibase segmentation strategies, using several bases to segment a total market. For example, the housing market might be segmented by family size, income, and age.
American Log Home, for example, offers a wide variety of packages and options to its customers based on their needs, incomes, skills, family size, and usage. Packages range from one-room shelters designed primarily for hunters to a 4,000 square-foot unit complete with hot tub, chandeliers, and three decks. Customers can select to finish part of the interior, part of the exterior, or to have the entire structure finished by American Log Home.
The resulting huge array of products is a disadvantage of multi-base segmentation as a strategy. Using several bases that vary in importance, considering all to be equal, could produce misdirected efforts.
Qualifying customers in market segments
Clearly, it is important to employ appropriate factors to identify market segments. Equally important is qualifying the customers who make up those segments. Qualifications involves judgment. Marketers must be able to differentiate between real prospects and individuals or firms who have some similar characteristics but cannot be converted to purchasers.
It should be clear that not all market segments present desirable marketing opportunities. Traditionally, five criteria have been employed to gauge the relative worth of a market segment:16
Clarity of identification: The degree to which we can identify who is in and who is outside the segment. Part of this process also involves the delineation of demographic and social characteristics that make it easier to measure and track the identified segment. Unfortunately, obtaining segment data is not always easy, especially when the segment is defined in terms of behavioral or benefit characteristics. Sex is a clear basis for segmenting a product such as brassieres.
Actual or potential need: Needs that reflect overt demands for existing goods and services, or needs that can be transformed into perceived wants through education or persuasion, constitute a segment. It is further assumed that this need exists in a large enough quantity to justify a separate segmentation strategy. This criterion requires the ability to measure both the intensity of the need and the strength of the purchasing power supporting it. A 40-story building has a clear need for elevators.
Effective demand: It is not enough for an actual or potential need to exist; purchasing power must also exist. Needs plus purchasing power create effective demand. The ability to buy stems from income, savings, and credit. Purchasing power derived from one or more of these three sources must belong to the members of a market segment in order for it to represent a meaningful marketing opportunity. The possession of a valid Visa or other credit card meets this criteria for most products.
Economic accessibility: The individuals in a market segment must be reachable and profitable. For example, segments could be concentrated geographically, shop at the same stores, or read the same magazines. Regrettably, many important segments—those based on motivational characteristics, for instance—cannot be reached economically. The elderly rich represent such a segment.
Positive response: A segment must react uniquely to marketing efforts. There must be a reason for using different marketing approaches in the various segments. Different segments, unless they respond in unique ways to particular marketing inputs, hardly justify the use of separate marketing programs. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/02%3A_Understanding_and_approaching_the_market/2.07%3A_Other_segmentations.txt |
During the last two decades, a more complete and concise understanding of market segmentation has emerged. This is not to say that there are not still unsettled issues, measurement problems, and other issues to consider. The most severe problem remains the difficulty of defining precisely the basis for segmentation. A great deal of knowledge about the market and considerable experience with it are highly desirable. Research into consumer motivation is essential. This does not mean that historical, descriptive data about consumers are no longer important. Nevertheless, the ultimate purpose of going through the process of delineating market segments is to select a target market or markets: otherwise, the segmentation process is worthless.
The segmental approach will be described throughout the text in greater detail. At this point, it is sufficient to know that the segmentation strategy is the primary marketing approach used by a majority of producers. Combined with product differentiation, it is the essence of a contemporary marketing strategy. The activity of selecting a target market involves five steps:
• Identify relevant person/organization and purchase situation variables beyond the core product variable. (For Minolta's Maxxum SLR Camera, the core product variable would be fool-proof photographs, and other relevant variables might be age, income, family composition, occasion for use, and photographic experience.).
• Collect and analyze other related data about potential segments (e.g. characteristics of neophyte camera users, price perceptions of these potential users, size of group, trends, minimum product features).
• Apply criteria of a good segment.
• Select one or more segments as target markets (e.g. neophyte photographers, frustrated with necessary adjustments for a 35mm camera, income of USD 35,000 or more, family, between 25-45 years of age, male).
• Develop appropriate action programs to reach target segment(s) (e.g. price at USD 350; distribute through discount stores, camera stores, and department stores; promote through TV and magazine ads). This type of effective action program is demonstrated in the Newsline that follows.
Newsline: Youth segments
It takes more than just traditional advertising to appeal to the ever elusive teenage market. One company that has discovered the right formula to reach this group is High Frequency Marketing (HFM), a youth marketing firm founded by Ron Vos. Since its inception in 1995, HFM has grown significantly in terms of cross-industry reach, marketing network, and revenue (which has tripled in the past two years). Vos attributes the company's success to its unconventional promotional campaigns.
As a youth marketing start-up, Vos's energies were initially focused on the music industry. He appealed to his target market of 12 to 26 year-olds by using grassroots marketing efforts and specializing in "takin' it to the streets". Back in 1995, street marketing had not become the cliche that it is now. Yet, Vos's key to success is the adaptability of his firm to youth culture and technology. As he likes to say, "As soon as a marketing concept becomes mainstream, it's history."
When asked to pinpoint a breakthrough campaign for his company, Vos immediately mentions The Wedding Singer. Hired by New Line Cinema in 1998 to promote the film, HFM developed the concept of a "karaoke jam contest" in the malls of 24 cities The campaign was immensely successful, opening doors for HFM to the whole entertainment industry.
Another successful campaign took place in 2000, when Food.com approached HFM with the concept of partnering with Second Harvest (a national food bank) to sponsor a national food drive on college campuses, using the incentive of awarding the campus that collected the most food at a big concert. HFM had to go back to the company and say that "you can put a carrot on the end of a stick, but the stick can't be too long". In other words, Food.com needed a more tangible campaign, something with instant feedback to "show (the students) that it is real, that it is there.” Vos and his creative marketing team came up with a compilation CD entitled "Music 4 Food", which was distributed free of charge to students who donated food (they also received a ticket to a nearby concert).[1]
The concept of positioning
Both product differentiation and market segmentation result in a perceived position for the company or organization. From the intelligent marketing organization, there should be an attempt to create the desired position, rather than wait for it to be created by customers, the public, or even competitors. Positioning is defined as the act of designing the company's offering and image to occupy a distinctive place in the target market's mind. The end result of positioning is the successful creation of a market-focused value proposition, a cogent reason why the target market should buy the product.
Since positioning is a strategy that starts with the product, we expand our discussion of positioning in the Product chapter.
The future of the marketplace
As the spread of the global marketplace continues, aided by satellites, the World Wide Web, and universal problems, it will also become increasingly difficult to effectively assess the market. In fact, there is solid evidence that the market will often consist of a single person or company. Customized product design, relationship marketing, and one-on-one marketing suggests that marketing has gone full circle. Like the first half of the twentieth century, when the corner grocer knew all of his customers personally, marketing in the rest of the twenty-first century may look very similar.
Capsule 5: Review
• Bases of segmentation
(a) ultimate consumers
i. geographic
ii. demographics
iii. usage
iv.psychological
(b) organizations
i. type of customer
ii. end uses
iii. common buying factors
iv. size and geography
(c) single-base versus multi-base
(d) qualify people into segments
i. clarity of identification
ii. actual or potential need
iii. effective demand
iv. economic accessibility
v. positive response
segmentation process
The Wall Street Journal (wsj.com)
In practice
What is the market? It depends on your product but, generally, all markets possess similar, basic characteristics. The market is people, either individuals or groups, businesses or institutions. The market is also a place, as in marketplace, where transactions take place. Finally, the market is an economic entity, influenced by financial pressures and government regulations.
In order to sell a product, marketers must know their market and know it well. Four primary markets exist, but they are not mutually exclusive. Consumer, industrial, institutional, and reseller markets all have characteristics specific to their consumers, but they also overlap in many instances. As a result, most successful companies segment their markets. By segmenting markets, a company can match the needs and wants of consumers to its product.
Print magazines and their online counterparts are excellent examples of market segmenting. The Interactive Journal targets the business community, while Outside Magazine (www.outsidemag.com). clearly targets outdoor enthusiasts.
You are able to customize the Interactive Journal to your personal preferences. On the Front Section, click on Personal Journal on the main menu. From here you will be directed to the Setup Center. Here, you can create folders in three separate areas:
1. News
2. Favorites
3. Portfolio
In the News section, you can search for news items in the Interactive Journal using key words, company names, and industry type. Articles meeting the criteria you specify will be listed automatically on a daily basis. Set up your own News folder now.
In the Favorites section, you can track regularly running columns and features in the major sections such as Marketplace and Tech Center. Create your own Favorites folder now.
In the Portfolio section, you can track your purchases and sales of specific stocks.
Deliverable
Identify three to five companies with segmented markets. Visit their websites for specific information about the companies and their products. Also search the Interactive Journal for more information about the companies you have identified. For each company, identify the segmented market and list specific characteristics about that market.
1. [1]Sources: Debra Goldman. "S&SI Markets the Tried and True to Teen Boys: Misogyny," Adweek, May 15, 2000, p. 24; Jinnefer Gilbert, "New Teen Obsession," Advertising Age, February 14, 2000, p. 38; Chritstina Merrill, "The Ripple Effect Reaches Gen Y." American Demographics, November 1999, pp. 15-16; Lauren Goldstein, ''The Alpha Teenager," Fortune, December 20, 1999, pp. 201-203. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/02%3A_Understanding_and_approaching_the_market/2.08%3A_The_strategy_of_market_segmentation.txt |
Learning Objectives
Having completed this chapter, you should:
• understand the role of marketing research
• understand the marketing research process and the techniques employed
Thumbnail: pixabay.com/photos/digital-m...oogle-1725340/
03: Marketing Research - an aid to decision making
Discovering why they chew
Juicy Fruit Gum, the oldest brand of the Wm. Wrigley Jr. Company, was not chewing up the teen market, gum's top demographic. In 1997, the company found itself under pressure from competitors. Sales and market share were down. How could Wrigley make more kids chomp on Juicy Fruit?
What qualities about Juicy Fruit might appeal to teens? Wrigley went to the source to find out. It found kids who chew five sticks or more of Juicy Fruit each week and promptly gave them a homework assignment. Find pictures that remind them of the gum and write a short story about it. From the focus group, Wrigley learned that teens chew Juicy Fruit because it is sweet. It refreshes and energizes them.
Their ad agency, BBDO, confirmed what the teens were saying. BBDO asked more than 400 heavy gum chewers to rate various brands by attributes that best represented them. For Juicy Fruit, respondents picked phrases such as "has the right amount of sweetness" and "is made with natural sweetness".
Another study by BBDO looked into why teens chew gum. Was it because they are stressed out—or because they forgot to brush their teeth before going to school? Nearly three out of four kids said they stick a wad into their mouth when they crave something sweet. And Juicy Fruit was the top brand they chose to fulfill that need (Big Red was a distant second).[1]
Introduction
Although the marketing research conducted by the Wrigley Co. was fairly simple, it provided a new direction for their marketing strategy. BBDO developed four TV commercials with the "Gotta Have Sweet" theme. Roughly 70 per cent of respondents voluntarily recalled the Juicy Fruit name after watching the commercial (the average recall for a brand of sugar gum is 57 per cent). Sales of 100-stick boxes of Juicy Fruit rose 5 per cent after the start of the ad campaign, reversing a 2 per cent decline prior to it. Juicy Fruit's market share also increased from 4.9 per cent to 5.3 per cent, the biggest gain of any established chewing gum brand during the year following the campaign.
Marketing research addresses the need for quicker, yet more accurate, decision making by the marketer. The impetus for this situation is the complex relationship between the business firm and the ever-changing external environment. In particular, most marketers are far removed from their customers; yet most know who their customers are, what they want, and what competitors are doing. Often the marketer relies on salespeople and dealers for information, but more and more the best source of information is marketing research.
It should be noted that most marketing decisions are still made without the use of formal marketing research. In many cases, the time required to do marketing research is not available. In other cases, the cost of obtaining the data is prohibitive or the desired data cannot be obtained in reliable form. Ultimately, successful marketing executives make decisions on the basis of a blend of facts and intuition.
In this chapter, we provide an overview of the marketing research process. We start the discussion with a look at business information. As noted in Exhibit 6, marketing research is applicable throughout the marketing planning process.
1. [1]Sources: "How Sweet It Is," American Demographics, March 2000, p, S 18; "Flavor du Jour," American Demographics, March 2000, p, SI0; Erika Rasmusson, "Cool for Sale," Sales & Marketing Management, March 1998, pp. 20-22,
3.02: The nature and importance of marketing research
Informal and, by today's standards, crude attempts to analyze the market date back to the earliest days of the marketing revolution. Only in recent years, however, has the role of research as it relates to management been clearly recognized.
Reflecting this change in orientation, the following definition of marketing research is offered: marketing research is the scientific and controlled gathering of nonroutine marketing information undertaken to help management solve marketing problems. There is often hearty disagreement over the answer to the question of whether marketing research is a science. One's answer depends on the employed definition of "science". To be specific, a research activity should use the scientific method. In this method, hypotheses (tentative statements of relationships or of solutions to problems) are drawn from informal observations. These hypotheses are then tested. Ultimately, the hypothesis is accepted, rejected, or modified according to the results of the test. In a true science, verified hypotheses are turned into "laws". In marketing research, verified hypotheses become the generalizations upon which management develops its marketing programs. (To simplify our discussion, we will use "questions" as a synonym of "hypothesis".)
The mechanics of marketing research must be controlled so that the right facts are obtained in the answer to the correct problem. The control of fact-finding is the responsibility of the research director, who must correctly design the research and carefully supervise its execution to ensure that it goes according to plan. Maintaining control in marketing research is often difficult because of the distance that separates the researcher and the market and because the services of outsiders are often required to complete a research project. 1 | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/03%3A_Marketing_Research_-_an_aid_to_decision_making/3.01%3A_Learning_Objective.txt |
An easy, and truthful, answer to this question is "everything". There is no aspect of marketing to which research cannot be applied. Every concept presented in this marketing text and every element involved in the marketing management process can be subjected to a great deal of careful marketing research. One convenient way to focus attention on those matters that especially need researching is to consider the elements involved in marketing management. Many important questions relating to the consumer can be raised. Some are:
• Who is/are the customer(s)?
• What does he/she desire in the way of satisfaction?
• Where does he/she choose to purchase?
• Why does he/she buy, or not buy?
• When does he/she purchase?
• How does he/she go about seeking satisfaction in the market?
Another area where research is critical is profits. Two elements are involved. First, there is the need to forecast sales and related costs—resulting in profits. Second, there is the necessity to plan a competitive marketing program that will produce the desired level of sales at an appropriate cost. Sales forecasting is the principal tool used in implementing the profit-direction element in the marketing management concept. Of course, the analysis of past sales and interpretation of cost information are important in evaluation of performance and provide useful facts for future planning.
A great deal of marketing research is directed toward rather specialized areas of management. These activities are broken down into five major areas of marketing research. Briefly, these activities are:
research on markets—market trends, market share, market potentials, market characteristics, completion, and other market intelligence
research on sales—sales analysis, sales forecasting, quota-setting, sales territory design, sales performance measurement, trade channels, distribution costs, and inventories
research on products—new product research, product features, brand image, concept tests, product tests, and market tests
research on advertising and promotion—promotion concepts, copy research, media research, merchandising, packaging, advertising effectiveness measurement
research on corporate growth and development—economic and technological forecasting, corporate planning inputs, corporate image, profitability measurement, merger and acquisition, and facilities location.
Newsline: How execs use research
Creating and introducing new products is the most important research priority among marketing executives. The Marketing Science Institute of Cambridge, Massachusetts, USA, surveyed 160 executives from its sponsoring organizations. The executives, representing 60 major consumer and industrial goods and services corporations, were asked to divide 100 points among several research areas.
After successful new product introductions, the executives said that market orientation and customer relationships are the next most important areas. Those issues displaced improving the use of marketing information and measuring brand equity as the second- and third-highest concerns, respectively, in the previous survey.
"The new research priorities indicate that a shift is taking place in marketing practice", notes Donald Lehmann, executive director of the institute. "Market orientation has taken hold and the increasing power of the consumer is apparent in the movement away from product-driven strategies. Marketers also realize that they need to make choices about who their customers should be and whose needs they are best equipped to meet ... and most significantly, they are looking for better ways to anticipate adoption and diffusion of really new products.” said Marni Clippenger, communications director at MSI, "Companies seem to be shifting away from using the brand to really figuring out what customers want."[1]
Capsule 6: Review
1. Marketing research is the scientific and controlled gathering of nonroutine marketing information undertaken to help management solve marketing problems.
2. Any business that is consumer-oriented will benefit from marketing research.
3. Research can be applied to every facet of marketing.
1. [1]Sources: Rachel Rosenthal. "New Products Reign as Research Priority," Advertising Age, August 8, 1994, p. 26; Robert McMath, “To Test or Not To Test," American Demographics, June 1998, p. 64; John McManus, "Mission Invisible," American Demographics, March 1999, p. 6. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/03%3A_Marketing_Research_-_an_aid_to_decision_making/3.03%3A_What_needs_researching_in_marketing.txt |
Considering the relatively short span of time in which marketing research has developed since the 1930s, it is quite remarkable that so sophisticated and thorough a collection of procedures and techniques should have been developed. In many respects, marketing research has advanced faster than any other specialized area in marketing management. In view of the highly specialized nature of marketing research, it is not possible in this discussion to present more than an outline of the basic procedures and techniques.
It is important for a marketing manager to be familiar with the basic procedures and techniques of marketing research. It is true that many businesspeople will never have occasion to engage personally in marketing research. However, it is quite likely that they will be faced with a need either to supervise an internal marketing research activity or to work with an outside marketing research firm. The manager who understands the research function is in a position to judge intelligently the proposals made by research specialists and to evaluate their findings and recommendations. Occasionally, the manager his or herself will have to seek solutions to marketing problems. It may not be possible to obtain the services of marketing research specialists. The manager familiar with the basic procedures of fact-finding in marketing should be able to supervise a reasonably satisfactory search for the information required.
There is no single set of steps in a market research procedure that is accepted by all. Indeed, each marketing research problem requires, to some degree, its own peculiar procedure. However, there is general agreement that four major activities should be performed in a thorough marketing research project. These are: (1) making a preliminary investigation; (2) creating the research design; (3) conducting the investigation; and (4) processing the data/reporting results (see Exhibit 8) 2
Making a preliminary investigation
There are two phases of activity in the preliminary investigation. The first of these involves the determination of the purpose and scope of the research. The second involves an investigation into the marketing environment called the informal assessment.
Determining the purpose and scope of the research
The basic and critical problem in marketing research is seldom the problem that appears on the surface. It is therefore necessary to explore beneath the surface to ascertain the nature and size of the problem. This is the vital first step and must be done correctly, since every subsequent phase of the project is directed at solving the basic problem. For the research to be worthwhile (indeed, for it not to be a waste of resources), the problem must be stated clearly and correctly. Failure to do so is the most serious of mistakes in this project.
Correctly defining the research problem should lead to the establishment of the research parameters. A research study could be restricted by function (advertising); customer group (heavy users); market (Far East); and time frame (1999-2001). Because research is so costly, it is imperative that parameters are established and maintained.
The informal assessment
The second important phase of the preliminary investigation is called the informal assessment. This is an unstructured search of the marketing environment. It enables the researcher to become familiar with the problem setting. This is particularly important for the outside consultant who needs to become acquainted with the company, its customers, its products, and all of the marketing conditions surrounding the problems. It is also wise for the company researcher to refresh his/her knowledge of those internal factors bearing on the problem and also to discover the external elements involved.
The informal investigation goes beyond merely "getting acquainted" with the problem and its marketing setting, however. The final result of the preliminary investigation is the creation of a set of research questions. In marketing research, theses questions can be stated as a tentative explanation of the problem that the research is designed to solve. For example, if a marketing manager is trying to solve a problem that involves an important loss of market share in a particular area of the country, an informal investigation might reveal three possible reasons for the decline in market position. These reasons, until verified by thorough study, can best be stated as research statements:
• The decline in market share is the result of increased competitive advertising in the area.
• The decline in market share is the result of the test marketing of a new product by a major competitor.
• The decline in market share is the result of "stock outs" at the retail level caused by a trucking strike in the area.
In attempting to verify one or more of these hypothetical statements, the researcher examines company records to uncover new sources of information or to discover relationships in old data with bearing on the current problem. Interviews with company executives and operating personnel are often conducted. Interviews are also conducted with various persons outside the company whose opinions might be expected to have some relevance to the problem. The preliminary search is always limited to obtaining an insight into the problem and into possible solutions for it.
In the final phase of the preliminary investigation, the researcher analyzes the results he has so far obtained and restates them in the form of research questions to be tested in the subsequent research steps.
Creating the research design
The design of a marketing research project is the plan proposed for testing the research questions as well as collecting and processing information. The administration of the project according to the design insures that the fact-finding process will be adequately controlled. "Design" means more than simply using good market research procedures. Every research project should be individually designed to produce the kinds of information needed to solve a particular problem. For this reason, no two market research projects are ever exactly alike.3
Six steps are involved in creating a research design: choosing the approach, determining types of data needed, locating data sources, choosing a method of collecting data, selecting the sample, and anticipating/collecting the results.
Choosing the approach
Three alternative approaches are possible in creating a research design. They are not mutually exclusive, but in most cases, the design of a research plan is limited to the use of one of the three.
The first approach is the experimental approach. This approach requires that certain procedural rules must be followed. Essentially, the variable of interest—e.g. price, message—must be manipulated and everyone participating in the experiment must have a known and equal chance of being selected.
In a market experiment, information relating to the basic problem is obtained through the use of a small-scale simulated program designed to test a specific research hypothesis. Suppose, for example, that we wish to test the question that families of similar size and economic characteristics living in three different cities purchase different amounts of a particular formula of a soft drink, such as Dr. Pepper. The first step would be to establish the research question: "For a given time period, the average fluid ounces of a Formula A, B, or C purchased in each city were the same". Next, a sample of the families in each city would be selected and randomly assigned either A, B, or C. Next, a survey would be taken to determine the number of ounces purchased by each family. Once this was done, a statistical test would be used to test the research question. If statistically significant differences in purchases of Formula A, B, or C of Dr. Pepper were noted, it could be concluded that taste does influence the amount of this soft drink purchased by families with the same social and economic characteristics. Of course, other hypotheses about soft drink purchasing could also have been tested using a slightly different method. For example, the effect of television advertising on the purchase of Dr. Pepper might have been studied by inspecting purchases in two or more cities that are in the same general area of the country (such as the southwest) but in which different levels of television advertising had been used.
The second approach is the historical. In this approach, reliance is placed on past experiences in seeking solutions to marketing problems. Historical marketing facts are relevant only to the degree that they can be projected into the future. Fortunately, in many areas of marketing, this can be done with a good deal of confidence. Certain types of changes, such as populations and income distribution, come about rather slowly. The day-to-day effect of these changes on marketing is almost imperceptible. Projections of future population, gross national product, and consumer purchasing power are practically foolproof. Historical analyses of such factors as consumer behavior, competitive selling tactics, and distributors' buying practices tend also to be fairly reliable indicators of future behavior by these same marketing components. Often, it is possible to trace the experience of organizations similar to yours and assess how they dealt with similar problems. There are literally hundreds of case studies on companies such as Microsoft that are useful to many business functions. Learning from the mistakes of others makes good business sense.
The third approach that can be used in designing a marketing research plan is the survey approach. In the survey approach, marketing information is collected either from observation or by questionnaire or interview. In contrast to the experimental and historical methods, in which the data are more or less directly related to the problem, the survey approach necessarily involves far more subjectivity and intuition on the part of the researcher. Watching a customer make a purchase of a new TV reveals something about his motives; simply asking him why he is buying it is much better. Drawing conclusions from either observations of behavior or from the opinions offered by a respondent create important insights. The survey method is flexible. It can be adapted to almost any type of research design. For this reason, and because of the difficulties in creating marketing experiments and in collecting pertinent historical data, the survey approach is the most often used in marketing research.
Determining the types of data needed
Three types of data are used: facts, opinions, and motivational information. The types of data required are partly identified by the nature of the problem to be solved. For instance, if the problem relates to production and inventory scheduling, the facts that are needed relate to market and sales potential. On the other hand, if the problem revolves around the choice between two new products, the opinions of potential customers are important considerations. Finally, if a problem involves the choice of an appropriate selling appeal, buyers' motivations are probably be most important. Facts are quantitative or descriptive information that can be verified. Opinions are ideas relating to a problem that are expressed by people involved in the solution. Motivations are basic reasons, recognized or unrecognized, that explain action. They are extremely difficult to discover.
Locating the sources of data
There are two general sources of data, secondary sources and primary sources.
Secondary source information has been previously published and can be either internal or external. Company records and previously prepared marketing research reports are typical of internal secondary source material. External secondary sources are widely available and can be found outside the organization. Excellent bibliographies of secondary data sources are available, especially online. There are eight primary sources of secondary market information:
• public libraries
• universities—library facilities and bureaus of business and economic research
• government agencies—especially departments of commerce, agriculture, and labor
• professional and trade associations
• commercial publishers—especially trade publications
• research and nonprofit organizations
• conferences and personal contact
• computer-provided search systems
There are tremendous advantages in using data from secondary sources. In the first place, the expense of gathering information from secondary sources is a fraction of the cost of collecting primary data. The time required to collect data is also less. Frequently, the information required to solve a management problem must be obtained quickly. Thanks to computer technology, it is now possible to gather, merge, and reformulate many secondary sources of data. This capability has made secondary data even more attractive.
The inherent limitations of using secondary sources data are twofold. First, the information is frequently dated. Second, seldom are secondary data collected for precisely the same reasons that the information is sought to solve the current marketing problem. In spite of these limitations, the advantages of secondary research are so great that it is a common procedure not to proceed with the collection of primary data until after a thorough search of secondary information source has been completed.
Primary information is obtained directly from its source. It involves data that are not available in published form or in company records. It is gathered specifically to answer your research question. The sources of primary information, however, cannot be as easily identified as can the sources of secondary market data. Having identified the information required to help management solve a problem, it is usually possible to identify the person or persons possessing the information desired. In some cases, the information can be obtained from one of several sources. In other situations, the information can be obtained only by contacting specific sources. For example, a manufacturer of vitamins for children discovered that it was necessary to obtain information from the users (children), purchasers (parents), sellers (for the most part, druggists), and purchase influencers (pediatricians). Similarly, a manufacturer of feed for dairy cattle found it desirable to seek market information from farmers, feed dealers, and dairy specialists. Obviously, it is expensive to collect marketing information from multiple sources, and often it is rather time consuming. These two disadvantages are offset by the fact that the information so obtained is tailored to the specific problem at hand. Ultimately, the question as to which source of market information to use depends on the value of the information in relationship to the time and cost required to gather it. 4
Choosing the method of collecting data
There are various methods of collecting data, both secondary and primary. Secondary sources of information, listed earlier, can be gathered through a number of means. A company may establish a data-gathering/storage system as part of their computer system. Sales, expenses, inventory, returns, and customer complaints are then gathered automatically. Or a company can subscribe to one or more public research companies that gather relevant information. Finally, a company can obtain information on a problem-by-problem basis.
There are three common methods used to collect primary information: observation, questionnaire, and self-report. Observational data collection may be the oldest method. Since the beginning of commerce, merchants have been watching their customers and noncustomers engage in a variety of behaviors. Examples include shopping, purchase, return, complaint behavior, and so forth. A local fast food manager might simply observe the expression on customers' faces as they eat a new sandwich. More formal observation techniques are also employed. Video cameras or audio systems can be targeted at customers. Researchers can also be hired to do license plate surveys in parking lots or simply record observations in a prescribed manner. There are even observational techniques that are quite intrusive. For instance, in the case of a pantry (cabinet) audit, the researcher comes to the consumer's home and actually takes an inventory of products found. Ethnography requires that the researcher practically move in with the consumer and observe various relevant behaviors. This technique is illustrated in the Newsline box that follows.
Newsline: Where's the beef?
A woman in suburban Baltimore is shopping for her family's meals for the week. She cruises past the poultry section, stopping only momentarily to drop a couple of packages of boneless chicken breasts into her cart. Then, the dreaded sea of red looms before her. Tentatively, she picks up a package of beef. "This cut looks good, not too fatty," she says, juggling her two-year-old on her hip. "But I do not know what it is. I do not know how to cook it," she confesses, and trades it for a small package of sirloin and her regular order of ground beef.
Scenes like these are replayed daily in supermarkets across the country. But this time, it is being captured on videotape by New York City-based PortiCo Research, part of a recent ethnographic study of beef consumers for the National Cattleman's Beef Association (NCBA) and major grocery retailers. And due in part to the trepidation of this one mother in Baltimore, many grocers' meat cases are now being rearranged to display beef by cooking method, rather than by cuts of meat. Simple, three-step cooking instructions will soon be printed on the packages
Ethnographic research, which combines intense observation with customer interviews, shows companies how people live with products—how they purchase and use them in their everyday lives. Knowing what consumers do with beef is vital to the NCBA. The study cost the NCBA approximately USD 60,000 (studies might range from USD 5,000 to USD 800,000). PortiCo videotaped consumer's purchasing behavior as well as their preparation habits at home. The researchers interviewed them each step of the way what they thought about beef, why they did (or did not) select particular cuts, and how they prepared the family meal. The retailers could not believe how little consumers knew about something that seemed as familiar to them as sliced bread or soft drinks.[1]
The observation technique can provide important research insights, especially if consistent patterns are noted. This method is relatively inexpensive and can be implemented and completed quickly. Unfortunately, interpreting an observation is still very subjective and mistakes are made.
Gathering information through a questionnaire format reflects the most popular research technique. There are two interrelated issues: the design of the questionnaire and the administration of the questionnaire.
There are several rules of thumb that should be followed when designing a questionnaire. For example, a good questionnaire should be like a well-written story: it should be logical, relevant, easy to follow, and interesting to the reader/respondent. There are also a host of techniques and related guidelines. For example, Exhibit 7 illustrates the forms questions can take. A yes/no question is considered a closed-ended dichotomous question; i.e. respondent must check one of two possible answers. Questions 4 and 5 are two types of scaled questions. Questions 6-8 are open-ended, in that respondent can provide any answer desired. Closed-ended questions are best used when the researcher desires a particular set of answers or feels the respondent is unlikely to come up with an original answer. Open-ended questions allow the respondent to come up with personal answers. Of course, there is a risk that the respondent will have no answer.
Other considerations are whether to place the easier questions at the beginning of the questionnaire, group similar questions, or place demographic questions at the end of the questionnaire. Again, the goal is to enable the respondent to answer the questionnaire easily and accurately.
The design of a questionnaire is a function of how the questionnaire is administered, and vice versa. Four techniques for administering a questionnaire are currently used: mail, telephone, personal interview, and online. In the mail technique, the questionnaire is distributed and returned through the mail. A typical packet might contain a cover letter explaining the purpose of the research, a copy of the questionnaire, a stamped self-addressed return envelope, and an incentive for compliance (cash, merchandise, contribution to charity, or copy of report). Mail questionnaires allow the researcher to ask a large number of questions over a broad range of topics. They also allow the respondent to answer the questionnaire at their leisure. Finally, the standardized format does not allow for subjective bias. Unfortunately, these advantages can become limitations. The longer the questionnaire, the less likely the individual will respond. In fact, a response rate of 10-20 per cent is common without an incentive. Control is lost through the mail process. Did the targeted person answer the questionnaire? Did the respondent understand the questions? Did she/he complete the questionnaire? Was the questionnaire returned on time? The loss of control also means that the interviewer cannot probe further into an interesting or controversial answer.
A more convenient and faster way of gathering marketing information is to conduct a telephone survey. Names and related telephone numbers can be obtained directly from a telephone directory or from an internally or externally generated database. Telephone surveys are limited in several important ways, such as the difficulty of reaching the correct respondent, the problem of completing the interview if the respondent decides to hang up, and the inability to eliminate the bias introduced by not interviewing those without phones or individuals with unlisted numbers. Also, 10-15 questions are likely to be the maximum number to be asked. Therefore, only a limited number of topics can be addressed. In spite of these limitations the telephone survey method has grown in popularity. The costs are relatively low, research companies can provide well-trained and technically supported interviewers, and the technique works if the research questions are limited and require a quick answer. Still, it would be better if they did not call while you were eating dinner.
Although often very costly and time-consuming, personal interviews may constitute the best way of collecting survey information. Once compliance is gained, the well-trained interviewer can make sure the right person is answering, ask as many questions as necessary, make sure questions are understood, probe in order to address new issues, and encourage the respondent to complete the questionnaire. With freedom comes bias. It is sometimes difficult for an interviewer to maintain objectivity. Asking questions with a certain intonation, changing the wording, or changing the ordering of questions can all modify responses.
There are several online information-gathering techniques that allow the respondent more freedom in providing answers. As one would expect, there has been a recent rapid technological evolution in this area. Online questionnaires can help website sponsors to gauge customer satisfaction, profile visitors, and provide a way to measure traffic for advertisers beyond banner click-throughs. By using research tools such as exit surveys, e-tailers can find out why people are leaving their sites—and why they might not come back.
There are four popular types of online research. Pop-up surveys occur when visitors are intercepted when they leave certain pages of the website. A questionnaire then appears in a box on top of their main browser screens asking for responses. With e-mail/web surveys, a company sends an e-mail message asking the recipient to complete a survey. Sometimes the survey is embedded in the e-mail itself. Other times the e-mail lists either a passworded location to visit or a unique location that only the addressee can access to fill out the survey. Online groups are much like traditional focus groups, but are conducted in a web-based chat room where select individuals are invited by the company or its research firm. Finally, in the case of moderated e-mail groups, discussions take place over a period of time with a group communicating by e-mail. A moderator compiles the answers and sends the summary back to the group for comments and follow-up.
The third technique used to gather research information is self-reporting. This technique allows the respondent to deliver the information in a somewhat unstructured format. One very popular version of this technique is the focus group. A focus group takes place in a room where approximately 8-10 individuals and a trained moderator gather to discuss a particular business problem or set of problems. Often, the room contains a two-way mirror, which the sponsors of the research sit behind in order to observe the process. The proceedings are audiotaped or videotaped. Focus groups have been an extremely popular type of data collecting for a long time. A great deal of diverse information can be gathered quickly (assuming there is a well-trained moderator). However, there are serious limitations. It is still a subjective process and interpretation is necessary. It is also expensive; often several thousand dollars per focus group. Finally, it is difficult to control the behavior of the participants. Some dominate and some say nothing. Some become the equivalent of professional focus group members and no longer are able to provide the hoped-for spontaneity.
According to a psychologically proven premise, it is possible by impersonalizing questions to obtain information from a respondent that he would not, or could not, otherwise provide. This method involves the use of the projective technique, and represents a second type of self-report technique. The intent of the projective technique is to give respondents an opportunity to answer questions without the embarrassment or confusion created by direct involvement. Several projective techniques are employed:
Word association tests. In the word association test, the respondent is asked to say the first word that comes into his mind upon the presentation of another word stimulus. The most obvious applications of this test are in research on brand recognition, company image, and advertising appeals.
Sentence completion tests. In a sentence completion test, the respondent is asked to complete a number of sentences with the first words that come to mind. A series of sentence completion questions used by a supermarket chain were: (a) I like to shop in an AG supermarket because . . .; (b) I think that food prices are . . .; (c) The thing that bothers me most about food shopping in an AG store is . . .
The sentence completion test is relatively simple to administer and easy to interpret. It is usually difficult, however, to reduce the finding from a sentence completion test to statistical form.
Psychodrama. In the psychodramatic type of question, the respondent is asked to project himself into an artificial marketing situation. The obvious artificiality of the situation makes the psychodrama a "role-playing" experiment in which the respondent provides information based on his personal attitudes through his explanation of the artificial situation.
Perhaps the greatest deficiency of projective techniques is the difficulty of presenting the findings. The identification of attitudes, motives, opinions, and so forth is not difficult; however, it is extremely hard to measure the importance of these factors.
Selecting the sample
In most marketing research, it is seldom necessary to conduct a complete census; i.e. to talk to 100 per cent of the target segment. To do so is time-consuming and expensive. For this reason most marketing surveys make use of samples. A sample is a group of elements (persons, stores, financial reports) chosen from among a "total population" or "universe". The value of a research project is directly affected by how well the sample has been conceived and constructed.
The selection of the sample to be investigated requires a master list, or a framework, from which they may be selected. The sampling frame is the "population" or statistical "universe" from which the sample units will be selected. The frame for a survey of attitudes of credit customers of a department store would be the company's list of customers using charge accounts.
Although there are many kinds of sample designs, all of them can be classified as either probability samples or nonprobability samples. In a probability sample, each unit has a known chance of being selected for inclusion in the sample. Its simplest version is the simple random sample, in which each unit in the sample frame has exactly the same chance of selection. Examples of this include flipping a fair coin, whose sides have a 50 per cent chance of turning up and throwing an unloaded die, whose sides have a 16 ⅔ per cent chance of turning up. This same principle can be applied to the previous department store example. A sample of names could be selected from the company's list of charge customers according to a random process, such as that of using a table of random digits.
While in a probability sample the sampling units have a known chance of being selected, in a nonprobability sample the sampling units are selected arbitrarily. To return to our department store example, instead of using a table of random numbers to select a sample of charge customers, an arbitrary and more convenient method would be to take the first 50 or 60 names on the list.
Anticipating the results/making the report
The research plan should provide for: (a) procedures for processing the data; (b) procedures for interpretation and analysis of the findings; and (c) an outline of the final report. In reaching these decisions, it is usually helpful to work from the form and content of the final report. The report should present a summary of findings and recommendations for management action drawn up in the light of the reasons for the research. The kinds of facts to be presented and the manner of their presentation dictates the type of analysis to be undertaken. The kinds of analysis will, in turn, often suggest the method of data processing. Data processing in general refers to the procedures for sorting, assembling, and reporting data. It can be done manually by the use of work sheets or by computer programming. The method of data processing has important bearing upon the manner in which the data are collected and reported. Thus, the design of the project is often expedited by a thorough consideration of the kinds of results that are expected and how they will be handled in the final report.
Anticipating the results of the project and preparing a "dummy" final report has another advantage. It is often helpful to use the results of this step in the research design to demonstrate to management the kind of project that is going to be undertaken. Agreement by the management group that the kinds of information anticipated will assist in the solving of a marketing problem is helpful in obtaining approval for the project and in restraining management expectations as to the scope and purpose of the project.
1. [1]Sources: Kendra Parker, "How Do You Like Your Beef?" American Demographics, January 2000, pp. 35-38; Jennifer Lach, "Meet You in Aisle Three," American Demographics, April 1999, pp. 41-42. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/03%3A_Marketing_Research_-_an_aid_to_decision_making/3.04%3A_Procedures_and_Technique_in_Marketing_Research.txt |
The attention devoted in the previous paragraphs to the design of the research plan might leave the impression that once a marketing research project has been carefully designed, the job is almost done. Clearly, this is not the case. The implementation of a research plan is seldom an easy task. Often a research program requires extra effort from already-busy personnel in the company. In other cases, outsiders must be recruited, hired, and trained. In either situation, carrying out a marketing research plan is difficult and requires very close supervision and control. To the extent that the plan has been well conceived, supervision and control are restricted to making sure that the research activities called for in the plan are carried out according to schedule and in the manner prescribed.
3.06: Processing the Data
Processing the data obtained in a market survey involves transforming the information obtained into a report to be used by management. Four steps are involved: (1) editing the data; (2) tabulating the data; (3) interpreting tile data; and (4) presenting the report. If, in the anticipation of the results of the survey, the procedures for handling the data have been sent forth and the form of the final report conceived, these final four steps in the research procedure may be quite mechanical. A good plan for the analysis and interpretation of the data is of immense assistance in bringing a project to a successful conclusion, but it should never limit the kinds of interpretations that eventually are made or restrict the content of the final report.
The final report of a marketing research study should ordinarily be written. Since vast amounts of data often are involved, the written report is the only appropriate method of presenting these findings. The written report also has the advantage of being permanent, thus permitting management to study the findings carefully and to refer to them in the future. Unfortunately, many marketing research projects are never translated into management action—sometimes because the research conclusions do not directly contribute to the solution of the problem, sometimes because the report is too technical and difficult to understand, and sometimes because the report writer has not offered specific suggestions as to how the report should be translated into management strategy.
3.07: The Value of marketing research
It is important to point out that it is not always necessary to conduct research before attempting to solve a problem in marketing management. The manager may feel that he already knows enough to make a good decision. In a few instances, there may be no choice among alternatives and hence no decision to make. It is rather pointless to study a problem if there is only one possible solution. But in most business situations, the manager must make a choice among two or more courses of action. This is where fact-finding enters in to help make the choice.
Even if a manager would like more information in order to make a decision, it is not always wise for him or her to conduct the research that would be required. One reason is that the time involved may be too great. Another more compelling reason is that the cost of the research may exceed its contribution. In principle, it is easy to understand how such a cost test might be applied. If the cost of conducting the research is less than its contribution to the improvement of the decision, the research should be carried out. If its cost is greater, it should not be conducted. The application of this principle in actual practice is somewhat more complex. Finally, good research should help integrate marketing with the other areas of the business.
Integrated marketing
Research brings it together
It is the bane of modern business: too many data, not enough information. Computers are every—to extract significance from the blizzard of numbers, facts, and stats. Help is on the way, in the form of a new class of software technology known broadly as data-mining. First developed to help scientists make sense of experimental data, this software has enough smarts to "see" meaningful patterns and relationships—to see patterns that might otherwise take tens of man-years to find. That is a huge leap beyond conventional computer databases, which are powerful but unimaginative. They must be told precisely what to look for. Data-mining tools can sift through immense collections of customer, marketing, production, and financial data, and, using statistical and artificial intelligence techniques, identify what is worth noting and what is not.
The payoffs can be huge, as MCI Communications is learning. Like other phone companies, MCI wants to keep its best customers. One way is to identify early those who might be considering jumping to a rival. If it can do that, the carrier can try to keep the customer with offers of special rates and services, for example.
How to find the customers you want to keep from among the millions? MCI's answer has been to comb marketing data on 140 million households, each evaluated on as many as 10,000 attributes—characteristics such as income, lifestyle, and details about past calling habits. But which set of those attributes is the most important to monitor, and within what range of values? A rapidly declining monthly bill may seem like a dead give-away, but is there a subtler pattern in international calling to be looking for, too? Or in the number of calls made to MCl's customer-service lines?
To find out, MCI regularly fires up its IBM SP/2 supercomputer, its "data warehouse", which identifies the most telling variables to keep an eye on. So far, the SP/2 has compiled a set of 22 detailed—and highly secret—statistical profiles based on repeated crunching of historical facts. None of them could have been developed without data-mining programs, says Lance Boxer, MCI's Chief Information Officer.
Data-mining in itself is a relatively tiny market: sales of such programs will grow to maybe USD 750 million by 2001. But the technology is crucial in getting a big payoff from what information technology executives think will be an immensely important growth area in coming years: data warehousing. There are the enormous collections of data—sometimes trillions of bytes—compiled by mass marketers, retailers, or service companies as they monitor transactions from millions of customers. Data warehouses, running on ultrafast computers with specialized software, are the basis on which companies hope to operate in real time—instantly adjusting product mix, inventory levels, cash reserves, marketing programs, or other factors to changing business conditions.[1]
The Wall Street Journal (wsj.com)
In practice
Marketing research is a scientific and controlled process, but ultimately, decisions are based on a blend of facts and intuition. Understanding marketing research allows managers to intelligently evaluate findings and recommendations.
Determining the purpose and scope of the research is the first critical activity in any marketing research project. All subsequent decisions are results of this process. Creating the research design, conducting the investigation, and processing the data are the remaining critical activities. Both primary and secondary data are accumulated when conducting research. Using this information to produce good research allows managers to integrate marketing with other areas of the business.
Secondary sources of data online include associations and business information sites. Check out the American Marketing Association's website at www.ama.org/resource for a list of resources and guides. For links to business directories, media sites, and marketing-related resource check out A Business Researcher's Interests at www.brint.com.
Your subscription to the Interactive Journal allows you to access articles in various Dow Jones publications. Under More Dow Jones Sites in the left menu, click on Dow Jones & Co. From here you will be able to access Dow Jones Web Links which offers you links to dozens of business and news websites. Click on several of these links now.
Return to the Interactive Journal's Front Section. Under Tools in the left menu, select WSJ Yogi. The WSJ Yogi is a free software application that works like a personal assistant, automatically suggesting relevant content to you as you browse the web. The WSJ Yogi will gather links to related stories as you read. Download the WSJ Yogi now.
Return again to the Interactive Journal's Front Section. Under Resources in the left menu, select Special Reports. This section offers links to special reports that have appeared as supplements to The Wall Street Journal print edition. These reports provide a thorough analysis and review of various topics such as e-commerce, Small Business, and World Business. Review recent Special Reports now.
Deliverable
With the information provided in this section about Web resources, use the Interactive journal and relevant Web links to conduct market research on recent trends in e-commerce. Find at least five sources of secondary data online that will help you identify relevant trends in e-commerce advertising, marketing, and business strategies.
Questions
➢ How can marketing research help managers create successful product lines and customer relationships?
➢ Most people conduct research when buying certain "big ticket" items like cars or computers. How do you conduct marketing research for these types of items?
➢ How has the Internet impacted consumers and their purchase decisions? What about the impact on companies?
Capsule 7: Review
1. The following steps are involved in conducting marketing research:
(a) making a preliminary investigation
(b) creating the research design
(c) conducting the investigation
(d) processing the data/deliver the results
1. [1]Sources: John W. Verity, "Coaxing Meaning out of Raw Data," Business Week, February 3, 1997, pp. 134-138; "Researchers Integrate Internet Tools in Their Work," R&D Magazine, June 2000, vol. 24, No.6, p. E13; "Smarter Kids. Com Chooses Quadstons–The Smartest Customer Data Mining Solution," Business Week, July 31, 2000. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/03%3A_Marketing_Research_-_an_aid_to_decision_making/3.05%3A_Conducting_Research.txt |
This introductory chapter described marketing as one of the major strategic tools available to the business organization. It began with a basic definition and expanded to a set of propositions of marketing. Simply, marketing is based on the mission statement of the organization; is dependent on the effective management of other functional areas; contains a functional area guided by its own philosophy; is the functional area that is concerned with market exchanges; and is likely to be successful when the philosophy, tasks, and manner of implementing available technology are coordinated and complimentary.
The chapter also discussed several characteristics shared by organizations that correctly implement marketing. Referred to as the Cs of marketing, they include consumer contact, company capabilities, communication, cross-functional contact, and community contact. Companies share these characteristics; the following factors divide marketing into specific types: macromarketing and micromarketing; services and goods marketing; for-profit and nonprofit marketing; mass and direct marketing; local, regional, national, and international marketing; and consumer goods and business-to-business marketing.
The chapter concluded with a discussion of the four levels of strategic management with considerations applicable to marketing: corporate functional, marketing, and marketing mix.
Key terms
Marketing The process of planning and executing the conception, pricing, and distribution of ideas, goods, and services to create exchanges that satisfy individual and organizational objectives.
Consumer/customers Individuals who have needs/wants that can be satisfied by the marketer's product or service.
Transaction An exchange between the person with the need and the organization selling the need-satisfying thing, inherently economic-based.
Internal marketing Attempting to ensure that all employees are positive ambassadors of the organization.
Competitive advantage Convince buyers (potential customers) that what you have to offer them comes closest to meeting their particular want or need at that point in time.
Marketing concept Understanding the consumer and working from the customer back rather than factory forward.
Questions
➢ Some marketers believe the Internet will become the most effective avenue for marketing products to consumers. Do you agree or disagree?
➢ Recently, the effectiveness of online marketing efforts has been questioned. What can marketers do to measure the success of online marketing?
➢ What advantages does receiving the Wall Street Journal online provide for users? Specifically, marketers?
➢ How would you have defined marketing before you read this chapter? How does that definition differ from the definition provided?
➢ Can you think of another organization that demonstrates the propositions of marketing as well as L.L. Bean? Provide a similar discussion using that organization.
➢ What are the factors to consider in maintaining consumer contact? Community contact?
➢ Why is it so important to understand your competition? Company functions?
➢ Contrast macro- and micromarketing. Contrast services and goods marketing.
➢ Demonstrate how the corporate mission can directly influence marketing.
➢ What is the difference between the internal and external environment? Provide five examples of each.2
➢ What is a competitive advantage? How does marketing contribute to the creation of a competitive advantage?
➢ Discuss the reasons for studying marketing.
➢ Give examples of how marketing communication differs from personal communication.
➢ Identify the ways in which Harley-Davidson exhibits the propositions discussed in this chapter.
➢ Would you consider Harley to be a marketing organization? Why or why not?
Project
Survey 10 nonbusiness students and ask them to provide a definition of marketing. Analyze these answers with respect to how they differ and why people differed in their understanding of this topic. Write a five page report explaining.
Case application
The hog is alive and well
After making a remarkable comeback in the 1980s, motorcycle manufacturer Harley-Davidson had two-year-long waiting lists all over the country. But the success placed the company in a familiar quandary. Should Harley expand and risk a market downturn or should it stay the course, content with its good position in the industry?
“To invest or not to invest, that was the question", notes Frank Cimermancic, Harley's Director of Business Planning. "Dealers were begging us to build more motorcycles. But you have to understand our history. One of the things that caused past problems was lack of quality, and that was the result of a too-rigid expansion. We did not want to relive that situation.”
In 1989, the reputation of Harley-Davidson was excellent. Harley shipped 30,000 motorcycles in 1985; just four years later it shipped 44,000. Harley's market share in the heavyweight bike category went from 27 per cent to 57 per cent during the same time period. It was regularly turning a profit—USD 53 million in 1989.
At the same time, however, the market for heavyweight bikes was shrinking. Harley-Davidson needed to know whether its growth could continue. "We were doing fine, but look at the market", said Cirnermancic. "Maybe, we thought, we could reverse these trends and become an industry leader, something we had not been for years."
A new kind of customer seemed to hold the key to market growth. White-collar motorcycle enthusiasts, or "Rubbies" (rich urban bikers), started to shore up Harley sales in the mid-1980s, adding to the company's success and image. But whether these people were reliable, long-term customers was another question. Harley also needed to know if it should market its product differently to different audiences. A core clientèle of traditional "bikers" had kept Harley afloat during its leanest years, and they could not be alienated.
From their research, Harley identified seven core customer types: the Adventure-Loving Traditionalist, the Sensitive Pragmatist, the Stylish Status-Seeker, the Laid-Back Camper, the Classy Capitalist, the Cool-Headed Loner, and the Cocky Misfit. All of them appreciated Harley-Davidson for the same reasons: independence, freedom, and power constituted the universal Harley appeal. Also, owners were very loyal.
Loyalty meant the company could build and sell more motorcycles without having to overextend itself. In 1990, Harley expanded to build 62,800 bikes; in 2000, it built more than 180,000. Based on research and the still-expanding waiting lists, Harley expects its phenomenal growth to continue. In addition, Harley is expanding its product line. In early 2000, the company introduced a USD 4,400 bike called the Blast, aimed at first-time riders and women.[1]
Questions
➢ Identify the ways in which Harley-Davidson exhibits the propositions discussed in this chapter.
➢ Would you consider Harley to be a marketing organization? Why or why not?
References
1 Dictionary of Marketing Terms, Peter D. Bennett, Ed., American Marketing Association, 1988 p. 54.
2 "A New Recipe for the Family Dinner," Adweek, April 27. 1992, p. 46.
3 Theodore Levitt, "Marketing Myopia," Harvard Business Review, July-August, 1960, pp. 45-66.
4 Shelby D. Hunt and John J. Burnett, "The Macromarketing/Micro marketing Dichotomy: A Taxonomical Model," Journal of Marketing, Summer. 1982 pp. 11-26.
1. [1]Sources: Ian P. Murphy, "Aided by Research, Harley Goes Whole Hog," The Marketing News, December 2, 1996, p. 16; Richard A. Melcher, "Tune-up Time for Harley," Business Week, April 8, 1996, pp. 90. 94; Kelly Barron, "HogWild," Forbes, May 15, 2000, pp. 68—70. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/03%3A_Marketing_Research_-_an_aid_to_decision_making/3.08%3A_Summary.txt |
Four major elements are involved in undertaking marketing research. The first element is a preliminary investigation. This initial study permits the researcher to determine the purpose and scope of his research as well as to identify tentative questions.
Creating a research design to test the questions is the most important and most complicated aspect of marketing research. It commences with the selection of the approach to be taken. The three most commonly used are the experimental, the observational, and the survey approaches. Any given project may use one or more of the three.
It is also necessary to determine the types of data that will be needed to solve the marketing problem and to locate sources where this information can be obtained. Data sources are generally classified as either primary or secondary. Secondary data are made up of previously collected information and are obtained from historical records, publications, government documents, and the like. Primary data are gathered for the first time. The survey method is probably the most frequently used method for collecting primary data. Data are by gathered by mail, by telephone, by personal interviewing, and online.
Another critical aspect of most marketing research projects is the selection of the sample. A probability sample involves the selection of respondents in such a way that every unit in the pool has the same chance of being selected. One method of drawing a probability sample is by the use of a table of random digits. A nonprobability sample is drawn on a judgmental basis; the respondents are selected because they are considered to be representative of the group from which they are drawn.
The final aspect of the research design is the anticipation of the results and the decision as to how the data will be summarized and reported. It is becoming more and more common in large marketing research projects to make use of a computer for the processing and tabulation of the research results. Some problems usually arise, however, and careful supervision and control of the data-collection activities are important. It is particularly critical to guard against various kinds of survey bias that can creep into a project.
Key terms
Marketing research The scientific and controlled gathering of nonroutine marketing information undertaken to help management solve marketing problems.
Informal assessment An unstructured search of the marketing environment.
Research design Plan proposed for testing the research questions as well as collecting and processing information.
Experimental approach Variable interest must be manipulated and everyone participating in the experiment must have a known and equal chance of being selected.
Historical/case method Reliance is placed on past experiences in seeking solutions to current marketing problems.
Survey approach Marketing information is collected either from observation or by questionnaire or interview.
Secondary source data Information that has been previously published and can come from within or outside the business.
Primary information Information gathered to address a particular problem.
Data processing Procedures for sorting, assembling, and reporting data.
Questions
➢ Marketing research is sometimes referred to as a "problem-solving tool". Explain what is meant by this statement.
➢ It is often argued that only such fields as physics, chemistry, and mathematics are really "scientific" and that marketing research, as common with all behavioral research, cannot be scientific. How would you respond to someone who stated this opinion?
➢ Do you think that a distinction can be made between "pure" and "applied" research in marketing?
➢ Select a local or campus enterprise with which you are familiar. Identify a marketing problem that it faces. (You may need to interview the manager of the establishment.) Translate this marketing problem into its informational elements. Conduct a small-scale informal investigation: (a) What tentative hypotheses can you develop? (b) What types of research design do you believe would be necessary to test these hypotheses?
➢ A small manufacturer of highly specialized medical laboratory equipment and a manufacturer of a proprietary (nonprescription) cold remedy need information to assist in planning new product introductions. What would be the advantages and drawbacks of using primary versus secondary marketing information for each firm?
➢ You are the advertising manager of a company that manufactures professional baseball equipment. Your firm employs 50 field salespeople who make periodic calls on sporting goods dealers, large schools and colleges, and professional athletic organizations. You also place full-page advertisements in a trade publication for the sporting goods industry, Scholastic Coach. The president of your company has questioned the use of this publication and has asked you to find out how effective it is in increasing awareness about your products and in stimulating sales. How would you go about this task?
➢ In 1970, Ford Motor Company introduced its subcompact automobile, the Pinto. Suppose you had been a marketing research analyst working for another car manufacturer. What kinds of primary and secondary marketing research would you have conducted to evaluate the success of this new product introduction?
Project
Design a short questionnaire (no more than 10 questions) intended to reveal whether or not another student is a good prospect for a new laptop computer. Assume the purpose of this questionnaire is to obtain information that could be used to help increase sales of laptops to college students. Would you use the same questions on a mail questionnaire as in a personal interview? If not, what questions would you use if you were going to mail the questionnaires?
Case application
Research saves the day at case
In today's combative marketplace, making any significant progress against skillful and large rivals is nothing short of a colossal achievement. Case Corporation, a manufacturer of construction and farm equipment, can make such a claim, but only after spending two years digging itself out of decline—operating losses for 1991 and 1992 reached USD 900,000—and are finally showing growth. Case's net income increased more than 300 per cent in 1994 to USD 165 million, with a 14 per cent sales increase, and 1995 revenues reached USD 4.2 billion.
Significant headway toward recovery began in 1994 when new CEO, Jean-Pierre Rosso, launched a new era at Case. His matter-of-fact pronouncement: "We need to be asking what the farmer and contractor need", triggered the company's turnaround and kindled a new respect from its customers.
Basic as it may seem, for most of the 1980s, “asking" was not a part of Case's product-driven orientation. Result: under performing products such a low-horsepower tractors entered the marketplace, fueled by low prices and sales incentives.
Worse yet, when market demand eventually plummeted, dealers found themselves stuck with a glut of unsold Case equipment. To further aggravate the situation, relationships with dealers were increasingly greeted with suspicion.
In the face of those dire conditions, Rosso issued his market-driven directive that pressed Case managers to determine the wants and needs of its customers. One incident showcases the process they used to obtain reliable customer feedback: A contractor was flown in to Case's Burlington, Iowa test site and put to work for three days testing a piece of Case equipment and comparing its performance with that of comparable Caterpillar and Deere machines. Each day managers grilled the customer about features, benefits, and problems.
In another approach, Case sent teams of engineers and marketing personnel to talk to key customers and users of competitors' equipment. Applying what they learned from the feedback, engineers developed prototype machines and shipped them to hundreds of participating users for evaluation. The engineers then incorporated actual field data into final prototypes.
The bottom line: all this market-driven "asking” is a far cry from the Case's reputation during the 1980s of being one of the most mismanaged companies in the field.
Questions
➢ Although things seem to be going well for Case, can you identify any potential mistakes they made in doing their research?
➢ How could they gather secondary data on this product category?
References
1 Ralph H. Sprague, Jr. and Hugh J. Watson, Decision Support Systems:Putting Theory Into Practice, Englewood Cliffs, N.J.: Prentice-Hall,1986, p. 1
2 Claire Selitz, Lawrence S. Wrightsman, and Stuart W. Cook, Research Methods in Social Relations, New York: Holt, Reinhart and Winston, 1976, pp. 11 4-115.
3 Ian P. Murphy, "Research with Bottom Line in Mind Only," Marketing News, March 3, 1997, p. 10.
4 Pamela L. Alreck and Robert D. Settle, The Survey Research Hand book, Richard D. Irwin, Inc., 1995.
5 Seymour Sudman, Applied Sampling, New York: Academic Press, 1976 | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/03%3A_Marketing_Research_-_an_aid_to_decision_making/3.S%3A_Summary.txt |
Learning Objectives
Having read this chapter, you should be able to:
• understand the behavior of the individual consumers in the marketplace
• examine the many factors that influence consumer behavior
• recognize the various principles of psychology, sociology, and social psychology that are of value in explaining consumer behavior
• examine the relationship of consumer behavior to marketing management decisions-particularly, target market selection and the design of the marketing mix
• understand how organizational market behavior differs from consumer market behavior
• and examine how organizations make purchase decisions
Thumbnail: www.pexels.com/photo/shopping-business-money-pay-50987/
04: Understanding Buyer Behavior
Till death do us part
At 1358 on Wednesday, May 5, in Houston's St Luke's Episcopal Hospital, a consumer was born. Her name was Alyssa J Nedell and by the time she went home three days later, some of America's biggest marketers were pursuing her with samples, coupons, and assorted freebies. Proctor & Gamble hoped its Pampers brand would win the battle for Alyssa's bottom. Johnson & Johnson offered a tiny sample of its baby soap. Bristol-Myers Squibb Company sent along some of its Enfamil baby formula.
Like no generation before, Alyssa enters a consumer culture surrounded by logos, labels, and acts almost from the moment of birth. As an infant. Alyssa may wear Sesame Street diapers and miniature pro-basketball jerseys. By the time she is 20 months old, she will start to recognize some of the thousands of brands flashed in front of her each day. At age 7, if she is anything like the typical kid, she will see some 20,000 TV (television) commercials a year. By the time she is 12, she will have her own entry in the massive data banks of marketers. Multiply Alyssa by 30 million-the number of babies born in this country since 1990—and you have the largest generation to flood the market since the baby boom. More impressive than their numbers though, is their wealth. The increase in single-parent and dual-earner households means that kids are making shopping decisions once left to the mother. Combining allowance, earnings, and gifts, kids aged 14 and under will directly spend an estimated USD 20 billion this year, and will influence another USD 200 billion. No wonder they have become the target of marketing campaigns so sophisticated as to make the kid-aimed pitches of yore look like, well, Mickey Mouse.
Marketers who had long ignored children now systematically pursue them–even when the tykes are years away from being able to buy their products. "Ten years ago it was cereal, candy, and toys. Today it is also computers and airlines and hotels and banks," says Julie Halpin, general manager of Saatchi & Saatchi Advertising's Kid Connection Division. "A lot of people are turning to a whole segment of the population they have not been talking to before."
Those businesses that have always targeted kids, such as fast-food restaurants and toy makers, have stepped up their pitches, hoping to reach kids earlier and bind them more tightly. Movies, t-shirts, hamburger wrappers, and dolls are all part of the cross promotional blitz aimed at convincing kids to spend. The cumulative effect of initiating children into a consumerist ethos at an early age may be profound. As kids take in the world around them, many of their cultural encounters—from books to movies to TV have become little more than sales pitches. Even their classrooms are filled with corporate logos. To quote clinical psychologist Mary Pipher, "Instead of transmitting a sense of who we are and what we hold important, today's marketing-driven culture is instilling in them the sense that little exists without a sales pitch attached and that self-worth is something you buy at a shopping mall."
Some wonder if marketers are creating a relationship with consumers too soon and for all the wrong reasons.[1]
Introduction
As noted, many of the parents of today's kids are the baby boomers marketers have been tracking for over 40 years. Primarily, their importance is based on their group's enormous size. Just as important, however, is that they have a great deal in common; some demographics, such as age, income, and health; some shared concerns such as college for their children, retirement, and diminishing health; and some behaviors such as voting Republican, eating out, and buying expensive walking shoes. Nevertheless, they still remain individuals who were brought up in a unique family and retain a personal way of thinking and behaving. The ultimate challenge facing marketers is to understand the buyer both as an individual and as a member of society so that the buyer's needs are met by the product offered by the marketer. The purpose of this chapter is to present a discussion of several of the key buyer behaviors considered important to marketers.
1. [1]Sources: David Leonhardt. "Hey Kid, Buy This," Business Week, June 30. 1997. p. 65-67; Larry Armstrong. "Pssst! Come Into My Web." Business Week, June 30,1997.p.67; Tom McGee, "Getting Inside Kids Heads," American Demographics, January 1997, pp. 53-59: "Kids These Days," American Demographics, April 2000, pp. 9-10; Joan Raymond, "Kids Just Wanna Have Fun," American Demographics, February 2000, pp.57-61.
4.02: Buyer Behavior and Exchange
As noted in an earlier chapter, the relationship between the buyer and the seller exists through a phenomenon called a market exchange. The exchange process allows the parties to assess the relative trade-offs they must make to satisfy their respective needs and wants. For the marketer, analysis of these trade-offs is guided by company polices and objectives. For example, a company may engage in exchanges only when the profit margin is 10 per cent or greater. The buyer, the other member in the exchange, also has personal policies and objectives that guide their responses in an exchange. Unfortunately, buyers seldom write down their personal policies and objectives. Even more likely, they often do not understand what prompts them to behave in a particular manner. This is the mystery or the "black box" of buyer behavior that makes the exchange process so unpredictable and difficult for marketers to understand.
Buyers are essential partners in the exchange process. Without them, exchanges would stop. They are the focus of successful marketing; their needs and wants are the reason for marketing. Without an understanding of buyer behavior, the market offering cannot possibly be tailored to the demands of potential buyers. When potential buyers are not satisfied, exchange falters and the goals of the marketer cannot be met. As long as buyers have free choice and competitive offerings from which to choose, they are ultimately in control of the marketplace.
A market can be defined as a group of potential buyers with needs and wants and the purchasing power to satisfy them. The potential buyers, in commercial situations, "vote" (with their dollars) for the market offering that they feel best meets their needs. An understanding of how they arrive at a decision allows the marketer to build an offering that will attract buyers. Two of the key questions that a marketer needs to answer relative to buyer behavior are:
• How do potential buyers go about making purchase decisions?
• What factors influence their decision process and in what way?
The answers to these two questions form the basis for target market selection, and, ultimately, the design of a market offering.
When we use the term "buyer", we are referring to an individual, group, or organization that engages in market exchange. In fact, there are differences in the characteristics of these three entities and how they behave in an exchange. Therefore, individuals and groups are traditionally placed in the consumer category, while organization is the second category. Let us now turn to consumer decision making. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/04%3A_Understanding_Buyer_Behavior/4.01%3A_Learning_Objective_and_Introduction.txt |
Consumer behavior refers to buyers who are purchasing for personal, family, or group use. Consumer behavior can be thought of as the combination of efforts and results related to the consumer's need to solve problems. Consumer problem solving is triggered by the identification of some unmet need. A family consumes all of the milk in the house or the tires on the family care wear out or the bowling team is planning an end-of-the-season picnic. This presents the person with a problem which must be solved. Problems can be viewed in terms of two types of needs: physical (such as a need for food) or psychological (for example, the need to be accepted by others).
Although the difference is a subtle one, there is some benefit in distinguishing between needs and wants. A need is a basic deficiency given a particular essential item. You need food, water, air, security, and so forth. A want is placing certain personal criteria as to how that need must be fulfilled. Therefore, when we are hungry, we often have a specific food item in mind. Consequently, a teenager will lament to a frustrated parent that there is nothing to eat, standing in front of a full refrigerator. Most of marketing is in the want-fulfilling business, not the need-fulfilling business. Timex does not want you to buy just any watch, they want you to want a Timex brand watch. Likewise, Ralph Lauren wants you to want Polo when you shop for clothes. On the other hand, the American Cancer Association would like you to feel a need for a check-up and does not care which doctor you go to. In the end, however, marketing is mostly interested in creating and satisfying wants.
The decision process
Exhibit 10 outlines the process a consumer goes through in making a purchase decision. Each step is illustrated in the following sections of your text. Once the process is started, a potential buyer can withdraw at any stage of making the actual purchase. The tendency for a person to go through all six stages is likely only in certain buying situations—a first time purchase of a product, for instance, or when buying high priced, long-lasting, infrequently purchased articles. This is referred to as complex decision making.
For many products, the purchasing behavior is a routine affair in which the aroused need is satisfied in a habitual manner by repurchasing the same brand. That is, past reinforcement in learning experiences leads directly to buying, and thus the second and third stages are bypassed. This is called simple decision making. However, if something changes appreciably (price, product, availability, services), the buyer may re-enter the full decision process and consider alternative brands. Whether complex 0r simple, the first step is need identification.1.
Need identification
Whether we act to resolve a particular problem depends upon two factors: (1) the magnitude of the discrepancy between what we have and what we need, and (2) the importance of the problem. A consumer may desire a new Cadillac and own a five-year-old Chevrolet. The discrepancy may be fairly large but relatively unimportant compared to the other problems he/she faces. Conversely, an individual may own a car that is two years old and running very well. Yet, for various reasons, he/she may consider it extremely important to purchase a car this year. People must resolve these types of conflicts before they can proceed. Otherwise, the buying process for a given product stops at this point, probably in frustration.
Once the problem is recognized it must be defined in such a way that the consumer can actually initiate the action that will bring about a relevant problem solution. Note that, in many cases, problem recognition and problem definition occur simultaneously, such as a consumer running out of toothpaste. Consider the more complicated problem involved with status and image–how we want others to see us. For example, you may know that you are not satisfied with your appearance, but you may not be able to define it any more precisely than that. Consumers will not know where to begin solving their problem until the problem is adequately defined.
Marketers can become involved in the need recognition stage in three ways. First they need to know what problems consumers are facing in order to develop a marketing mix to help solve these problems. This requires that they measure problem recognition. Second, on occasion, marketers want to activate problem recognition. Public service announcements espousing the dangers of cigarette smoking is an example. Weekend and night shop hours are a response of retailers to the consumer problem of limited weekday shopping opportunities. This problem has become particularly important to families with two working adults. Finally, marketers can also shape the definition of the need or problem. If a consumer needs a new coat, does he define the problem as a need for inexpensive covering, a way to stay warm on the coldest days, a garment that will last several years, warm cover that will not attract odd looks from his peers, or an article of clothing that will express his personal sense of style? A salesperson or an ad may shape his answers.
Information search and processing
After a need is recognized, the prospective consumer may seek information to help identify and evaluate alternative products, services, and outlets that will meet that need. Such information can come from family, friends, personal observation, or other sources, such as Consumer Reports, salespeople, or mass media. The promotional component of the marketers offering is aimed at providing information to assist the consumer in their problem solving process. In some cases, the consumer already has the needed information based on past purchasing and consumption experience. Bad experiences and lack of satisfaction can destroy repeat purchases. The consumer with a need for tires may look for information in the local newspaper or ask friends for recommendation. If he has bought tires before and was satisfied, he may go to the same dealer and buy the same brand.
Information search can also identify new needs. As a tire shopper looks for information, she may decide that the tires are not the real problem, that the need is for a new car. At this point, the perceived need may change triggering a new informational search.
Information search involves mental as well as the physical activities that consumers must perform in order to make decisions and accomplish desired goals in the marketplace. It takes time, energy, money, and can often involve foregoing more desirable activities. The benefits of information search, however, can outweigh the costs. For example, engaging in a thorough information search may save money, improve quality of selection, or reduce risks. As noted in the integrated marketing box, the Internet is a valuable information source.
Information processing
When the search actually occurs, what do people do with the information? How do they spot, understand, and recall information? In other words, how do they process information? This broad topic is important for understanding buyer behavior in general as well as effective communication with buyers in particular, and it has received a great deal of study. Assessing how a person processes information is not an easy task. Often observation has served as the basis. Yet there are many theories as to how the process takes place. One widely accepted theory proposes a five-step sequence.2.
Exposure. Information processing starts with the exposure of consumers to some source of stimulation such as watching television, going to the supermarket, or receiving direct mail advertisements at home. In order to start the process, marketers must attract consumers to the stimulus or put it squarely in the path of people in the target market.
Attention. Exposure alone does little unless people pay attention to the stimulus. At any moment, people are bombarded by all sorts of stimuli, but they have a limited capacity to process this input. They must devote mental resources to stimuli in order to process them; in other words, they must pay attention. Marketers can increase the likelihood of attention by providing informational cues that are relevant to the buyer.
Perception. Perception involves classifying the incoming signals into meaningful categories, forming patterns, and assigning names or images to them. Perception is the assignment of meaning to stimuli received through the senses. (More will be said about perception later.)
Retention. Storage of information for later reference, or retention, is the fourth step of the information-processing sequence. Actually, the role of retention or memory in the sequence is twofold. First, memory holds information while it is being processed throughout the sequence. Second, memory stores information for future, long-term use. Heavy repetition and putting a message to music are two things marketers do to enhance retention.
Retrieval and application. The process by which information is recovered from the memory storehouse is called retrieval. Application is putting that information into the right context. If the buyer can retrieve relevant information about a product, brand, or store, he or she will apply it to solve a problem or meet a need.
Integrated marketing
Kids are hooked online
These days, practically even the tiniest of tykes is tech-savvy. It is no wonder. There are computers in elementary schools, computer games, and, of course, there is educational software.
Kids spend a lot of time online, not just at school, but also at home, for social interaction and entertainment. According to market researcher Teen Research Unlimited, 62 per cent of teenagers say they log on at home for 4.2 hours a week, while 46 per cent spend 2.3 hours a week using a computer outside the home. Teens say they spend most of their online time doing research (72 per cent), sending and reading email (63 per cent), playing games (28 per cent), and checking out things to buy or making purchases (23 per cent).
Internet consultancy Cyber Dialogue Data reveals the number of teenagers going online at least once a month grew by nearly 270 per cent between 1998 and 1999. That frequency, coupled with the fact that 19 per cent of these kids have a credit card in his or her own name and 9 per cent have access to a parent's card to shop online, adds up to a huge customer base for Internet marketers.
Snowball.com is a portal that claims to serve both Gen Y and Gen X youth. It includes ChickClick.com for young women, IGN.com for young men, PowerStudents.com for high school and college students, and InsideGuide.com for college students. The portal has inked deals with major marketers, including Sony, Toyota, and Pillsbury. The site also has received a lot of interest from the entertainment world.[1]
Variations in how each step is carried out in the information-processing sequence also occur. Especially influential is the degree of elaboration. Elaborate processing, also called central processing, involves active manipulation of information. A person engaged in elaborate processing pays close attention to a message and thinks about it; he or she develops thoughts in support of or counter to the information received. In contrast, nonelaborate, or peripheral, processing involves passive manipulation of information3. It is demonstrated by most airline passengers while a flight attendant reads preflight safety procedures. This degree of elaboration closely parallels the low-involvement, high-involvement theory, and the same logic applies.
Identification and evaluation of alternatives
After information is secured and processed, alternative products, services, and outlets are identified as viable options. The consumer evaluates these alternatives, and, if financially and psychologically able, makes a choice. The criteria used in evaluation varies from consumer to consumer just as the needs and information sources vary. One consumer may consider price most important while another puts more weight upon quality or convenience.
The search for alternatives and the methods used in the search are influenced by such factors as: (a) time and money costs; (b) how much information the consumer already has; (c) the amount of the perceived risk if a wrong selection is made; and (d) the consumer's pre-disposition toward particular choices as influenced by the attitude of the individual toward choice behavior. That is, there are individuals who find the selection process to be difficult and disturbing. For these people there is a tendency to keep the number of alternatives to a minimum, even if they have not gone through an extensive information search to find that their alternatives appear to be the very best. On the other hand, there are individuals who feel it necessary to collect a long list of alternatives. This tendency can appreciably slow down the decision-making function.
Product/service/outlet selection
The selection of an alternative, in many cases ,will require additional evaluation. For example, a consumer may select a favorite brand and go to a convenient outlet to make a purchase. Upon arrival at the dealer, the consumer finds that the desired brand is out-of-stock. At this point, additional evaluation is needed to decide whether to wait until the product comes in, accept a substitute, or go to another outlet. The selection and evaluation phases of consumer problem solving are closely related and often run sequentially, with outlet selection influencing product evaluation, or product selection influencing outlet evaluation.
The purchase decision
After much searching and evaluating, or perhaps very little, consumers at some point have to decide whether they are going to buy. Anything marketers can do to simplify purchasing will be attractive to buyers. In their advertising marketers could suggest the best size for a particular use, or the right wine to drink with a particular food. Sometimes several decision situations can be combined and marketed as one package. For example, travel agents often package travel tours.
To do a better marketing job at this stage of the buying process, a seller needs to know answers to many questions about consumers' shopping behavior. For instance, how much effort is the consumer willing to spend in shopping for the product? What factors influence when the consumer will actually purchase? Are there any conditions that would prohibit or delay purchase? Providing basic product, price, and location information through labels, advertising, personal selling, and public relations is an obvious starting point. Product sampling, coupons, and rebates may also provide an extra incentive to buy.
Actually determining how a consumer goes through the decision-making process is a difficult research task. As indicated in the Newsline box, there are new research methods to better assess this behavior.
Newsline: Follow the consumer and see what happens
It seems that traditional market research no longer works with an increasingly diverse and fickle customer base. The methods marketers have relied on for decades–perfunctory written and phone surveys merely skim the surface of the shifting customer profile. Says Larry Keeley, president of the Doblin Group, a Chicago-based design and consulting firm: "The surveys are nothing more than tracking studies designed to measure if customers are a little more or a little less pleased with you than they were last year."
Surely there must be a better way. Wise heads in the arcane world of customer research are onto something called storytelling. These folks advocate far more probing research than ever before, advising companies to elicit real-life stories from customers about how they behave and what they truly feel. The notion may seem like a leap into the unknown, but some companies have discovered that these storytelling methods work. Great service and, ultimately, breakthrough products have resulted. Kimberly-Clark built a new USD 500-million diaper market using in-depth customer research. At Intuit, storytelling customers helped its software writers revolutionize the way people all over the US handle their money. US clothing maker Patagonia, soliciting true tales about how customers live and use their gear, manages to keep its product ahead of the curve.
At the heart of this new brand of customer research is a search for subtle insight into human behavior—not only emotion-laden anecdotes, but also unspoken impulses. Just think, for example, of the last time you made eye contact with an attractive stranger. A whole range of feelings washed over you, and at that moment it would be hard to argue with the notion that at least 80 per cent of all human communication is nonverbal.
At Patagonia, an outdoor-sports apparel company in Ventura, California, customer storytellers surf at the "Point" right outside the front door of headquarters. Founder Yoon Chouinard, who spends at least six months a year at the ends of the earth testing his company's gear himself, has made a point of hiring several of these customers so they could share their war stories in-house. He refers to them affectionately as his "dirtbags", people who spend so much time outside that it shows under their fingernails.
Patagonians collect such war stories from far-flung customers as well and use them as a marketing tool. Many of their wares are sold through a biennial catalogue that is unique among its peers. Instead of spending millions to shoot glossy spreads of unthinkably beautiful models, the company relies on its customers to pose while wearing Patagonia duds in exotic locales. This pictorial road map of customer adventures makes for great reading, but it has another role as well. The placement of customers' stories front and center proves that their opinions and experience are valued, and they respond in droves. "We have trained them to believe that we are serious about responding to their feedback and improving our products," notes Randy Howard, the company's director of quality.[2]
Postpurchase behavior
All the behavior determinants and the steps of the buying process up to this point are operative before or during the time a purchase is made. However, a consumer's feelings and evaluations after the sale are also significant to a marketer, because they can influence repeat sales and also influence what the customer tells others about the product or brand.
Keeping the customer happy is what marketing is all about. Nevertheless, consumers typically experience some postpurchase anxiety after all but the most routine and inexpensive purchases. This anxiety reflects a phenomenon called cognitive dissonance. According to this theory, people strive for consistency among their cognitions (knowledge, attitudes, beliefs, values). When there are inconsistencies, dissonance exists, which people will try to eliminate. In some cases, the consumer makes the decision to buy a particular brand already aware of dissonant elements. In other instances, dissonance is aroused by disturbing information that is received after the purchase4. The marketer may take specific steps to reduce postpurchase dissonance. Advertising that stresses the many positive attributes or confirms the popularity of the product can be helpful. Providing personal reinforcement has proven effective with big-ticket items such as automobiles and major appliances. Salespeople in these areas may send cards or may even make personal calls in order to reassure customers about their purchase.
Capsule 8: Review
• Buyer behavior takes place in an exchange setting and addresses two questions:
(a) How do potential buyers go about making purchase decisions?
(b) What factors influence their decision process and in what way?
• Buyer behavior is a problem-solving process and entails the following decisions:
(a) need identification
i. determined by the discrepancy between what we have and what we want
ii. determined by the relative importance of the problem
(b) information search and processing is a five-step sequence:
i. exposure
ii. attention
iii. reception
iv. retention
v. retrieval and application
(c) identification and evaluation of alternatives
(d) product/service/outlet selection
(e) the purchase decision
(f) postpurchase behavior
Influencing factors of consumer behavior
While the decision-making process appears quite standardized, no two people make a decision in exactly the same way. As individuals, we have inherited and learned a great many behavioral tendencies: some controllable, some beyond our control. Further, the ways in which all these factors interact with one another ensures uniqueness. Although it is impossible for a marketer to react to the particular profile of a single consumer, it is possible to identify factors that tend to influence most consumers in predictable ways.
The factors that influence the consumer problem-solving process are numerous and complex. For example, the needs of men and women are different in respect to cosmetics; the extent of information search for a low-income person would be much greater when considering a new automobile as opposed to a loaf of bread; a consumer with extensive past purchasing experience in a product category might well approach the problem differently from one with no experience. Such influences must be understood to draw realistic conclusions about consumer behavior.
For purpose of discussion, it may be helpful to group these various influences into related sets. Exhibit 11 provides such a framework. Situational, external, and internal influences are shown as having an impact on the consumer problem solving process. Situation influences include the consumer's immediate buying task, the market offerings that are available to the consumer, and demographic traits. Internal influences relate to the consumer's learning and socialization, motivation and personality, and lifestyle. External influences deal with factors outside the individual that have a strong bearing on personal behaviors. Current purchase behavior is shown as influencing future behavior through the internal influence of learning. Let us now turn to the nature and potential impact of each of these sets of influences on consumer problem solving. Exhibit 11 focuses on the specific elements that influence the consumer's decision to purchase and evaluate products and services.
Situational influences
Buying task
The nature of the buying task has considerable impact on a customer's approach to solving a particular problem. When a decision involves a low-cost item that is frequently purchased, such as bread, the buying process is typically quick and routinized. A decision concerning a new car is quite different. The extent to which a decision is considered complex or simple depends on (a) whether the decision is novel or routine, and on (b) the extent of the customers' involvement with the decision. A great deal of discussion has revolved around this issue of involvement. High-involvement decisions are those that are important to the buyer. Such decisions are closely tied to the consumer's ego and self-image. They also involve some risk to the consumer; financial risk (highly priced items), social risk (products important to the peer group), or psychological risk (the wrong decision might cause the consumer some concern and anxiety). In making these decisions, it is worth the time and energies to consider solution alternatives carefully. A complex process of decision making is therefore more likely for high involvement purchases. Low-involvement decisions are more straightforward, require little risk, are repetitive, and often lead to a habit: they are not very important to the consumer5. Financial, social, and psychological risks are not nearly as great. In such cases, it may not be worth the consumer's time and effort to search for information about brands or to consider a wide range of alternatives. A low involvement purchase therefore generally entails a limited process of decision making. The purchase of a new computer is an example of high involvement, while the purchase of a hamburger is a low-involvement decision.
When a consumer has bought a similar product many times in the past, the decision making is likely to be simple, regardless of whether it is a high-or low-involvement decision. Suppose a consumer initially bought a product after much care and involvement, was satisfied, and continued to buy the product. The customer's careful consideration of the product and satisfaction has produced brand loyalty, which is the result of involvement with the product decision.
Once a customer is brand-loyal, a simple decision-making process is all that is required for subsequent purchases. The consumer now buys the product through habit, which means making a decision without the use of additional information or the evaluation of alternative choices.
AD 1: Ordering DishPVR is a high-involvement decision
Market offerings
Another relevant set of situational influences on consumer problem solving is the available market offerings. The more extensive the product and brand choices available to the consumer, the more complex the purchase decision process is likely to be.
For example, if you already have purchased or are considering purchasing a DVD (digital versatile disc), you know there are many brands to choose from—Sony, Samsung, Panasonic, Mitsubishi, Toshiba, and Sanyo, to name several. Each manufacturer sells several models that differ in terms of some of the following features–single or multiple event selection, remote control (wired or wireless), slow motion, stop action, variable-speed scan, tracking control, and so on. What criteria are important to you? Is purchasing a DVD an easy decision? If a consumer has a need that can be met by only one product or one outlet in the relevant market, the decision is relatively simple. Either purchase the product or let the need go unmet.
This is not ideal from the customer's perspective, but it can occur. For example, suppose you are a student on a campus in a small town many miles from another marketplace. Your campus and town has only one bookstore. You need a textbook for class; only one specific book will do and only one outlet has the book for sale. The limitation on alternative market offerings can clearly influence your purchase behavior.
As you saw in the DVD example, when the extent of market offerings increases, the complexity of the problem-solving process and the consumers' need for information also increases. A wider selection of market offerings is better from the customer's point of view, because it allows them to tailor their purchases to their specific needs. However, it may confuse and frustrate the consumer so that less-than-optimal choices are made.
Demographic influences
An important set of factors that should not be overlooked in attempting to understand and respond to consumers is demographics. Such variables as age, sex, income, education, marital status, and mobility can all have significant influence on consumer behavior. One study showed that age and education have strong relationships to store selection by female shoppers. This was particularly true for women's suits or dresses, linens and bedding, cosmetics, and women's sportswear.
DeBeers Limited, which has an 80 per cent share of the market for diamonds used in engagement rings, employed a consumer demographic profile in developing their promotional program. Their target market consists of single women and men between the ages of 18 and 24. They combined this profile with some lifestyle aspects to develop their promotional program.
People in different income brackets also tend to buy different types of products and different qualities. Thus various income groups often shop in very different ways. This means that income can be an important variable in defining the target group. Many designer clothing shops, for example, aim at higher-income shoppers, while a store like Kmart appeals to middle-and lower-income groups.
External influences
External factors are another important set of influences on consumer behavior. Among the many societal elements that can affect consumer problem solving are culture, social class, reference groups, and family.
Culture
A person's culture is represented by a large group of people with a similar heritage. The American culture, which is a subset of the Western culture, is of primary interest here. Traditional American culture values include hard work, thrift, achievement, security, and the like. Marketing strategies targeted to those with such a cultural heritage should show the product or service as reinforcing these traditional values. The three components of culture-beliefs, values, and customs-are each somewhat different. A belief is a proposition that reflects a person's particular knowledge and assessment of something (that is, "I believe that ..."). Values are general statements that guide behavior and influence beliefs. The function of a value system is to help a person choose between alternatives in everyday life.
Customs are overt modes of behavior that constitute culturally approved ways of behaving in specific situations. For example, taking one's mother out for dinner and buying her presents for Mother's Day is an American custom that Hallmark and other card companies support enthusiastically.
The American culture with its social values can be divided into various subcultures. For example, African-Americans constitute a significant American subculture in most US cities. A consumer's racial heritage can exert an influence on media usage and various other aspects of the purchase decision process.
Social class
Social class, which is determined by such factors as occupation, wealth, income, education, power, and prestige, is another societal factor that can affect consumer behavior. The best-known classification system includes upper-upper, lower-upper, upper-middle, lower-middle, upper-lower, and lower-lower class. Lower-middle and upper-lower classes comprise the mass market.
The upper-upper class and lower-upper class consist of people from wealthy families who are locally prominent. They tend to live in large homes furnished with art and antiques. They are the primary market for rare jewelry and designer originals, tending to shop at exclusive retailers. The upper-middle class is made up of professionals, managers, and business owners. They are ambitious, future-oriented people who have succeeded economically and now seek to enhance their quality of life. Material goods often take on major symbolic meaning for this group. They also tend to be very civic-minded and are involved in many worthy causes. The lower-middle class consists of mid-level white-collar workers. These are office workers, teachers, small business people and the like who typically hold strong American values. They are family-oriented, hard-working individuals. The upper-lower class is made up of blue-collar workers such as production line workers and service people. Many have incomes that exceed those of the lower-middle class, but their values are often very different. They tend to adopt a short-run, live-for-the-present philosophy. They are less future-oriented than the middle classes. The lower-lower class consists of unskilled workers with low incomes. They are more concerned with necessities than with status or fulfillment.
People in the same social class tend to have similar attitudes, live in similar neighborhoods, dress alike, and shop at the same type stores. If a marketer wishes to target efforts toward the upper classes, then the market offering must be designed to meet their expectations in terms of quality, service, and atmosphere. For example, differences in leisure concerts are favored by members of the middle and upper classes, while fishing, bowling, pool, and drive-in movies are more likely to involve members of the lower social classes.
Reference groups
Do you ever wonder why Pepsi used Shaquille O'Neal in their advertisements? The teen market consumes a considerable amount of soft drinks. Pepsi has made a strong effort to capture a larger share of this market, and felt that Shaquille represented the spirit of today's teens. Pepsi is promoted as "the choice of a new generation" and Shaquille is viewed as a role model by much of that generation. Pepsi has thus employed the concept of reference groups.
A reference group helps shape a person's attitudes and behaviors. Such groups can be either formal or informal. Churches, clubs, schools, notable individuals, and friends can all be reference groups for a particular consumer. Reference groups are characterized as having individuals who are opinion leaders for the group. Opinion leaders are people who influence others. They are not necessarily higher-income or better educated, but perhaps are seen as having greater expertise or knowledge related to some specific topic. For example, a local high school teacher may be an opinion leader for parents in selecting colleges for their children. These people set the trend and others conform to the expressed behavior. If a marketer can identify the opinion leaders for a group in the target market, then effort can be directed toward attracting these individuals. For example, if an ice cream parlor is attempting to attract the local high school trade, opinion leaders at the school may be very important to its success.
The reference group can influence an individual in several ways6.:
• Role expectations: The role assumed by a person is nothing more than a prescribed way of behaving based on the situation and the person's position in the situation. Your reference group determines much about how this role is to be performed. As a student, you are expected to behave in a certain basic way under certain conditions.
• Conformity: Conformity is related to our roles in that we modify our behavior in order to coincide with group norms. Norms are behavioral expectations that are considered appropriate regardless of the position we hold.
• Group communications through opinion leaders: We, as consumers, are constantly seeking out the advice of knowledgeable friends or acquaintances who can provide information, give advice, or actually make the decision. For some product categories, there are professional opinion leaders who are quite easy to identify–e.g. auto mechanics, beauticians, stock brokers, and physicians.
Family
One of the most important reference groups for an individual is the family. A consumer's family has a major impact on attitude and behavior. The interaction between husband and wife and the number and ages of children in the family can have a significant effect on buying behavior.
One facet in understanding the family's impact on consumer behavior is identifying the decision maker for the purchase in question. In some cases, the husband is dominant, in others the wife or children, and still others, a joint decision is made. The store choice for food and household items is most often the wife's. With purchases that involve a larger sum of money, such as a refrigerator, a joint decision is usually made. The decision on clothing purchases for teenagers may be greatly influenced by the teenagers themselves. Thus, marketers need to identify the key family decision maker for the product or service in question.
Another aspect of understanding the impact of the family on buying behavior is the family lifecycle. Most families pass through an orderly sequence of stages. These stages can be defined by a combination of factors such as age, marital status,and parenthood. The typical stages are:
• The bachelor state; young, single people.
• Newly married couples; young, no children.
• The full nest I and II; young married couples with dependent children:
• Youngest child under six (Full nest I)
• Youngest child over six (Full nest II)
• The full nest III; older married couples with dependent children.
• The empty nest I and II; older married couples with no children living with them:
• Adults in labor force (Empty nest I)
• Adults retired (Empty nest II)
• The solitary survivors; older single people:
• In labor force
• Retired
Each of these stages is characterized by different buying behaviors. For example, a children's clothing manufacturer would target its efforts primarily at the full nest I families. Thus, the family cycle can be helpful in defining the target customers.
Internal influences
Each customer is to some degree a unique problem solving unit. Although they can be grouped into meaningful segments, in order to fully appreciate the totality of the buying process, a marketer needs to examine the internal forces that influence consumers. They are learning/socialization, motivation and personality, and lifestyle.
Learning and socialization
As a factor influencing a person's perceptions, learning may be defined as changes in behavior resulting from previous experiences. However, learning does not include behavior changes attributable to instinctive responses, growth, or temporary states of the organism, such as hunger, fatigue, or sleep. It is clear that learning is an ongoing process that is dynamic, adaptive, and subject to change. Also, learning is an experience and practice that actually brings about changes in behavior. For example, in order to learn how to play tennis, you might participate in it to gain experience, be exposed to the different skills required, the rules, and so forth. However, the experience does not have to be an actual, physical one. It could be a conceptualization of a potential experience. In other words, you could learn to play tennis by reading about how to play without actually doing it. This is called nonexperiential learning.
Nonexperiential learning is particularly relevant in consumer behavior. For example, assume you are considering purchasing a bottle of Zinfandel wine. You ask the salesclerk what it tastes like, and he tells you it tastes like a strong ginger ale. Not liking the taste of ginger ale, you reject the purchase. Thus you have learned that you do not like Zinfandel wine without having a direct taste experience. A great deal of our learning is of this type. This may be one reason why marketers try to identify opinions leaders who in turn tell others in the market about the benefits of the product.
Another characteristic of learning is that the changes may be immediate or anticipated. In other words, just because we do not see immediate evidence that learning has taken place is no reason to assume that learning has not occurred. We can store our learning until it is needed, and frequently do this in terms of making purchase decisions. For example, we are willing to learn about many product attributes even though we do not expect to buy the product in the near future.
As new information is processed and stored over time, consumer learning takes place There are several theories of learning: one of the most useful to marketers is that of socialization. Socialization refers to the process by which persons acquire the knowledge, skills, and dispositions that make them more or less able members of their society. The assumption made is that behavior is acquired and modified over the person's lifecycle.
The social learning approach stresses sources of influence–"socialization agents" (i.e. other people)–that transmit cognitive and behavioral patterns to the learner. In the case of consumer socialization, this takes place in the course of the person's interaction with other individuals in various social settings. Socialization agents might include any person, organization, or information source that comes into contact with the consumer.
Consumers acquire this information from the other individuals through the processes of modeling, reinforcement, and social interaction Modeling involves imitation of the agent's behavior. For example, a teenager may acquire a brand name preference for Izod from friends. Marketers can make use of this concept by employing spokespersons to endorse their products and services who have strong credibility with their target consumers, as in the case of Bill Cosby (Jell-O). Reinforcement involves either a reward or a punishment mechanism used by the agent. A parent may be reinforced by good product performance, excellent post-purchase services, or some similar rewarding experience. The social interaction mechanism is less specific as to the type of learning involved; it may include a combination of modeling and reinforcement. The social setting within which learning takes place can be defined in terms of variables such as social class, sex, and family size.
These variables can influence learning through their impact on the relationship between the consumer and others. It should be noted that an individual who promotes learning can be anyone—such as parent, friend, salesperson, or television spokesperson.
Motivation
Motivation is a concept that is difficult to define. In fact, the difficulty of defining motives and dealing with motivation in consumer research accounts for its limited application. For the most part, the research in motivation involves benefit segmentation and patronage motives. Patronage motives typically concern the consumer's reasons for shopping at a particular outlet. Consumers are classified, for example, as price-conscious, convenience-oriented, service-oriented, or in terms of some other motivating feature.
A motive is the inner drive or pressure to take action to satisfy a need. To be motivated is to be a goal-oriented individual. Some goals are positive, some are negative, some individuals have a high level of goal orientation, some have a very low level. In all cases, the need must be aroused or stimulated to a high enough level so that it can serve as a motive. It is possible (and usual) to have needs that are latent (unstimulated) and that therefore do not serve as the motive of behavior. The sources of this arousal may be internal (people get hungry), environmental (you see an ad for a Big Mac), or psychological (just thinking about food can cause hunger). It is possible (and usual) to have needs that are latent (unstimulated) and that therefore do not serve as the motive of behavior.
For motivation to be useful in marketing practice, a marketing manager must understand what motives and behaviors are influenced by the specific situation in which consumers engage in goal-directed, problem-solving behavior.
Motivation flows from an unmet need, as does all consumer problem solving. Perhaps the best known theory dealing with individual motivation is provided in the work of A H Maslow. One of the most important parts of Maslow's theory is his development of a model consisting of several different levels of needs that exist in a human being and relate to each other via a "need hierarchy”. Maslow has differentiated between five levels of needs. The first of these concerns itself with physiological needs; that is, hunger, thirst, and other basic drives. All living beings, regardless of their level of maturity, possess physiological needs. Physiological needs are omnipresent and are of a recurrent nature7.
Safety and security needs are second in Maslow's hierarchy. The difference between physiological needs and safety and security needs is somewhat hazy. Safety and security imply a continued fulfillment of physiological needs. This is an extension of the more basic needs.
Third in Maslow's hierarchy of needs are the love needs. These are the needs for belonging and friendship. They involve a person's interaction with others. The fourth level of needs in Maslow's hierarchy is the esteem needs. These are needs related to feeling good about oneself and having a positive self-image.
The fifth and highest level in Maslow's needs hierarchy is the need for self-actualization or self-fulfillment. This need can be defined as the need of a person to reach his full potential in terms of the application of his own abilities and interest in functioning in his environment.
It is important in discussing these levels of Maslow's hierarchy to point out two additional factors. First, Maslow has clearly indicated that these five levels of needs operate on an unconscious level. That is, the individual is probably not aware of concentration upon one particular need or one assortment of needs. One of the misunderstandings associated with Maslow's theory is that he believes the five needs to be mutually exclusive. That, in fact, is not the intent of Maslow. To the contrary, several of these needs may occur simultaneously for any one individual; the relative importance of each need for any one individual determines the hierarchy involved.
When we attempt to integrate Maslow's needs hierarchy with the concept of segmentation, we can see that a manager might find certain subgroups that fit together because of some homogeneity of needs. For example, a marketer may target a group with strong self-esteem needs in designing a promotional program for cosmetics. Appeals to higher-order needs are important for many products and services, even basic commodities.
Personality is used to summarize all the traits of a person that make him/her unique. No two people have the same traits, but several attempts have been made to classify people with similar traits. Perhaps the best-known personality types are those proposed by Carl Jung, as is a variation on the work of his teacher, Sigmund Freud. His personality categories are introvert and extrovert. The introvert is described as defensive, inner-directed, and withdrawn from others. The extrovert is outgoing, other-directed, and assertive. Several other more elaborate classifications have also been devised.
Various personality types, like people with various motives, are likely to respond in different ways to different market offerings. For example, an extrovert may enjoy the shopping experience and rely more on personal observation to secure information; thus, in-store promotion would become an important communication tool. Knowing the basic personality traits of target customers can be useful information for the manager in designing the marketing mix. Marketers have, however, found personality to be difficult to apply in developing marketing strategy. The primary reason for this is the lack of good ways to measure personality traits. Most available measures were developed to identify people with problems that needed medical attention. These have little value with consumers who are mentally healthy. As a result, most marketers have turned to lifestyle analysis.
Lifestyle
One of the newer and increasingly important set of factors that is being used to understand consumer behavior is lifestyle. Lifestyle has been generally defined as the attitudes, interests, and opinions of the potential customer. Such variables as interest in hunting, attitude toward the role of women in society, and opinion on the importance of dressing well can be used to better understand the market and its behavior.
It is the multifaceted aspect of lifestyle research that makes it so useful in consumer analysis. A prominent lifestyle researcher, Joseph T Plummer, summarizes the concept as follows:
...life style patterns, combines the virtues of demographics with the richness and dimensionality of psychological characteristics....Life style is used to segment the marketplace because it provides the broad, everyday view of consumers life style segmentation and can generate identifiable whole persons rather than isolated fragments.8.
A useful application of the lifestyle concept relates to consumer's shopping orientation. Different customers approach shopping in very different ways. They have different attitudes and opinions about shopping and different levels of interest in shopping. Once people know their alternatives, how do they evaluate and choose among them? In particular, how do people choose among brands of a product? Current description of this process emphasizes the role of attitudes. An attitude is an opinion of a person, idea, place, or thing. Attitudes range based on a continuum from very negative to very positive. Traditionally, an attitude is broken down into three components: cognitive, affective, and behavioral. That is, an attitude is first what we know/believe, followed by what we feel, and ending with an action. Thus, we have learned that a particular company has been polluting a local river; we feel very strongly that business should not do this and feel very angry; and we boycott the product made by that company.
A great deal of marketing strategy is based on the idea that the cognitive, affective, and behavioral components of an attitude tend to be consistent. Thus, if it is possible to change what people believe about Yamaha CD players, their feelings and their actions may eventually change as well. However, this relationship among the three components of an attitude seems to be situation–or even product–specific. For example, attitudes tend to predict behavior better in high-involvement decisions. Thus, if someone has a strong attitude about wearing stylish clothes, then it is possible to predict that the person will restrict purchases to a particular set of brands. Furthermore, we do not react to products in isolation. The situation, or our attitude toward the situation, plays an important role in how well attitudes predict behavior. For example, assume that a consumer likes pizza but does not like Pizza Inn pizza. In a social setting where everyone wants to go to Pizza Inn for pizza, this person might eat this brand rather than not have pizza at all.
Despite limitations on the predictive power of attitudes, attitudes can help us understand how choices are made. However, we need to carefully assess the validity of the attitude-behavior relationships for each situation and product.
Capsule 9: Review
• The following factors influence consumer behavior:
(a) situational influences
i. the buyer task: high-involvement vs low involvement
ii. market offerings
iii. demographics
(b) external influences
i. culture
ii. social class
iii. reference groups
iv. family
(c) internal influences
i. learning and socialization
ii. motivation
iii. personality
iv. lifestyle
v. attitudes
Given the hypothesis that attitudes influence buying behavior, how can a company bring its products and consumers' attitudes into a consistent state; that is, into a situation where consumers evaluate a given product or brand as satisfying their need? Marketers have two choices: either they can change consumers' attitudes to be consistent with their product, or they can change the product to match attitudes. It is easier to change the product than to change consumers' attitudes. Nevertheless, attitudes can sometimes be modified. Modifying attitudes might be the only reasonable choice, as when a firm is introducing a truly new product or an unusual new use for an existing one. Marketers should nevertheless face the fact that it is extremely difficult to change consumers' attitudes. If there is to be change, it is most likely to occur when people are open-minded in their beliefs or when an existing attitude is of weak intensity; that is, when there is little information to support the attitude or very little ego involvement on the individual's part. The stronger a person's loyalty to a certain brand, for example, the more difficult it is to change that attitude.
1. [1]Sources: Jennifer Gilbert, "New Teen Obsession," Advertising Age, February 14, 2000, p. 8; "School Daze," American Demographics, August 1999, p. 80; Krestina Filiciano, "Just Kidding," Adweek, May 1, 2000, p. 58.
2. [2]Sources: Joanne Gordon, "Shrink Rap," Fortune, February 7, 2000, pp. 110-111; Ronald B. Liebier, "Storytelling: A New Way to Get Close to the Customer," Fortune, February 3, 1997, pp. 102-105; Kendra Darko, "Zooming In On What's Important." American Demographics, August 1999, pp. 46-47. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/04%3A_Understanding_Buyer_Behavior/4.03%3A_Buyer_behavior_as_problem_solving.txt |
Those who supply goods and services to consumer markets are themselves in need of goods and services to run their business. These organizations–producers, resellers, and government–make up vast marketing organizations that buy a large variety of products, including equipment, raw material, and labor and other services. Some organizations sell exclusively to other organizations and never come into contact with consumer buyers.
Despite the importance of organizational markets, far less research has been conducted on factors that influence their behavior than on factors that influence consumers. However, we can identify characteristics that distinguish organizational buying from consumer buying and typical steps in the organizational buying process.
Characteristics of organizational buying
Many elements of the sociocultural environment discussed earlier influence organizational as well as consumer buying, but some additional forces are salient only in the organizational setting. In particular, each organization has its own business philosophy that guides its actions in resolving conflicts, handling uncertainty and risk, searching for solutions, and adapting to change. For example, Peabody Coal, which is part of a declining industry, relies on a conservative purchase strategy in an attempt to maintain their status quo.
AD 1: This ad illustrates organization behavior decision criteria.
Five characteristics mark the organizational buying process:
• In organizations, many individuals are involved in making buying decisions.
• The organizational buyer is motivated by both rational and quantitative criteria dominant in organizational decisions; the decision makers are people, subject to many of the same emotional criteria used in personal purchases.
• Organizational buying decisions frequently involve a range of complex technical dimensions. A purchasing agent for Volvo Automobiles, for example, must consider a number of technical factors before ordering a radio to go into the new model. The electronic system, the acoustics of the interior, and the shape of the dashboard are a few of these considerations.
• The organizational decision process frequently spans a considerable time, creating a significant lag between the marketer's initial contact with the customer and the purchasing decision. Since many new factors can enter the picture during this lag time, the marketer's ability to monitor and adjust to these changes is critical.
• Organizations cannot be grouped into precise categories. Each organization has a characteristic way of functioning and a personality.9.
The first item in this list of characteristics has important implications. Unlike the consumer buying process, organizational buying involves decision making by groups and enforces rules for making decisions. These two characteristics greatly complicate the task of understanding the buying process. For example, to predict the buying behavior of an organization with certainty, it is important to know who will take part in the buying process, what criteria each member uses in evaluating prospective suppliers, and what influence each member has. It is also necessary to understand something not only about the psychology of the individuals involved but also how they work as a group. Who makes the decision to buy depends in part on the situation. Three types of buying situations have been distinguished: the straight rebuy, the modified rebuy, and the new task.
The straight rebuy is the simplest situation: The company reorders a good or service without any modifications. The transaction tends to be routine and may be handled totally by the purchasing department. With the modified rebuy, the buyer is seeking to modify product specifications, prices, and so on. The purchaser is interested in negotiation, and several participants may take part in the buying decision. A company faces a new task when it considers buying a product for the first time. The number of participants and the amount of information sought tend to increase with the cost and risks associated with the transaction. This situation represents the best opportunity for the marketer.
Stages in organizational buying
The organizational buying process contains eight stages, or key phrases, which are listed in Exhibit 12. Although these stages parallel those of the consumer buying process, there are important differences that have a direct bearing on the marketing strategy. The complete process occurs only in the case of a new task. Even in this situation, however, the process is far more formal for the industrial buying process than for the consumer buying process.
Most of the information an industrial buyer receives is delivered through direct contacts such as sales representatives or information packets. It is unlikely that an industrial buyer would use information provided through a trade ad as the sole basis for making a decision.
Problem recognition. The process begins when someone in the organization recognizes a problem or need that can be met by acquiring a good or service. Problem recognition can occur as a result of internal or external stimuli. External stimuli can be a presentation by a salesperson, an ad, or information picked up at a trade show.
General need description. Having recognized that a need exists, the buyers must add further refinement to its description. Working with engineers, users, purchasing agents, and others, the buyer identifies and prioritizes important product characteristics. Capsule 8 lists several sources of information for many industrial customers. Armed with extensive product knowledge, this individual is capable of addressing virtually all the product-related concerns of a typical customer. To a lesser extent, trade advertising provides valuable information to smaller or isolated customers. Noteworthy is the extensive use of direct marketing techniques (for example, toll-free numbers and information cards) in conjunction with many trade ads. Finally, public relations plays a significant role through the placement of stories in various trade journals.
Product specification. Technical specifications come next. This is usually the responsibility of the engineering department. Engineers design several alternatives, depending on the priority list established earlier.
Supplier search. The buyer now tries to identify the most appropriate vendor. The buyer can examine trade directories, perform a computer search, or phone other companies for recommendations. Marketers can participate in this stage by contacting possible opinion leaders and soliciting support or by contacting the buyer directly. Personal selling plays a major role at this stage.
Proposal solicitation. Qualified suppliers are next invited to submit proposals. Some suppliers send only a catalog or a sales representative. Proposal development is a complete task that requires extensive research and skilled writing and presentation. In extreme cases, such proposals are comparable to complete marketing strategies found in the consumer sector.
Supplier selection. At this stage, the various proposals are screened and a choice is made. A significant part of this selection is evaluating the vendor. One study indicated that purchasing managers felt that the vendor was often more important than the proposal. Purchasing managers listed the three most important characteristics of the vendor as delivery capability, consistent quality, and fair price. Another study found that the relative importance of different attributes varies with the type of buying situations. For example, for routine-order products, delivery, reliability, price, and supplier reputation are highly important. These factors can serve as appeals in sales presentations and in trade ads.
Order-routine specification. The buyer now writes the final order with the chosen supplier, listing the technical specifications, the quantity needed, the warranty, and so on.
Performance review. In this final stage, the buyer reviews the supplier's performance. This may be a very simple or a very complex process.
Table 2: Industrial buyer information sources
Source
Description
Salespeople
Sales personnel representing manufacturers or distributors of the product in question.
Technical sources
Engineering types of personnel internal or external to the subject's firm.
Personnel in buyer's firm
Peer group references (e.g. other purchasing agents in the subject's firm).
Purchasing agents in other companies
Peer group references external to the buyer's firm.
Trade association
Cooperatives voluntarily joined by business competitors designed to assist its members and industry in dealing with mutual problems (e.g. National Association of Purchasing Management).
Advertising in trade journals
Commercial messages placed by the manufacturer or distributor of the product in question.
Articles in trade journals
Messages relating to the product in question but not under the control of the manufacturer or distributor.
Vendor files
Information pertaining to the values of various sources of supply as developed and maintained by the buyer's firm.
Trade registers
Buyer guides providing listings of suppliers and other marketing information (e.g. Thomas' Register).
Product literature
Specific product and vendor information supplied by the manufacturing or distributing firm.
Newsline: The future of the consumer
Experts say consumers in the new millennium will throw some surprising twists and turns into the business of target marketing, overturning some of the traditional thinking about what we will buy, how we will live, and where we will work. ''The 21st century will be the century of the consumer," says Roger Blackwell, a professor of marketing. "Marketers will have to push their understanding beyond knowing what people buy to knowing why they buy." The 2010s will be the "Linked Decade”, defined by a busy, mature, ethnically heterogeneous group of consumers who are confident in their ability to read anything, buy anything, and experience anything.
Several fundamental demographic changes will serve as the underpinning for this new consumer mind-set: the aging of the baby boom generation, the increasing importance of children as consumers, a growing chasm between society's haves and have-nots, and the world's increasingly diverse population.
Given that demographic backdrop. what will be the most powerful values shaping the consumer mind-set? The following possibilities have been proposed:
(a) The Shrinking Day–Harried baby boomers will create a time famine for themselves by working more hours and committing to more family and community obligations.
(b) The Connectedness Craze–The urge to connect will pervade all aspects of consumers' lives and increasingly consumers will turn to the World Wide Web for a sense of community between buyers and sellers, information suppliers and consumers, and friends and family.
(c) The Body vs Soul Conundrum–Consumers will continue their obsession with fitness and spirituality, while at the same time consuming record amounts of take-out food.
(d) The Triumph of Individualism–Work, family, and purchase processes will reflect the consumer's need to be treated as a unique individual.
Capsule 10: Review
• Organizational buyer behavior is different from consumer behavior:
(a) Many individuals make the buying decision.
(b) Behavior is motivated by both rational and emotional.
(c) Decisions include a range of complex technical decisions.
(d) Lag time exists between contact and actual decision.
(e) Organizations cannot by grouped into precise categories.
• The following stages are involved in the organizational buying decision:
(a) problem recognition
(b) general need description factors
(c) product specification
(d) supplier's research
(e) proposal solicitation
(f) supplier selection
(g) order-routine specification
(h) performance review
The Wall Street Journal (wsj.com)
In practice
Understanding buyer behavior is a complicated process, with many factors influencing the process. Why and what products are purchased baffles marketers as much as understanding why certain products are not purchased. Ultimately, understanding buyer behavior influences the marketing mix used for a product.
Marketers must be able to answer two critical questions when assessing consumer and organizational buyer behavior: (a) How do buyers make purchase decisions? and (b) What factors influence decisions and in what way? Answering these questions correctly impacts the success of any product.
Consumer and organizational buyer behavior differ significantly. While considerable research about consumer purchasing decisions has been conducted, minimal research has been done about organizational buyer behavior. Marketers must understand the different factors and influences affecting each group and the impact of these on purchase decisions.
Cisco Systems Inc., provides networking solutions that connect computer devices and networks for businesses. Check out Cisco's website at www.cisco.com. Under Solutions for Your Network, click on Overview. A menu will appear to the left with information for customers such as Large Enterprises, Small and Medium Businesses, and Government entities. Click on one of those links now to read about product offerings for these customers.
The Business Focus section of Marketplace provides information about various business activities, including purchasing. On the Marketplace home page, click on Business Focus on the left menu.
For information about consumer buying behavior, go to the Interactive Journal's Front Section and click on Marketplace. Click on Marketing/Media. Look for articles in the Advertising section. These articles discuss examples of advertising efforts that various companies employ to influence consumer buying decisions. Information about retail sales can also be found in Marketing/Media.
Deliverable
Using the Interactive Journal's Business Index feature under Journal Atlas on the left menu, select a consumer products company featured in today 's Interactive Journal. Visit that company's website and search the Interactive Journal for information that will help you identify the Situational and External Influences for customers purchasing the company's product(s). | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/04%3A_Understanding_Buyer_Behavior/4.04%3A_Organizational_buyer_behavior.txt |
In this chapter, the rudiments of buyer behavior were presented. The chapter is divided into two parts: consumer behavior and organizational behavior. In the case of consumer behavior, the discussion began with six stages in the consumer decision-making process. These stages include need identification, information search and processing, evaluation of alternatives, product/service/outlet selection, purchase. and post-purchase behavior.
Following the material was a discussion of the factors that influence this decision-making process. The situational influences consist of the complexity, market offerings, and demographics. External influences include the culture, social class, reference groups, and the family. Finally, the internal influences identified were learning/socialization, motivation, personality, lifestyles, and attitudes.
The final section of the chapter dealt with issues germane to how organizations make buying decisions compared to how consumers make buying decisions. Discussion began with a description of the characteristics of organizational buying. The section concluded with a description or the stages followed in organizational buying. These stages were problem recognition, general need description, product specification, supplier's search, proposal solicitation, supplier selection, order-routine specification, and performance review.
Key terms
Market A group of potential buyers with needs and wants and the purchasing power to satisfy them.
Need A basic deficiency given a particular situation.
Want Placing certain personal criteria as to how a need should be fulfilled.
Information search Involves the mental as well as physical activities that consumers must perform in order to make decisions and accomplish desired goals in the marketplace.
Attitude An opinion we hold toward a person, idea, place, or thing.
Cognitive dissonance Negative feelings the consumer has after purchase.
High-involvement decisions Decisions that are important to the buyer because they are closely tied to self-image and have an inherent risk.
Low-involvement decisions Decisions that are not very important to the buyer because ego is not involved and risk is low.
Culture A large group of people with a similar heritage.
Social class People grouped together because of similar occupation, wealth, income, education, power, and prestige.
Reference groups Individuals who share common attitudes and behavior.
Family lifecycle Predictable stages experienced by families.
Learning Changes in behavior resulting from previous experiences.
Socialization The process by which persons acquire the knowledge, skills, and dispositions that make them more or less able members of their society.
Motivation An inner drive or pressure to take action to satisfy a need.
Personality A term used to summarize all the traits of a person that makes him/her unique.
Lifestyle A profile of an individual as reflected in their attitudes, interests, and opinions.
Questions
➢ Discuss several reasons why marketers continue to have a hard time understanding, predicting, and explaining consumer behavior.
➢ Based on your understanding of motives, develop some general guidelines or directives for practicing marketing.
➢ How can marketers influence a person's motivation to take action? How can they facilitate learning?
➢ Define an attitude. Discuss the components of an attitude. What are the implications for marketing?
➢ Distinguish between high-involvement and low-involvement decision making.
➢ Present a diagram of the consumer decision process. What is the role of marketing in each stage of this process?
➢ What are the differences between the consumer decision-making process and organizational decision-making process?
➢ Assume that you are training a salesperson to sell industrial products. Although this salesperson has a strong track record, she has been selling consumer products. What would you emphasize during training?
➢ Explain how complexity of the product influences the buying decision process.
➢ Why are opinion leaders so important to marketers? Discuss how marketers could use this type of individual in prompting a decision.
➢ How can marketers use the Internet to influence consumer buyer behavior? Organizational buyer behavior?
➢ How has business-to-business (B2B) commerce affected purchasing transactions?
➢ What new factors or influences do you foresee impacting consumer buyer behavior? Organizational buyer behavior?
➢ What ethical considerations (if any) do advertisers face when they try to influence buyer behavior?
➢ What risk do airlines take when all of them have the same goal-improving service quality?
➢ Should the airlines focus on business travelers or consumers? Why?
Project
Locate an individual who has purchased a new automobile during the last year. Using the six-step decision-making process, ask this person to indicate how he or she accomplished each step.
Case application
Customer satisfaction still matters
To many American travelers, airline quality is an oxymoron. Ted J Kredir, director of hobby sales for Dallas-based trading card company, Pinnacle Brands, Inc., complains of frequent flight cancellations, late arrivals, and lousy food. To the surprise of skeptical passengers, the gripes are not falling on deaf ears. After years of focusing on paring expenses, such major airlines as American, Delta, and Continental are stepping up their quality efforts. Cost-cutting "diverted our attention from the nuts and bolts of out business,” concedes American Airlines Chief Executive Robert L Crandall. "Our customers have noticed."
American Airlines, which once dubbed itself the "on-time machine” placed a dismal ninth among 10 carriers in on-time rankings for the third quarter of 1996. So Crandall told managers at the next meeting that leading all industry-quality ratings is their top job for 1997. An American spokesperson will not provide specifics, but says: "We are talking about a lot of operational things like customer comfort on board airplanes."
At Delta Air Lines, Inc., customer complaints have nearly doubled since 1994; CEO Ronald W Allen blames the pursuit of lower costs. "In some cases we did cut too deeply," he says. Trans World Airlines, Inc., now in the cellar for on-time and customer complaint rankings by the Transportation Department, is getting the message too. After on-time arrivals dropped under 50 per cent during the holidays and cancellations climbed, managers warned workers to get back to basics.
Underscoring the quality drive is the stunning turnaround at Continental Airlines, Inc., where for two years CEO Gordon M Bethune has hammered away at the theme. Once near the bottom of transportation rankings, Continental now has one of the best ratings for on-time performance, baggage handling, and customer complaints. In 1996, they won the prestigious J D Power & Associates, Inc., award for the highest customer satisfaction on long-haul flights. Bethune claims to be grabbing marketing share among business travelers from American and others. "We have been kicking their butts," boasts Bethune.
Jaded coach passengers, however, are not expecting first-class treatment anytime soon. ''The product is bad, and it is going to stay that way as near as I can tell," says Ed Perkins, editor of Consumer Reports Travel Letters. It is up to the airlines to prove such doubters wrong.
References
1.Henry Assael, Consumer Behavior and Marketing Action, 3rd ed., Boston: Kent Publishing, 1987, p. 84.
2.James Bettman, An Information Processing Theory of Consumer Choice, Reading, Mass: .Addison Wesley, 1979.
3.Richard E. Petty, John T. Cacioppo, and David Schumann, "Central and Peripheral Routes to Advertising Effectiveness: The Moderating Role of Involvement," Journal of Consumer Research 10, September 1983, pp. 135-146.
4.L. Festinger, A Theory of Cognitive Dissonance, Stanford, Calif.: Stanford University Press, 1957.
5.Richard Petty and John T. Cacioppo, "Issue Involvement as a Moderator of the Effects on Attitude Advel1ising Content and Context," in Advances in Consumer Research, ed. K. B. Monroe, Vol. 8, Ann Arbor, Mich., 1981.
6.William O. Bearden and Michael G. Etzel, "Reference Group Influence on Product and Brand Choice," Journal of Consumer Research, September 1982, pp. 183-194.
7.C. N. Coffer and M. H. Appley, Motivation: Theory Research, New York: John Wiley & Sons, 1964.
8.Martha Farnsworth Riche, "Psychographics for the 1990's," American Demographics, July 1989, pp. 25-6, 30-2.
9.William A. Dempsey, "Vendor Selection and the Buying Process," Industrial Marketing Management 7, 1978, pp. 257-67. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/04%3A_Understanding_Buyer_Behavior/4.05%3A_Summary.txt |
Learning Objectives
As you read through this chapter, you should develop an understanding of the external considerations in marketing planning. Specifically, you should:
• Understand the importance of analyzing the organization's external environment and the impact that the external environment has on strategic marketing planning.
• Realize that marketing 0rganizati0ns often work with external agencies that perform some of these marketing activities. These agencies include distributors, retailers, market research suppliers, advertising agencies, and materials suppliers.
• Appreciate the external factors that have an impact on marketing activities, including external agencies, competitors, legal/ethical issues, economic/political issues, technology, and social trends.
• Relate these external factors to the marketing planning process.
Thumbnailk: pixabay.com/photos/social-me...itter-1795578/
05: External Considerations in Marketing
The car industry and technology
The EV1 is an electric car built by US based General Motors, marketed under the Saturn brand. The EV1 was introduced to California and Arizona in 1996 with an estimated USD 25 million marketing campaign.
In 1997, a clean air mandate went into effect in three US states—California, Massachusetts, and New York. The mandate requires that each year, a certain percentage of vehicles sold must be zero-emission vehicles. California has since pushed its deadline to the year 2003, but requires that 10 per cent of all vehicles sold be zero-emission. General Motors stayed with the original date and won acclaim for the zero-emission technology. General Motors is not the only company with an interest in developing electric-powered vehicles. Here are several other electric projects that are underway:
• Honda EV Plus, introduced in 1997 and marketed to families of four
• Chrysler EPIC
• Nissan Prairie Jay minivan
• Ford Ranger EV
• Chevy S-10 pickups
• Toyota RAV4-EV sport-utility vehicle
Production of electric vehicles was undertaken in response to voter mandates, a factor external to the firm. Now, auto producers are introducing electric vehicles in part to learn about customer reactions. There is still much to learn about electric-powered technology. Today, there are concerns about things like range, price, and refueling of electric vehicles. This is quite a drastic change from typical customer concerns like car phones, cup holders, and other frills associated with gas-powered vehicles. A few other facts about General Motors' EV1:
• It leases for between USD 399 and USD 549 monthly.
• Monthly payments on a typical purchase are around USD 500.
• They have limited range (about 120 miles or 193.21 Km between changes).
• Recharging takes several hours.
• They are currently best as a second vehicle.[1]
Introduction
When marketing organizations plan strategically, the key question is: "Does the strategic planning process raise the overall level of the organization's effectiveness, and does it provide the new strategic direction that is required for the future?" A good strategic plan must help marketing organizations recognize the interrelationships among various forces in the business environment. These interrelationships must be accounted for if the organization is to be capable of implementing its vision.
It is important to recognize that most existing planning processes have an internal focus. Internal planning processes ask questions like, "What are our strengths and weaknesses? "What comparative cost advantages do we have?" and "What product features provide us with an advantage?"
The external planning approach asks these same questions but also attempts to understand how all of the elements of the marketplace relate to each other. In this chapter, we focus on the external environmental factors that have an impact on the organization, especially the marketing function. In the chapters that follow, we consider the marketplace and its behavior.
As shown in Exhibit 13, marketing managers are confronted with many environmental concerns, including technology; customer; competitor; ethical/legal; and economic, political, demographic, and social trends. All organizations should continuously appraise their situation and adjust their strategy to adapt to the environment.
One technique used by organizations to monitor the environment is known as environmental scanning, which refers to activities directed toward obtaining information about events and trends that occur outside the organization and that can influence the organization's decision making. In a sense, such data collection scanning acts as an early warning system for the organization. It allows marketers to understand the current state of the environment and to predict trends. A formal but simple strategic information scanning system can enhance the effectiveness of the organization's environmental scanning efforts. An information system (part of marketing research) organizes the scanning effort so that information related to specific situations can be more readily obtained and used.
A good strategic plan requires careful monitoring of the marketing organization's external environment. The external environment represents sources of opportunities and threats. If the marketing organization is to align its capabilities and resources with opportunities and threats, it must know what those threats are. It is important that marketing organizations have a strategy to uncover relevant strategic opportunities and threats early. As threats and opportunities appear, marketing organizations should develop strategies to deal with them.
Another problem is that at any one time, there may appear to be a great many opportunities and threats looming. Marketers must be able to prioritize these opportunities and threats according to such factors as their relevance to the organization, the cost effectiveness of strategies to deal with the threats and opportunities, and the urgency of the threat or opportunity. Organizations are inundated with information and must therefore have an effective mechanism for sorting out that information which is relevant to the organization.
Only after the marketing environment is thoroughly understood can an organization spot trends and determine whether they represent market opportunities or market threats.
1. [1]Sources: "OM's Advanced Auto Technologies Showcased at Democratic National Convention,” Financial News. August 13,2000; Jon Pepper, "California Mandate for Electric Cars Means OM Has a Lot to Explain,” The Detroit News, August 23, 2000. p. 1; Paul Rog0rs, "California Air Officials Want Auto Makers to Deliver Electric Cars in Two Years,” San Jose Mercury News, September 9, 2000. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/05%3A_External_Considerations_in_Marketing/5.01%3A_Introduction.txt |
There are many marketplace changes occurring that marketers cannot control but affect what marketers do. Faced with these environmental uncertainties, successful marketers will be those who recognize the changes that are occurring and who make effective adjustments.
There are a number of external factors that constitute the external environment. Our approach is to attempt to present an all-encompassing view of the elements of the external environment. Rather, it is to briefly describe each of the components and show how external factors affect marketing strategy.
External surprises
Carol Wolfe and Jane Barnes have been friends for six years, sharing carpool responsibilities, a common love of sewing, and a belief that being self-employed would be a dream come true. After two years of tinkering, they produced a child carrier that they felt would appeal to devoted moms who wanted their baby to be physically attached to the parent in a secure and comfortable manner. They knew they would need lots of help getting this business off the ground, but never realized how difficult and complicated it would be to obtain such assistance.
They contacted the chairman of the marketing department at a local college and were told they could be considered as a student project for the capstone marketing course. One month later, they were given a preliminary report. The report began by listing the various agencies and intermediaries they would need to contact in order to start their business. The list included the following: personal attorney, patent attorney, accountant, commercial banker, raw materials providers (e.g. denim, thread, staples), distributors (wholesalers and retailers), advertising agency, marketing research firm, and fulfillment house. Further, they would have to understand the capabilities, options, and costs associated with each agency or intermediary.
Since they lived in a relatively small city (population 185,000), many of these agencies or intermediaries were not readily available. A local attorney put them in touch with a patent attorney and a marketing research company in a nearby large city. The estimated cost of doing the patent search was USD 5,500 while the cost of preliminary research was USD 9,300. Their combined savings totaled USD 18,000. Clearly, they were underfunded. A quick call to the local bank produced another list of requirements they would have to meet in order to qualify for a business loan, including a business plan, a pro forma statement, and so forth.
The initial business plan developed by the student group indicated that there were several competitors selling a product very similar to Carol and Jane's baby carrier. Also, the sources for denim were limited and required a minimum purchase of 500 bolts of fabric. Finally, because most retailers selling similar products were already committed to other manufacturers, it was unlikely that they would find retail distributors. The expected cost of manufacturing and marketing 30,000 units the first year was USD 1.4 million with a maximum possible profit of USD 146,000. Carol and Jane gave up on their idea.
While this scenario is quite depressing, it is not that unusual. It is critical that a business identify and evaluate the various agencies and intermediaries with whom it must deal. Throughout this book, we will constantly identify these external agencies and attempt to assess their influence on a marketing organization.
Competitors
As with other external forces, management must also prioritize the importance of the factors that affect competition. The relationships between these elements and competition must be understood if the organization is to be able to develop and sustain a competitive advantage.
Competitive analysis focuses on opportunities and threats that may occur because of actual or potential competitive changes in strategy. It starts with identifying current and potential competitors. For example, who are General Motors' competitors? If you named companies like Toyota, Ford, Chrysler, and Honda, you are right, but you have just begun. Table 3 outlines some of General Motors' competitors, and Table 4 does the same with Nintendo's competitors.
It is essential that the marketer begin this assessment by answering the following question: "What criteria can be used to identify a salient set of competitors?"
Table 3: Analysis of General Motors' competitors
Transportation
After-market
Autos
Other
Repairs
Parts
Toyota
Schwinn
Auto dealers
Pep-Boys
Ford
Delta Airlines
Sears
NAPA
Chrysler
American Airlines
Kmart
Honda
Honda motorcycles
Local repair shops
Audi
Mass transit
Table 4: Analysis of Nintendo's competitors
Video games
Entertainment
Game suppliers
Game providers
In-home
Out-of-home
Hobbies
Sega
The Tilt
Family time
Plitt Theaters
Hunting, fishing
Atari
Video game parlor
Parker brothers
The New York Mets
golf, Little league
Genesis
Mazzio's
Blockbuster Video
Six Flags
baseball, Girl Scouts
It is clear from these two examples that an accurate accounting of competitors is much broader than the obvious. If we define our competitors too narrowly, we risk the chance that an unidentified competitor will take market share away from us without our knowledge. For example, General Motors obviously competes against Ford, Chrysler, Toyota, and other auto manufacturers. They also compete against Sears in the repair market, the subway in large cities, the airlines, and Schwinn, among people for whom bicycle riding is popular. Nintendo competes against Sega in the video game market. They also compete against Blockbuster Video, the local gym, board games, the theater, and rock concerts. Competition focuses on the wants and needs being satisfied, not the product being produced. General Motors, then, is competing to satisfy your need for transportation. Nintendo is competing to satisfy your need for entertainment.
In addition to identifying a competitor from the perspective of the customer, other criteria might be the geographic location of competitors, relative size, history, channels of distribution, and common tactics.
A second question to consider is the following: "What criteria do we need to use to make sure that our competitors are 'correctly' identified?" One way of answering this question is to track the customers' perceptions of product groupings and substitution. Do they change over time? Likewise, tracking expected competitors over time may prove insightful.
Once competitors are correctly identified, it is helpful to assess them relative to factors that drive competition: entry, bargaining power of buyers and suppliers, existing rivalries, and substitution possibilities. These factors relate to a firm's marketing mix decisions and may be used to create a barrier to entry, increase brand awareness, or intensify a fight for market share.
Barriers to entry represent business practices or conditions that make it difficult for new or existing firms to enter the market. Our entrepreneurs, Carol and Jane, aced several barriers to entry. Typically, barriers to entry can be in the form of capital requirements, advertising expenditures, product identity, distribution access, or switching costs. Japan has been accused of having unofficial cultural-based barriers to the Japanese market.
In industries such as steel, automobiles, and computers, the power of buyers and suppliers can be very high. Powerful buyers exist when they are few in number, there are low switching costs, or the product represents a significant share of the buyer's total costs. This is common for large retailers such as Wal-Mart and Home Depot. A supplier gains power when the product is critical to the buyer and when it has built up the switching costs. Examples include Microsoft and BMW.
Existing competitors and possible substitutes also influence the dynamics of the competition. For example, in slow-growth markets, competition is more severe for any possible gains in market share. High fixed costs also create competitive pressure for firms to fill production capacity. For example hospitals are increasing their advertising in a battle to fill beds, which represents a high fixed cost.
Legal/ethical factors
Every marketing organization's activities are influenced by ethical and legal factors that establish the rules of the game. These laws, agencies, policies, and behavioral norms are established to ensure that marketers compete legally and ethically in their efforts to provide want and need-satisfying products and services. The various US legal issues with which marketers must be knowledgeable include the following:
Monetary and fiscal policy: Marketing decisions are affected by factors like tax legislation, the money supply, and the level of government spending. The tendency of a Republican Congress to spend on defense materials and not on the environment is an example.
Federal legislation: Federal legislation exists to ensure such things as fair competition, fair pricing practices, and honesty in marketing communications. Anti-tobacco legislation affects the tobacco and related industries.
Government/industry relationships: Agriculture, railroads, shipbuilding, and other industries are subsidized by government. Tariffs and import quotas imposed by government affect certain industries (e.g. automobile). Other industries are regulated (or no longer regulated) by government (e.g. rail, trucking, and airlines). Deregulating the utilities industry had a tremendous negative effect on the California power industry in 2001.
Social legislation: Marketers' activities are affected by broad social legislation like the civil rights laws, programs to reduce unemployment, and legislation that affects the environment (e.g. water and air pollution). The meat processing industry has spent billions of dollars trying to comply with water pollution legislation.
State laws: State legislation affects marketers in different ways. For example, utilities in Oregon can spend only ½ per cent of their net income on advertising. California has enacted legislation to reduce the energy consumption of refrigerators and air conditioners. In New Jersey, nine dairies have paid the state over USD 2 million to settle a price-fixing lawsuit.
Regulatory agencies: State regulatory agencies (e.g. the US Attorney General's Office) actively pursue marketing violations of the law. Federal agencies like the US Federal Trade Commission and the Consumer Product Safety concern themselves with all facets of business.
Literally every facet of business is affected by one or more laws. It would be impossible to adequately cover them all in the space allotted. However, we will briefly discuss the three areas receiving the most notice in marketing: product liability, deregulation, and consumer protection.
Product liability
The courts are increasingly holding sellers responsible for the safety of their products. The US courts generally hold that the producer of a product is liable for any product defect that causes injury in the course of normal use. Liability can even result if a court or a jury decides that a product's design, construction, or operating instructions and safety warnings make the product unreasonably dangerous to use.2.
Two Maryland men decided to dry their hot air balloon in a commercial laundry dryer. The dryer exploded, injuring them. They sued the manufacturer and won.
A two-year-old child being treated for bronchial spasms suffered brain damage from a drug overdose. The hospital staff had clearly exceeded the dosage level prescribed by the drug manufacturer. The child's parents successfully sued the manufacturer.
In Australia, about 20,000 kangaroos are killed or injured by motor vehicles each year. Vehicles are equipped with bullbars to limit damage to kangaroos. The problem is that the bullbars often confuse computer sensors, causing airbags to deploy unnecessarily. To solve the problem, General Motors-Holden's Automotive is experimenting with Robo-roo, a crash dummy that is made in the image of a 60-kg kangaroo. Robo-roo is used to test various bullbars in an effort to find one that prevents injury to the kangaroos and is often safe with regard to airbags. 3.
While examples such as these are devastating, many feel that product liability law is now as it should be—in favor of the injured product user. Consumer advocates like Ralph Nader argue that for too long, product liability favored producers at the expense of the product user. They claim that the threat of lawsuits and huge settlements and restitutions force companies to make safe products. While a discussion of all aspects of products liability is beyond the scope of this text, it is clear that liability has and will continue to have tremendous impact on consumers and manufacturers alike. And these two groups are not the only ones affected. Retailers, franchises, wholesalers, sellers of mass-produced homes, and building site developers and engineers are all subject to liability legislation.
Deregulation
Deregulation means the relaxation or removal of government controls over industries that were thought to be either "natural monopolies”, such as telephones, or essential public services like airlines and trucking. When regulated, industries got protection against renegade competition. For 40 years, the US Civil Aeronautics Board (CAB) barred the creation of any major new airline and carriers could fly only over routes awarded them by the CAB.
With time, the bargain grew increasingly bad. Insulated from competition, regulated industries had little reason to lower costs. They concentrated on influencing the regulators to make favorable decisions. There was an unhealthy tension and costs rose, industries sought price increases, and regulators resisted, often depressing industry profits. That, in turn, reduced new investment and perpetuated high costs and poor service.
Industries such as the airlines, banking railroads, communications, and trucking have long been subject to government regulation. A market place shock wave hit these industries as they were deregulated. Each of these industries saw the birth of many new competitors attempting to take advantage of market opportunities uncovered by deregulation. For example, US Airways Midway, People Express, AirCal, Golden West, Muse Air, and Texas Air all started after the airline industry was deregulated. Not all of them survived. The result was that competition intensified, prices were lowered (sometimes below cost), and many once-stable organizations suffered huge financial losses.
As deregulation unfolded—new competition was permitted, rate regulation was loosened or abandoned—the vicious cycle began to reverse itself. For example, AT&T had been slow to adopt fiber-optic cable. In 1985, there were only 352,000 km of it in AT&T's system. Sprint and MCI had more. AT&T responded. By 1994, it had 3.3 million kilometers of fiber cable (slightly more than MCI and Sprint). Airlines, freed of the CAB's routine restrictions, organized "hub and spoke" systems–outing passengers via major transfer points that provided more connections. In 1978, about 14 per cent of all passengers had to change airlines to reach their destination; by 1995, this number fell to about 1 per cent.4.
Consumer protection
Since the beginning of the twentieth century, there has been a concerted effort in the US to protect the consumer. For example, the US Food, Drug, and Cosmetic Act (1938) was aimed principally at preventing the adulteration or misbranding of the three categories of products. The various federal consumer protection laws include more than 30 amendments and separate laws relating to food, drugs, and cosmetics, such as the US Infant Formula Act (1980) and the US Nutritional Labeling and Education Act (1990). Perhaps the most significant period in consumer protection was the 1960s, with the emergence of consumerism. This was a grassroots movement intended to increase the influence, power, and rights of consumers in dealing with the institutions. The US Consumer Product Safety Act (1972) established the Consumer Product Safety Commission.
Ethics is generally referred to as the set of moral principles or values that guide behavior. There is a general recognition that many, if not most, business decisions involve some ethical judgement. Consider the following dilemma. An athletic shoe company is considering whether to manufacture shoes in a country with a very poor record on human rights. The new facility will improve the company's competitive position, but the host government will also make a considerable profit, a profit that will be enjoyed by the ruling elite, not by the people of the country who will be employed at meager wages. Will the firm support a corrupt government in order to make higher profits?
Firms hope that a consideration of ethical issues during the decision-making process will be helpful in preventing or at least decreasing the frequency of unethical behavior. Having a corporate ethics policy also seems to facilitate the process of recovery after an ethical scandal—although firms may wish otherwise, unethical acts do occur and do not often go unnoticed. The lack of respect many people feel towards business today, the press's propensity for investigative reporting, and the willingness of many insiders to blow the whistle on unethical corporate behavior increase the likelihood that such behaviors will eventually be discovered. See Exhibit 14.
Ethical problems faced by marketing professionals stem from conflicts and disagreements. They tend to be relationship problems. Each party in a marketing transaction brings a set of expectations regarding how the business relationship will exist and how transactions should be conducted. For example, when you as a consumer wish to purchase something from a retailer, you bring the following expectations about the transaction: (a) you want to be treated fairly by the salesperson, (b) you want to pay a reasonable price, (c) you want the product to be available as advertising says it will and in the indicated condition, and (d) you want it to perform as promised. Unfortunately, your expectations might not be in agreement with those of the retailer. The retail salesperson may not "have time for you”, or the retailer's notion of a "reasonable" price may be higher than yours, or the advertising for the product may be misleading. A summary of ethic issues related to marketing is shown in Table 5.
Exhibit 14: How business rates: by the numbers.
While ethics deal with the relationship between buyer and seller, there are also instances when the activities of marketing influence society as a whole. For example, when you purchase a new refrigerator, there is a need to discard your old refrigerator. Thrown in a trash dump, the old refrigerator may pose a safety risk, or contaminate the soil, and certainly will contaminate the aesthetics of the countryside, thus requiring society to bear part of the cost of your purchase. This example illustrates the issue of social responsibility, the idea that organizations are part of a larger society and are accountable to society for their actions. The well-being of society at large should also be recognized in an organization's marketing decisions. In fact, some marketing experts stress the societal marketing concept, the view that an organization should discover and satisfy the needs of its consumers in a way that also provides for society's well-being. A definition for social marketing is provided by Alan Andreasen:
Social marketing is the adaptation of commercial marketing technologies to programs designed to influence the voluntary behavior of target audiences to improve their personal welfare and that of the society of which they are a part.5.
There is little doubt that the importance of social marketing is growing, and that for many marketers, it will become part of their competitive advantage. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/05%3A_External_Considerations_in_Marketing/5.02%3A_External_factors_that_affect_planning.txt |
Is the car of the future the electric car? They are called zero-emission vehicles by their advocates, but they do not have zero emissions according to some experts. While an electric car does not emit exhaust, the technology required to charge their batteries does, according to the US Environmental Protection Agency (EPA).6. Critics argue that the more electric cars that are driven, the more pollution from smokestacks at the plants that provide the electric power. You are familiar with the complaints about gas-driven automobiles, but, if the electric-powered auto is no different in terms of its impact on the environment, then there could be some interesting battles ahead between proponents of the electric car and environmental groups. In fact, some auto industry executives felt that the EPA report did not go far enough in discrediting the electric car.
Technology is the knowledge of how to accomplish tasks and goals. Technology affects marketers in several ways. First, aggressively advancing technology is spawning new products and processes at an accelerating rate that threatens almost every existing product. Second, competition continues to intensify from broad and new organizations and many substitute technologies compete with established products. Third, product innovations that result in superior performance or cost advantages are the best means of protecting or building market position without sacrificing profit margins. This is especially true in today's world, when many markets are experiencing flat or slow growth and when excess capacity is commonplace.
History provides many examples of companies that have lost their competitive advantage–and perhaps even their entire business–because a competitor came into the market with a product that had superior cost advantage or performance characteristics. These examples are not limited to small or weak companies; even industrial giants like IBM, General Electric, and AT&T have seen certain parts of their markets eroded by competition that surprised them with a distinctly superior product. IBM, despite its dominant position in the computer market, lost position in the late 1970s to several smaller companies that were first to develop powerful minicomputers to replace the larger mainframe computers that were the cornerstone of IBM's business.
All organizations must make assumptions about the future in technology and its impact on their business activities. The results of technology cannot be ignored. For example, the Japanese promote the use of electronic circuits and have used them almost exclusively in their controls. However, US based organizations have been slower to change and many have continued to use electromechanical controls in their products.
Everyone enjoys thinking about the future and the kinds of technology that will evolve. Let us fast forward a few years to see what opportunities technology will open up for marketers:
• How about ads that are targeted not t0 a demographic or psychographic group, but to you specifically—ads that know what you need and what you want?
• How about a house of smart appliances with Internet connections—refrigerators that tell you when you are running out of milk and dryers that know to call the repairman when they break?
• How about a cell phone that knows where you are and can direct you to a great new Korean restaurant, or a Palm handheld device that delivers streaming video right to your hand?
• How about a TV that airs a pizza ad from which you can order at the click of a button, with total integration between a channel and its Web site?
• How about underwear that knows your glucose level is rising and automatically injects you with insulin or clothing that senses a heart attack coming and tells you to take a pill?
Integrated marketing
Not in love with online—imagine!
There are people who are Net-free, and they plan to stay that way. This seems to be especially true with many of the rich and famous. Mark McCormack, agent to Tiger Woods and tennis phenoms Venus and Serena Williams, surrounds himself with tech-savvy folks but has never used a computer himself. Actress Daryl Hannah has a computer, but has not turned it on in three years. Author Harlan Ellison, who churns out novels and short stories by typing with two fingers on a manual typewriter, is simply turned off by the Internet. "It is a massive waste of time," he says. "Does Skippy peanut butter really need a website?"
Lest you think these are the attitudes of the slightly demented, a report conducted by Pew Internet and American Life Project indicate that half of US adults are not online and the majority of those non-users are unlikely to hit the Net any time soon:
Fifty-seven per cent have little or no interest in getting online.
More than one in ten adults who are not online tried the Net before disconnection.
More than 14 per cent of Americans have computers but are not online.
The results seem to contradict predictions that Internet growth will continue to boom in coming years. "It may take another generation", says Lee Rainie, director of the Pew Project, "before the Net becomes as ubiquitous and essential as the telephone and television are today."
To study the 94 million Americans who are not online, interviewers questioned 1,158 non-Internet and non-computer users in depth. Findings included the following:
Thirty-two per cent or 31 million Americans, said they "definitely will not" go online.
Twenty-five per cent say they "probably will not" venture online.
Twenty-nine per cent "probably will" get Internet access.
Twelve per cent say they "definitely will" get Internet access.
Those surveyed by Pew said their primary reasons for shunning the Internet are fear and lack of interest. More than half of those not online believe that the Internet is a dangerous thing and that they are not missing anything by staying away.[1]
All these miracles are possible in the amazing world of tomorrow. These are not technologies in a lab, but working prototypes, many just about to hit the market. The potential for marketers in just five years makes today's Web offerings look like a warm up act. While these services will rely on the Internet to communicate between newfangled gadgets and more intelligent servers, most of the services will not be based on HTML, for practical reasons. For example, you cannot effectively run a Web browser on a cell phone screen, and you do not want one inside your shirt.
The pitfalls for marketers are also obvious. While today's Web is open, each of these new technologies has a potential gatekeeper cell phone operators, cable companies, appliance makers, and, as noted in “Integrated marketing”, consumers who are not enthralled with the computer.
1. [1]Sources: Karen Thomas, "Not Everyone's E-Namored With the Net," USA Today, September 25, 2000, p. 3D; Dana Blankenhorn, "Hype Blasters," Advertising Age, June 9, 2000, pp. 58-62. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/05%3A_External_Considerations_in_Marketing/5.03%3A_Technology.txt |
The social environment includes all factors and trends related to groups of people, including their number, characteristics, behavior, and growth projections. Since consumer markets have specific needs and problems, changes in the social environment can affect markets differently. Trends in the social environment might increase the size of some markets, decrease the size of others, or even help to create new markets. We discuss here two important components of the social environment: the demographic environment and the cultural environment.
Demographic changes
Whereas beliefs, values, and customs describe the characteristics of the culture and subculture, demographics describe the observable characteristics of individuals living in the culture. Demographics include our physical traits, such as gender, race, age, and height; our economic traits, such as income, savings, and net worth; our occupation-related traits, including education; our location-related traits; and our family-related traits, such as marital status and number and age of children. Demographic trait compositions are constantly changing, and no American, Japanese, or Brazilian is "typical" anymore. There is no average family, no ordinary worker, no everyday wage and no traditional middle class.
Still, marketing managers must understand consumers intimately. Often, the best they can do is take a snapshot and try to understand what is happening in US culture in the early years of this century. As we see next, some trends are old; others are new. For instance, the aging of the population has been going on for several decades, but births and birth rates in recent years have been much higher than expected. Immigration is also greater than predicted, and so is the backlash against it. In the US, interstate migration to the south and west are old trends. What is new is heavier movement in the US from the northeast rather than from the mid-West and rapid growth in the mountain states. Next, we examine nine demographic changes and how they affect marketing.
• Households are growing more slowly and getting older. About half of all households are aged 45 and older and growing at an annual rate of one per cent compared with nearly 2 per cent in the 1980s. Marketing communicators must plan for a greater number of middle-aged households, consumers who are experienced and have a better understanding of price and value. These consumers should have an interest in high-quality household goods and in-home health care.
The demise of the traditional family. Married couples are a bare majority of US households. Only one-third of households have children under 18, and nearly one-fourth of households are people who live alone. However, married couples dominate the affluent market as the vast majority of very high-income households are married couples. The long-term trend of high growth in nontraditional types of households and lack of growth among married couples can only mean further segmentation of an already segmented marketplace.
A phenomenon that speaks to the change in the traditional family structure is known as the “sandwich generation”. These are a growing group of adults who are caring for aging parents while raising their own children. According to a study from the National Alliance for Caregiving and the American Association of Retired Persons, there are more than 9 million Americans in this situation, 40 per cent of them between 35 and 49. The stress of belonging to the sandwich generation is taking a toll countrywide. “All of a sudden you are struggling with this huge balancing act,” says Beth Willogen McLeod, author of Caregiving: The Spiritual Journey of Love, Loss, and Renewal. “How do you fulfill all your roles? How do you balance your marriage, your children, your work and elder care?”
The continued increase in education. Most adults in the United States still have not completed college (approximately 67 per cent), but that number continues to decline. More and more people have attended some college or have an associate or technical degree. More skilled workers mean more knowledgeable and sophisticated consumers who expect more information about product attributes and benefits before making a purchase.
Nonphysical jobs keep growing. Jobs that do not require physical strength keep growing in number. Virtually all job growth during the next 10 years will take place among service providers, especially in health care and social services. Because providing services requires little investment compared with producing consumer goods, we can expect continued high growth in small businesses, sole proprietorships, and other entrepreneurial activities, Also, the extremely high cost of employee benefits suggests that the use of temporary workers and independent contractors will continue to grow. Marketing managers must assess whether consumers who do not have corporate benefits will become more risk-averse because they lack the safety net of company-provided pension plans and medical insurance. If so, consumers may seek money-back guarantees or other product features that reduce risk. Marketing managers must also see whether people who work for themselves or for small firms are more time-conscious.
Growing faster than expected. About 272 million people live in the United States. This is an increase of 18 million since 1990, and most of the growth has resulted from an unforeseen boom in births. The United States had about 20.4 million births between January 1990 and December 1994. This was more than in any five-year period since the last five years of the legendary baby boom (1960 to 1964), and 6 per cent more than in the late 1980s. The United States also experienced the highest five-year immigration total (4.6 million) since the turn of the century, an increase of 31 per cent over the previous five years. The annual influx of nearly 1 million new residents has led to an increasingly diverse consumer marketplace, particularly among young people.
The growth of minorities. Although white non-Hispanics have been the biggest contributors to the US, population growth in the 1990s, Hispanics have been a close second. The number of Hispanics in the United States increased from 22 million in 1990 to 35 million in 2000. That number is nearly twice as many new residents as were added by African-Americans and Asians. If each minority segment keeps growing at current rates, Hispanics will outnumber African Americans in ten years. This trend will be particularly important for marketing communicators that target certain regions, because Hispanics and Asians are more geographically concentrated than African-Americans.
Baby boomers become middle-aged. More than half of Americans are aged 35 or older, and the oldest baby boomers are now aged 55. The largest ten-year age group, people aged 41-50, has been growing as it absorbs the younger half of the baby boom generation. The number of people in this segment reached a peak in 2000 and then started to decline. The fastest-growing age group is middle-aged people aged 45-54, the age at which income and spending peak. Middle-aged people are also the least likely of all age groups to change their residence. This combination of high growth, high income, and low mobility will provide considerable lift to discretionary spending, particularly in the categories of home furnishings, education, and insurance.
• People in the US are moving south. More than half (54 per cent) of US residents live in the ten largest states, and more than half of US population growth between 1990 and 1999 occurred in these ten states. New York had the largest population of all states in 1950, but in the 1990s, fast-growing Texas pushed the barely growing New York to number three. One reason for the explosive growth in the southern states is the influx of people from other countries. More than half of the four million immigrants that located in the United States between 1990 and 1995 moved to California, Texas, or Florida.
The middle class gets hammered. According to the US Census Bureau, the share of aggregate household income earned by the middle 60 per cent of households has shrunk from 52 per cent in 1973 to 49 per cent 25 years later. Meanwhile, the share of such income earned by the top 20 per cent (average income USD 98,600) increased from 44 per cent to 48 per cent. In other words, the total purchasing power of the top 20 per cent of US households now equals that of the middle 60 per cent.7.
Demographic groupings
In addition to understanding general US demographic trends, marketing communicators must also recognize demographic groupings that may turn out to be market segments because of their enormous size, similar socioeconomic characteristics, or shared values. We examine three examples of demographic groupings by age that have or will become dominant market segments: baby boomers, Generation X, and the baby boomlet.
The baby boom
The baby boom occurred from 1946 through 1964. During this 19-year time frame, 76.4 million babies were born in the United States. Today, approximately 70 million of these baby boomers are still alive. They represent about one-fourth of the total population. Because of their numbers and buying power, baby boomers have and will continue to influence the marketing mix for the services and products businesses offer and how these services and products are offered. For example, the majority of baby boomer women work full-time and view their job as a career. This trend has implications for childcare, fashion, automobiles, travel, and fast-food marketing. Health concerns will also grow as baby boomers age.
Generation X
Generation X, also known as the "baby busters" or the "shadow generation", is the group of people born from 1969 to 1980. This group has been labeled with a "slacker" stereotype. Imagine 45 million humans that are characterized as culturally illiterate, apathetic, and directionless. From a marketers' perspective, they have a total disposable income of USD 125 billion. In tune to the newest rage, Xers—highly steeped in a culture of sound bytes—seem to know instinctively what they want. More importantly, what they do not want.8.
Unfortunately, the more marketers learn about this group, the less it appears to be a market segment. For example, Xers' lifestyles range from the 10 million who are full-time college and postgraduate students to the 15 million who are married. They are also the most radically diverse generation in history. Yet their opinions about life in the United States mirror those of the general population. For instance, 52 per cent of Xers believe that "quality of life" is good compared with 53 per cent of the entire population, and 64 per cent of Xers are more "stressed about money this year", compared to 58 per cent of the general population.
Given the diversity of Generation X, what are the possibilities that an integrated marketing strategy can be targeted to this group? The key will be finding subsegments within this 45-million-person group. For example, level of education might be a point of distinction. Those in college or with a college degree are likely to be computer-literate and can be reached by online media. Their optimism and general concern for a simpler life suggests that non-condescending marketing messages through public relations or cause-related activities would prove effective.
The baby boomlet
Just like the baby boomers, the group of 72 million children of the baby boomers, called the "baby boomlet" or the "echo boom", is creating new waves of change. This group spans 1975 to the present. In 1995, the boomlet had 72 million people under age 19. It is 60 per cent larger than the baby boom. Even if 1995 is the final year for boomlet births, this generation will grow through immigration for several more decades. By 2015, the baby boomlet will again outnumber the boom.
The baby boomlets will acquire their own attitudes, often shaped by new technology and global changes. Global conversations on the Internet will change their outlook on the world. AIDS will change their attitudes toward relationship, marriage, and family. Real time information and the customization of the information will produce a very discerning consumer. Finally, their attitude will also be shaped by defining events. For instance, it will be a generation that expects terrorists acts, such as the Oklahoma City and the 1996 Olympics bombings. Memorable events will have a lasting effect on their outlook.
Cultures and subcultures
All of us are part of a cultural fabric that affects our behavior, including our behavior as consumers. Culture is the sum of learned beliefs, values, and customs that regulate the behavior of members of a particular society. Through our culture, we are taught how to adjust to the environmental, biological, psychological, and historical parts of our environment.
Beliefs and values are guides of behavior, and customs are acceptable ways of behaving. A belief is an opinion that reflects a person's particular knowledge and assessment of ("I believe that ..."). Values are general statements that guide behavior and influence beliefs and attitudes ("Honesty is the best policy"). A value system helps people choose between alternatives in everyday life. Customs are overt modes of behavior that constitute culturally approved ways of behaving in specific situations. Customs vary among countries, regions, and even families. In Arab societies, for instance, usury (payment of interest) is prohibited, so special Islamic banks exist that provide three types of accounts: non-profit accounts, profit sharing deposit accounts, and social service funds. A US custom is to eat turkey on Thanksgiving Day. However, the exact Thanksgiving Day menu may depend on family customs.
Dominant cultural values are referred to as core values; they tend to affect and reflect the core character of a particular society. For example, if a culture does not value efficiency but does value a sense of belonging and neighborliness, few people in the culture will want to use automatic teller machines. What do Americans value? Clearly, a catchall phrase such as the "Protestant work ethic" no longer captures the whole value system.
Core values are slow and difficult to change. Consequently, marketing communication strategies must accurately portray and reflect these values.
Secondary values also exist in any culture. Secondary values are less permanent values that can sometimes be influenced by marketing communications. In addition, secondary values are often shared by some people but not others. These values serve as a basis for subcultures.
A natural evolution that occurs in any culture is the emergence of subcultures. Core values are held by virtually an entire culture, whereas secondary values are not. A subculture is a group of people who share a set of secondary values. Examples include Generation X and environmentally concerned people. Many factors can place an individual in one or several subcultures. Five of the most important factors that create subcultures are:
Material culture. People with similar income may create a subculture. The poor, the affluent, and the white-collar middle class are examples of material subcultures.
Social institutions. Those who participate in a social institution may form a subculture. Examples include participation in marriage, parenthood, a retirement community, the army, and so on.
Belief systems. People with shared beliefs may create a subculture, such as shared beliefs in religion or politics. For example, traditional Amish do not use several types of products, including electricity and automobiles. A whole set of factors has also been correlated with whether a person is a Democrat, Republican, Independent, Libertarian, or Socialist.
Aesthetics. Artistic people often form a subculture of their own associated with their common interests, including art, music, dance, drama, and folklore.
Language. People with similar dialects, accents, and vocabulary can form a subculture. Southerners and northerners are two traditional categories in the US.
Capsule 11: Review
• Environmental scanning refers to activities directed toward obtaining information about events and trends that occur outside the organization and that can influence the organization's decision making.
• The following external factors affect planning:
(a) external agencies
(b) competitors
(c) legal and ethical factors
(d) economic and political issues
(e) technology
(f) social trends
Understanding other cultures around the world
Adjusting to cultural differences is perhaps the most difficult task facing marketing communicators who operate in other countries. Before entering a foreign market, a company must decide to what extent it is willing to customize its marketing efforts to accommodate each foreign market. Naturally, the more the company standardizes its effort, the less trouble it incurs and the greater the assumed profitability. Is some customization inevitable? More is said about this in a later chapter. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/05%3A_External_Considerations_in_Marketing/5.04%3A_Social_trends.txt |
There are literally hundreds of companies and forecasters who claim to have a handle on the future. One that has an excellent track record is Roper Starch, a research firm that has been looking at trends for over 50 years. The 2000 Roper Report identified four concepts that help marketers understand Americans in the new millennium:9.
"High Pace/High Peace: Americans' high-speed lifestyles create new goals and needs": Silicon Valley marketers often talk about a phenomenon called "high tech-high touch"; the more technology becomes part of people's lives (tech), the more the need for personal interaction (touch). We think a similar, possibly more powerful phenomenon, is unfolding today in today's frenetic, high-speed world of drive for success, "Internet time", "24/7" business, and multitasked lifestyles. As the pace of life is picking up (high pace), there is growing desire and demand for peace. The shift to "High Pace/High Peace" is evident in the marketplace. Increasingly, brands seem to be "high-pace" (efficiency-oriented, intense brands like the Internet broker E-Trade; personalities like Micro chief and bestselling author Bill Gates) or "high-peace" (relaxing, spa-pace brands like Banana Republic, Canyon Ranch; personalities like spiritual leader and bestselling author the Dalai Lama. The shift is reflected in Roper data as well). Americans are working harder than ever to get ahead. Work is spilling into all corners of life: a record 39 per cent of Americans say they often spend leisure time on work, a three-fold increase from the beginning of the decade. New technologies are making it possible to be ever more productive. Americans generally recognize that hard work is the price for getting ahead. At the same time, there is a growing yearning for peace. Most agree that the best leisure time is the time alone. Declining numbers are getting such time to rest, relax, and renew. More, instead, are feeling stressed out. This tension between high pace and high peace shows no sign that it will go away. At the same time, data suggest that there are opportunities for marketers to become a bridge to get people to both their high pace and high peace goals.
"Kinnections: The movement to connection in technology, relationships, and brands": The increasing pace of life is not the only characteristic of America since the turn of the new century. Empowered by new technology, the strong economy, and a growing command of self-reliance and other skills, Americans have begun to reach out and take the next step to extend their sense of connection. In a whole host of areas—from communications and computing to attitudes towards family and community—connections are up. These connections are different from the past. They can be fast changing and dynamic (kinetic). They appear to be part of a desire for a greater sense of association (kinship). The movement to connections, thus, is actually a move toward "kinnections". The results are reflected in the data. Communications technologies are taking off. This is most evident in the explosive growth of cellular communications. It is also apparent in the computer industry, where increasing interest in using computers to connect (e-mail, the Web) is driving interest. Many Americans say that these technologies are improving the quality of their connections, making it easier to stay in touch with friends and family, and, overall, "making life better". The growth in connections is reflected in personal relationships as well: Americans are feeling better about the family and more connected to their communities. Indeed, satisfaction with many aspects of community is at record levels. Many are pursuing spiritual connections. This sense of connection is apparent in the marketplace as well in cause-related marketing and a greater desire for brands to go beyond the basics like quality and value (which are now expected) to connect in new ways with consumers.
• "Diversity/Destiny": Diversity is destiny for America, not just in some far off future. The US increasingly is "the world's nation": our foreign-born population has almost tripled in the past 30 years. African-Americans, Hispanics, and other minorities make up the majority of the nation's population growth in the past decade—and will account for an even larger proportion of the nation's growth in the decade to come. The result is creating new, distinctive demographic segments that must be understood. It is also changing society. America is becoming multicultural. Americans are much more appreciative of ethnic customs and traditions compared to two decades ago. Where past generations may have defined the American character in terms of pioneer heritage, Americans today see strength in our status as "a melting pot". Indeed, being a melting pot is now seen as a core source of America's greatness, almost equal to the work ethic, the free enterprise system, the Constitution and the system of government, and the nation's natural splendor. Multiculturalism defines the nation's tastes in areas from food to popular music. Roper analysis shows that Americans share many basic values and concerns across racial and ethnic groups. At the same time, the data suggest that there continue to be many distinctions as well. To succeed in this year of diversity/destiny, marketers need to know both sides.
"Marketing by life stage": Marketers have traditionally relied on standard demographics to understand and predict consumer behavior. Our research shows, however, that life stage can be a more powerful predictor of consumer attitudes and behavior than traditional demographic analysis. For example, a 49-year-old woman starting a second marriage and second career may have more in common with a 29-year-old woman starting her first marriage and first career than she does with another 49-year-old woman whose last child just moved out of the house. Classifying Americans by the life events they have experienced, rather than by demographic traits, can yield insights and understanding into a market that might otherwise have been overlooked. In conjunction with Modern Maturity, Roper has identified seven life stage segments that demonstrate the appeal and rewards of marketing to consumers by life stage.
The Wall Street Journal (wsj.com)
In practice
Internal planning processes in marketing organizations focus on an organization's strengths and weaknesses, but organizations must also consider the impact of external environmental factors. By understanding how external elements of the marketplace affect an organization's planning process, marketers can develop strategies that capitalize on opportunities and minimize threats.
Legal and ethical issues pose complex challenges for marketers. From product liability to deregulation, the external environment varies by state and country, The Interactive Journal helps you keep up with legal and ethical issues that affect organizations, On the Front Section, select Marketplace. On the left menu in Marketplace, select Law. Here you will find articles about discrimination suits, recent legal rulings, and product liability claims. Articles are both national and international in scope.
Economic and political issues are as variable as legal issues, and are impacted by government/industry relationships, consumer spending habits, and political leadership. The Interactive Journal helps you keep up with these issues as well. On the Front Section, select Politics & Policy under In this Section on the left menu. Here you will find articles about pending legislation, government mandates, tax proposals, and policy directives. These articles are also national and international in scope.
Technology is rapidly changing the external environment. The Interactive Journal provides you with in-depth information and analysis on technology in Tech Center. From the Front Section, select Tech Center. You can use this new menu to read the latest on tech stocks and personal technology. Select Tech Briefs to find out what is happening with leading companies. On the right side of your screen you will find headings with different topics. Page down to locate Tech Resources. Here you will find links to Company Profiles, Issue Briefings, and a Dot-Com Layoffs and Shutdowns list. Select one of these links now.
The Interactive Journal also features a weekly personal technology column. Under Free WSJ.com Sites on the Front Section, select Personal Tech.
Deliverable
Select Microsoft under the Company Profiles link in the Tech Resources Section of Tech Center. Also search the Interactive Journal by using the Search feature under Journal Atlas on the left menu for articles about Microsoft. Discuss the legal, ethical, and political issues in the antitrust suit filed against the company. Also discuss the implications of the suit on the company's technology. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/05%3A_External_Considerations_in_Marketing/5.05%3A_Forecasts_of_the_future.txt |
In this chapter, the importance of understanding environmental forces was discussed. Marketing decisions are affected by external agencies, competitors, regulators, the economy, technology, and the social factors. Each of these elements of the marketing environment must be monitored continuously for changes that are taking place. Changes affect the way marketers go about providing want-and need-satisfying products.
Information about external forces must be gathered for each stage of the strategic marketing planning process. The purpose of collecting and analyzing this information is to reduce the uncertainty associated with marketing decision making. While experience is an important resource, new problems or old problems that need new solutions require marketers to stay abreast of marketplace developments so that they can continue to offer successful products and service to the marketplace.
Key terms
External environment Forces external to the organization that affect organization and marketing decision making.
External analysis The identification of trends, opportunities, and threats that will influence marketing strategy and tactics.
Marketing research supplier An external agency that specializes in the conduct of marketing research demography-the study of important population statistics such as age, income, sex, and location of people.
Business cycle The pattern that is generally followed by a fluctuating economy.
Prosperity A. period of time during which the economy is growing.
Recession A period of time that is characterized by a decrease in the rate of growth of the economy.
Depression A long-lasting recession during which unemployment is very high, buying power is very low, and consumers are unwilling to spend.
Recovery A period of time in which unemployment begins to decline, buying power increases, and consumers become more willing to purchase products.
Technology The knowledge of how to accomplish tasks and goals.
Buying power The ability of a consumer to make purchases.
Regulators The set of laws, agencies, and policies established to ensure that marketers compete legally in their efforts to provide want-and need-satisfying products and services.
Questions
➢ Describe the role of external analysis in the strategic marketing planning process.
➢ Of what importance is environmental scanning to marketing decision makers?
➢ Several external forces were presented in this chapter. Describe each and provide a brief statement as to the importance of each of these to the marketing planner.
➢ External agencies can provide valuable marketing services to marketing organizations. Under what circumstances do you think that a marketing organization might seek the services of an external agency like a distributor? A marketing research supplier? An advertising agency? A materials supplier?
➢ Comment on the impact that the decline of mass marketing might have on marketing strategists for companies that have typically mass marketed products.
➢ How should a marketing organization define its competition?
➢ What role do price competition and discount promotions play in the marketing of products? Do you think that the use of these strategies has been effective from the standpoint of organizations? Customers?
➢ Briefly describe the impact that each of the following has on marketing activity: regulators, the economy, and technology.
➢ To what extent can marketers foresee opportunities and threats posed by the external environment? What factors can alter forecasts?
➢ What steps can organizations take to ensure external elements are factored into the strategic planning process?
➢ How can the information found in the Interactive Journal be utilized to help organizations take advantage of market opportunities? Divert threats?
➢ Describe the external factors that have an impact on the soft drink industry.
➢ How would you assess the competitive situation in the soft drink industry?
➢ What marketing strategies might be appropriate for soft drink marketers in order to improve sales of New Age beverages?
Project
Since Pathfinder touched down on Mars, much has been learned about the Red Planet. Did you know that sales of Mattel's Hot Wheels Mars Rover Action Pack skyrocketed and that sales of Mars bars increased dramatically?
The activities of the National Aeronautics and Space Administration (NASA) from Alan Shepard's first space flight to today's Pathfinder have spawned many new products and spurred the sales of many products. Track key NASA events, like landing on the moon, and see which products' sales were boosted by some of these events. Also, discover what new products entered into the marketplace as a result of developments in space technology.
Case application
Snapple is in a financial funk. Clearly Canadian is in a sales free-fall. Results are mixed for Pepsi's juice line. Coca-Cola's Fruitopia is off to a slow start.
These could have been headlines for these New Age beverages. They do accurately describe their performance. At the same time, "plain old" carbonated beverages were making a comeback after years of flat sales.
One reason cited for these results is the fading intensity of America's health kick. Consumers seem to have grown weary of sipping "all-natural" teas and juices. Many have returned to chugging sweet, fizzy colas. A second reason, according to taste researchers, is that people quickly get tired of the taste of distinctive juices and unusual teas. According to one industry expert, a third reason is that many consumers got caught up in the mystical, good-for-you, Generation X phenomenon. The phenomenon was cute and interesting for a while, but it had no staying power.
A fourth reason cited for waning consumer interests is in consumer perceptions. Originally, many consumers believe that all-natural sodas, teas, and juices were healthier than brown cola, However, it has been discovered that many of these alternative beverages contain more sugar than traditional colas.
Finally, the new generation of soft drinks has not pleased bottlers. Many bottlers spend millions of dollars to overhaul their product lines or change their distribution systems to accommodate the new soft drinks. Despite the many new products, New Age beverages have resulted in only small sales increases.
Sales of these alternative beverages are still growing, reaching a level of USD 5.36 billion in 1999. In that same year, the soft drink industry had total sales of about USD 51 billion.
Some industry experts are predicting an industry shakeout. Their reasoning is that New Age beverage sales are driven by trendy young consumers who are constantly seeking the latest drink. Tapping into this young generation, over 100 companies introduced a New Age beverage into the marketplace.
References
1Subhash C. Jain, Marketing Planning and Strategy, South-Western Publishing Co., Cincinnati, OH, 1981, p. 67.
2Robert H. Malott, 1981 , "An Overdose of Lawsuits," excerpts from a speech in Friendly Exchange, August, 27-28.
3Witcher, S. Karene, "A Driving Tip From Down Under: Keep Those Roos Off the Bullbar," The Wall Street Journal, (July 14, 1994), BI.
4Robert 1. Samuelson, "The Joy of Deregulation," Newsweek, (February 3, 1997), p. 39.
5Alan R. Andreasen "Social Marketing: It's Definition and Domain," Journal of Public Policy & Marketing, Vol. 13(1), Spring 1994, 108-114.
6Oscar Suris, "Electric Cars Also Pollute Air, EPA Study Says," The Wall Street Journal, (April 5, 1994), BI , B8.
7Peter Francese, "America At Mid-Decade," American Demographics, Feb, 1995, pp. 12-31.
8Laurie Freeman, "No Tricking the Media-Savvy," Advertising Age, Feb 6, 1995, p. 30.
9"The Power to Create Competitive Advantage," Roper Starch World-wide, 2000. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/05%3A_External_Considerations_in_Marketing/5.06%3A_Summary.txt |
Now that the world has entered the next millennium, we are seeing the emergence of an interdependent global economy that is characterized by faster communication, transportation, and financial flows, all of which are creating new marketing opportunities and challenges. Given these circumstances, it could be argued that companies face a deceptively straightforward and stark choice: they must either respond to the challenges posed by this new environment, or recognize and accept the long-term consequences of failing to do so. This need to respond is not confined to firms of a certain size or particular industries. It is a change that to a greater or lesser extent will ultimately affect companies of all sizes in virtually all markets. The pressures of the international environment are now so great, and the bases of competition within many markets are changing so fundamentally, that the opportunities to survive with a purely domestic strategy are increasingly limited to small and medium-sized companies in local niche markets.
Perhaps partly because of the rapid evolution of international marketing, a vast array of terms have emerged that suggest various facets of international marketing. Clarification of these terms is a necessary first step before we can discuss this topic more thoroughly.
Let us begin with the assumption that the marketing process outlined and discussed in “Introducing Marketing”, “Understanding and Approaching the Market”, “Marketing Research: An Aid to Decision Making”, and “Understanding Buyer Behavior” is just as applicable to domestic marketing as to international marketing. In both markets, we are goal-driven, do necessary marketing research, select target markets, employ the various tools of marketing (i.e. product, pricing, distribution, communication), develop a budget, and check our results. However, the uncontrollable factors such as culture, social, legal, and economic factors, along with the political and competitive environment, all create the need for a myriad of adjustments in the marketing management process.
At its simplest level, international marketing involves the firm in making one or more marketing decisions across national boundaries. At its most complex, it involves the firm in establishing manufacturing and marketing facilities overseas and coordinating marketing strategies across markets. Thus, how international marketing is defined and interpreted depends on the level of involvement of the company in the international marketplace. Therefore, the following possibilities exist:
Domestic marketing. This involves the company manipulating a series of controllable variables, such as price, advertising, distribution, and the product, in a largely uncontrollable external environment that is made up of different economic structures, competitors, cultural values, and legal infrastructure within specific political or geographic country boundaries.
International marketing. This involves the company operating across several markets in which not only do the uncontrollable variables differ significantly between one market and another, but the controllable factor in the form of cost and price structures, opportunities for advertising, and distributive infrastructure are also likely to differ significantly. Degree of commitment is expressed as follows:
(a) Export marketing. In this case the firm markets its goods and/or services across national/political boundaries.
(b) Multinational marketing. Here the marketing activities of an organization include activities, interests, or operations in more than one country, and where there is some kind of influence or control of marketing activities from outside the country in which the goods or services will actually be sold. Each of these markets is typically perceived to be independent and a profit center in its own right.
(c) Global marketing. The entire organization focuses on the selection and exploration of global marketing opportunities and marshals resources around the globe with the objective of achieving a global competitive advantage. The primary objective of the company is to achieve a synergy in the overall operation, so that by taking advantage of different exchange rates, tax rates, labor rates, skill levels, and market opportunities, the organization as a whole will be greater than the sum of its parts.1.
Thus Toyota Motors started out as a domestic marketer, eventually exported its cars to a few regional markets, grew to become a multinational marketer, and today is a true global marketer, building manufacturing plants in the foreign country as well as hiring local labor, using local ad agencies, and complying to that country's cultural mores. As it moved from one level to the next, it also revised attitudes toward marketing and the underlying philosophy of business.
Ultimately, the successful marketer is the one who is best able to manipulate the controllable tools of the marketing mix within the uncontrollable environment. The principal reason for failure in international marketing results from a company not conducting the necessary research, and as a consequence, misunderstanding the differences and nuances of the marketing environment within the country that has been targeted. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/06%3A_Marketing_in_Global_Markets/6.01%3A_Defining_international_marketing.txt |
In 1983, Harvard marketing professor Theodore Levitt wrote an article entitled, "The Globalization of Markets", and nothing about marketing has been the same since.2. According to Levitt, a new economic reality—the emergence of global consumer markets for single standard products–has been triggered in part by technological developments. Worldwide communications ensure the instant diffusion of new lifestyles and pave the way for a wholesale transfer of goods and services.
Adopting this global strategy provides a competitive advantage in cost and effectiveness. In contrast to multinational companies, standardized (global) corporations view the world or its major regions as one entity instead of a collection of national markets. These world marketers compete on a basis of appropriate value: i.e. an optimal combination of price, quality, reliability, and delivery of products that are identical in design and function. Ultimately, consumers tend to prefer a good price/quality ratio to a highly customized but less cost-effective item.
Levitt distinguished between products and brands. While the global product itself is standardized or sold with only minor modifications, the branding, positioning, and promotion may have to reflect local conditions.
Critics of Levitt's perspective suggest that his argument for global standardization is incorrect and that each market strategy should be customized for each country. Kotler notes that one study found that 80 per cent of US exports required one or more adaptations. Furthermore, the average product requires at least four to five adaptations out of a set of eleven marketing elements: labeling, packaging, materials, colors, name, product features, advertising themes, media, execution, price, and sales promotion.3. Kotler suggests that all eleven factors should be evaluated before standardization is considered.
To date, no one has empirically validated either perspective. While critics of Levitt can offer thousands of anecdotes contradicting the validity of standardization, a more careful read of Levitt's ideas indicate that he offers standardization as a strategic option, not a fact. Although global marketing has its pitfalls, it can also yield impressive advantages. Standardized products can lower operating costs. Even more important, effective coordination can exploit a company's best product and marketing ideas.
Too often, executives view global marketing as an either/or proposition-either full standardization or local control. But when a global approach can fall anywhere on a spectrum-from tight worldwide coordination on programming details to loose agreements on a product ideas-there is no reason for this extreme view. In applying the global marketing concept and making it work, flexibility is essential. The big issue today is not whether to go global, but how to tailor the global marketing concept to fit each business and how to make it work.
6.03: Reason for entering international market
Many marketers have found the international marketplace to be extremely hostile. A study by Baker and Kynak,4. for example, found that less than 20 per cent of firms in Texas with export potential actually carried out business in international markets. But although many firms view in markets with trepidation, others still make the decision to go international. Why?
In one study, the following motivating factors were given for initiating overseas marketing involvement (in order of importance):5.
• large market size
• stability through diversification
• profit potential
• unsolicited orders
• proximity of market
• excess capacity
• offer by foreign distributor
• increasing growth rate
• smoothing out business cycles
Other empirical studies over a number of years have pointed to a wide variety of reasons why companies initiate international involvement. These include the saturation of the domestic market, which leads firms either to seek other less competitive markets or to take on the competitor in its home markets; the emergence of new markets, particularly in the developing world; government incentives to export; tax incentives offered by foreign governments to establish manufacturing plants in their countries in order to create jobs; the availability of cheaper or more skilled labor; and an attempt to minimize the risks of a recession in the home country and spread risk.6.
6.04: Reason to avoid international market
Despite attractive opportunities, most businesses do not enter foreign markets. The reasons given for not going international are numerous. The biggest barrier to entering foreign markets is seen to be a fear by these companies that their products are not marketable overseas, and a consequent preoccupation with the domestic market. The following points were highlighted by the findings in the previously mentioned study by Barker and Kaynak, who listed the most important barriers:7.
• too much red tape
• trade barriers
• transportation difficulties
• lack of trained personnel
• lack of incentives
• lack of coordinated assistance
• unfavorable conditions overseas
• slow payments by buyers
• lack of competitive products
• payment defaults
• language barriers
It is the combination of these factors that determines not only whether companies become involved in international markets, but also the degree of any involvement. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/06%3A_Marketing_in_Global_Markets/6.02%3A_Standardization_and_customization.txt |
Earlier in our discussion on definitions, we identified several terms that relate to how committed a firm is to being international. Here we expand on these concepts and explain the rationale behind this process. Two points should be noted. First, the process tends to be ranked in order of "least risk and investment" to "greatest involvement”. Second, these are not necessarily sequential steps, even though exporting is apparently most common as an initial entry.
Firms typically approach involvement in international marketing rather cautiously, and there appears to exist an underlying lifecycle that has a series of critical success factors that change as a firm moves through each stage. For small and medium-sized firms in particular, exporting remains the most promising alternative to a full-blooded international marketing effort, since it appears to offer a degree of control over risk, cost, and resource commitment. Indeed, exporting, especially by the smaller firms, is often initiated as a response to an unsolicited overseas order–these are often perceived to be less risky.
Exporting
In general, exporting is a simple and low risk-approach to entering foreign markets. Firms may choose to export products for several reasons. First, products in the maturity stage of their domestic lifecycle may find new growth opportunities overseas, as Perrier chose to do in the US. Second, some firms find it less risky and more profitable to expand by exporting current products instead of developing new products. Third, firms who face seasonal domestic demand may choose to sell their products to foreign markets when those products are "in season" there. Finally, some firms may elect to export products because there is less competition overseas.
A firm can export its products in one of three ways: indirect exporting, semi-direct exporting, and direct exporting. Indirect exporting is a common practice among firms that are just beginning their exporting. Sales, whether foreign or domestic, are treated as domestic sales. All sales are made through the firm's domestic sales department, as there is no export department. Indirect exporting involves very little investment, as no overseas sales force or other types of contacts need be developed. Indirect exporting also involves little risk, as international marketing intermediaries have knowledge of markets and will make fewer mistakes than sellers.
In semi-direct exporting, an American exporter usually initiates the contact through agents, merchant middlemen, or other manufacturers in the US. Such semi-direct exporting can be handled in a variety of ways: (a) a combination export manager, a domestic agent intermediary that acts as an exporting department for several noncompeting firms; (b) the manufacturer's export agent (MEA) operates very much like a manufacturer's agent in domestic marketing settings; (c) a Webb-Pomerene Export Association may choose to limit cooperation to advertising, or it may handle the exporting of the products of the association's members and; (d) piggyback exporting, in which one manufacturer (carrier) that has export facilities and overseas channels of distribution handles the exporting of another firm (rider) noncompeting but complementary products.
When direct exporting is the means of entry into a foreign market, the manufacturer establishes an export department to sell directly to a foreign film. The exporting manufacturer conducts market research, establishes physical distribution, and obtains all necessary export documentation. Direct exporting requires a greater investment and also carries a greater risk. However, it also provides greater potential return and greater control of its marketing program.
Licensing
Under a licensing agreement, a firm (licensor) provides some technology to a foreign firm (licensee) by granting that firm the right to use the licensor's manufacturing process, brand name, patents, or sales knowledge in return for some payment. The licensee obtains a competitive advantage in this arrangement, while the licensor obtains inexpensive access to a foreign market.
A licensing arrangement contains risk, in that if the business is very successful, profit potentials are limited by the licensing agreement. Alternatively, a licensor makes a long-term commitment to a firm and that firm may be less capable than expected. Or, the licensee may be unwilling to invest the necessary resources as needed to be successful. Licensing may be the least profitable alternative for market entry. Scarce capital, import restrictions, or government restrictions may make this the only feasible means for selling in another country.
Franchising represents a very popular type of licensing arrangement for many consumer products firms. Holiday Inn, Hertz Car Rental, and McDonald's have all expanded into foreign markets through franchising.
Joint ventures
A joint venture is a partnership between a domestic firm and a foreign firm. Both partners invest money and share ownership and control of partnership. Joint ventures require a greater commitment from firms than licensing or the various other exporting methods. They have more risk and less flexibility.
A domestic firm may wish to engage in a joint venture for a variety of reasons; for example, General Motors and Toyota have agreed to make a subcompact car to be sold through GM dealers using the idle GM plant in California. Toyota's motivation was to avoid US import quotas and taxes on cars without any US-made parts.
Direct investment
Multinational organizations may choose to engage in full-scale production and marketing abroad. Thus, they will invest in wholly owned subsidiaries. An organization using this approach makes a direct investment in one or more foreign nations. Organizations engaging in licensing or joint ventures do not own manufacturing and marketing facilities abroad.
By establishing overseas subsidiaries, a multinational organization can compete more aggressively because it is "in" the marketplace. However, subsidiaries require more investment as the subsidiary is responsible for all marketing activities in a foreign country. While such operations provide control over marketing activities, considerable risk is involved. The subsidiary strategy requires complete understanding of business conditions, customs, markets, labor, and other foreign market factors.
US commercial centers
Another method of doing business overseas has come in the form of US Commercial Centers8.. A commercial center serves the purpose of providing additional resources for the promotion of exports of US goods and services to host countries. The commercial center does so by familiarizing US exporters with industries, markets, and customs of host countries. They are facilitating agencies that assist with the three arrangements just discussed.
US commercial centers provide business facilities such as exhibition space, conference rooms, and office space. They provide translation and clerical services. They have a commercial library. They have commercial law information and trade promotion facilities, including the facilitation of contacts between buyers. sellers, bankers, distributors, agents, and government officials. They also coordinate trade missions and assist with contracts and export and import arrangements.
Capsule 12: Review
1. International marketing involves the firm in making one or more marketing decisions across national boundaries.
2. The debate between standardization versus customization of the international marketing strategy is unsettled; best to consider on a case-by-case basis.
3. There are many reasons to enter an international market led by large market size and diversification.
4. There are also several reasons to avoid entering international markets, including too much red tape, trade barriers, and transportation difficulties.
5. The stages of going international are as follows: exporting, licensing, joint ventures, direct investment, US commercial centers, trade intermediaries, and alliances.
Trade intermediaries
Small manufacturers who are interested in building their foreign sales are turning to trade intermediaries to assist them in the sale and distribution of their products. These entrepreneurial middlemen typically buy US-produced goods at 15 per cent below a manufacturer's best discount and then resell the products in overseas markets. These trade intermediaries account for about 10 per cent of all US exports9.. The trade intermediary provides a valuable service to small companies, which often do not have the resources or expertise to market their products overseas. The trade intermediaries have developed relationships with foreign countries; these relationships are time-consuming and expensive to develop.
Alliances
Heineken, the premium Dutch beer, is consumed by more people in more countries than any other beer10. It is also the number-one imported beer in America. Miller and Budweiser, the two largest American beer producers, have entered into global competition with Heineken, partly because the American beer market has been flat. They are doing so by forming alliances with global breweries such as Molson, Corona, and Dos Equis. Heineken has responded to the challenge, heavily promoting products such as Amstel Light and Murphy's Irish Stout. Heineken has also begun developing an alliance with Asia Pacific Breweries, the maker of Tiger Beer. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/06%3A_Marketing_in_Global_Markets/6.05%3A_The_stages_of_going_international.txt |
It should be apparent by now that companies and organizations planning to compete effectively in world markets need a clear and well-focused international marketing plan that is based on a thorough understanding of the markets in which the company is introducing its products. The challenge, then, of international marketing is to ensure that any international strategy has the discipline of thorough research, and an understanding and accurate evaluation of what is required to achieve the competitive advantage. As such, the decision sequence in international marketing (see Exhibit 15) is much larger than that of domestic markets. As noted in the next “Integrated marketing”, it is also more complicated.
Exhibit 15: The decision sequence in international marketing.
The corporate level
We begin at the corporate level, where firms decide whether to become involved in international markets and determine the resources they are willing to commit. Thus, this stage is primarily concerned with the analysis of international markets. Decisions here will be dependent on matching the results of that analysis with the company's objectives. These objectives, in turn, will be determined by the many motivating factors we have discussed in the earlier sections. The level of resources that the company is willing to commit should be determined by the strategy that is needed to achieve the objectives that have been set.
The business level
Business-level considerations begin with the assessment of the stakeholders involved in the business. It is important to clearly identify the different stakeholder groups, understand their expectations, and evaluate their power, because the stakeholders provide the broad guidelines within which the firm operates. In the case of international marketing, it is particularly important to address the concerns of the stakeholders in the host company.
Recall from the chapter “Introducing marketing” that the situation analysis concerns a thorough examination of the factors that influence the businesses' ability to successfully market a product or service. The results lead to a realistic set of objectives. Conducting a situation analysis in an international setting is a bit more extensive. It not only includes the normal assessment of external environmental factors and resources/capabilities, it also includes a determination of the level of commitment exhibited by the business, as well as possible methods of entry. These last two factors are interrelated in that a company's level of commitment to international markets will directly influence whether they employ exporting, a joint venture, or some other method of entry.
In turn, level of commitment and method of entry are influenced by the evaluation of environmental factors as well as resources and capabilities. The latter audits not only the weaknesses of the company, but also the strengths of the company, which are often taken for granted. This is particularly important in international markets; for example, customer brand loyalty may be much stronger in certain markets than others, and products may be at the end of their life in the domestic market but may be ideal for less sophisticated markets. It is important, too, to evaluate the capacity of the firm to be flexible, adaptable, and proactive, as these are the attributes necessary, for success in a highly competitive and rapidly changing world.
Undoubtedly, environmental factors have received the most attention from marketers considering international markets.
Integrated marketing
Going global takes coordination
Importing technology and the evolution of a global economy has made global marketing a reality for many American companies. Larger corporations are not alone in their pursuit of business abroad: the US Department of Commerce reports that 60 per cent of American firms exporting products today have fewer than 100 employees. American businesses have plenty of reasons to market their products in other countries. According to consulting firm Deloitte and Touche, about 95 per cent of the world's population and two-thirds of its total purchasing power are currently located outside the US.
Moreover, the decision to distribute products in other countries not only opens new markets, but can also greatly expand a company's business. For example, if a US bicycle manufacturer focuses only on the US market, it loses the opportunity to increase revenues in countries where bicycles are a primary mode of transportation.
Global marketing can also breathe life into a foundering product, and may even extend its lifespan. Additionally, a foreign product often can command a higher price simply because consumers around the world expect foreign items to cost more.
However, implementing a global strategy requires a great deal of coordination. For example, many companies that have successfully built a strong brand in the US have found that their domestic identity has little, if any, impact in markets where they are relatively unknown. An advertising campaign is one way to deal with this problem. Attaching your corporate identity to a known, respected entity in your target market is another. When FedEx, for example, wanted to increase its name recognition in Europe, the company teamed with clothing manufacturer Benetton, an established name there. FedEx sponsors one of Benetton's formula racing cars in Europe.
Karen Rogers, manager of key customer marketing at FedEx, added that sponsoring events domestically or internationally also gives a company the opportunity to meet with perspective customers in a social setting and affords a series of spin-offs, such as promotions and product giveaways.
In distributing products globally, many American corporations team with large multinational companies that do not offer competitive products but have the resources and expertise to distribute and market those goods. This can be a cost-effective alternative to setting up operations outside the US.
Many small and mid-sized companies that are uncertain whether to open operations in another country investigate the possibility of using an export management company. These companies typically provide services that range from research to negotiating contracts with overseas distributors.[1]
The functional level
Having set the objectives for the company, both at the corporate level and the business level, the company can now develop a detailed program of functional activities to achieve the objectives. Following the integrated approach employed throughout this text, each of the functional elements (e.g. finance, human resources, research) must be considered jointly. The best international marketing strategy is doomed to failure if human resources can not find and train the appropriate employees, or research cannot modify the product so that it is acceptable to consumers in another country. Ultimately, this coordination between business functions is contingent on the market entry strategy employed as well as the degree of standardization or customization deemed.
Having integrated at the function level, we next consider integration of the marketing mix elements.
Product/promotion
Keegan11 has highlighted the key aspect of marketing strategy as a combination of standardization or adaptation of product and promotion elements of the mix and offers five alternative and more specific approaches to product policy:
One product, one message, worldwide. While a number of writers have argued that this will be the strategy adopted for many products in the future, in practice only a handful of products might claim to have achieved this already.
Product extension, promotion adaptation. While the product stays the same this strategy allows for the adaptation of the promotional effort either to target new customer segments or to appeal to the particular tastes of individual countries.
Product adaptation, promotion extension. This strategy is used if a promotional campaign has achieved international appeal, but the product needs to be adapted because of local needs.
Dual adaptation. By adapting both products and promotion for each market, the firm is adopting a totally differentiated approach.
Product invention. Firms, usually from advanced nations, that are supplying products to less well-developed countries adopt product invention.
Another critical element that is closely aligned with the product and promotion is the brand. Anthony O'Reilly, Chairman of H J Heinz, believes that the communications revolution and the convergence of cultures have now set the stage for truly global marketing. The age of the global brand is at hand. For example, Heinz was looking to expand its 9 Lives cat food brand and Morris the Cat logo into Moscow. Although it is a stable and successful brand in the US, testing and research done by Dimitri Epimov, a local marketing manager in Moscow, led Heinz executives to make a marketing change to ensure the product's success in Russia. Namely, a fatter-looking Morris was created for packaging. Another discovery: while Americans tend to treat their kitties with tuna, Russian cat-lovers prefer to serve beef-flavored food.
As discussed earlier, product positioning is a key success factor and reflects the customer's perceptions of the product or service. However, in countries at different stages of economic development, the customer segments that are likely to be able to purchase the product and the occasions on which it is bought may be significantly different. For example, while Kentucky Fried Chicken (KFC) and McDonald's restaurants aim at everyday eating for the mass market in the developed countries, in less-developed countries they are perceived as places for special-occasion eating, and are beyond the reach of the poorest segments of the population. The product positioning, therefore, must vary in some dimensions. In confirming the positioning of a product or service in a specific market or region, it is therefore necessary to establish in the consumer perception exactly what the product stands for and how it differs from existing and potential competition by designing an identity that confirms the value of the product.
Pricing
Pricing products in foreign nations is complicated by exchange rate fluctuations, tariffs, governmental intervention, and shipping requirements. A common strategy involves a marketer setting a lower price for their products in foreign markets. This strategy is consistent with the low income levels of many foreign countries, and the lower price helps to build market share. Pricing strategies are also strongly influenced by the nature and intensity of the competition in the various markets.
For these reasons, it is important to recognize at the outset that the development and implementation of pricing strategies in international markets should follow the following stages:
1. analyzing the factors that influence international pricing, such as the cost structures, the value of the product, the market structure, competitor pricing levels, and a variety of environmental constraints
2. confirming the impact the corporate strategies should have on pricing policy
3. evaluating the various strategic pricing options and selecting the most appropriate approach
4. implementing the strategy through the use of a variety of tactics and procedures to set price
5. managing prices and financing international transactions
Perhaps the most critical factor to be considered when developing a pricing strategy in international markets, however, is how the customers and competitors will respond. Nagle 12 has suggested nine factors that influence the sensitivity of customers to prices, and all have implications for the international marketer. Price sensitivity reduces:
• The more distinctive the product is;
• the greater the perceived quality;
• the less aware consumers are of substitutes in the market;
• if it is difficult to make comparisons;
• if the price of a product represents a small proportion of total expenditure of the customer;
• as the perceived benefit increases;
• if the product is used in association with a product bought previously;
• if costs are shared with other parties;
• if the product cannot be stored.
Finally, there are several inherent problems associated with pricing in international markets. Often companies find it difficult to coordinate and control prices across their activities in order to enable them to achieve effective financial performance and their desired price positioning. Simply, how can prices be coordinated by the company across the various markets and still make the necessary profit? Difficulty answering this question has led to two serious problems. Dumping (when a firm sells a product in a foreign country below its domestic price or below its actual costs) is often done to build a company's share of the market by pricing at a competitive level. Another reason is that the products being sold may be surplus or cannot be sold domestically and are therefore already a burden to the company. When companies price their products very high in some countries but competitively in others, they engage in a gray market strategy. A gray market, also called parallel importing, is a situation where products are sold through unauthorized channels of distribution. A gray market comes about when individuals buy products in a lower-priced country from a manufacturer's authorized retailer, ship them to higher-priced countries, and then sell them below the manufacturer's suggested price through unauthorized retailers.
Considerable problems arise in foreign transactions because of the need to buy and sell products in different currencies. Questions to consider are: What currency should a company price its products? How should a company deal with fluctuating exchange rates?
Finally, obtaining payment promptly and in a suitable currency from less developed countries can cause expense and additional difficulties. How should a company deal with selling to countries where there is a risk of nonpayment? How should a company approach selling to countries that have a shortage of hard currency?
Distribution and logistics
Distribution channels are the means by which goods are distributed from the manufacturer to the end user. Logistics, or physical distribution management, is concerned with the planning, implementing, and control of physical flows of materials and final goods from points of origin to points of use to meet customer needs at a profit.
Essentially there are three channel links between the seller and buyer. The first link is the seller's headquarters organization, which is responsible for supervising the channel, and acts as part of the channel itself. Channels between countries represent the second link. They are responsible for getting products to overseas markets and payment in return. Finally, the third link is the channel structure (logistics) within countries, which distributes the products from their point of entry to the final consumer.
Distribution strategies within overseas markets are affected by various uncontrollable factors. First, wholesaling and retailing structure differs widely from one nation to the next. So, too, does the quality of service provided. Differences in the size and nature of retailers are even more pronounced. Retailers more closely reflect the economic conditions and culture of that country; many small retailers dominate most of these countries.
Capsule 13: Review
1. The international marketing plan includes concern for:
a. corporate level considerations-determining the resources to be allocated
b. business level considerations, including:
i. assessment of stakeholders
ii. the situation analysis
c. functional level considerations that delineate the various activities that will achieve objectives
2. The international marketing environment includes concern for:
a. the social/cultural environment
b. the political/legal environment
c. the technological environment
d. the economic environment
e. the competitive environment
Physical distribution to overseas markets often requires special marketing planning. Many countries have inadequate docking facilities, limited highways, various railroad track gauges, too few vehicles, and too few warehouses. Managing product inventories requires consideration of the availability of suitable warehousing, as well as the costs of shipping in small quantities.
1. [1]Sources: Dom DelPrete, "Winning Strategies Lead to Global Marketing Success,” Marketing News, August 18, 1997 pp. 1-2; Frank Rose, "Think Globally, Script Locally," Fortune, Nov. 8, 1999, pp. 157-161; Lambeth Hochwald, "Are You Smart Enough to Sell Globally?" Sales and Marketing Management. July 1998, pp. 53-55; Erica Rasmusson, "Global Warning," Sales and Marketing Management, Nov. 2000, p. 17. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/06%3A_Marketing_in_Global_Markets/6.06%3A_The_international_marketing_plan.txt |
The social/cultural environment
The cultural environment consists of the influence of religious, family, educational, and social systems in the marketing system. Marketers who intend to market their products overseas may be very sensitive to foreign cultures. While the differences between our cultural background in the United States and those of foreign nations may seem small, marketers who ignore these differences risk failure in implementing marketing programs. Failure to consider cultural differences is one of the primary reasons for marketing failures overseas. Table 6 provides some illustrations of cultural difference around the world.
This task is not as easy as it sounds as various features of a culture can create an illusion of similarity. Even a common language does not guarantee similarity of interpretation. For example, in the US we purchase "cans" of various grocery products, but the British purchase "tins". A number of cultural differences can cause marketers problems in attempting to market their products overseas. These include: (a) language, (b) color, (c) customs and taboos, (d) values, (e) aesthetics, (f) time, (g) business norms, (h) religion, and (i) social structures. Each is discussed in the following sections.
Language
The importance of language differences cannot be overemphasized, as there are almost 3,000 languages in the world. Language differences cause many problems for marketers in designing advertising campaigns and product labels. Language problems become even more serious once the people of a country speak several languages. For example, in Canada, labels must be in both English and French. In India, there are over 200 different dialects, and a similar situation exists in China.
Colors
Colors also have different meanings in different cultures. For example, in Egypt, the country's national color of green is considered unacceptable for packaging, because religious leaders once wore it. In Japan, black and white are colors of mourning and should not be used on a product's package. Similarly, purple is unacceptable in Hispanic nations because it is associated with death.
Customs and taboos
All cultures have their own unique set of customs and taboos. It is important for marketers to learn about these customs and taboos so that they will know what is acceptable and what is not for their marketing programs.
Table 6: Illustrations of potential areas of misunderstanding due to differences in cultural norms
In Ireland, the evening meal is called tea, not dinner.
In Asia, when a person bows to you, bow your head forward equal or lower than theirs.
A nod means "no" in Bulgaria and shaking the head side-to-side means "yes”.
The number 7 is considered bad luck in Kenya, good luck in the Czech Republic, and has magical connotations in Benin.
Pepsodent toothpaste was unsuccessful in Southeast Asia because it promised white teeth to a culture where black or yellow teeth are symbols of prestige.
In Quebec, a canned fish manufacturer tried to promote a product by showing a woman dressed in shorts, golfing with her husband, and planning to serve canned fish for dinner. These activities violated cultural norms.
Maxwell House advertised itself as the "great American coffee" in Germany. It found out that Germans have little respect for American coffee.
General Motors' "Body by Fisher" slogan became "Corpse by Fisher" when translated into Japanese.
In German, "Let Hertz Put You in the Driver's Seat" means "Let Hertz Make You a Chauffeur”.
In Cantonese, the Philip Morris name sounded the same as a phrase meaning no luck.
In Hong Kong, Korea, and Taiwan, triangular shapes have a negative connotation.
In Thailand, it is considered unacceptable to touch a person's head, or pass something over it.
Red is a positive color in Denmark, but represents witchcraft and death in many African countries.
Americans usually smile as they shake hands. Some Germans consider smiles overly familiar from new business acquaintances. Americans should not say "Wie gehts?" ("How goes it?") It is also too informal for first meetings.
If you offer a compliment to a Chinese-speaking person, he or she will decline it, because disagreeing is the polite way to accept praise.
Do not say "Merci" ("Thanks") to a French person's compliment. You might be misinterpreted as making fun.
Italians wave goodbye as Americans beckon someone–with palm up and fingers moving back and forth; but in Asia, waving with the palm down is not interpreted as goodbye, but rather, "come here”.
Offering gifts when you visit a home is expected in Japan, but in the Soviet Union it may be considered a bribe.
In Brazil and Portugal, businesspeople like to entertain foreigners in their homes. When it is time to go, the host may feel constrained to insist that the foreigner stay. Foreigners should politely take their leave.
Consider how the following examples could be used in development of international marketing programs:
• In Russia, it is acceptable for men to greet each other with a kiss, but this custom is not acceptable in the US.
• Germans prefer their salad dressing in a tube, while Americans prefer it in a bottle.
• In France, wine is served with most meals, but in America, milk, tea, water, and soft drinks are popular.
McDonalds's Corporation has opened 20 restaurants in India. Since 80 per cent of Indians are Hindu, McDonald's will use a nonbeef meat substitute for its traditional hamburger. The likely beef substitute will be lamb, a very popular meat in India. In anticipation of its restaurant openings, McDonald's conducted extensive market research, site selection studies, and developed a relationship with India's largest chicken supplier. McDonald's has opted to market its product in India, largely because India's population of more than 900 million represents one-sixth of the world's population.
Values
An individual's values arise from his/her moral or religious beliefs and are learned through experiences. For example, in America we place a very high value on material well-being, and are much more likely to purchase status symbols than people in India. Similarly, in India, the Hindu religion forbids the consumption of beef, and fast-food restaurants such as McDonald's and Burger King would encounter tremendous difficulties without product modification. Americans spend large amounts of money on soap, deodorant, and mouthwash because of the value placed on personal cleanliness. In Italy, salespeople call on women only if their husbands are at home.
Aesthetics
The term aesthetics is used to refer to the concepts of beauty and good taste. The phrase, "Beauty is in the eye of the beholder" is a very appropriate description for the differences in aesthetics that exist between cultures. For example, Americans believe that suntans are attractive, youthful, and healthy. However, the Japanese do not.
Time
Americans seem to be fanatical about time when compared to other cultures. Punctuality and deadlines are routine business practices in the US. However, salespeople who set definite appointments for sales calls in the Middle East and Latin America will have a lot of time on their hands, as business people from both of these cultures are far less bound by time constraints. To many of these cultures, setting a deadline such as "I have to know next week" is considered pushy and rude.
Business norms
The norms of conducting business also vary from one country to the next. Here are several examples of foreign business behavior that differ from US business behavior:
• In France, wholesalers do not like to promote products. They are mainly interested in supplying retailers with the products they need.
• In Russia, plans of any kind must be approved by a seemingly endless string of committees. As a result, business negotiations may take years.
• South Americans like to talk business "nose to nose". This desire for close physical proximity causes American business people to back away from the constantly forward-moving South Americans.
• In Japan, businesspeople have mastered the tactic of silence in negotiations. Americans are not prepared for this, and they panic because they think something has gone wrong. The result is that Americans become impatient, push for a closure, and often make business concessions they later regret.
These norms are reflected in the difficulty of introducing the Web into Europe (see the next “Integrated marketing”).
Religious beliefs
A person's religious beliefs can affect shopping patterns and products purchased in addition to his/her values, as discussed earlier. In the United States and other Christian nations, Christmas time is a major sales period. But for other religions, religious holidays do not serve as popular times for purchasing products. Women do not participate in household buying decisions in countries in which religion serves as opposition to women's rights movements.
Every culture has a social structure, but some seem less widely defined than others. That is, it is more difficult to move upward in a social structure that is rigid. For example, in the US, the two-wage earner family has led to the development of a more affluent set of consumers. But in other cultures, it is considered unacceptable for women to work outside the home.
Integrated marketing
Hooking up in Europe
Everyone in Europe vacations in August, and business is booming at Internet Train, the perhaps inappropriately named chain of Internet cafes in Florence, Italy. Just over the Ponte Vechio, the old bridge joining the Uffizi art gallery with Pallazo Pitti, there is a small storefront with 20 personal computers. Inside, people from around the world peck away at their email, communicating with friends and acquaintances from more than a hundred countries–for just ITL 6,000 (about USD 3) per half hour.
Thousands of kilometers away in London, near Victoria Station, the scene is much the same. Stelio's Haij-Joannu, a Greek shipping tycoon and Internet entrepreneur, has created Easy Everything, which he claims are the world's largest Internet cafes. Haij-Joannu boasts nine Internet cafes with 3,900 PCs ready and available. "Easy Everything (easyeverything.com) is wonderful," reports Reade Fahs, CEO of London based First Tuesday, a global Internet networking organization. "You call it an Internet cafe, but it's much more. Most Internet cafes are about the coffee with computers on the side. This is about 400 thin-screen computers in this very cool environment with a little coffee on the side."
Of course, the story in Europe goes far beyond email and Internet cafes. They are just the top of the innovation revolution sweeping Europe from the North to the South. Consider easyGroup, which owns easyEverything: easyGroup includes easyJet.com and easyRentacar.com (all properties controlled by Haij-Joannu). EasyJet.com bills itself as the "Web's favorite airline" and markets itself as it discount airline with steep incentives for buyers to transact online. EasyRentacar.com is "the world's first Internet-only rent-a-car company," he adds. He also plans to start easyMoney.com, offering discount mortgages online.
Still, the challenges of European Internet marketing are legion. Putting a B2C (business-to-consumer) or a B2B (business-to-business) site up in Europe is much more difficult than in the United States. Among the many complexities facing pan-European websites are the following:
(a) developing a site for multiple languages
(b) developing a site for multiple currencies
(c) providing multilingual customer service
(d) shipping across borders in Europe
(e) handling the value-added tax (VAT)
(f) coping with strict government regulatory issues
(g) recruiting and retaining people in markets that prohibit or curtail stock options and other economic incentives[1]
The political/legal environment
The political/legal environment abroad is quite different from that of the US. Most nations desire to become self-reliant and to raise their status in the eyes of the rest of the world. This is the essence of nationalism. The nationalistic spirit that exists in many nations has led them to engage in practices that have been very damaging to other countries' marketing organizations.
For example, foreign governments can intervene in marketing programs in the following ways:
• contracts for the supply and delivery of goods and services
• the registration and enforcement of trademarks, brand names, and labeling
• patents
• marketing communications
• pricing
• product safety, acceptability, and environmental issues
Political stability
Business activity tends to grow and thrive when a nation is politically stable. When a nation is politically unstable, multinational firms can still conduct business profitably. Their strategies will be affected however. Most firms probably prefer to engage in the export business rather than invest considerable sums of money in investments in foreign subsidiaries. Inventories will be low and currency will be converted rapidly. The result is that consumers in the foreign nation pay high prices, get less satisfactory products, and have fewer jobs.
Monetary circumstances
The exchange rate of a particular nation's currency represents the value of that currency in relation to that of another country. Governments set some exchange rates independently of the forces of supply and demand. The forces of supply and demand set others. If a country's exchange rate is low compared to other countries, that country's consumers must pay higher prices on imported goods. While the concept of exchange rates appears relatively simple, these rates fluctuate widely and often, thus creating high risks for exp0rters and importers.
Trading blocs and agreements
US companies make one-third of their revenues from products marketed abroad, in places such as Asia and Latin America. The North American Free Trade Agreement (NAFTA) further boosts export sales by enabling companies to sell goods at lower prices because of reduced tariffs.
Regional trading blocs represent a group of nations that join together and formally agree to reduce trade barriers among themselves. The Association of Southeast Asian Nations (ASEAN) is an example of a regional trading block. The organization is compromised of 10 independent member nations, including Indonesia, Malaysia, Thailand, and the Philippines. A free trade agreement within ASEAN member nation allows for the free exchange of trade, service, labor and capital. However, a universal implementation of these standards is scheduled for 2020. In addition, ASEAN promotes regional integration of transportation and energy infrastructure.
One of the potentially interesting results of trade agreements like ASEAN or NAFTA is that many products previously restricted by dumping laws, laws designed to keep out foreign products, would be allowed to be marketed. The practice of dumping involves a company selling products in overseas markets at very low prices, one intention being to steal business from local competitors. These laws were designed to prevent pricing practices that could seriously harm local competition. The laws were designed to prevent large producers from flooding markets. In 2007, about 60 nations had anti-dumping legislation. Those in favor of agreements argue that anti-dumping laws penalize those companies who are capable of competing in favor of those companies that are not competitive.
Almost all the countries in the Western hemisphere have entered into one or more regional trade agreements. Such agreements are designed to facilitate trade through the establishment of a free trade area, customs union or customs market. Free trade areas and customs unions eliminate trade barriers between member countries while maintaining trade barriers with nonmember countries. Customs unions maintain common tariffs and rates for nonmember countries. A common market provides for harmonious fiscal and monetary policies while free trade areas and customs unions do not. Trade agreements are becoming a growing force for trade liberalization; the development of such agreements provides for tremendous opportunities for companies with global operations.
The creation of the single European market in 1992 was expected to change the way marketing is done worldwide. It meant the birth of a market that was larger than the United States, and the introduction of European Currency Units (Euros) in place of the individual currencies of member nations. Experience in multilingual marketing would help non-European companies succeed in this gigantic market. With new technologies such as multilingual processing programs, it would be possible to target potential customers anywhere in Europe, in any language, and in the same marketing campaign.
Progress toward European unification has been slow-many doubt that complete unification will ever be achieved. However, on 1 January 1999, 11 of the 15 member nations took a significant step toward unification by adopting the Euro as the common currency. These 11 nations represent 290 million people and a USD 6.5 trillion market. Still, with 14 different languages and distinctive national customs, it is unlikely that the European Union (EU) will ever become the "United States of Europe”.
Tariffs
Most nations encourage free trade by inviting firms to invest and to conduct business there, while encouraging domestic firms to engage in overseas business. These nations do not usually try to strictly regulate imports or discriminate against foreign-based firms. There are, however, some governments that openly oppose free trade. For example, many Communist nations desire self-sufficiency. Therefore, they restrict trade with non-Communist nations. But these restrictions vary with East-West relations.
The most common form of restriction of trade is the tariff, a tax placed on imported goods. Protective tariffs are established in order to protect domestic manufacturers against competitors by raising the prices of imported goods. Not surprisingly, US companies with a strong business tradition in a foreign country may support tariffs to discourage entry by other US competitors.
Expropriation
All multinational firms face the risk of expropriation. That is, the foreign government takes ownership of plants, sometimes without compensating the owners. However, in many expropriations there has been payment, and it is often equitable. Many of these facilities end up as private rather than government organizations. Because of the risk of expropriation, multinational firms are at the mercy of foreign governments, which are sometimes unstable, and which can change the laws they enforce at any point in time to meet their needs.
The technological environment
The level of technological development of a nation affects the attractiveness of doing business there, as well as the type of operations that are possible. Marketers in developed nations cannot take many technological advances for granted. They may not be available in lesser developed nations. Consider some of the following technologically related problems that firms may encounter in doing business overseas:
• Foreign workers must be trained to operate unfamiliar equipment.
• Poor transportation systems increase production and physical distribution costs.
• Maintenance standards vary from one nation to the next.
• Poor communication facilities hinder advertising through the mass media.
• Lack of data processing facilities makes the tasks of planning, implementing, and controlling marketing strategy more difficult.
The economic environment
A nation's economic situation represents its current and potential capacity to produce goods and services. The key to understanding market opportunities lies in the evaluation of the stage of a nation's economic growth.
A way of classifying the economic growth of countries is to divide them into three groups: (a) industrialized, (b) developing, and (c) less-developed nations. The industrialized nations are generally considered to be the United States, Japan, Canada, Russia, Australia and most of Western Europe The economies of these nations are characterized by private enterprise and a consumer orientation. They have high literacy, modem technology, and higher per capita incomes.
Developing nations are those that are making the transition from economies based on agricultural and raw materials production to industrial economies. Many Latin American nations fit into this category, and they exhibit rising levels of education, technology, and per capita incomes,
Finally, there are many less developed nations in today's world. These nations have low standards of living, literacy rates are low, and technology is very limited.
Usually, the most significant marketing opportunities exist among the industrialized nations, as they have high levels of income, one of the necessary ingredients for the formation of markets. However, most industrialized nations also have stable population bases, and market saturation for many products already exists. The developing nations, on the other hand, have growing population bases, and although they currently import limited goods and services, the long-run potential for growth in these nations exists. Dependent societies seek products that satisfy basic needs–food, clothing, housing, medical care, and education. Marketers in such nations must be educators, emphasizing information in their market programs. As the degree of economic development increases, so does the sophistication of the marketing effort focused on the countries.
The competitive environment
Entering an international market is similar to doing so in a domestic market, in that a firm seeks to gain a differential advantage by investing resources in that market. Often local firms will adopt imitation strategies, sometimes successfully. When they are successful, their own nation's economy receives a good boost. When they are not successful, the multinational firm often buys them out.
Japanese marketers have developed an approach to managing product costs that has given them a competitive advantage over US competitors. A typical American company will design a new product, then calculate the cost. If the estimated cost is too high, the product will be taken back to the drawing board. In Japan, a company typically starts with a target cost based on the price that it estimates the market is most willing to accept. Product designers and engineers are then directed to meet the cost target. This approach also encourages managers to worry less about product costs and more about the role it should play in gaining market share. Briefly, at Japanese companies like Nippon Electric Company (NEC), Nissan, Sharp, and Toyota, a team charged with bringing a product idea to market estimates the price at which the product is most likely to appeal to the market. From this first important judgement, all else follows. After deducting the required profit margin from the selling price, planners develop estimates of each element that make up the product's cost: engineering, manufacturing sales, and marketing. US firms tend to build products, figure how much it costs to build the product, and then ask whether the product can be sold at a profitable price. US companies tend not to assess what the market will be willing to pay.
Marketing objectives
Having identified stakeholder expectations, carried out a detailed situation analysis, and made an evaluation of the capabilities of the company, the overall marketing goals can be set. It is important to stress that there is a need for realism in this, as only too frequently corporate plans are determined more by the desire for short-term credibility with shareholders than with the likelihood that they will be achieved.
The process adopted for determining long-term and short-term objectives is important and varies significantly, depending on the size of the business, the nature of the market and the abilities and motivation of managers in different markets. At an operational level, the national managers need to have an achievable and detailed plan for each country, which will take account of the local situation, explain what is expected of them and how their performance will be measured. Examples of objectives might be:
• financial performance, including return on investment and profitability;
• market penetration, including sales (by volume and value), market share by product category;
• customer growth, by volume and profitability;
• distribution, including strength in supply chain, number of outlets;
• brand awareness and value;
• new product introductions and diffusion;
• company image, including quality and added value (or service).
The Wall Street Journal (wsj.com)
In practice
International markets offer organizations market expansion and profit opportunities. However, entering international markets poses risks and valid reasons to avoid entering these markets. International marketing plans must identify the benefits and risks involved with international expansion, and detail the options for entry into the foreign market.
Deciding whether or not to adjust its domestic marketing program is a critical issue for any organization planning to expand internationally. Organizations must understand the various environmental factors affecting international marketing to determine whether a standardized or customized marketing mix will be the best strategy.
The Interactive Journal provides extensive information about world business. On the Front Section, select World-Wide from the main page.
World-Wide focuses on international news and events. You will find information about trade agreements, international governing organizations, and regional conflicts in this section. Under the Asia, Europe, and The Americas headings, you will find information specific to these regions. General news stories, financial markets activity, and technology issues are all discussed as they pertain to the specific region. For country specific information, page down to Country News in any of the regional sections. Using the drop down menu, you will find links to recent news and business articles.
In the Economy section, you will find an International Calendar of Economic Events. On the Front Section, select Economy from the left menu. In this section you will also find articles about noteworthy economic developments in various countries.
Travel news is found in the Business Fare section of Marketplace. Here you will find a Currency Converter as well as travel related business articles.
Deliverable
Select one major headline in the Asia, Europe, and The Americas sections. Use the Country News menu to select the specific countries discussed and to look for additional information about the articles you have chosen. Review the articles and write a one-paragraph synopsis of each.
1. [1]Sources: Henry Heilbrunn, "Interactive Marketing in Europe," Direct Marketing, March 1998, pp. 98-101 Michael Krauss, "Europe Forges Ahead with Web Innovations," Marketing News, August 14, 2000, p. 8; Michael Plogell and Felix Hofer, "No-nos in Europe," Promo, April 2000, pp. 23-24. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/06%3A_Marketing_in_Global_Markets/6.07%3A_The_international_marketing_environment.txt |
Most American firms have discovered that many opportunities exist in international marketing, as evidenced by the vast amount of goods exported by US-based firms. There are many reasons why US firms choose to engage in international marketing. Perhaps the most attractive reasons are the market expansion and profit opportunities afforded by foreign markets.
Basic principles of domestic marketing apply to international marketing. However, there are some differences, many of which are centered on environmental factors which affect international marketing: (a) the economic environment, (b) the competitive environment, (c) the cultural environment, (d) the political/legal environment, and (e) technological environment and the ethical environment.
Once a firm has decided to enter a particular foreign market, it must decide upon the best way to enter that market. A firm has five basic foreign market entry options, the selection of which depends largely on the degree of control that the firms wishes to maintain over its marketing program.
When a firm chooses to market its products internationally, it must decide whether to adjust its domestic marketing program. Some firms choose to customize their market programs, adjusting their marketing mix to meet the needs of each target market. Others use a standardized marketing mix. In making the decision to customize or standardize, there is a wide range of possibilities for adapting a firm's product, price, promotion, and distribution strategies.
Key terms
International marketing The marketing of a company's products and/or services outside of that company's home nation.
Multinational marketing Firms that are involved in marketing as well as production, research, human resource management and the employment of a foreign work force.
Dumping A practice in which a firm attempts to sell discontinued products, seconds, or repaired products in overseas markets at below domestic prices.
Exchange rate The value of one nation's currency in relation to that of another country.
Tariff A tax placed on imported goods.
Expropriation The act of a government taking ownership of a firm's plants.
Indirect exporting Occurs when all of a firm's foreign sales are made through the firm's domestic sales department.
Semi-direct exporting Occurs when a firm sells products in foreign markets through agents, merchant middlemen, or other manufacturers.
Combination export manager A domestic agent intermediary that acts as an exporting department for several noncompeting firms.
Manufacturers export agent Similar to manufacturer's agents in domestic product setting.
Webb-Pomerene Export Association Two or more firms that compete domestically, but work together in exporting their products.
Piggyback exporting A situation in which one manufacturer that has export facilities and overseas channels of distribution will handle the exporting of another firm's noncompeting but complementary products.
Direct exporting Occurs when a firm establishes an export department to sell directly to a foreign firm.
Licensing An agreement in which a firm (licensor) provides some technology to a foreign firm (licensee) by granting the firm the right to use the licensor's manufacturing process, brand name, or sales knowledge in return for some payment.
Joint venture A partnership between a domestic firm and a foreign firm.
Straight extension The introduction of the same product and the same message in every foreign market.
Communication adaptation A strategy used in foreign markets when the same product can be used to satisfy different needs, or if a product is used in a different way in foreign market.
Product adaptation A product is changed to meet individual foreign target market needs.
Questions
➢ What are the reasons a firm might engage in exporting?
➢ How does the economic environment affect international marketing activities?
➢ How does the cultural environment affect international marketing activities?
➢ How does the technological environment affect international marketing activities?
➢ Briefly describe the major strategies a firm might use to enter a foreign market.
➢ Why are prices often lower in foreign markets than in domestic markets?
➢ What are the differences between straight extension, communication adaptation, product adaptation, dual adaptation, and product invention strategies?
➢ What are the reasons why a firm might enter a foreign market by means of a joint venture strategy?
➢ Briefly describe the methods of distribution used by direct exporters.
➢ Why does direct investment in foreign markets afford marketers the greatest degree of control over international marketing activities?
➢ How can an organization determine its best option for entering an international market?
➢ What impact do international trade agreements such as NAFTA and international governing organizations such as the World Trade Organization have on decisions to expand internationally?
➢ Other than the Interactive Journal, what other sources provide relevant information to organizations facing international marketing decisions?
➢ What changes do you anticipate in international marketing? What countries will influence international trade?
➢ What will be some of the problems Persona faces as it enters markets outside of Europe?
➢ The initial monitoring machine costs USD 78, plus USD 16 a month for the sticks. Will these costs present problems?
Project
Identify a US-made product that is currently sold in the US. Develop a marketing plan for this product, assuming they plan to export to Canada.
Case application
Unilever's global brand
Unilever division Unipath is to begin the global rollout of a contraceptive product that has been 15 years in secret development and that the company is hailing as a major brand launch.
"The biggest thing to happen to contraception since the 60s," as the UK print and poster ads through Ogilvy & Mather Worldwide, London, describes it. Persona is the fruit of tens of millions of dollars investment.
"This is going to be a big Unilever brand," said Senior Brand Development Manager, Susannah Day, at its UK launch, backed by a USD 7.8 million marketing campaign that also includes an Internet site, a free phone "careline”, retailer training, point of purchase displays, and direct mailings to the medical profession. Ogilvy and Mather (O&M), a Unilever roster agency, was appointed in 1995 to create ads that would work internationally.
First evidence that all this was not mere launch puffery came at Unilever's results meeting, when co-chairman Niall FitzGerald revealed sparkling sales and awareness statistics and details of the product's march just into Italy and Ireland and then into the Netherlands, Scandinavia, and Germany.
In the first few weeks of the UK launch, Persona was the biggest selling item by value in the 1,247 stores nationwide of Boots–the retailer through which the brand was exclusively launched–and it achieved 55 per cent consumer awareness within a month. In pre-launch research among hundreds of women in the UK and Germany, 30 per cent said they were likely to buy the product.
"We expect Persona to be a mainstream form of contraception in most markets in Europe and the US," notes Ms Day. Plans are to take the brand into 20 countries by 2000, including Australia and ultimately, it is expected to go on sale worldwide. This occurred in July of 2000.
Persona works by measuring a woman's hormone levels via home urine tests and revealing the days in a month when she is least at risk of becoming pregnant. An electronic monitor records the days in a woman's cycle. On the mornings when a test is required, a yellow light flashes, asking for a stick carrying a urine sample to be inserted into the monitor. After the hormone level is measured, either a red light denoting high risk or a green light denoting low appears. Reliability is claimed to be 95 per cent-the same as condoms.[1] | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/06%3A_Marketing_in_Global_Markets/6.08%3A_Summary.txt |
Thumbnail: pixabay.com/photos/bananas-fruits-food-grocery-store-698608/
07: Introducing and Managing the Product
In essence, the term "product" refers to anything offered by a firm to provide customer satisfaction, be it tangible or intangible. It can be a single product, a combination of products, a product-service combination, or several related products and services. It normally has at least a generic name (e.g. banana) and usually a brand name (e.g. Chiquita). Although a product is normally defined from the perspective of the manufacturer, it is also important to note two other points-of-view, those of the consumer and of other relevant publics.
For a manufacturer like Kraft Foods, their macaroni and cheese dinner reflects a food product containing certain ingredients packaged, distributed, priced, and promoted in a unique manner, and requiring a certain return on their investment. For the consumer, the product is a somewhat nutritious food item that it is quick and easy to prepare and is readily consumed by the family, especially the kids. For a particular public, such as the US Food and Drug Administration, this product reflects a set of ingredients that must meet particular minimum standards in terms of food quality, storage, and distribution.
Making this distinction is important in that all three perspectives must be understood and satisfied if any product will survive and succeed. Furthermore, this sensitivity to the needs of all three is the marketing concept in action. For example, a company might design a weight-reduction pill that not only is extremely profitable but also has a wide acceptance by the consumer. Unfortunately, it cannot meet the medical standards established by the US Federal government. Likewise, Bird's Eye Food might improve the overall quality of their frozen vegetables and yet not improve the consumers' tendency to buy that particular brand simply because these improvements were not perceived as either important or noticeable by the consumer. Therefore, an appraisal of a company's product is always contingent upon the needs and wants of the marketer, the consumer, and the relevant publics. We define product as follows: anything, either tangible or intangible, offered by the firm; as a solution to the needs and wants of the consumer; is profitable or potentially profitable; and meets the requirements of the various publics governing or influencing society.
There are four levels of a product: core, tangible, augmented, and promised (see Exhibit 16). We begin with the notion of the core product, which identifies what the consumers feel they are getting when they purchase the product. The core benefits derived when an overweight 45-year-old male purchases a USD 250 ten-speed bicycle is not transportation; it is the hope for better health and improved conditioning. In a similar vein, that same individual may install a USD 16,000 swimming pool in his backyard, not in order to obtain exercise, but to reflect the status he so desperately requires. Both are legitimate product cores. Because the core product is so individualized, and oftentimes vague, a full-time task of the marketer is to accurately identify the core product for a particular target market.
Once the core product has been indicated, the tangible product becomes important. This tangibility is reflected primarily in its quality level, features, brand name, styling, and packaging. Literally every product contains these components to a greater or lesser degree. Unless the product is one-of-a-kind (e.g. oil painting), the consumer will use at least some of these tangible characteristics to evaluate alternatives and make choices. In addition, the importance of each will vary across products, situations, and individuals. For example, for Mr Smith at age 25, the selection of a particular brand of new automobile (core product=transportation) was based on tangible elements such as styling and brand name (choice=Corvette); at age 45, the core product remains the same, while the tangible components such as quality level and features become important (choice=Mercedes).
At the next level lies the augmented product. Every product is backed up by a host of supporting services. Often, the buyer expects these services and would reject the core-tangible product if they were not available. Examples would be restrooms, escalators, and elevators in the case of a department store, and warranties and return policies in the case of a lawn mower. Dow Chemical has earned a reputation as a company that will bend over backwards in order to service an account. It means that a Dow sales representative will visit a troubled farmer after-hours in order to solve a serious problem. This extra service is an integral part of the augmented product and a key to their success. In a world with many strong competitors and few unique products, the role of the augmented product is clearly increasing.
Exhibit 16: Levels of the product.
The outer ring of the product is referred to as the promised product. Every product has an implied promise. An implied promise is a characteristic that is attached to the product over time. The car industry rates brands by their trade-in value. There is no definite promise that a Mercedes-Benz holds its value better than a BMW. There will always be exceptions. How many parents have installed a swimming pool based on the implied promise that their two teenagers will stay home more or that they will entertain friends more often?
Having discussed the components of a product, it is now relevant to examine ways of classifying products in order to facilitate the design of appropriate product strategies. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/07%3A_Introducing_and_Managing_the_Product/7.01%3A_Defining_the_Products.txt |
It should be apparent that the process of developing successful marketing programs for individual products is extremely difficult. In response to this difficulty, a variety of classification systems have evolved that, hopefully, suggest appropriate strategies. The two most common classifications are: (a) consumer goods versus industrial goods, and (b) goods products (i.e. durables and nondurables) versus service products.
Consumer goods and industrial goods
The traditional classification of products is to dichotomize all products as being either consumer goods or industrial goods. When we purchase products for our own consumption or that of our family with no intention of selling these products to others, we are referring to consumer goods. Conversely, industrial goods are purchased by an individual or organization in order to modify them or simply distribute them to the ultimate consumer in order to make a profit or meet some other objective.
Classification of consumer goods
A classification long used in marketing separates products targeted at consumers into three groups: convenience, shopping, and specialty.1 A convenience good is one that requires a minimum amount of effort on the part of the consumer. Extensive distribution is the primary marketing strategy. The product must be available in every conceivable outlet and must be easily accessible in these outlets. Vending machines typically dispense convenience goods, as do automatic teller machines. These products are usually of low unit value, are highly standardized, and frequently are nationally advertised. Yet, the key is to convince resellers, i.e. wholesalers and retailers, to carry the product. If the product is not available when, where, and in a form desirable by the consumer, the convenience product will fail.
From the consumer's perspective, little time, planning, or effort go into buying convenience goods. Consequently, marketers must establish a high level of brand awareness and recognition. This is accomplished through extensive mass advertising, sales promotion devices such as coupons and point-of-purchase displays, and effective packaging. The fact that many of our product purchases are often on impulse is evidence that these strategies work. Availability is also important. Consumers have come to expect a wide spectrum of products to be conveniently located at their local supermarkets, ranging from packaged goods used daily, e.g. bread and soft drinks, to products purchased rarely or in an emergency such as snow shovels, carpet cleaners, and flowers.
In contrast, consumers want to be able to compare products categorized as shopping goods. Automobiles, appliances, furniture, and homes are in this group. Shoppers are willing to go to some lengths to compare values, and therefore these goods need not be distributed so widely. Although many shopping goods are nationally advertised, often it is the ability of the retailer to differentiate itself that creates the sale. The differentiation could be equated with a strong brand name, such as Sears Roebuck or Marshall Field; effective merchandising; aggressive personal selling; or the availability of credit. Discounting, or promotional price-cutting, is a characteristic of many shopping goods because of retailers' desire to provide attractive shopping values. In the end, product turnover is slower, and retailers have a great deal of their capital tied-up in inventory. This combined with the necessity to price discount and provide exceptional service means that retailers expect strong support from manufacturers with shopping goods.
Specialty goods represent the third product classification. From the consumer's perspective, these products are so unique that they will go to any lengths to seek out and purchase them. Almost without exception, price is not a principle factor affecting the sales of specialty goods. Although these products may be custom-made (e.g. a hairpiece) or one-of-a-kind (e.g. a statue), it is also possible that the marketer has been very successful in differentiating the product in the mind of the consumer. Crisco brand shortening, popular in the US, may be considered to be a unique product in the mind of a consumer and the consumer would pay any price for it. Such a consumer would not accept a substitute and would be willing to go to another store or put off their pie baking until the product arrives. Another example might be the strong attachment some people feel toward a particular hair stylist or barber. A person may wait a long time for that individual and might even move with that person to another hair salon. It is generally desirable for a marketer to lift her product from the shopping to the specialty class (and keep it there). With the exception of price-cutting, the entire range of marketing activities are required to accomplish this goal.
Classification of industrial goods
Consumer goods are characterized as products that are aimed at and purchased by the ultimate consumer.2. Although consumer products are more familiar to most readers, industrial goods represent a very important product category, and in the case of some manufacturers, they are the only product sold. The methods of industrial marketing are somewhat more specialized, but in general the concepts presented in this text are valid for the industrial marketer as well as for the consumer goods marketer.
Industrial products can either be categorized from the perspective of the producer and how they shop for the product or from the perspective of the manufacturer and how they are produced and how much they cost. The latter criteria offers a more insightful classification for industrial products.
Farms, forests, mines, and quarries provide extractive products to producers. Although there are some farm products that are ready for consumption when they leave the farm, most farm and other extractive products require some processing before purchase by the consumer. A useful way to divide extractive products is into farm products and natural products, since they are marketed in slightly different ways.
Manufactured products are those that have undergone some processing. The demands for manufactured industrial goods are usually derived from the demands for ultimate consumer goods. There are a number of specific types of manufactured industrial goods.
Semi-manufactured goods are raw materials that have received some processing but require some more before they are useful to the purchaser. Lumber and crude oil are examples of these types of products. Since these products tend to be standardized, there is a strong emphasis on price and vendor reliability.
Parts are manufactured items that are ready to be incorporated into other products. For instance, the motors that go into lawn mowers and steering wheels on new cars are carefully assembled when they arrive at the manufacturing plant. Since products such as these are usually ordered well in advance and in large quantities, price and service are the two most important marketing considerations.
Process machinery (sometimes called "installations") refers to major pieces of equipment used in the manufacture of other goods. This category would include physical plant (boilers, lathes, blast furnaces, elevators, and conveyor systems). The marketing process would incorporate the efforts of a professional sales force, supported by engineers, technicians, and a tremendous amount of personalized service.
Equipment is made up of portable factory equipment (e.g. fork lift trucks, fire extinguisher) and office equipment (e.g. computers, copier machines). Although these products do not contribute directly to the physical product, they do aid in the production process. These products may be sold directly from the manufacturer to the user, or a middleman can be used in geographically dispersed markets. The marketing strategy employs a wide range of activities, including product quality and features, price, service vendor deals, and promotion,
Supplies and service do not enter the finished product at all but are never the less consumed in conjunction with making the product. Supplies would include paper, pencils, fuel, oil, brooms, soap, and so forth. These products are normally purchased as convenience products with a minimum of effort and evaluation. Business services include maintenance (e.g. office cleaning), repairs (e.g. plumbing), and advisory (e.g. legal). Because the need for services tends to be unpredictable, they are often contracted for a relatively long period of time.
Goods versus services
Suggesting that there are substantial differences between goods, products, and service products has been the source of great debate in marketing. Opponents of the division propose that "products are products", and just because there are some characteristics associated with service products and not goods products and vice-versa, does not mean customized strategies are generally necessary for each. Advocates provide evidence that these differences are significant. It is the position in this book that service products are different than goods products, and that service products represent an immense market sector.
Service products are reflected by a wide variety of industries: utilities, barbers, travel agencies, health spas, consulting firms, medical care, and banking, to name but a few, and they account for nearly 50 per cent of the average consumer's total expenditures, 70 per cent of the jobs, and two-thirds of the US Gross National Product (GNP). Clearly, the service sector is large and is growing. While all products share certain common facets, service products tend to differ from goods products in a number of ways.
Characteristics of service products
Like goods products, service products are quite heterogeneous. Nevertheless, there are several characteristics that are generalized to service products.
Intangible
As noted by Berry: "a good is an object, a device, a thing; a service is a deed, a performance, an effort." With the purchase of a good, you have something that can be seen, touched, tasted, worn or displayed; this is not true with a service.
Although you pay your money and consume the service, there is nothing tangible to show for it. For example, if you attend a professional football game, you spend USD 19.50 for a ticket and spend nearly three hours taking in the entertainment.
Simultaneous production and consumption
Service products are characterized as those that are being consumed at the same time they are being produced. The tourist attraction is producing entertainment or pleasure at the same time it is being consumed. In contrast, goods products are produced, stored, and then consumed. A result of this characteristic is that the provider of the service is often present when consumption takes place. Dentists, doctors, hair stylists, and ballet dancers are all present when the product is used.
AD 1: Shoes are a traditional good products
Little standardization
Because service products are so closely related to the people providing the service, ensuring the same level of satisfaction from time to time is quite difficult. Dentists have their bad days, not every baseball game is exciting, and the second vacation to Walt Disney World Resort may not be as wonderful as the first.
High buyer involvement
With many service products, the purchaser may provide a great deal of input into the final form of the product. For example, if you wanted to take a Caribbean cruise, a good travel agent would give you a large selection of brochures and pamphlets describing the various cruise locations, options provided in terms of cabin location and size, islands visited, food, entertainment, prices, and whether they set up for children. Although the task may be quite arduous, an individual can literally design every moment of the vacation.
It should be noted that these four characteristics associated with service products vary in intensity from product to product. In fact, service products are best viewed as being on a continuum in respect to these four characteristics. (See Exhibit 17)
The point of this disclaimer is to suggest: (a) that service products on the right side of the continuum (e.g. high intangibility) are different from good products on the left side of the continuum, (b) that most marketing has traditionally taken place on the left side, and (c) service products tend to require certain adjustments in their marketing strategy because of these differences.
Exhibit 17: Characteristics that distinguish goods from services.
While this discussion implies that service products are marketed differently than goods products, it is important to remember that all pr0ducts whether they are goods, services, blankets, diapers, or plate glass, possess peculiarities that require adjustments in the marketing effort. However, "pure" goods products and "pure" service products (i.e. those on the extreme ends of the continuum) tend to reflect characteristics and responses from customers that suggest opposite marketing strategies. Admittedly, offering an exceptional product at the right price, through the most accessible channels, promoted extensively and accurately, should work for any type of product. The goods/services classification provides the same useful insights provided by the consumer/industrial classification discussed earlier. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/07%3A_Introducing_and_Managing_the_Product/7.02%3A_Classifications_of_product.txt |
Strategies for developing new products
For several decades, business has come increasingly to the realization that new and improved products may hold the key to their survival and ultimate success. Consequently, professional management has become an integral part of this process. As a result, many firms develop new products based on an orderly procedure, employing comprehensive and relevant data. and intelligent decision making.9.
Capsule 14: Review
1. A product is anything, either tangible or intangible, offered by the firm as a solution to the needs and wants of the consumer, that is profitable or potentially profitable and meets the requirements of the various publics, governing, or influencing society. There is a core product, a tangible product, an augmented product, and a promised product.
2. Consumer goods are purchased for personal consumption.
3. Industrial goods are modified or distributed for resale.
4. Service products, in contrast to goods products are characterized as being intangible and having simultaneous production/consumption, little standardization, and high buyer involvement.
5. The product plan process includes the following:
a. determination of product objectives,
b. development of product plans to reach objectives,
c. and development of appropriate strategies.
Integrated marketing
Putting Levi's back in the saddle
Levi Strauss & Company is opting for a new marketing direction. The situation is reflected by Maressa Emmar, high school sophomore from Setaukat, NY, and her friends, who won't wear anything from Levi's. "It doesn't make the styles we want," says Emmar, who prefers baggy pants from JNCO and Kikwear. "Levi's styles are too tight and for the older generation, like middle-aged people."
After three years of tumbling sales, layoffs, plant closing, and a failed effort to woo kids online, Levi's is gearing up for several product launches. Notes new chief executive Philip Martineau, "Levi's is a mythical brand, but our performance has been poor. We need to turn our attention back to customers and have more relevant products and marketing."
In coming months, Levi's will unveil a slew of youth oriented fashions, ranging from oddly cut jeans to nylon pants that unzip into shorts. But Martineau is not giving up on the geezers. He wants to broaden Levi's appeal to grown-ups by extending the Dockers and Slates casual pants brands. Martineau also needs to smooth out kinks in manufacturing and shipping that prevent Levi's from rushing new products into stores. How do you sell the idea that you're hip while not turning off the oldsters? New ads will showcase the products themselves rather than relentlessly trying to convey "attitude". A television campaign for frayed cutoff shorts shows a young woman throwing her jeans in front of an oncoming train, which slices them to cutoffs. Print will support its Lot 53 fashion forward Levi's Engineered jeans. This new style has curved bottom hems, slanted back pockets and a larger watch pocket to hold pagers and other electronic items.
As Levi's try to rise like a phoenix from the ashes, one of the greatest American brand icons is passing into a new era in its history. Classic Levi's Jeans may find its greatest influence, much like the American cowboy, is more myth than reality.[1]
Defining the "new" in a new product
The determination of what constitutes a "new" product remains one of the most difficult questions faced by the marketer. Does the most recent TV model introduced by Sony represent a new product even though 95 per cent of the product remains the same as last year's model? Are packaged salads a new product, or is the package the only part that is really new?
Indeed, companies have often been guilty of using the word "new" in conjunction with some questionable products. For example, older products have simply been marketed in new packages or containers but have been identified as new products by the manufacturer. Flip-top cans, plastic bottles, and screw-on caps have all been used to create this image of newness. Industrial companies have been guilty of similar actions. Computer manufacturers, for instance, have slightly modified some of the basic hardware or developed some software for a particular customer (banks, churches), and have felt free to claim newness. Finally, manufacturers may add an existing product to their product line and call it new, even though it is not new to the consumer.
Does technology make a product new, or features, or even the price? It is important to understand the concept of "new" in a new product, since there is sufficient evidence that suggests that each separate category of "newness” may require a different marketing strategy.
Perhaps the best way to approach this problem is to view it from two perspectives; that of the consumer and that of the manufacturer.
The consumer's viewpoint
There are a variety of ways that products can be classified as new from the perspective of the consumer. Degree of consumption modification and task experience serve as two bases for classification. Robertson provides an insightful model when he suggests that new products may be classified according to how much behavioral change or new learning is required by the consumer in order to use the product.10
The continuum proposed by Robertson and shown in Exhibit 19 depicts the three primary categories based on the disrupting influence the use of the product has on established consumption patterns. It is evident that most new products would be considered continuous innovations. Annual model changes in automobiles, appliances, and sewing machines are examples. Portable hair dryers, diet soda, and aerobic dance CDs reflect products in the middle category. True innovations are rare.
Although conceptualizing new products in terms of how they modify consumer consumption patterns is useful, there is another basis for classification. New task experience can also be a criteria. An individual may live in a house for several years without ever having to repair a broken window. One day a mishap occurs, and Mr. Smith is forced to go to the hardware store to buy the necessary supplies required to install a new window pane. As he has no experience at all with this task, all those products are new to Mr Smith. The glazing compound, the new glass and molding, and metal tacks, as well as the appropriate tools, are as new to Mr Smith as a home computer. Using the model proposed by Robertson, products can also be placed on a continuum according to degree of task experience. Clearly, a product that has existed for a great many years, such as a carpenter's level, may be perceived as totally new by the person attempting to build a straight wall. In this case, newness is in the eye of the beholder.
The obvious difficulty with this classification is that it tends to be person-specific. Just because replacing a new washer in your bathroom faucet constitutes a new product for you does not mean it is a new product for me. However, it is conceivable that marketing research would show that for certain types of products, large groups of people have very limited experience. Consequently, the marketing strategy for such products might include very detailed instructions, extra educational materials, and sensitivity on the part of the sales clerk to the ignorance of the customer.
Another possible facet of a new task experience is to be familiar with a particular product but not familiar with all of its functions. For example, a homemaker may have a microwave oven which she uses primarily for reheating food items and making breakfast foods. Suppose that one afternoon her conventional oven breaks and she must deliver several cakes she has donated to a church bazaar. Unfortunately, she has not baked them yet and is forced to use her microwave, a brand-new task.
Exhibit 19:Continuum for classifying new products.
The firm's viewpoint
Classifying products in terms of their newness from the perspective of the manufacturer is also important. There are several levels of possible newness that can be derived through changes either in production, marketing, or some combination of both.
Based on a schema developed by Eberhard Scheuing, new products, from the perspective of the business, can take the following forms:11
Changing the marketing mix: one can argue that whenever some element of the marketing mix (product planning, pricing, branding, channels of distribution, advertising, etc.) is modified, a new product emerges.
Modification: certain features (normally product design) of an existing product are altered, and may include external changes, technological improvements, or new areas of applicability.
Differentiation: within one product line, variations of the existing products are added.
Diversification: the addition of new product lines for other applications.
A final consideration in defining "new" is the legal ruling provided by the Federal Trade Commission. Since the term is so prevalent in product promotion, the FTC felt obliged to limit the use of "new" to products that are entirely new or changed in a functionally significant or substantial respect. Moreover, the term can be used for a six-month period of time. Given the limited uniqueness of most new products, this ruling appears reasonable.
Strategies for acquiring new products
Most large and medium-sized firms are diversified, operating in different business fields. It would be unrealistic to assume that the individual firm is either capable or willing to develop all new products internally. In fact, most companies simultaneously employ both internal and external sources for new products. Both are important to the success of a business.12
Internal sources
Most major corporations conduct research and development (R&D) to some extent. However, very few companies make exclusive use of their own internal R&D. On the contrary, many companies make excellent use of specialists to supplement their own capabilities. Still, to depend extensively upon outside agencies for success is to run a business on the blink of peril. Ideally, the closer the relationship between the new business and existing product lines, the better the utilization of R&D will be. The US National Science Foundation (NSF) (1957-77) divides R&D into three parts:
Basic research: original investigations for the advancement of scientific knowledge that do not have specific commercial objectives, although they may be in fields of present or potential interest to the reporting company.
Applied research: directed toward practical applications of knowledge, specific ends concerning products and processes.
Development: the systematic use of scientific knowledge directed toward the production of useful materials, devices, systems, or methods, including design and development of prototypes and processes.
External sources
External approaches to new product development range from the acquisition of entire businesses to the acquisition of a single component needed for the internal new product development effort of the firm. The following external sources for new products are available to most firms.
Mergers and acquisitions. Acquiring another company already successful in a field a company wishes to enter is an effective way of introducing products while still diversifying. Research suggests that mergers and acquisitions can take place between companies of various sizes and backgrounds and that first experiences with this process tend to be less than satisfactory. Even large marketers such as General Motors engage in acquisitions.
Licenses and patents. A patent and the related license arise from legal efforts to protect property rights of investors or of those who own inventions. A patent is acquired from the US Patent Office and provides legal coverage for a period of seventeen years, which means all other manufacturers are excluded from making or marketing the product. However, there are no foolproof ways to prevent competition. There are two main types of patents: those for products and those for processes. The first covers only the product's physical attributes while the latter covers only a phase of a production procedure, not the product. The patent holder has the right to its assignment or license. An assignment is any outright sale, with the transfer of all rights of ownership conveyed to the assignee. A license is a right to use the patent for certain considerations in accordance with specific terms, but legal title to the patent remains with the licensor.
Joint ventures. When two or more companies create a third organization to conduct a new business, a joint venture exists. This organization structure emerges, primarily, when either the risk or capital requirements are too great for any single firm to bear. Lack of technical expertise, limited distribution networks, and unfamiliarity with certain markets are other possible reasons. Joint ventures are common in industries such as oil and gas, real estate, and chemicals, or between foreign and domestic partners. Joint ventures have obvious application to product development. For example, small firms with technological resources are afforded an opportunity to acquire capital or marketing expertise provided by a larger firm.
1. [1]Sources: Michael McCarthy and Emily Fromm, "An American Icon Fades Away," Adweek, April 26, 1999, pp. 28-35; Alice Z. Cuneo, "Levi's Makes Move to Drop All the Hype and Push Products," Advertising Age. April 17,2000, pp. 4, 69; Louis Lee, "Can Levi's Be Cool Again?" Business Week. March 13, 2000, pp.144-145; Diane Brady. "Customizing for the Masses." Business Week. March 20, 2000. pp. 130-131. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/07%3A_Introducing_and_Managing_the_Product/7.04%3A_Strategy_Formulation.txt |
Evidence suggests that there may be as many varieties of new product development systems as there are kinds of companies. For the most part, most companies do have a formal comprehensive new product development system, and the evolution of such systems were not necessarily the result of systematic planning. The list of activities suggested in Exhibit 20 illustrates the extensiveness of this process. Because of the complexity of the process, it is important that the general guidelines of effective management be applied to new product development.13
Before starting our discussion of the eight-step process of new product development, a necessary caveat should be considered: a great many new products fail. Depending on definitions used for products actually introduced, failure rates range between 20 per cent and 30 per cent, but have been as high as 80 per cent. Of more concern than the level of failure are the reasons for failure. Possibilities include: technical problems, bad timing, misunderstanding the consumer, actions by competitors, and misunderstanding the environment.
Step 1: generating new product ideas
Generating new product ideas is a creative task that requires a specific way of thinking. Gathering ideas is easy, but generating good ideas is another story. Examples of internal sources are:
Basic research: many companies, such as DuPont, have several scientists who are assigned the task of developing new product ideas and related technology.
Manufacturing: people who manufacture products often have ideas about modifications and improvements, as well as completely new concepts.
Exhibit 20: The new product development process.
Salesperson: company salespeople and representatives can be a most helpful source of ideas, since they not only know the customer best, but they also know the competition and the relative strengths and weaknesses of existing products.
Top management: the good top executive knows the company's needs and resources, and is a keen observer of technological trends and 0f competitive activity.
External sources of new product ideas are almost too numerous to mention. A few of the more useful are:
Secondary sources of information: there are published lists of new products, available licenses, and ideas for new product ventures.
Competitors: good inferences about competitive product development can be made on the basis of indirect evidence gained from salespeople and from other external sources, including suppliers, resellers, and customers.
Customers: frequently customers generate new product ideas or at least relay information regarding their problems that new and improved products would help to solve.
Resellers: a number of firms use "councils", or committees made up of representative resellers to assist in solving various problems, including product development.
Foreign markets: many companies look toward foreign markets, especially western Europe, because they have been so active in product development.
There are probably as many approaches to collecting new product ideas as there are sources. For most companies, taking a number of approaches is preferable to a single approach. Still, coming up with viable new product ideas is rare (see Newsline).
Step 2: screening product development ideas
The second step in the product development process is screening. It is a critical part of the development activity. Product ideas that do not meet the organization's objectives should be rejected. If a poor product idea is allowed to pass the screening state, it wastes effort and money in subsequent stages until it is later abandoned. Even more serious is the possibility of screening out a worthwhile idea.
Newsline: New ideas are rare
New product ideas can come from anywhere and everywhere. It is exciting when a new product idea comes from out of the blue, prototypes test well among consumers, and purchase interest scores are off the charts. But relying on the "anywhere and everywhere" approach will not do in the long run. What is required for product development are methodologies that enable us to systematically discover new product opportunities.
One such method is the category appraisal, which points to new product opportunities within an existing category and sometimes to opportunities in a new, adjacent category. The objective of the category appraisal study is to this what makes the category "tick". Questions to ask include:
What drives consumer acceptability?
What are the strengths and weaknesses of each product in the category?
What are the opportunities to outperform existing products?
To what extent does brand equity play a role in product acceptability?
Does collected data point to unexplored regions of the category "space" that new products can successfully fill?
An example from the confectionery industry illustrates this technique. The mission was to identify the properties of a new candy item for consumers who buy candy in supermarkets, convenience stores, and movie theaters. A database of in-depth sensory profile of a wide range of candy products and "liking scores" of each of those products was created. The researchers shopped 'till they dropped. They thoroughly filled a sensory space in terms of texture, flavor, size, and appearance with 25-30 products.
A questionnaire was developed that required quantitative ratings (such as 100 per cent scale rating) of product attributes that were unique to some products. There were questions about hardness, chewiness, crispness, flavor intensity, degree of fruit flavor, sweetness, tartness, color, and many more. Overall liking for each product was also measured.
How well each product and brand performed—the overall liking score for each product—was not an objective of the study. The point was to discover the most generalized drivers of consumer acceptability in the confectionery category. Products were ranked by their performance and key sensory properties. Close study of the data revealed that these consumers were not the least bit influenced by brand. Overall taste was the dominant factor. Second, a new chocolate product held the most promise. Of all flavors explored, chocolate captivated consumers most. In fact, the ideal product is chocolate-filled chocolates with chocolate dipping sauce.[1]
There are two common techniques for screening new product ideas; both involve the comparison of a potential product idea against criteria of acceptable new products. The first technique is a simple checklist. For example, new product ideas can be rated on a scale ranging from very good to poor, in respect to criteria such as: value added, sales volume, patent protection, affect on present products, and so forth. Unfortunately, it is quite difficult for raters to define what is fair or poor. Also, it does not address the issue of the time and expense associated with each idea, nor does it instruct with regard to the scores. A second technique goes beyond the first: the criteria are assigned importance weights and then the products are rated on a point scale measuring product compatibility. These scores are then multiplied by their respective weights and added to yield a total score for the new product idea. Table 7 provides an example of both these techniques for screening new product ideas.
Step 3: business analysis
After the various product ideas survive their initial screen, very few viable proposals will remain. Before the development of prototypes can be decided upon, however, a further evaluation will be conducted to gather additional information on these remaining ideas in order to justify the enormous costs required. The focus of the business analysis is primarily on profits, but other considerations such as social responsibilities may also be involved.
The first step in the business analysis is to examine the projected demand. This would include two major sources of revenue: the sales of the product and the sales or license of the technology developed for or generated as a by-product of the given product.
Table 7: Screening product ideas
Rating
Weight
Very good
(5) (4)
Fair
(3)
Poor
(2) (1)
Unweighted Value
Weighted Value
Customer utilities
-amusement
.1
X
5
0.5
-comfort
.1
X
3
.3
-convenience
.2
X
4
.8
-satisfaction
.3
X
4
1.2
-easy to use
.1
X
3
.3
Ability to create effective sales appeals
.3
X
4
1.2
Price
.1
X
2
.2
Product quality
.2
X
3
.6
Product profitability
.2
X
3
.6
Attractiveness of product to customers
.1
X
4
.4
Ability to produce product in large volumes
.3
X
5
1.5
Ability of new product in helping sale of other products
.1
X
1
.1
Requires low capital investment
.3
X
4
1.2
Product can be produced through existing advertising
.2
X
3
.6
Product can be produced in existing facilities
.3
X
4
1.2
Product can be distributed through existing channels
.3
X
3
.9
Strength of competition
.2
X
3
.6
Patent situation
.1
X
2
.2
Total score
60
12.4
A complete cost appraisal is also necessary as part of the business analysis. It is difficult to anticipate all the costs that will be involved in product development, but the following cost items are typical:
• expected development cost, including both technical and marketing R&D;
• expected set-up costs (production, equipment, distribution);
• operating costs that account for possible economies of scale and learning curves;
• marketing costs, especially promotion and distribution;
• and management cost.
Step 4: technical and marketing development
A product that has passed the screen and business analysis stages is ready for technical and marketing development. Technical development involves two steps. The first is the applied laboratory research required to develop exact product specifications. The goal of this research is to construct a prototype model of the product that can be subjected to further study. Once the prototype has been created, manufacturing-methods research can be undertaken to plan the best way of making the product in commercial quantities under normal manufacturing conditions. This is an extremely important step, because there is a significant distinction between what an engineer can assemble in a laboratory and what a factory worker can produce.
While the laboratory technicians are working on the prototype, the marketing department is responsible for testing the new product with its intended consumers and developing the other elements of the marketing mix. The testing process usually begins with the concept test. The product concept is a synthesis or a description of a product idea that reflects the core element of the proposed product. For example, a consumer group might be assembled and the interview session might begin with the question: "How about something that would do this?"
The second aspect of market development involves consumer testing 0f the product idea. This activity must usually await the construction of tile prototype or, preferably, limited production models. Various kinds of consumer preference can be conducted. The product itself can be exposed to consumer taste or use tests. Packaging, labeling, and other elements in the mix can be similarly studied. Comparison tests are also used.
Step 5: manufacturing planning
Assuming that the product has cleared the technical and marketing development stage, the manufacturing department is asked to prepare plans for producing it. The plan begins with an appraisal of the existing production plant and the necessary tooling required to achieve the most economical production. Fancy designs and material might be hard if not impossible to accommodate on existing production equipment; new machinery is often time consuming and costly to obtain. Compromise between attractiveness and economy is often necessary.
Finally, manufacturing planning must consider the other areas of the organization and what is required of each. More specifically, they should determine how to secure the availability of required funds, facilities, and personnel at the intended time, as well as the methods of coordinating this effort.
Step 6: marketing planning
It is at this point that the marketing department moves into action again. The product planner must prepare a complete marketing plan—one that starts with a statement of objectives and ends with the fusion of product distribution, promotion, and pricing into an integrated program of marketing action.
Step 7: test marketing
Test marketing is the final step before commercialization; the objective is to test all the variabilities in the marketing plan including elements of the product. Test marketing represents an actual launching of the total marketing program. However, it is done on a limited basis.
Integrated marketing
Trickier than you think
Everyone knows the fastest way to get rich is to start a dot-com business. According to the US Commerce Department, traffic on the Internet doubles every 100 days. To acquire an audience of 50 million, it took radio 30 years, television 13 years, personal computers 16 years, and the Internet four years.
Still, marketers who go online expecting to make an "overnight killing" are in for a bruising lesson. Getting on the Web takes an investment, and once there, you have to build your Web presence and brand. And there are still technical and logistical hurdles to clear. Just ask Julie Wainwright, who got a firsthand look at the new math after the pet-products website she heads, Pet.com, went public in 2000. After making its debut at USD 11 a share, the San Francisco-based Internet company's stock rose to USD 14 and then promptly dropped below USD 3.
Volatility in the Internet business has produced a new industry—Internet consultants. As a result, a plethora of recommendations have emerged for entering an Internet business. Here are some of the suggestions:
(a) Keep it simple—focus on providing compelling information.
(b) Put customers first—understand them and meet their needs.
(c) Make your site Web-friendly—do not assume everyone is technically competent.
(d) Spread the word—publicize your Web address, offline as well as on the Net, by putting it everywhere you do business.
(e) Be ready for success—a Web site can give you more business than you can handle.
(f) Although e-business moves fast: managers shouldn't move carelessly—do not take risks that jeopardize reaching your goals.
(g) Cash-flow problems are common with Internet start ups—project the amount of cash needed, then double it.
(h) Creating a true brand is specially difficult with Internet start-ups—excellent customer service, not advertising, is likely the answer.
(i) Deliver the goods—getting goods delivered to a customer's doorstep in a timely manner is much more complicated for Internet businesses.
(j) Actively monitor the customer—this ongoing dialogue leads to a deeper understanding of a customer's preferences and shopping habits, and that, in turn, leads to more personalized offerings and services..
Do not assume that the Web will solve all your problems or substitute for sound business judgment. "It is not some sort of get-rich-quick scheme," says Mark Weaver, professor of entrepreneurship at the University of Alabama. "You have to be even more a perfectionist, more meticulous, and more prepared to adjust to the changing rules of business online."[2]
Three general questions can be answered through test marketing. First, the overall workability of the marketing plan can be assessed. Second, alternative allocations of the budget can be evaluated. Third, determining whether a new product introduction is inspiring users to switch from their previous brands to the new one and holding them there through subsequent repeat purchases is determined. In the end, the test market should include an estimate of sales, market share, and financial performance over the life of the product.
Initial product testing and test marketing are not the same. Product testing is totally initiated by the producer: he or she selects the sample of people, provides the consumer with the test product, and offers the consumer some sort of incentive to participate.
Test marketing, on the other hand, is distinguished by the fact that the test cities represent the national market, the consumer must make the decision herself, must pay him or her money, and the test product must compete with the existing products in the actual marketing environment. For these and other reasons a market test is an accurate simulation of the national market and serves as a method for reducing risk. It should enhance the new product's probability of success and allow for final adjustment in the marketing mix before the product is introduced on a large scale.
However, running test marketing is not without inherent risks. First, there are substantial costs in buying the necessary plant and machinery needed to manufacture the product or locating manufacturers willing to make limited runs. There are also promotional costs, particularly advertising, and personal selling. Although not always easy to identify, there are indirect costs as well. For example, the money used to test market could be used for other activities. The risk of losing consumer goodwill through the testing of an inferior product is also very real. Finally, engaging in a test-market might allow competitors to become aware of the new product and quickly copy it.
Because of the special expertise needed to conduct test markets and the associated expenses, most manufacturers employ independent marketing research agencies with highly trained project directors, statisticians, psychologists, and field supervisors. Such a firm would assist the product manager in marketing the remaining test market decisions.
Duration of testing: the product should be tested long enough to account for market factors to even out, allow for repeat purchases, and account for deficiencies in any other elements in the new product (three to six months of testing may be sufficient for a frequently purchased and rapidly consumed convenience item).
Selection of test market cities: the test market cities should reflect the norms for the new product in such areas as advertising, competition, distribution system, and product usage.
Number of test cities: sh0uld be based on the number of variations considered (i.e. vary price, package, or promotion), representativeness, and cost.
Sample size determination: the number of stores used should be adequate to represent the total market.
Even after all the test results are in, adjustments in the product are still made. Additional testing may be required, or the product may be deleted.
Step 8: commercialization
At last the product is ready to go. It has survived the development process and it is now on the way to commercial success. How can it be guided to that marketing success? It is the purpose of the lifecycle marketing plan to answer this question. Such a complete marketing program will, of course, involve additional decisions about distribution, promotion, and pricing.
Capsule 15: Review
• New product strategies begin by putting "new" on a continuum.
• There are both internal and external sources for acquiring new products.
• The new product development process includes the following steps:
1. generate new product ideas
2. screen ideas
3. perform a business analysis
4. technical and marketing development
5. manufacturing planning
6. marketing planning
7. test marketing
8. commercialization
The Wall Street Journal
wsj.com
In practice
Organizations must introduce new products and manage existing products successfully to remain competitive in today's marketplace. Products are planned, and the product strategy aims to ensure that product objectives are achieved.
Unprecedented advancements in technology render shorter product life cycles. As a result, product plans must provide competitive distinctiveness.
The Interactive Journal examines product development for large and small organizations in Marketplace. Under the Marketplace heading, click on Small Business. This section provides articles targeted toward small and emerging businesses.
Special reports on small and emerging businesses can be found in the Breakaway section, also under Small Business.
Here you will find more in-depth analysis about small business. The Interactive Journal also sponsors several online discussions. Click on one of the links to join an online discussion.
Return to the Marketplace home page and click on the Business Focus link on the left menu. This link directs you to articles discussing general business developments taking place in various companies.
Return to the Front Section and select Starting a Business under Resources in the left menu. This link sends you to the Startup Journal, a site designed to provide new business with a variety of tools. Navigate the bar at the top of the site for information about franchising, financing, and running a business.
Additional sites
Check out www.adweek.com for industry articles about advertising and brand development. The Brandweek link on the site provides weekly excerpts of headlines from the print edition.
Advertising Age is another resource for information about product strategies. Check out www.adage.com.
Business Week magazine's Web site www.businessweek.com is a comprehensive site. Daily briefings cover a wide range of topics.
Deliverable
Use the Interactive Journal and Additional Sites listed here to find three articles about product development. Read each article and compare the strategies employed by the companies profiled. Why are the products successful, or why did they fail? Write a one-page brief supporting your conclusions.
1. [1] Sources: Jeff Braun, "Overcoming the Odds." Marketing News, March 29,1999. pp. 15-16: David Fishben, "Sweet Success: Category Appraisal is Proven Source of New Ideas," Marketing News. March 29, 1999, pp. 15-16; Tomina "On Your Mark," Entrepreneur, April 1999, pp. 161-162; Laurie Freeman, "Brach's Fruit Snacks Shapes," Advertising Age. June 28, 1999,pp. 5-7.
2. [2]Sources: Sreenath Sreenivasan, "Wrestling with the Web," Business Week, May 24, 1999, pp. FI6-- Peggy Pulliam, "To Web or Not to Web," Internet Marketing, June 2000, pp. 37-41; Kara Swisher, "Reality Check," The Wall Street Journal, April 17,2000,p. R19; Erin Strout, "Launching an E-Business," Sales & Marketing Management, July 2000, pp. 89-91. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/07%3A_Introducing_and_Managing_the_Product/7.05%3A_New_Product_Development_Process.txt |
The ability of the organization to consistently produce new products and effectively manage existing products looms as one of the most important and difficult tasks faced by the company. This chapter provides an overview of the components that constitute a product, and the product planning process.
The process begins with the task of defining the product. In order to provide an accurate portrayal of the product, it is important to consider the perspective of the consumer, the manufacturer, and the various publics. All three perspectives must be understood and satisfied. In addition, the three components of the product are discussed. The core product identifies what the consumer expects when purchasing the product. The tangible product is reflected in its quality level, features, brand name, styling, and packaging. The augmented product is reflected by the services supporting the core/tangible product. The promised product suggests what the product delivers in the long term.
There are also several classification schemes that are useful in improving our understanding of the product into three categories: convenience, shopping, and specialty. A convenience good is one that requires a minimum amount of effort on the part of the consumer. In contrast, consumers want to be able to compare products categorized as shopping goods. Specialty goods are so unique, at least from the perspective of the consumer, that they will go to great lengths to seek out and purchase them.
Another relevant classification scheme has been applied to business goods. Three characteristics of business products are: (a) demand is derived from purchase of another product, (b) demand tends to be price-inelastic, and (c) tendency toward pure competition. Business products are classified as extractive products and manufactured products.
Goods products versus service products is the final categorization. Although there is still controversy about the validity of this separation, we contend that the differences justify adjustments in the marketing strategy for service products. Services are intangible, require simultaneous production and consumption, cannot be easily standardized, and require high consumer involvement.
This chapter continues with a discussion of the product planning process. Three elements were delineated: (a) the determination of product objective, (b) the identification and resolution of factors that have an impact on the product, and (c) the development of programs appropriate for that particular product. Examples of product objectives, as well as a discussion of the importance of product objectives, are provided. The third element of program development provides the basis for the two chapters that follow. The continuing development of successful new product looms as the most important factor in the survival of the firm. This chapter introduces the concept of a "new" product as well as the process of actually producing a new product.
It is noted that what constitutes a new product must be appraised from both the consumer's point of view as well as that of the manufacturer. In the former case, newness is measured in respect to: (a) degree of consumption modification and (b) the extent of new task experience. The firm defines the product in terms of: (a) changes in the marketing mix, (b) modifications, (c) differentiation, and (d) diversification.
New products can be acquired from several internal and external sources. The firm can employ basic research, applied research, and development to develop new products. Or they can use the external route: mergers and acquisitions, licenses and patents, and joint ventures.
Key terms
Product Anything, either tangible or intangible, offered by the firm as a solution to the needs and wants of the consumer, that is profitable or potentially profitable and meets the requirements of the various publics governing or influencing society.
Consumer goods Products purchased for personal consumption with no intention of selling to others.
Industrial goods Products purchased by an individual or organization in order to modify the product or distribute it for a profit.
Packaging Provides protection, containment, communication, and utility for the product.
Product lifecycle A product planning tool that parallels the stages of the human lifecycle.
Brand Identifies the product and distinguishes it from competitors.
Position A strategic management decision that determines the place a product should occupy in a given market.
Questions
➢ What overriding objectives should be kept in mind when designing a product strategy?
➢ How do the strategies of market extension and market segmentation differ?
➢ Identify the steps a product manager should take in deciding positioning of a product.
➢ In what kind of market situation will a strategy of product differentiation be most effective?
➢ What are the four product mix strategies discussed in the chapter? Name three reasons why a company might decide to alter its product mix.
➢ What factors would impact a marketing manager's decision to engage in a temporary or permanent price change for a mature product?
➢ How would you define the term "product"? Differentiate between the points of view of the manufacturer and the customer.
➢ Distinguish between convenience goods, shopping goods, and specialty goods. Can you think of examples that belong in each category, other than those discussed in the chapter?
➢ Compare and contrast the consumer's view and the firm's view of a new product.
➢ Describe the steps in the new product development process. Are all these steps necessary?
➢ How do organizations identify product objectives when developing a product strategy? Why are these objectives important?
➢ What impact do market trends have on new product development? How do organizations decide whether to introduce a new product or extend an existing product line?
➢ How does the media react to new products like Apple's iMac? What about product failures like Coca-Cola's New Coke? Use the Interactive Journal to find articles about these companies and products.
➢ What type of innovation is Hershey chocolate milk?
➢ How would you describe the product development process Hershey followed?
➢ Describe any potential problems.
Project
Identify a product that you feel is in the maturity or decline stage. Determine the characteristics of this product in light of the discussion throughout this chapter. Write a three to five page analysis.
Case application
Hershey chocolate milk
Hershey Foods Corporation is making an unusual move in using national TV advertising for its chocolate milk, a product that historically has not received much ad support. The national TV commercial, which first aired in June 1983, was shot in 12 weeks in London by Clearwater Productions. Doyle Dane Bernbach (DDB) in New York developed the commercial, which has been shown nationally on a children's network and in the early fringe time period.
"The commercial's creative; it's aggressive. It breaks one cardinal rule by not mentioning this new product until 75 per cent into the commercial. But the commercial works. We think its unique", says Bob Jeffery, DDB VP account supervisor. He admits that the Hershey packaging also has had an important consumer impact. "The carton practically screams chocolate."
According to Hershey sales figures, Hershey chocolate milk is the number-one chocolate milk in the country. These results are indeed admirable considering the gamble Hershey took with their chocolate milk. It was the first time Hershey had attempted to sell a premixed beverage or promote a product not under its direct control. Hershey is licensing the use of its name on the chocolate milk another big first for the company. Hershey sells powdered chocolate to large dairies which mix the product with their milk, package it, and handle distribution. Following strict standards, Hershey has selected only certain dairies to be licensed to use the Hershey chocolate powder and label. Each dairy must follow detailed specification on mixing. To make sure there are no slip-ups, Hershey has printed a toll-free telephone number for consumers to call if they have complaints about the chocolate milk.
For Hershey, the taste of success is sweet. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/07%3A_Introducing_and_Managing_the_Product/7.06%3A_Summary.txt |
Thumbnail: www.pexels.com/photo/group-o...puter-1595387/
08: Communicating to Mass Markets
The case example clearly points to one of the most difficult problems facing marketers. How can a marketer clearly and effectively communicate the story (message) in a society that is so over communicated that the typical consumer is both overwhelmed with the vast number of messages and annoyed at the thousands of messages that have no relevance whatsoever to that person's needs and wants? The amount of sameness, and the amount of communication clutter is so excessive, that the approach employed by American Express appears to be the only answer. Yet, as we have noted throughout this text, the needs and capabilities of marketers vary, and not all marketers are blessed with a creative genius like Jerry Walsh. Nor do all marketers require a multimillion dollar national advertising campaign in order to reach objectives. All marketers, however, must learn to communicate their strategy to their target market.
The concept of Integrated Marketing Communication (IMC) is offered as a general framework, which can be employed by marketers in order to design a comprehensive and effective program of communication. It acknowledges the inherent differences between marketers and builds upon the reality that "every company is cast in the role of communicator". Ultimately, it is the choice of each company whether this communication process will be performed in a haphazard, unplanned way, or whether it will be guided by stated objectives and implemented through effective strategies.
This chapter introduces the concept of IMC, a framework for organizing the persuasive communication efforts of the business. Because of its visibility, many consumers feel that they already know a great deal about IMC, or at least about advertising. Most hold either a somewhat positive or negative attitude toward advertising, aggressive salespeople, coupons, and so forth. This is a case when a little bit of information can be a dangerous thing.
This chapter also provides a discussion of four of the IMC mix elements-advertising, sales promotion, public relations, and personal selling. We begin our discussion with an explanation of the role IMC plays in the marketing strategy.
The role of IMC
The heart of every transactional exchange is communication between parties. The buyer seeks certain basic information about product features, price, quality, support service, reputation of the seller, and so forth. All this information is intended to assess how close each alternative is to meeting desired needs and wants. We seek information to reduce possible risk associated with the transaction. Presumably, the more solid the information we have, the more secure we feel in our decision. The seller also desires information. The seller wants to know whether you qualify as a buyer (i.e. do you really need the product and can you pay for it), which product features are important to you, what other choices you are considering, are you ready to buy, how much do you know about my product, and so forth. Therefore, all the parties enter a transaction with a whole set of questions they want answered. Some of these questions are quite explicit: "How much does it cost?" Others are quite vague and may almost be subconscious:"Will this product make me feel better about myself?" All these decisions relate to the marketer's ability to integrate marketing communications.
The primary role of IMC is to systematically evaluate the communication needs and wants of the buyer and, based on that information, design a communication strategy that will (a) provide answers to primary questions of the target audience, (b) facilitate the custom ability to make correct decisions, and (c) increase the probability that the choice they make most often will be the brand of the information provider, i.e. the sponsor or marketer.1Marketers know that if they learn to fulfill this role, a lasting relationship with the customer can be established.
Primary tasks
If the marketer is to consistently and effectively communicate with consumers, three preliminary tasks must be acknowledged and achieved. First, there must be a mechanism for collecting, storing, analyzing, and disseminating relevant information. This includes information about customers (past, present, potential), competitors, the environment, trends in the industry, and so forth. The quality of communication is closely related to the quality of information. Kellogg's, for example, constantly monitors its customers through surveys and consumer panels, and keeps track of its competitors and changes in the US Food and Drug Administration in order to assess the relevance of all its communication vehicles.
Second, communication is not one-way; it is a dialogue. That is, all relevant parties are actually participating in the communication process. Marketers must provide a system that constantly allows the consumer to express desires, satisfactions, complaints, and disappointments about the product, the price, the message, or the way it is distributed. There is a real tendency in large-scale marketing to view the consumer as a faceless, nameless entity, without individual needs and wants. Effective marketing communication allows direct feedback (e.g. toll-free numbers, hotlines, service departments), and actively responds by making substantial changes to address customer requests.
Finally, there must be an acknowledgement that target customers may not be the same as target audiences. While the target market is concerned primarily with individuals who are users and potential users of the product, the target audience may encompass a much larger or smaller group of people.
Integrated marketing
IMC-harder than you think
According to IMC guru Don Schultz, the difficulty in developing an integrated marketing communication program is in the planning. He notes that most managers have tried to integrate communication elements and activities as they were developed by various functional groups. Or they have tried to bring all the elements together once the communications concept was developed to generate one voice or a unifying brand theme that will tie all the disparate elements together.
Unfortunately, managers have been approaching the problem as one of coordination or consolidation, although integration is not at the end of the process, but at the beginning. The difficulty has been that there is not a system via which managers can develop truly integrated marketing communications.
A new approach to integration is based on the planning matrix. The matrix mantra goes like this: "From consolidate and segregate, to aggregate and integrate." The meaning is simple. Traditionally, we have tried to take a market or a category and segment it. Once we segmented the market, we then tried to apply various communication disciplines-advertising, sales promotion, or direct marketing. We tried to take activities that had been developed separately and pulled them into an integrated whole. In short, we've tried to "consolidate and segregate". Take the market, segment it, and then communicate separately to the segments.
Consider a new approach. Rather than starting with total market, start with individual customers and prospects. Aggregate them based on their behavior. Let the customers and prospects create their own groups or segments. That's aggregation. Then look at the way customers and prospects experience marketing communications. Most consumers aren't familiar with the tightly defined marketing communications disciplines we have developed. To them, most everything we do is either an advertisement or an incentive. That's the second part of the new approach. Integrate, and most of all simplify.
Now, the planning process is simple. At the top, we have how consumers think about and evaluate marketing communication activities. It's either a message or an incentive. We have collapsed all the very sophisticated marketing communication disciplines into what they are supposed to do: deliver a message or an incentive.
The second part of the matrix is the impact we expect the activity to have-short-term or long-term. What will be the basis for the measurement of the impact of the planned communications program? For purposes of measurement, almost everything can be considered short-term or within the fiscal year. Long-term is anything more than one fiscal year. Building immediate sales for our product or service is short-term. Brand building is long-term. Therefore, we plan whether we'll give our target messages or incentives and the impact of those messages or incentives, either short-term or long-term.[1]
More specifically, the target audience includes all individuals, groups, and institutions that receive the marketing message and employ this information either as a basis for making a product decision or in some way employ it to evaluate the sponsoring business. Thus, the target market for E.P.T. pregnancy tests might be women between the ages of 18-34, with a college education; the target audience might also include parents of the youngest of these women, who either approve or disapprove of this product based on advertising messages, government agencies who assess the truthfulness of the product claims, and potential stockholders who determine the future success of the firm based on the perceived quality of the messages. IMC must identify all members of the target audience and must consider how the communication strategy must change in response to this membership.
In the end, the role of IMC is to communicate with target audiences in a manner that accurately and convincingly relays the marketing strategy of the firm.
Integrated Marketing Communication
Instead of a functional approach, IMC attempts to integrate these functions into a collective strategy. If conducted properly, IMC results in a more effective achievement of an organization's communications objectives. Although it is difficult to determine exactly what prompted the move to IMC, experts speculate as to several possible interrelated causes. Historically, mass media has been characterized because of its general inability to measure its results, especially sales. Recently, the availability of consumer information (especially purchase patterns) through single-source technology such as store scanners and other related technology has meant that marketers are now able to correlate promotional activities with consumer behavior. During this same period, companies have been downsizing their operations and task expectations have been expanded. This greater expectation has carried over into the client-advertising agency relationship. Agency employees can no longer remain specialists. Rather, they must understand all the functions performed for the client, as well as their own. In reality, IMC appears to be much the same as a promotional strategy, a concept that has been around for several years. Perhaps the term "IMC" has emerged due to the confusion with the term "sales promotion" and the failure of promotion to be adopted by the advertising industry. Only time will tell whether IMC will become a salient part of marketing communication. (More was said about IMC in the previous “Integrated Marketing”.)
The meaning of marketing communication
Defining the concept of marketing communication (MC) is not an easy task, because in a real sense, everything the company does has communication potential. The price placed on a product communicates something very specific about the product. A company that chooses to distribute their products strictly through discount stores tells the consumer a great idea. Yet if all of these things are considered communication, the following definition is offered:
Marketing communication includes all the identifiable efforts on the part of the seller that are intended to help persuade buyers to accept the seller's message and store it in retrievable form.
Note that the central theme of the communication process is persuasion. Communication is most definitely goal-directed. It is not intended to be an arbitrary, haphazard activity. Each of the tools used in marketing communication has specific potentialities and complexities that justify managerial specialization and require directed efforts. Yet a company, even a very large one, typically does not have a specialist in each area, but only in those cases where the importance and usage frequency of the tool justify specialized competence. Historically, companies first made a separate function out of the personal selling function, later out of advertising, and still later out of public relations. The remaining tools (e.g. coupons, specials) were employed by the directors of these functional areas as needed. Although the definitions vary, the four components that make up marketing communication are as follows:
Advertising: Any paid form of non-personal presentation of ideas, goods, or services by an identified sponsor. Although some advertising is directed to specific individuals (as, for example, in the use of direct mail), most advertising messages are tailored to a group, and employ mass media such as radio, television, newspaper, and magazines.
Personal selling: An oral presentation in a conversation with one or more prospective purchasers for the purpose of making sales. It includes several different forms, such as sales calls by a field representative (field selling), assistance by a sales clerk (retail selling), having an Avon representative call at your home (door-to door selling), and so forth.
Public relations: A non-personal stimulation of demand for a product, service, or business unit by planting commercially significant news about it in a published medium (i.e. publicity) or obtaining favorable presentation of it through vehicles not paid for by the sponsor. Although commissions are not paid to the various media, there are salaries and other expenses that mean that public relations is not a costless form of promotion.
Sales promotion: Those marketing activities that add to the basic value of the product for a limited time period and thus directly stimulate consumer purchasing and dealer effectiveness. These activities include displays, shows and exhibitions, demonstrations, and various nonrecurring selling efforts not in the ordinary routine. As the provision for an additional incentive to buy, these tools can be directed at consumers, the trade, or the manufacturer's own sales force.
1. [1]Sources: Don E. Schultz, "A New IMC Mantra," The Marketing News, May 26, 1997, p. 8; Richard Linnett, "Full Court Press," Adweek, January 31, 2000, pp. 3-6; Don E. Schultz, "Structural Straight Jackets Stifle Integrated Success," The Marketing News, March 1, 1999, p. 8; Don E. Schultz, "How to Create Your Own Worst Enemy," The Marketing News, July 3, 2000, p. 10. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/08%3A_Communicating_to_Mass_Markets/8.01%3A_The_role_of_IMC.txt |
The basic objectives of marketing communication have been reduced to three more meaningful directives: (a) to communicate, (b) to compete, and (c) to convince. The primary purpose of MC is to communicate ideas to target audiences. This is done through advertising, personal selling, sales promotion, and/or public relations. Principles of effective communication are intended to achieve this task. Clearly, most of marketing is communications, and it is in this context that communication is included as a purpose of MC. Moreover, whatever is communicated should be accurate, truthful, and useful to the parties involved. Because of the pervasiveness of marketing communication, it has a unique responsibility to communicate with integrity.
Helping the company to compete consistently and effectively in the marketplace is the second objective. For many companies, MC may offer the company its most promising marketing opportunities. Competitors may sell essentially the same product, at the same price, in the same outlets. It is only through MC that the company may be able to appeal to certain segments, properly differentiate its product, and create a level of brand loyalty that can last for many years. In addition, the prominence of extensive communication efforts on the part of competitors means that a company that did not exhibit a strong MC program would appear dull and unconvincing to the customer. Thus, MC is employed as both a defensive and offensive weapon.
The final objective of MC is to convince. Although this goal is most often ascribed to MC, it is the most questionable. "Convince" and "persuade" are not synonymous terms. Realistically, MC does extremely well if it presents ideas in a manner that is so convincing that the consumer will be led to take the desired action. These ideas, along with a host of other factors, will help persuade the consumer to make a particular decision. Therefore, the ability of MC to present information in a convincing manner is critical. It is also necessary to re-convince many consumers and customers. Just because a person buys a particular brand once or a dozen times, or even for a dozen years, there is no guarantee that they will not stop using the product if not constantly reminded of the product's unique benefits. Ultimately, MC objectives can be broken down into very specific tasks. The point is all MC must be guided by objectives.
In conclusion, effective marketing communication should present useful ideas (information) in a manner that makes them clearly understood (communicate), cause the consumer to believe the message is true (convince), and is as appealing or more appealing than the message delivered by competitors (compete).
8.03: How we communicate
Because communication is such an integral part of effective marketing, it is important that we provide a basic understanding of its process. Our starting point is a basic definition of human communication: a process in which two or more persons attempt to consciously or unconsciously influence each other through the use of symbols or words in order to satisfy their respective needs.
Basic elements of communication
The basic elements within any communication system are depicted in Exhibit 21. It includes two or more people or organizations called communicators. The underlying assumption of this model is that all communications (dialogue) are continuous. This factor suggests that we are constantly and simultaneously in the role of communicator and receiver. Each communicator is composed of a series of subsystems (i.e. inputs, outputs, processing). The input subsystem permits the communicator to receive messages and stimulus from outside as well as from the other communicator. It involves the reception of light, temperature, touch, sound and, odors via our eyes, skin, ears, nose, and taste buds. These stimuli are intimately evaluated through a process called perception. Thus, we input and perceive advertising messages, a coupon, the appearance and words of a salesperson, and so forth.3
The processing subsystem of a communicator includes all thought processes. As we process, we generate, organize, and reflect on ideas in response to the stimuli received. This entire process is determined not only by the stimuli just received, but also by all stimuli ever received, such as past experiences, education, health, genetics, and all other factors in our environment. Some people clearly process the humor in the Pepsi-Cola ads better than others.
The output subsystem includes the messages and other behaviors produced by the communicator. These include nonverbal messages, verbal messages, and other physical behaviors. All of these become input (feedback) for other people and can have both intentional and unintentional effects on them.
Friend, parent, boss, client, or customer are just some of the roles we may portray in any communication process. The nature of the role directly affects the nature of communication. We communicate quite differently with our boss than we do with close friends. People who have known each other for a long time often devise their own communication system, which may include lots of nonverbal signals.
Finally, the communication system exists within an environment. The environment is everything internal and external to the communication system that can affect the system (family, school, competing advertisements, etc.). Each of the factors within the environment interacts with the communication system to a different degree. Because communication systems are open to the influence of the total environment, we can never analyze a communication event from only the point of view of the people who seem obviously involved. Everything may affect communication, positively or negatively. The latter factors may alter or distort inputs, outputs, or processing and are called interference. Interference can be generated internally (e.g. fear, love, prejudice) or externally (e.g. noise, weather, physical appearance).
Capsule 16: Review
• The primary role of IMC is to systematically evaluate the communication needs and wants of the buyer and, based on that information, design a communication strategy that will: provide answers to primary questions of the target audience; facilitate the customer's ability to make correct decisions; and increase the probability that the choice they make will most often be the brand of the information provider.
• Marketing communications is defined as a message delivery system that includes all the identifiable efforts on the part of the seller that are intended to help persuade buyers to accept the seller's message and store it in retrievable form.
• The four components that make up marketing communication are: advertising, sales promotion, public relations, and personal selling.
• The basic objectives of marketing communication are to: communicate, convince, and compete.
• The elements of human communication include:
• the processing subsystem
• the output subsystem
• the nature of the role
• the environment
• There are four types of communication systems:
• interpersonal
• organizational
• public
• mass
Types of communication systems
There are several types of communication systems, classified depending on the level of contact between communicators and the ability to respond to feedback.
Interpersonal communication systems
At the basic level of interpersonal communication systems is the dyadic context. A dyad consists of two people, or two major subsystems. Personal selling falls under this heading.
Organizational communication systems
The organizational communication context represents a much more complex system than interpersonal communication. Examples include a bank, a factory, a retail store, or the government attempting to communicate with one another. These systems include a large collection of subsystems, all organized around a common goal(s). Interactive technology has changed these types of systems in a dramatic way.
Public communication systems
This type of system involves communication usually from one person to a large group of people. Although everyone affects everyone else to some degree in every communication system, in a public communication context, such as a speech from a politician to people standing behind a platform of a campaign train, the speaker does most of the talking.
Mass communication systems
The mass communication context exists when a person/organization is communicating indirectly with a large group of people and there is even less opportunity for people to interact freely with one another and to mutually affect one another. Advertising and public relations are such mass communications.
Marketing communications
While all communication includes the same basic components depicted in Exhibit 21, marketing communication differs somewhat in two respects. First, the intent of marketing communications is to present a persuasive message, which reinforces the total offer made by the marketer. Essentially, all marketing communication attempts to create uniqueness in the mind of the target audience.
Second, marketing communication can be divided into two flows (i.e. internal and external), which are directed at different target audiences. This necessitates different communication strategies, which, never the less, must be
compatible. A company cannot be telling a customer one story and stockholders another. The flow of marketing
communication is depicted in Exhibit 22.
Exhibit 22: The flow of marketing communication | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/08%3A_Communicating_to_Mass_Markets/8.02%3A_The_objective_of_marketing_communication.txt |
The design of an effective IMC strategy is a very difficult and time-consuming process that requires the efforts of many members of the marketing staff. Although there has been a great deal of variety in designing this process, the steps depicted in Exhibit 23 are most common.
As is the case with most marketing activities, IMC is guided by a set of objectives. There are numerous responses that the manager may desire from his IMC effort. Although the ultimate buyer behavior desired is product purchase, several intermediate responses may prove important as well.
If there is a marketing opportunity, there must also be a communication opportunity. Although the role of IMC is de-emphasized in certain marketing programs, there will also be some communicative, motivational, or competitive tasks to be performed. Whether or not the marketing programs should rely heavily on its communication ingredient to perform such tasks depends upon the nature and extent of the opportunity. There are several conditions which, if they exist, indicate a favorable opportunity to communicate: for example, it is always easier to communicate effectively when moving with the current consumer demand rather than against it. Companies such as IBM have been actively promoting their business computers, which are increasing in popularity, rather than home computers, which are not doing as well.
The third consideration is selecting the target audience for the IMC. This is undoubtedly the most important factor in the IMC strategy, yet it is probably the issue that many companies slight or overlook entirely. Marketing messages must be directed at the specific target for which the overall marketing program is being designed. However, very seldom is there a single group of consumers at which to direct promotion. Many individuals affect the buying process, and the IMC program must be designed to reach all of them. In addition to the primary purchasers and users of the product, individuals who influence the purchase decision must also be considered. For example, consumers usually rely heavily upon the assistance and advice of others in purchasing such products as automobiles, interior decorating, major appliances, and physicians, to name but a few. Similarly, industrial buyers consider the advice of engineers, technicians, and even competitors. Thus it is extremely important in resolving the communication issue to identify accurately not only those who consume and buy the product but also those who influence its purchase.
Determining exactly what to say to the relevant audience is the fourth consideration. The heart of IMC is the transmission of ideas of marketing significance to the seller. Whether these ideas are received and perceived as intended depends in large part on the skill used in developing the communication appeal. It also depends upon the vehicle used to deliver the message. Whether it is the message delivered by a salesperson, a newspaper, or a point of purchase display, the message must facilitate reaching the communication objectives.
Money is always an important factor; a typical IMC effort is extremely expensive and is becoming more expensive every day. Keeping track of these cost elements is a full-time job. The budget for a particular IMC effort can be determined through very sophisticated computer programs or through intuitive techniques such as experience, following competition, or simply spending all you can afford. Particular budgetary approaches are summarized in Table 8.
Once you decide how much to spend, the amounts to be spent on personal selling, advertising, publicity, and sales promotion must be decided. After determining the major allocations, each of these figures must be broken down into much finer increments. For example, the advertising budget must be reallocated by media category, then by specific media, and finally, by particular dates, times, issues, etc.
Evaluating the effectiveness of an IMC effort is very important. Three tasks must be completed when one attempts to measure the results of IMC. First, standards for IMC effectiveness, such as retention and liking, must be established. This means that the market planner must have a clear understanding of exactly what the communication is intended to accomplish. For measurement purposes, the standards should be identified in specific, quantitative terms. Second, actual IMC performance must be monitored. To do this, it is usually necessary to conduct experiments in which the effects of other variables are either excluded or controlled. The third step in measuring IMC efficiency is to compare these performance measures against the standards. In doing so, it is theoretically possible to determine the most effective methods of marketing communication.
Table 8: Summary of techniques: setting the IMC budget
Technique
General description
Arbitrary allocation
Management bases budget on personal experience, business philosophy, and marketing intuition
Affordability
Upper limit of budget based on available company resources
Ratio-to-sales
Amount budgeted is based on some portion of past or forecasted sales
Competitive comparisons
Budget based on amount being spent by major competitors
Experimental approach
Budget based on test market results
Objective-task method
Determine costs of reaching specific promotional objectives and sum amounts
Finally, how a company organizes for IMC depends on the degree to which it desires to perform the communication function internally or to assign this task to outside agencies. Typically, the sales function is performed internally and the sales organization is a part of the overall, standing organizational plan. Occasionally, as when manufacturer's agents are used, outside organizations are employed to perform personal selling. Advertising services might be performed internally or externally. Sales promotion activities are usually also handled internally, although it is not uncommon for advertising agencies to be consulted in connection with sales promotion plans. The same is true for public relations.
The promotion mix
The manner in which the four components of IMC (i.e. advertising, personal selling, sales promotion, public relations) are combined into an effective whole is called the IMC mix. The promotion mix tends to be highly customized. While, in general, we can conclude that business-to-business marketers tend to emphasize personal selling and sales promotion over advertising and public relations, and that mass marketers are just the opposite, there are many exceptions. However, the following factors tend to have an impact on the particular IMC mix a company might select:
Marketing/IMC objectives: Companies that desire broad market coverage or quick growth in market share, for example, must emphasize mass advertising in order to create a dramatic and simultaneous impact.
Nature of the product: The basic characteristics of product (highly technical) suggest the need for demonstration and explanation through personal selling, or mass advertising in the case of a product with emotional appeal (perfume).
Place in the product lifecycle: Products in the introductory stage in the life cycle often need mass advertising and sales promotion, those in maturity need personal selling, and those in decline employ sales promotion.
Available resources: Companies with limited financial and human resources are often restricted to sales promotion and public relations while those with plenty of both opt for mass advertising and personal selling.2
The most striking fact about IMC techniques is their cross-substitutability. They represent alternate ways to influence buyers to increase their purchases. It is possible to achieve a given sales level by increasing advertising expenditures or personal selling, or by offering a deal to the trade or a deal to customers. This substitutability calls for treating the various IMC tools in a joint-decision framework.
The campaign
Determining what particular devices to use and how to combine them in order to achieve IMC objectives is one of the greatest challenges facing the communication planner. Ordinarily, management just makes use of the campaign concept. A campaign is a planned, coordinated series of marketing communication efforts built around a single theme or idea and designed to reach a predetermined goal. Although the term "campaign" is probably thought of most often in connection with advertising, it seems appropriate to apply the concept of a campaign to the entire IMC program.
Many types of IMC campaigns may be conducted by a company, and several may be run concurrently. Geographically, a firm may have a local, regional, or national campaign, depending upon the available funds, objectives, and market scope. One campaign may be aimed at consumers and another at wholesalers and retailers.
A campaign revolves around a theme, a central idea or focal point. This theme permeates all IMC efforts and tends to unify the campaign. A theme is simply the appeals developed in a manner considered unique and effective. As such, it is related to the campaign's objectives and the customer's behavior. It expresses the product's benefits. Frequently the theme takes the form of a slogan, such as Coca-Cola's "Coke is it!" Or DeBeers' "A diamond is forever". Some companies use the same theme for several campaigns; others develop a different theme for each new campaign.
In a successfully operated campaign, the efforts of all groups concerned will be meshed effectively. The advertising program will consist of a series of related, well-timed, carefully placed ads. The personal selling effort can be tied in by having the sales person explain and demonstrate the product benefits stressed in ads. Also, the sales force will be fully informed about the advertising part of the campaign-the theme, media used, schedule of appearance of ads, appeals used, etc. The sales force will also inform the middlemen, i.e. wholesalers and retailers, about this campaign, and convince them to incorporate it into their total marketing effort. Sales promotional devices will be coordinated with the other aspects of the campaign. For each campaign, new display materials must be prepared, reflecting the ads and appeals used in the current campaign, in order to maximize the campaign's impact at the point of sale.
Capsule 17: Review
• Marketing communication:
• is intended to be persuasive
• has internal and external flows
• The following steps are involved in designing an IMC strategy:
• determine objectives
• determine IMC opportunities
• select audience(s)
• select message(s)
• determine budget
• allocate funds
• measure results
• organize
• Factors that most impact the IMC mix include:
• marketing/IMC objectives
• nature of the product
• place in the product lifecycle
• available resources
• A campaign is a planned, coordinated series of marketing communication eff0rts built around a single theme or idea and designed to reach a predetermined goal.
Personnel responsible for the physical distribution activities must ensure that adequate stocks of the product are available in all outlets prior to the start of the campaign. Finally, people working in public relations must be constantly kept aware of new products, product demonstrations, new product applications, and so forth. Of course, it is extremely important to provide enough lead time so that the public relations effort can take advantage of optimum timing. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/08%3A_Communicating_to_Mass_Markets/8.04%3A_Designing_an_IMC_strategy.txt |
Undoubtedly, advertising is the promotional element that most consumers feel they know the best and hold strong opinions about. This is a result of the visibility and intrusiveness of advertising. In fact, most people have little understanding of advertising.
The organization of advertising
There are within the advertising industry a wide variety of means by which advertising is created and placed in media. At one extreme, an individual might write and place his own classified ad in a newspaper in the hope of selling his daughter's canopy bed. At the other extreme, the advertiser employs a full-service advertising agency to create and place the advertisement, retaining only the function of final approval of plans developed by that agency. Significant specialization is developed within the full-service advertising agency to discourage clients from hiring any outside vendors or other parties to perform any of the various functions involved in planning and executing advertising programs for the various advertisers that the agency serves. Another organizational possibility is a full-scale, in-house advertising department. This department may have total responsibility for all aspects of the advertisement, or some of the tasks might be optioned out to ad agencies or other types of specialty organizations, e.g. production, talent, media placement. It is not unusual for a large corporation to employ all of these possibilities or to use different agencies for different products or for different parts of the country.
Whether or not the advertiser uses an advertising agency, does his advertising in-house, or uses some combination of the two depends upon a host of factors unique to each organization: available funds, level of expertise, expediency, and so forth. Regardless of the influencing factors, a number of basic functions must be performed by someone if creative and effective advertisements are to be placed:
• what products, institutions, or ideas are to be advertised;
• who is to prepare advertising programs;
• who the organization engages and gives policy and other direction to the advertising agency, if any agency is used;
• who in the organization has the authority to develop advertising work and/or approves the advertising programs presented by the advertising agency;
• who pays the advertising bill;
• who determines the extent to which advertisements help reach the stated objectives.3
The advertising department
A company advertising department can range from a one-person department to one employing 500 or more people. Regardless of the size, advertising departments share similar responsibilities:
• formulating the advertising program
• implementing the program
• controlling the program
• presenting the budget
• maintaining relationships with suppliers
• establishing internal communications
• setting professional standards
• selecting an advertising agency
The advertising agency
The relations between an advertising agency and a client can go on for years, although some clients do move from agency to agency. Firms such as DuPont, Procter & Gamble, Kraft, Kellogg, and General Mills rarely change agencies.
Clients employ advertising agencies because they believe that the agency can: (a) produce better-quality, more persuasive messages for their products; and (b) place these messages in the right media so that the message reaches the greater number of prospects. Clients who believe they can do better themselves set up their own in-house agencies. However, relatively few of them exist and these are in specialized fields such as retailing.
Developing the creative strategy
Once all the relevant facts are gathered and evaluated, the process of actually creating the advertisement is appropriate. This process is very complex, and a complete description of it is well beyond the scope of this book. However, it is possible to highlight the primary parts of this process.
To begin with, the person or persons actually responsible for the complete advertisement depends upon the advertiser's organization of the advertising function and whether an advertising agency is used. More than likely, the development and approval of advertising creation is the responsibility of the senior advertising manager within the advertiser company and, when an advertising agency is used, of the agency management. In most agencies, the responsibility is that of the senior account person, in conjunction with the senior creative person assigned to the account. The advertising effort can be divided into two elements: the creative strategy and creative tactics. The creative strategy concerns what you are going to say to the audience. It flows from the advertising objectives and should outline what impressions the campaign should convey to the target audience. Creative tactics outline the means for carrying out the creative strategy. This includes all the various alternatives available, which will help reach the advertising objective
The place to begin the creative strategy is to ascertain the proper appeal to employ in the ad. (See Table 9) Identifying the appropriate appeal is just the first part of the advertising design process. The second part is to transform this idea into an actual advertisement. To say that there are a large variety of ways to do this would be a gross understatement. The number of techniques available to the creative strategist are not only vast, but the ability of more than one technique to successfully operationalize the same appeal makes this process even more nebulous.
Table 9: Primary advertising appeals
Product/service features
Many products have such strong technology or performance capabilities that these features can serve as a primary advertising appeal.
Product/competitive advantage
When an advertiser can determine that his product is superior, either in terms of features, performance, supporting services, or image, emphasizing a competitive advantage has proved to be a successful appeal.
Product/service price advantage
Offering a product at a reduced price or under some special deal arrangement (e.g. buy-one-get-one-free) may be the only viable appeal in a particular ad.
News about product/service
There are times when a truly new product is developed, or when an existing product is changed or improved in a substantial manner, that highlighting this single element is the core appeal.
Product/service popularity
Although the manner varies, the notion of claiming that a product is "number one" or the most popular is an appeal that has been around for a long time.
Generic approach
In such advertising, a product or service category is promoted for its own sake, but individual makes or brands of product are not singled out.
Consumer service
A popular appeal is to illustrate through the advertisement how the product may be used to best serve the needs of the consumer.
Savings through use
An opportunity to save time, money or energy is always very appealing to consumers.
Self-enhancement
Helping us feel better about ourselves (e.g. personal care, clothing, automobiles) is an appeal that many people cannot resist.
Embarrassment or anxiety
Situations that represent a threatening situation, either physically or socially, can provide the basis for an effective appeal.
Product trial
When this appeal is used, the advertiser offers a free sample, a price reduction, or some other purchase incentive to encourage consumer use or trial.
Corporate
This type of appeal presents a company or corporation in a favorable light in order to create a favorable impression or image.
Developing the media plan
Although the media plan is placed later in this process, it is in fact developed simultaneously with the creative strategy. This area of advertising has gone through tremendous changes; a critical media revolution has taken place.
The standard media plan consists of four stages: (a) stating media objectives; (b) evaluating media; (c) selecting and implementing media choices; and (d) determining the media budget.
Stating media objectives
Media objectives are normally started in terms of three dimensions:
• Reach: number of different persons or households exposed to a particular media vehicle or media schedule at least once during a specified time period.
• Frequency: the number of times within a given time period that a consumer is exposed to a message.
• Continuity: the timing of media assertions (e.g. 10 per cent in September, 20 per cent in October, 20 per cent in November, 40 per cent in December and 10 per cent the rest of the year).
Evaluating media
As noted in Table 10, there are definite inherent strengths and weaknesses associated with each medium. In addition, it would require extensive primary research either by the sponsoring firm or their advertising agency in order to assess how a particular message and the target audience would relate to a given medium. As a result, many advertisers rely heavily on the research findings provided by the medium, by their own experience, and by subjective appraisal.
Selection and implementation
The media planner must make media mix decisions and timing directions, both of which are restricted by the available budget. The media mix decision involves putting media together in the most effective manner. This is a difficult task, and necessitates quantitatively and qualitatively evaluating each medium and combination thereof.
Unfortunately, there are very few valid rules of thumb to guide this process, and the supporting research is spotty at best. For example, in attempting to compare audiences of various media, we find that A C Nielsen measures audiences based on TV viewer reports of the programs watched, while outdoor audience exposure estimates are based on counts of the number of automobile vehicles that pass particular outdoor poster locations. The timing of media refers to the actual placement of advertisements during the time periods that are most appropriate, given the selected media objectives. It includes not only the scheduling of advertisements, but also the size and position of the advertisement.4
Determining the media budget
This budget is a part of the advertising budget, and the same techniques and factors that apply to the advertising budget apply to the media budget as well.
Banner advertisements
Before leaving the topic of advertising, both creative and media, it is important to introduce a new form of advertising—banner advertising. Banner ads are the dominant form of online advertising. Banner ads are graphic images in Web pages that are often animated and can include small pieces of software code to allow further interaction. Most importantly, they are "clickable", and take a viewer to another Web location when chosen.
Banner ads typically run at the top and bottom of the page, but they can be incorporated anywhere. The CASIE organization has developed a small number of standard sizes and formats. Like the Web itself, banner ads are a mixture of approaches, with elements of traditional print advertising and more targeted direct advertising. Banner ads include direct marketing capabilities. Each banner carries with it a unique identifier. This allows the website to track the effectiveness of the ad in generating traffic. Measurability permits ad banner pricing based on results and behavior. Click-through pricing ignores impressions and charges the advertiser based on the number of viewers that select the ad and follow it to the linking website.
Admittedly, the performance of banner ads to date has been less than stellar. One company, San Francisco-based Organic, has approached the problem of ineffective online advertising with a product called "expand-o". This new ad vehicle allows an advertiser to include some of its website's content in an expandable banner ad. At the click of a mouse, the advertisement expands to as much as five or six times its original size.
Table 10: An appraisal of mass media
Type
Strengths
Weaknesses
Television
• strong emotional impact
• mass coverage/small cost per impression
• repeat message
• creative flexibility
• entertaining/prestigious
• high costs
• high clutter (too many ads)
• short-lived impression
• programming quality
• schedule inflexibility
Radio
• provides immediacy
• low cost per impression
• highly flexible
• limited national coverage
• high clutter
• less easily perceived during drive time
• fleeting message
Newspapers
• flexibility
• community prestige
• market coverage
• offer merchandising services
• reader involvement
• short life
• technical quality
• clutter
• timing flexibility
• two-tiered rate structure
Magazines
• highly segmented audiences
• high-profile audiences
• reproduction qualities
• prestigious
• long life
• extra services
• inflexible
• narrow audiences
• waste circulation
• high cost
Outdoor/transit
• inexpensive
• flexible
• reminder
• repetition
• immediacy
• short/concise messages
• negative reputation
• uncontrollable
• inflexible
Direct mail
• flexibility
• develop complete/precise message
• supplement
• negative image
• high cost per impression
• high production costs
• dependent upon mailing list
Specialty advertising
(Directories, matchbooks, calendars, etc.)
• positive reinforcement
• segmented markets
• flexible
• wasteful
• expensive
Interactive
• flexible
• repetition
• involvement
• hard to measure
• limited market coverage
• uncontrollable
For instance, an expand-o for Fort Washington, PA-based CDNow provides consumers with a sample of dynamically updated content housed on the music retailer's site. When the consumer clicks an arrow on the ad, it expands to show the top 10 songs in CDNow's top 100 Billboard Chart.5 | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/08%3A_Communicating_to_Mass_Markets/8.05%3A_Understanding_Advertising.txt |
For several years, sales promotion and public relations have been often misunderstood, mis-measured, and misused by a great many marketers. Unlike advertising and personal selling that can claim formal structures and point to obvious accomplishments, sales promotion and PR have neither. Although this situation is changing somewhat, there is still a great deal of room for improvement. In the case of sales promotion, there exists some confusion as to which activities actually fall under this heading. Are packaging, couponing, and point-of-purchase displays all sales promotion? Because the answer to this question varies from organization to organization and across situations, sales promotion is often viewed as a catch-all category that includes everything that an organization does not label advertising or public relations.
Public relations, too, is difficult to define as it deals with the ultimate intangible creating a positive image of the company. Not only is this difficult to accomplish, but it is also virtually impossible to ascertain if you have succeeded and to what extent. An organization, for instance, might sponsor a free barbecue for a Fourth of July celebration in the US and never really know if the money spent produced additional business. Management has a difficult time appreciating an activity that produces indirect results.
Sales promotion: a little bit of everything
As the newest member of the promotional team, sales promotion has suffered from a serious identity crisis. For example, initially the American Marketing Association (AMA) defines sales promotion as: "marketing activities, other than personal selling, advertising, and publicity, that stimulate consumer purchasing and dealer effectiveness, such as displays, shows and exhibitions, demonstrations, and various non-recurrent selling efforts not in the ordinary routine"6. In the AMA view, sales promotion supplements both personal selling and advertising, coordinates them, and helps make them more effective.6 However, this does not provide an accurate portrayal of the role played by sales promotion. A simple way of viewing sales promotion is to say that it means special offers: special in the sense that they are extra as well as specific in time or place; offers in the sense that they are direct propositions, the acceptance of which forms a deal. Simply, it increases the perceived value of the product.
As in most aspects of marketing, the rationale of sales promotion is to provide a direct stimulus to produce a desired response by customers. It is not always clear, however, what the distinctions are between sales promotion and advertising, personal selling and public relations. For example, suppose that Pillsbury decides to tape three cans of their buttermilk canned biscuits together and sell them for a price slightly cheaper than the three sold individually. Is that a branded multipack special offer and therefore promotional? Or is it just an example of a giant-sized economy pack, and therefore a product or packaging tactic? In order to sort out which it is, the question has to be asked, is it intended to be a permanent feature of the manufacturer's product policy to have the family pack as a component of the product? If it is not, it is a sales promotion scheme.
AD 1:example of sales promotions
The same sort of problem comes up when studying strategies run by firms in service industries. If a hotel offers cut-price accommodations at off-peak times of the year, is it a feature of the hotel management's pricing policy or is it a promotional tactic? If the hotel management provides price reductions on tickets to local theaters for their guests, is it part of the product or is it a device to attract customers for a limited period only? Again, the answer can only be given once the question about performance is asked. Even then, there still tend to be elements of advertising, personal selling, public relations and sales promotion in many promotional vehicles, and this may be the right approach. A candy manufacturer, for instance, has made substantial contributions of both cash and products to the local heart fund telethon. Immediately following the telethon, they run a full-page ad in several magazines describing their contributions, and describing a special rebate of USD .05 for every candy wrapper mailed in. The USD .05 can be donated to the heart fund if the customer wishes. The sales reps also have copies of this promotion to show their customers. Clearly, this strategy has all four components of the IMC mix.
AD 2:example of rebate offer
Types of sales promotion
There are a great many techniques that are considered sales promotion. One way of organizing this myriad of techniques is in terms of audience. As shown in Table 11, sales promotions are directed at consumers, employees, and distributors, and dealers. While consumers attract the greatest number of sales promotion devices, the other two audiences are growing in importance. While space does not permit a discussion of these strategies, some generalizations apply to all. Specifically, the value of a sales promotion is especially prominent when a marketer is introducing a new product, especially a product with high perceived risk; is interested in creating a repeat purchase pattern for the customer; is attempting to create movement of large amounts of products quickly; is attempting to counter the strategy of a competitor; and is trying to move marginal customers to make a choice. Sales promotion cannot compensate for a poor product or ineffective advertising. Nor can it create strong brand loyalty or reverse a declining sales trend.
Public relations: the art of maintaining goodwill
Every organization engages in some form of public relations (PR). In essence, every form of communication emitted by an organization both internally and externally is perceived by various publics. In turn, these publics form attitudes and opinions about that organization, which affect their behaviors. These behaviors range from low morale on the part of the employees to product rejection on the part of consumers.
AD 3: StartSampling offers its more than 1.5 million members the chance to try a wide variety of samples while helping marketers more effectively connect with their target audience.
AD 4: Both StartSampling and FreeSamples.com have systems in place to prevent inventory depletion.
Nevertheless, public relations looms as one of the most misunderstood and mistrusted elements in marketing. Consequently, management may provide marketing in general with full support, ample scope, and time for planning, but often does not establish a role for public relations. Public relations may be brought in belatedly at advanced stages of marketing process as a peripheral area with no real purpose.
Obtaining a good working definition of public relations requires an acknowledgement of the concept's core elements. Four such elements emerge. First, the ultimate objective of PR is to retain as well as create goodwill. Second, the successful procedure to follow in public relations is to first do good. and then take credit for it. Third, the publics addressed by the PR program must be described completely and precisely. In most instances, PR programs are aimed at multiple publics that have varying points of view and needs. Consequently, the publics served should be researched just as carefully as the target audiences for an advertising campaign. Finally, public relations is a planned activity. There is an intelligence behind it.
The definition that encompasses all these considerations, and was coined at the First Assembly of Public Relations Associations in 1987, follows:
Public Relations practice is the art of social science in analyzing trends, predicting their consequences, counseling organization leaders. and implementing planned programs of action, which serve both the organizations and the public interest. 7
Table 11: Types of sales promotion techniques
Audience/Technique Description
Description
Consumer
price discounts
temporary reduction in price, often at point of purchase
coupon offers
certificates redeemable for amount specified
combination offers
selling two products in conjunction at a lower total price
contests
awarding of prizes on the basis of chance or consideration
rebates
refund of a fixed amount of money
premiums
tangible reward received for performing an act, normally a purchase
trading stamps
certificate awarded based on purchase amount
sampling
providing the product either free or for a small fee
Employee
orientation program
introducing the employee to company facts
fringe benefits
extra incentives provided by company to employee
institutional promotion
messages portraying company in a positive light
motivational programs
temporary incentives, e.g. contests, prizes, or awards
Distributer/dealer
contests
temporary incentives offered for specific performance
trade shows
central location where products are displayed/sold
push money/dealer loaders
money offered for selling specified amounts of products
trade deals
dealers receive special allowances, discounts, goods, or cash
Public relation's publics
A public may be said to exist whenever a group of people is drawn together by definite interests in certain areas and has definite opinions upon matters within those areas. There are many publics, and individuals are frequently members of several that may sometimes have conflicting interests. For example, in the case of a school bond vote, a voter might be torn between feelings as a parent and as a member of a conservative economic group opposed to higher taxes; or an elderly couple, with no children now in school, might be parents of a teacher.
Public relations must be sensitive to two general types of publics: internal and external. Internal publics are the people who are already connected with an organization, and with whom the organization normally communicates in the ordinary routine of work. Typical internal publics in an industry are the employees, stockholders, suppliers, dealers, customers, and plant neighbors. For example, employees want good wages and working conditions, opportunities for advancement, and a secure retirement. Customers want a dependable supply of quality products provided at a fair price and supported by convenient services. Stakeholders want dividends, growth, and a fair return on their investments.
External publics are composed of people who are not necessarily closely connected with a particular organization. For example, members of the press, educators, government officials, or the clergy may or may not have an interest in an industry. The leaders of the industry cannot assume any automatic interest and, to some extent, must choose whether to communicate with these groups.
There is, of course, interaction between internal and external publics. Yet it cannot be assumed that good relations with insiders will ever be translated to outsiders without effort. An employee who is quite happy on the job may be much more interested in bowling than in the fact that the firm has just opened a new branch in the US city of Phoenix, Arizona. The firm must think of what interests the external public and not what interests the firm. With employees and other internal publics, there is a fair chance that all interests may coincide because all are connected with the same organization; with an external audience, the assumption should be that the chance of such accidental coincidence of interest is slight.
Public relations techniques
The public relations process is quite complex and involves a wide variety of techniques. Public relations is different than any other type of promotion, because a great deal of the communication provided by someone in PR must be screened and reprocessed through a third party that is not employed by the company. Therefore, if I wished for the local newspaper and television station to carry a story detailing the grand opening of my new store, I have no guarantee that either will send representatives to cover the store opening or that they will cover it the way I would have liked. Even if I were to write the story myself and send it to the newspaper, including appropriate photographs, the editor might choose not to print it or to modify it. The fact that PR is characterized by a low level of control necessitates that PR people establish a positive relationship with the various media. Without first accomplishing this goal, the tools employed by the PR person are usually doomed to failure. Various public relations techniques are described in Table 12.
AD 5: The Catholic Campaign for Human Development is hoping to convey the message that one in nine Americans lives below poverty line.
Personal selling and the marketing communication mix
Few companies coordinate marketing communication efforts in support of the sales force. Salespeople are often separated from marketing communications specialists because of both the structure of the business and difference in perspective. Most salespeople view other marketing communication activities strictly as a means to help sell a product or company. Advertisers, sales promotion managers, and public relations experts rarely consider the needs and suggestions of salespeople, and salespeople seldom pay attention to information about a marketing communication campaign.
Table 12: Public relations techniques
Technique
Description
News release (press release)
a prepared statement sent to various media
Press conference
meeting attended by media representatives for the purpose of making announcements or answering questions
Delivering bad news
system that anticipates and handles negative events
Publicity photographs
a prepared photo sent to various media
Company publications
magazines, newspapers, and newsletters produced by the company, depicting specific stories
Open houses/tours
providing various publics' access to plant facilities
Meetings
planned meeting provided for various publics, especially employees and stockholders
Organized social activities
company-sponsored social activities directed at employees, e.g. teams and picnics.
Participation
company-encouraged involvement in community activities, e.g. clubs, charities
Motion pictures/slides
professionally produced films and slides about some aspect of the company, provided to various publics
Capsule 18: Review
• Advertising is the marketing communication technique that provides messages to mass audiences via a creative strategy and a media strategy.
• The organization for advertising may include an in-house advertising department or an external agency.
• The creative strategy includes what you are going to say to the audience and the means for delivering the message.
• Sales promotion adds value to the product, and can be targeted at consumers, salespeople, or distributors.
• Public relations maintains or enhances goodwill with the company's various publics.
Integrating personal selling with other marketing communication elements may seriously affect that salesperson's job. Regis McKenna, international consultant, contends that although marketing technology has made salespeople more effective, it may also decrease the need for traditional sales people who convince people to buy. As we move closer to "realtime" marketing, he believes customers and suppliers will be linked directly, so that customers can design their own products, negotiate price with suppliers, and discuss delivery and other miscellaneous concerns with producers rather than salespeople. McKenna suggests that the main role of salespeople will no longer be to "close" the sale. Instead it will be to carry detailed design, quality, and reliability information, and to educate and train clients.8
Don Schultz, a professor of marketing and proponent of IMC at Northwestern University in Illinois, USA, supports this notion of the modern salesperson. "If you create long-term affiliations, then you don't sell. You form relationships that help people buy." He observes that because products have become more sophisticated, the businesses that buy are often smaller than those that sell. "Today, I think the sales force is primarily focused on learning about the product and not about the market. We're talking about flipping that around," he concludes. In short, effective personal selling must focus on customer relationships.
AD 6: This ad is a typical Institutional Public Relations advertising.
To integrate personal selling with other marketing communication tools to forge strong customer relationships, top management should lead the integration effort. Unless managers understand what salespeople do, however, integration may not be successful. Before considering how to combine selling efforts with other marketing communication tools, we first examine the job of personal selling.
The underlying rationale for personal selling is facilitating exchange. As suggested by a personal selling expert, it is "the art of successfully persuading prospects or customers to buy products or services from which they can derive suitable benefits, thereby increasing their total satisfaction". A professional salesperson recognizes that the long-term success for the organization depends on consistently satisfying the needs of a significant segment of its target market. This modern view of selling has been called "non-manipulative selling", and the emphasis of this view is that selling should build mutual trust and respect between buyer and seller. Benefit must come to both parties. This perspective is developed further in the integrated marketing box that follows.
Types of selling
Considerable differences exist in the various kinds of selling tasks. Early writers provided two-way classification of selling jobs, consisting of service selling, which focuses on obtaining sales from existing customers, and developmental selling, which is not as concerned with immediate sales as with converting prospects to customers.
Integrated marketing
Selling involves everything
Salespeople have been taught for years that the key to successful selling is finding out what people need and then doing whatever it takes to fill that need. There are thousands of books and articles based on this principle alone. Recently, however, many sales professionals are discovering a better way to sell.
The real definition of selling has to do with finding out what people or businesses do, where they do it, and why they do it that way, and then helping them to do it better.
The word "need" does not appear in that definition at all, because there is no need associated with today's selling. A successful salesperson first asks the prospect about the company's goals before trying to fill an imagined need with the product or service being sold.
Critics of this approach say that determining what a business does is the same as determining its needs. "It's all semantics," they say. "The word 'do' is the same as the word 'need'." It is not semantics. There is a major difference in the new sales philosophy.
What does the concept of need-driven sales really mean? For one thing, the word "need" implies that something is missing. For example, if a car has only three wheels, there is a need for a fourth. The driver of the car realizes that something is missing and stops at the nearest tire shop.
A business generally has a full complement of tires, or needed items. Even if a business needs something, it does not want a salesperson to call. The needed service or items is bought as soon as the need is recognized. In a proactive sale, the business is running smoothly when the salesperson calls. The salesperson, having been trained in a needs-driven industry, asks the prospect what is missing. The buyer replies that nothing is needed. The salesperson insists that something must be wrong, and attempts to prove that there is a solution to the "pain" the business is experiencing.
There are two possible outcomes to this scenario. The first is that no sale is made. The second is that the salesperson does uncover some deep-seated problem that can be fixed, and a sale is made. But this is an arduous process that pays off all too infrequently.
The top competitor of salespeople today is the status quo. People continue to do what they do because it works. The salesperson is a messenger of change. He or she makes a sale by helping someone improve the way they do business.[1]
Factor
Personal selling
Mass selling
Speed in a large audience
slow
fast
Cost per individual reached
high
low
Ability to attract attention
high
low
Clarity of communications
high
moderate
Chance of selective screening
moderate
high
Direction of message flow
two way
one way
Speed of feedback
high
low
Accuracy of feedback
high
low
Most sales positions require some degree of both types of selling. Sales jobs can be classified on a continuum of service selling at one end to developmental selling at the other. Nine types of sales jobs are classified on this continuum (see Exhibit 26).
Service selling involves the following participants:
Inside order taker: predominantly waits on customer; for example, the sales clerk behind the neckwear counter in a men's store.
Delivery salesperson: predominately engaged in delivering the product; for example, persons delivering milk, bread, or fuel oil.
Route or merchandising salesperson: predominantly an order taker, but works in the field; for example, the soap or spice salesperson calling on retailers.
Missionary salesperson: position where the salesperson is not expected or permitted to take an order but to build goodwill or to educate the actual or potential user; for example, the distiller's missionary and the pharmaceutical company's detail person.
Technical salesperson: major emphasis is placed upon technical knowledge; for example, the engineering salesperson who is primarily a consultant to client companies.
Developmental selling involves the following participants:
Creative salesperson of tangibles: for example, salespersons selling vacuum cleaners, refrigerators, siding, and encyclopedias.
Creative salesperson of intangibles: for example, salespersons selling insurance, advertising services, and educational programs.
Developmental selling, but requiring a high degree of creativity, involves the following participants:
Indirect salesperson: involves sales of big ticket items, particularly of commodities or items that have no truly competitive features. Sales consummated primarily through rendering highly-personalized services to key decision-makers in customers' organizations.
Salesperson engaged in multiple sales: involves sales of big-ticket items where the salesperson must make presentations to several individuals in the customer's organization, usually a committee, only one of whom can say yes, but all of whom can say no. For example, the account executive of an advertising agency who makes presentation to the agency selection committee. Even after the account is obtained, the salesperson generally has to work continually to retain it.
While the developmental-service and oriented classifications are helpful to better our understanding of the selling job, there are several other traditional classifications.
Inside versus outside selling
Inside selling describes those sales situations in which selling takes place in the salesperson's place of business. Retail selling is inside selling. Outside selling represents situations in which the salesperson travels to the customer's place of business. Most industrial selling situations fall into this category.
Company salespeople versus manufacturer representatives
A manufacturer's representative is an independent agent who handles the related products of noncompeting firms. Generally, these agents are used by new firms or firms that have little selling expertise. Company salespeople work for a particular company and sell only the product manufactured by that company.
Direct versus indirect selling
Indirect selling is characterized by situations in which people in the marketing channel are contacted who can influence the purchase of a product. This type of selling occurs in the pharmaceutical industry in which detail salespeople call on physicians in an effort to convince them to prescribe their firm's brand of drugs. Direct salespeople call on the person who makes the ultimate purchase decision.
The selling process
To better understand the job of a salesperson and how it should be managed, the selling process can be broken into a series of steps. Each step in the process may not be required to make every sale, but the salesperson should become skilled in each area in case it is needed.
Prospecting. Prospecting is defined as the seller's search for, and identification of, qualified potential buyers of the product or service. Prospecting can be thought of as a two stage process: (1) identifying the individuals and/or the organizations that might be prospects, and (2) screening potential prospects against evaluative qualifying criteria. Potential prospects that compare favorably to the evaluative criteria can then be classified as qualified prospects.
Preapproach. After the prospect has been qualified, the salesperson continues to gather information about the prospect. This process is called the preapproach. The preapproach can be defined as obtaining as much relevant information as possible regarding the prospect prior to making a sales presentation. The knowledge gained during the preapproach allows the tailoring of the sales presentation to the particular prospect. In many cases, salespeople make a preliminary call on the prospect for the purpose of conducting the preapproach. This is perfectly acceptable, and most professional buyers understand that such a call may be necessary before a sales presentation can be made.
Planning the presentation. Regardless of the sales situation, some planning should be done before the sales presentation is attempted. The amount of planning that will be necessary and the nature of the planning depend on many factors, including: (a) the objective or objectives of the presentation, (b) how much knowledge the salesperson has regarding the buyer, buyer needs, and the buying situation, (c) the type of presentation to be planned and delivered, and (d) the involvement of other people assisting the salesperson in the sales presentation. Careful planning offers advantages for both the salesperson and the buyer. By carefully planning the presentation, salespeople can: (a) focus on important customer needs and communicate the relevant benefits to the buyer, (b) address potential problem areas prior to the sales presentation, and (c) enjoy self-confidence, which generally increases with the amount of planning done by the salesperson. In planning the presentation, the salesperson must select the relevant parts of their knowledge base and integrate the selected parts into a unified sales message. For any given sales situation, some of the facts concerning the salesperson's company, product, and market will be irrelevant. The challenge to the salesperson is in the task of distilling relevant facts from the total knowledge base. The key question here is, "What information will the prospect require before they will choose to buy my offering?"
Delivering the presentation. All sales presentations are not designed to secure an immediate sale. Whether the objective is an immediate sale or a future sale, the chances of getting a positive response from a prospect are increased when the salesperson: (a) makes the presentation in the proper climate, (b) establishes credibility with the prospect, (c) ensures clarity of content in the presentation, and (d) controls the presentation within reasonable bounds.
Handling objections. During the course of the sales presentation, the salesperson can expect the prospect to object to one or more points made by the salesperson. Sales objections raised by the prospect can be defined as statements or questions by the prospect which can indicate an unwillingness to buy. Salespeople can learn to handle customer's objections by becoming aware of the reasons for the objections. The objections of customers include objections to prices, products, service, the company, time, or competition. The reasons for objections include that customers have gotten into the habit of raising objections, customers have a desire for more information, and customers have no need for the product or service being marketed. Salespeople can overcome objections by following certain guidelines including viewing objections as selling tools, being aware of the benefits of their product. and creating a list of possible objections and the best answers to those objections.
Closing. To a large degree, the evaluation of salespeoples' performance is based on their ability to close sales. Certainly, other factors are considered in evaluating performance, but the bottom line for most salespeople is their ability to consistently produce profitable sales volume. Individuals who perform as salespeople occupy a unique role: they are the only individuals in their companies who bring revenue into the company.
There may be several opportunities to attempt to close during a presentation, or opportunity may knock only once. In fact, sometimes opportunities to close may not present themselves at all and the salesperson must create an opportunity to close. Situations where a closing attempt is logical include:
• when a presentation has been completed without any objectives from the prospect
• when the presentation has been completed and all objections and questions have been answered.
When the buyer indicates an interest in the product by giving a closing signal, such as a nod of the head.
Capsule 19: Review
• Personal selling involves the direct presentation of a product or service idea to a customer or potential customer by a representative of the company or organization.
• There are various types of selling: inside order taker, delivery salesperson, route-merchandise salesperson, missionary salesperson, technical salesperson, creative salesperson of tangibles, creative salesperson of intangibles, indirect salesperson, salesperson engaged in multiple sales.
• The selling process includes the following steps:
• prospecting
• preapproach
• planning for presentation
• delivering the presentation
• handling objectives
• closing
• follow-up
Follow-up To ensure customer satisfaction and maximize long-term sales volume, salespeople often engage in sales follow-up activities and the provision for post-sale service. If a sale is not made, a follow-up may eventually lead to a sale.
Strengths and weaknesses of personal selling
Personal selling has several important advantages and disadvantages compared with the other elements of marketing communication mix (see Exhibit 25). Undoubtedly, the most significant strength of personal selling is its flexibility. Salespeople can tailor their presentations to fit the needs, motives, and behavior of individual customers. As salespeople see the prospect's reaction to a sales approach, they can immediately adjust as needed.
Personal selling also minimizes waste effort. Advertisers typically expend time and money to send a mass message about a product to many people outside the target market. In personal selling, the sales force pinpoints the target market, makes a contact, and expends effort that has a strong probability of leading to a sale.
Consequently, an additional strength of personal selling is that measuring effectiveness and determining the return on investment are far more straightforward for personal selling than for other marketing communication tools, where recall or attitude change is often the only measurable effect.
Another benefit of personal selling is that a salesperson is in an excellent position to encourage the customer to act. The one-on-one interaction of personal selling means that a salesperson can effectively respond to and overcome objections (customers' concerns or reservations about the product) so that the customer is more likely to buy. Salespeople can also offer many specific reasons to persuade a customer to buy, in contrast to the general reasons that an ad may urge customers to take immediate action.
A final strength of personal selling is the multiple tasks the sales force can perform. For instance, in addition to selling, a salesperson can collect payment service or repair products, return products, and collect product and marketing information. In fact, salespeople are often best at disseminating negative and positive word-of-mouth product information.
High cost is the primary disadvantage of personal selling. With increased competition, higher travel and lodging costs, and higher salaries, the cost per sales contract continues to increase. Many companies try to control sales costs by compensating sales representatives based on commission only, thereby guaranteeing that salespeople get paid only if they generate sales. However, commission-only salespeople may become risk-averse and only call on clients who have the highest potential return. These salespeople, then, may miss opportunities to develop a broad base of potential customers that could generate higher sales revenues in the long run.
Companies can also reduce sales costs by using complementary techniques, such as telemarketing, direct mail, toll-free numbers for interested customers, and online communication with qualified prospects. Telemarketing and online communication can further reduce costs by serving as an actual selling vehicle. Both technologies can deliver sales messages, respond to questions, take payment, and follow up.
Another disadvantage of personal selling is the problem of finding and retaining high quality people. First, experienced salespeople sometimes realize that the only way their income can outpace their cost-of-living increase is to change jobs. Second, because of the push for profitability, businesses try to hire experienced salespeople away from competitors rather than hiring college graduates, who take three to five years to reach the level of productivity of more experienced salespeople. These two staffing issues have caused high turnover in many sales forces.
Another weakness of personal selling is message inconsistency. Many salespeople view themselves as independent from the organization, so they design their own sales techniques, use their own message strategies, and engage in questionable ploys to create a sale. Consequently, it is difficult to find a unified company or product message within a sales force, or between the sales force and the rest of the marketing communication mix.
A final weakness is that sales force members have different levels of motivation. Salespeople may vary in their willingness to make the desired sales calls each day; to make service calls that do not lead directly to sales; or to use new technology, such as a laptop, e-mail, or the company's website. Finally, overzealous sales representatives may tread a thin line between ethical and unethical sales techniques. The difference between a friendly lunch and commercial bribery is sometimes blurred.
The sales force of the future
What will the sales force of the year 2020 look like? Will it still consist of dependent operators who are assigned a territory or a quota? Will the high cost of competing in a global marketplace change the traditional salesperson? Although we can speculate about dramatic changes in the nature of personal selling, the traditional salesperson figure will likely remain intact for several decades. Why? Many products will still need to be sold personally by a knowledgeable, trustworthy person who is willing to resolve problems at any hour of the day.
Still, major changes in personal selling will occur, in large part due to technology. Though technology has increased selling efficiency, it has also resulted in more complex products, so that more sales calls are required per order in many industries. Also, because of the trend toward business decentralization, sales representatives now have more small or mid-sized accounts to service. Currently, companies such as Hewlett-Packard and Fina Oil and Chemical as well as many smaller companies provide laptop computers to all salespeople. Computer-based sales tracking and follow-up systems allow salespeople to track customers. This technology means that salespeople can assess customer-buying patterns, profitability, and changing needs more rapidly. Accessing this information via computer saves the salesperson time and allows customization of the sales presentation
Sales teams will continue to gain in popularity because customers are looking to buy more than a product. They are looking for sophisticated design, sales, education, and service support. A sales team includes several individuals who possess unique expertise and can coordinate their efforts to help meet the needs of the particular prospect in every way possible. The salesperson acts as a team quarterback, ensuring that the account relationship is managed properly and that the customer has access to the proper support personnel.
Procter & Gamble is one company that has adopted the team approach. P&G has 22 sales executives who coordinate the sales effort of various P&G divisions in their assigned market areas. Each manager coordinates key account teams composed of sales executives from P&G's grocery division. As many as three key account teams may sell in each market. The marketing manager supervises a logistics team composed primarily of computer systems and distribution executives. The team works closely with retailers to develop mutually compatible electronic data and distribution systems. P&G hopes the team approach will reduce the pressure for trade promotions because the team provides greater service to resellers.
Salespeople of the future will have to adjust to new forms of competition. With the increased capabilities and greater use of direct marketing, for example, salespeople must recognize that some customers will buy a product without contact with a salesperson. Product catalogs that feature everything from computers to classic automobiles are mailed directly to customers or ordered on the Internet. These often provide all the information about the product the customer needs to know. Questions can be answered through a toll-free number, an Internet comment form, or e-mail. Salespeople of the twenty-first century should either integrate direct marketing to support the selling process or offer the customer benefits not available through other marketing communications techniques.
On this very small planet, salespeople will also have to adjust to new sources of competition. Companies in Asia, South America, and Eastern Europe are introducing thousands of new products to industrialized nations every year. The salesperson of the future must know how to respond to foreign competitors and how to enter their markets. A program that integrates personal selling with other marketing communication tools will give salespeople more opportunity to act efficiently and have selling success.
Newsline: New toys for sales success?
Recent technological advances have given salespeople more ways than ever to improve sales and productivity. To make technology work, however, you have to control it instead of letting it control you. Start by learning to use everyday tools (computer, fax, and e-mail) more efficiently and effectively. Once you know how to get the most out of technology, you can get more out of each workday.
Get a voicemail advantage. You can avoid time-consuming two way phone conversations by outlining detail in voicemail. Also, if you need the person for whom you are leaving the message to take some actions, say so in the message, then say there is no need to call you back unless they have questions or problems.
Improve your email habits. To avoid frequent interruptions to your workday, set aside specific, scheduled times during the day to answer your e-mail.
Fax casually. When you are flooded with faxes, forget about taking the time to send replies on new sheets of paper and fill out cover sheets. Instead, simply hand-write your replies at the bottom of the fax you received and turn it around.
Get better acquainted with your PC. Take an hour or so before or after work for a week to learn all of your computer's functions and how they can boost your productivity.
Make a sound investment. You rely on technology every day to do your job, so it pays to spend a little more for equipment that will not let you down. Carefully assess your technology needs, then shop around for equipment that meets those needs without a lot of bells and whistles.
Take a break. Overall increases in the speed of business can leave a salesperson feeling done in and turned out. [2]
The Wall Street Journal (wsj.com)
In practice
Marketing communication must communicate an organization's ideas to its target audiences, compete consistently and effectively in the marketplace, and convince consumers to buy its products. To achieve these objectives, marketers design an integrated marketing communication plan using advertising, sales promotion, public relations, and personal selling.
Marketing communication is both internal and external in scope with an array of target audiences some small, some large. Marketing communication is also both direct and indirect. Advertising and public relations are indirect, mass communication systems, while sales promotion and personal selling are direct, interpersonal and organizational systems.
The Marketplace section of the Interactive Journal is an invaluable source for articles related to marketing communication. With a section dedicated for Advertising news, the Journal keeps readers informed of the latest trends in the field.
Marketplace Columns are the main features in the Marketplace section. They are regular weekly columns, offering insight into a variety of topical issues such as E-business and work and family.
The Marketplace Extra section is the online companion to the print edition's supplement to the Weekend Journal. Here you will find stories about broader market trends. Astute marketers can leverage this information to learn more about consumer behavior. In turn, they can develop marketing communication strategies with more relevant and convincing messages.
Careers
Many marketers get their start in advertising, sales, or public relations. The Interactive Journal offers job seekers advice about finding jobs and building careers. On the Front Section, click on the Careers link under Free WSJ.com Sites. You will find negotiation strategies, a career Q&A, and interviewing tips. You can also find information about writing effective cover letters and resumes.
Deliverable
Read one of the featured articles in today's Marketplace section of the Interactive Journal. Search the Interactive Journal and other relevant sites for additional information. Identify the marketing communication strategies the company uses and argue their effectiveness. Support your conclusions with facts and chapter concepts.
1. [1]Sources: Stephan Schiffman, "Here's the Real Definition of Selling," The Marketing News, December 8, 1997, pp. 4-5; Diana Ray, "Value-based Selling," Selling Power, September 1999, pp.. 30-33; Rochelle Garner, "The Ties That Bind," Sales & Marketing Management, October 1999, pp. 71-74.
2. [2]Sources: Robin Sharma. "A Technology Edge," Selling Power, January/February, 1998, pp. 37-38; Ginger Conlon, "How to Move Customers Online," Sales & Marketing Management, March 2000, pp. 27-28; Neil Rackman, "The Other Revolution in Sales," Sales & Marketing Management, March 2000, pp. 34-35. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/08%3A_Communicating_to_Mass_Markets/8.06%3A_Sales_promotion_and_public_relation.txt |
Marketing communication remains one of the most visible and controversial aspects of marketing. Everyday we see hundreds of ads, redeem coupons, are approached by a variety of salespeople, and are told by countless companies how good they are. This chapter introduces the persuasive arm of marketing communication. In it we suggest that since everything about a company is going to communicate something, it would be beneficial to have as much control over this process as possible. Other reasons for planning the communication effort are also discussed, as are the primary objectives: (a) to communicate, (b) to convince, and (c) to compete. The systems model of communication is discussed to clarify the general communications process. Components of this process are defined and described. Types of communications systems are described. IMC is defined from a broad perspective, and then categorized into four components: (a) advertising, (b) personal selling, (c) public relations, and (d) sales promotion. The eight-step process involved in designing an IMC strategy is discussed.
Advertising is discussed in the context of marketing communication that is targeted at mass markets. It contains a sequential process, but is highlighted through its creative strategy and media strategy.
Sales promotion and public relations are two components that are both misunderstood and misused. The second part of this chapter develops some basic concepts related to both strategies. Reasons for sales promotion and types of sales promotion are discussed. Public relations is viewed in terms of its two publics, internal and external. Several techniques used to reach these publics are proposed.
Professional selling has been defined as personal contact aimed at successfully persuading prospects to buy products or services from which they can derive suitable benefits. Selling is a major force in our economy, both in terms of employment and its impact on the success of various organizations. The product, customer, competition, and environment must all be considered in determining the relative emphasis to place on personal selling in the promotional mix. The activities of a salesperson can be broken into a series of steps called the sales process. Not all of the steps are required for every sale, but the complete process includes prospecting, preapproach, planning the presentation, the approach, delivering the presentation, handling objectives, closing, and follow-up.
Key terms
Advertising (consumer's perspective) One of several incoming messages directed at the consumer, the salience of which is influenced by the emotional, physical, and need state of the individual, and the benefit of which can be information, motivation, and entertainment.
Advertising (societal perspective) An institution of society that has the capability of informing the citizen, stimulating economic growth, and providing knowledge useful in decision making, as well as the tendency both to misallocate scarce economic resources and lead consumers to engage in behavior that may not be in their best interest.
Advertising (business perspective) Advertising's function is primarily to inform potential buyers of the problem-solving utility of a firm's market offering, with the objective of developing consumer preferences for a particular brand.
Advertising campaign The culmination of all the strategic, creative, and operational efforts of the people working towards a particular set of advertising objectives.
Creative strategy Concerns what an advertiser is going to say to an audience, based on the advertising objectives. Strategy should outline what impressions the campaign should convey to the target audience.
Creative tactics Specific means of implementing strategy.
Sales promotion Temporary special offers intended to provide a direct stimulus to produce a desired response by customers.
Price deals Short-term reductions in the price of a product to stimulate demand that has fallen off. Coupon offers, certificates for a specified amount off a product.
Combination offers Link two products together for a price lower than the products purchased separately. Contest A promotion that involves the award of a prize on the basis of chance or merit.
Rebates A refund of a fixed amount of money for a certain amount of time.
Premium offers A tangible reward received for performing a particular act, usually purchasing a product. Consumer sampling Getting the physical product into the hands of the consumer.
Push money A monetary bonus paid by a manufacturer to a retail salesperson for every unit of a product sold.
Dealer loader A premium that is given to a retailer by a manufacturer for buying a certain amount of a product.
Trade deals Strategies intended to encourage middlemen to give a manufacturer's product special promotional efforts that it would normally not receive.
Public relations Public relations practice is the art and social science of analyzing trends, predicting their consequences, counseling organization leaders, and implementing planned programs of action that serve both the organization's and the public interest.
Internal publics People connected with an organization with whom the organization normally communicates in the ordinary routine of work.
External publics People not necessarily closely connected with an organization.
Campaign Planned series of promotional efforts designed to reach a predetermined goal through a single theme or idea.
Communication A process in which two or more persons attempt to consciously or unconsciously influence each other through the use of symbols or words in order to satisfy their respective needs.
Federal Trade Commission (FTC) US government agency established to protect businesses against unfair competition.
Marketing communication Includes all the identifiable efforts on the part of the seller that are intended to help persuade buyers to accept the seller's message and store it in retrievable form.
IMC mix Various combinations of elements in a promotional plan: advertising, sales promotion,personal selling, public relations.
Questions
➢ List the basic objectives of marketing communication. Why is it often difficult for promoters to reach their objectives? Provide some valid reasons why marketers should pursue these objectives.
➢ Assume that top management for General Equipment, Inc. hired you to determine if a promotional opportunity exists for a fabricated part that has been developed for heavy-duty equipment. What criteria would you use as a basis of investigation?
➢ Define the phrase "sales promotion”. Cite some examples of how sales promotion can supplement or complement the other components of the IMC mix.
➢ What steps might a public relations person take to prevent the firm from acquiring a negative public image?
➢ Assume that you are the public relations director for a bank. Suppose that two people were robbed while withdrawing money from an automatic 24-hour teller machine. Develop a program in response to this incident.
➢ How is the consumer's definition of advertising different from that of a businessperson's?
➢ Give some examples of situations in which primary demand product advertising might be fruitful. When would selective demand product advertising be useful?
➢ Assume that you have been charged with organizing an in-house advertising department for a growing consumer products company. The first task is to hire an advertising manager who will have ultimate responsibility. What responsibilities should be mentioned in the job description for this position?
➢ Explain the difference between creative strategy and creative tactics.
➢ List and describe the various types of appeals. Develop an appeal, as well as tactics to operationalize this appeal, for Old Spice Shave Cream.
➢ Why are organizations shifting from specialized to integrated marketing communication strategies?
➢ How can organizations design marketing communication programs that keep pace with the rapid changes in technology?
➢ What careers are available in advertising? Sales? Public relations? What skills are employers seeking for these positions?
Project
Can you cite some examples of how either advertising or another form of marketing communication led you to purchase a product that did not satisfy a need? Could any form of MC (marketing communications) or gimmick lead you to repurchase it? Has MC enabled you to find a product which satisfies a personal need? How might future MC keep you loyal to a product? Write a two to three page response.
Case application
The microrecorder
One of the fastest growing industries in the United States in the past ten years has been the direct marketing of a wide variety of consumer goods and services. Today it is not unusual for most of us to shop by mail (or use some other form of direct marketing) for almost anything imaginable. Among the most well-known and successful direct marketers is Neiman Marcus, a retail department store that also discovered the additional profits of selling such unusual gifts as elephants, airplanes and USD 1,000 boxes of chocolate candy–all by mail.
However, Neiman Marcus is certainly not alone. There are literally thousands of companies selling via direct marketing. One of these companies is American Import Corporation. American Import was started in 1969 by Tom and Sally Struven. They started their business by importing a line of Japanese-made sports watches and selling them for USD 29.95 with advertisements in The Wall Street Journal, The Rotarian, Elks Magazine, and the Legionnoire. At that time, comparable watches were retailing for USD 49.95 to USD 79.95. The Struvens were successful, and in the next few years they continued to expand their product lines, compiled their own customer list, and eventually issued a shopping catalog. Although the catalog was successful, they discovered the most successful way to introduce a new item was to advertise it separately.
In early 1980, Tom and Sally Struven made arrangements to purchase 50,000 micro-recorders from a Korean manufacturer. These recorders measured 1 x 2 ½ x 5 ½ inches (approx. 2.5 x 6.35 x 13.97 cm) and were supplied with a built-in microphone, a vinyl carrying case, a wrist strap, and a 30-minute micro-cassette. The micro-recorder is operated by 4 AA batteries or an optional AC adapter.
This type of recorder became very popular in the past few years, particularly among businesspeople. A traveling executive or salesperson could dictate letters on the micro-recorder and then have a secretary transcribe them onto letterhead. The micro-recorder is also ideal as an audio notepad, substituting for paper-and-pencil note taking.
The first micro-recorder was brought to the mass market in 1975 and retailed for USD 400. Since then, several companies entered the market, and today there are approximately twelve major brands available through traditional retail locations. The prices of micro-recorders vary by the sophistication of the individual piece of equipment; however, the retail price range is USD 90 to USD 250.
American Import Corporation decided to offer its micro-recorder for USD 39.95. Although American Import's product was a technically simple product, it did a very capable and reliable job of performing the basic task of recording and playing back the human voice.
With several years of direct marketing experience behind them, the Struvens decided to introduce the micro-recorder via direct marketing. They were planning an advertising campaign in Barron's, the Wall Street Journal, the New York Times, the Chicago Tribune, the Los Angeles Times, and a spot television campaign in selected markets.
The Struvens were very excited about the sales prospects of their new micro-recorder, and while the media portion of their advertising campaign was rather obvious, they could not decide on the best creative approach for the product.
Several possible themes came to mind. For example, should the product be sold on the basis of its comparatively low price? Its simplicity of operation? Its flexibility of use? Its size/convenience? Perhaps they should use a competitive-comparison strategy? How about their no-risk, 30-day trial?
The products had arrived from Korea. The media schedule had been set. Shipping procedures were established. Contractual arrangements with service organizations had been made. The only obstacle between American Import Corporation and a new source of profits seemed to be the selection of the most promising creative strategy for this new mini-recorder. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/08%3A_Communicating_to_Mass_Markets/8.07%3A_Summary.txt |
Thumbnail: www.pexels.com/photo/green-and-orange-corella-pear-fruit-lot-1656665/
09: Pricing the Product
Although making the pricing decision is usually a marketing decision, making it correctly requires an understanding of both the customer and society's view of price as well. In some respects, price setting is the most important decision made by a business. A price set too low may result in a deficiency in revenues and the demise of the business. A price set too high may result in poor response from customers and, unsurprisingly, the demise of the business. The consequences of a poor pricing decision, therefore, can be dire. We begin our discussion of pricing by considering the perspective of the customer.
Exhibit 28: The customer's view of price
The customer's view of price
As discussed in an earlier chapter, a customer can be either the ultimate user of the finished product or a business that purchases components of the finished product. It is the customer that seeks to satisfy a need or set of needs through the purchase of a particular product or set of products. Consequently, the customer uses several criteria to determine how much they are willing to expend in order to satisfy these needs. Ideally, the customer would like to pay as little as possible to satisfy these needs. This perspective is summarized in Exhibit 28.
Therefore, for the business to increase value (i.e. create the competitive advantage), it can either increase the perceived benefits or reduce the perceived costs. Both of these elements should be considered elements of price. To a certain extent, perceived benefits are the mirror image of perceived costs. For example, paying a premium price (e.g. USD 650 for a piece of Lalique crystal) is compensated for by having this exquisite work of art displayed in one's home. Other possible perceived benefits directly related to the price-value equation are status, convenience, the deal, brand, quality, choice, and so forth. Many of these benefits tend to overlap. For instance, a Mercedes Benz E750 is a very high-status brand name and possesses superb quality. This makes it worth the USD 100,000 price tag. Further, if one can negotiate a deal reducing the price by USD 15,000, that would be his incentive to purchase. Likewise, someone living in an isolated mountain community is willing to pay substantially more for groceries at a local store rather than drive 78 miles (25.53 kilometers) to the nearest Safeway. That person is also willing to sacrifice choice for greater convenience. Increasing these perceived benefits is represented by a recently coined term, value-added. Thus, providing value-added elements to the product has become a popular strategic alternative. Computer manufacturers now compete on value-added components such as free delivery setup, training, a 24-hour help line, trade-in, and upgrades.
Perceived costs include the actual dollar amount printed on the product, plus a host of additional factors. As noted, these perceived costs are the mirror-opposite of the benefits. When finding a gas station that is selling its highest grade for USD 0.06 less per gallon, the customer must consider the 16 mile (25.75 kilometer) drive to get there, the long line, the fact that the middle grade is not available, and heavy traffic. Therefore, inconvenience, limited choice, and poor service are possible perceived costs. Other common perceived costs include risk of making a mistake, related costs, lost opportunity, and unexpected consequences, to name but a few. A new cruise traveler discovers he or she really does not enjoy that venue for several reasons–e.g. he or she is given a bill for incidentals when she leaves the ship, has used up her vacation time and money, and receives unwanted materials from this company for years to come.
In the end, viewing price from the customer's perspective pays off in many ways. Most notably, it helps define value–the most important basis for creating a competitive advantage.
Price from a societal perspective
Price, at least in dollars and cents, has been the historical view of value. Derived from a bartering system (exchanging goods of equal value), the monetary system of each society provides a more convenient way to purchase goods and accumulate wealth. Price has also become a variable society employs to control its economic health. Price can be inclusive or exclusive. In many countries, such as Russia, China, and South Africa, high prices for products such as food, health care, housing, and automobiles, means that most of the population is excluded from purchase. In contrast, countries such as Denmark, Germany, and Great Britain charge little for health care and consequently make it available to all.
There are two different ways to look at the role price plays in a society: rational man and irrational man. The former is the primary assumption underlying economic theory, and suggests that the results of price manipulation are predictable. The latter role for price acknowledges that man's response to price is sometimes unpredictable and pretesting price manipulation is a necessary task. Let us discuss each briefly.
Rational man pricing: an economic perspective
Basically, economics assumes that the consumer is a rational decision maker and has perfect information. Therefore, if a price for a particular product goes up and the customer is aware of all relevant information, demand will be reduced for that product. Should price decline, demand would increase. That is, the quantity demanded typically rises causing a downward sloping demand curve.
A demand curve shows the quantity demanded at various price levels (see Exhibit 29). As a seller changes the price requested to a lower level, the product or service may become an attractive use of financial resources to a larger number of buyers, thus expanding the total market for the item. This total market demand by all buyers for a product type (not just for the company's own brand name) is called primary demand. Additionally, a lower price may cause buyers to shift purchases from competitors, assuming that the competitors do not meet the lower price. If primary demand does not expand and competitors meet the lower price the result will be lower total revenue for all sellers.
Since, in the US, we operate as a free market economy, there are few instances when someone outside the organization controls a product's price. Even commodity-like products such as air travel, gasoline, and telecommunications, now determine their own prices. Because large companies have economists on staff and buy into the assumptions of economic theory as it relates to price, the classic price-demand relationship dictates the economic health of most societies. The Chairman of the US Federal Reserve determines interest rates charged by banks as well as the money supply, thereby directly affecting price (especially of stocks and bonds). He is considered by many to be the most influential person in the world.
Irrational man pricing: freedom rules
There are simply too many examples to the contrary to believe that the economic assumptions posited under the rational man model are valid. Prices go up and people buy more. Prices go down and people become suspicious and buy less. Sometimes we simply behave in an irrational manner. Clearly, as noted in our earlier discussion on consumers, there are other factors operating in the marketplace. The ability of paying a price few others can afford may be irrational, but it provides important personal status. There are even people who refuse to buy anything on sale. Or, others who buy everything on sale. Often businesses are willing to hire a USD 10,000 consultant, who does no more than a USD 5,000 consultant, simply to show the world they are successful.
In many societies, an additional irrational phenomenon may exist–support of those that cannot pay. In the US, there are literally thousands of not-for-profit organizations that provide goods and services to individuals for very little cost or free. There are also government agencies that do even more. Imagine what giving away surplus food to the needy does to the believers of the economic model.
Pricing planners must be aware of both the rational as well as the irrational model, since, at some level, both are likely operating in a society. Choosing one over the other is neither wise nor necessary.
The marketer's view of price
Price is important to marketers, because it represents marketers' assessment of the value customers see in the product or service and are willing to pay for a product or service. A number of factors have changed the way marketers undertake the pricing of their products and services.1
• Foreign competition has put considerable pressure on US firms' pricing strategies. Many foreign-made products are high in quality and compete in US markets on the basis of lower price for good value.
• Competitors often try to gain market share by reducing their prices. The price reduction is intended to increase demand from customers who are judged to be sensitive to changes in price.
• New products are far more prevalent today than in the past. Pricing a new product can represent a challenge, as there is often no historical basis for pricing new products. If a new product is priced incorrectly, the marketplace will react unfavorably and the "wrong" price can do long-term damage to a product's chances for marketplace success.
• Technology has led to existing products having shorter marketplace lives. New products are introduced to the market more frequently, reducing the "shelf life" of existing products. As a result, marketers face pressures to price products to recover costs more quickly. Prices must be set for early successes including fast sales growth, quick market penetration, and fast recovery of research and development costs.
9.02: Pricing objective
Firms rely on price to cover the cost of production, to pay expenses, and to provide the profit incentive necessary to continue to operate the business. We might think of these factors as helping organizations to: (a) survive, (b) earn a profit, (c) generate sales, (d) secure an adequate share of the market, and (e) gain an appropriate image.
Capsule 20: Review
• Price should be viewed from three perspectives:
• the customer
• the marketer
• society
• Pricing objectives:
• survival
• profit
• sales
• market share
• image
Survival: It is apparent that most managers wish to pursue strategies that enable their organizations to continue in operation for the long term. So survival is one major objective pursued by most executives. For a commercial firm, the price paid by the buyer generates the firm's revenue. If revenue falls below cost for a long period of time, the firm cannot survive.
Profit: Survival is closely linked to profitability. Making a USD 500,000 profit during the next year might be a pricing objective for a firm. Anything less will ensure failure. All business enterprises must earn a long-term profit. For many businesses, long-term profitability also allows the business to satisfy their most important constituents–stockholders. Lower-than-expected or no profits will drive down stock prices and may prove disastrous for the company.
Sales: Just as survival requires a long-term profit for a business enterprise, profit requires sales. As you will recall from earlier in the text, the task of marketing management relates to managing demand. Demand must be managed in order to regulate exchanges or sales. Thus marketing management's aim is to alter sales patterns in some desirable way.
Market share: If the sales of Safeway Supermarkets in the Dallas-Fort Worth metropolitan area of Texas, USA, account for 30 per cent of all food sales in that area, we say that Safeway has a 30 per cent market share. Management of all firms, large and small, are concerned with maintaining an adequate share of the market so that their sales volume will enable the firm to survive and prosper. Again, pricing strategy is one of the tools that is significant in creating and sustaining market share. Prices must be set to attract the appropriate market segment in significant numbers.
Image: Price policies play an important role in affecting a firm's position of respect and esteem in its community. Price is a highly visible communicator. It must convey the message to the community that the firm offers good value, that it is fair in its dealings with the public, that it is a reliable place to patronize, and that it stands behind its products and services. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/09%3A_Pricing_the_Product/9.01%3A_Price_Defined_-_Three_different_Perspective.txt |
While pricing a product or service may seem to be a simple process, it is not. As an illustration of the typical pricing process, consider the following quote: "Pricing is guesswork. It is usually assumed that marketers use scientific methods to determine the price of their products. Nothing could be further from the truth. In almost every case, the process of decision is one of guesswork."2
Good pricing strategy is usually based on sound assumptions made by marketers. It is also based on an understanding of the two other perspectives discussed earlier. Clearly, sale pricing may prove unsuccessful unless the marketer adopts the consumer's perspective toward price. Similarly, a company should not charge high prices if it hurts society's health. Hertz illustrates how this can be done in “Integrated marketing” below.
A pricing decision that must be made by all organizations concerns their competitive position within their industry. This concern manifests itself in either a competitive pricing strategy or a nonprice competitive strategy. Let us look at the latter first.
Nonprice competition
Nonprice competition means that organizations use strategies other than price to attract customers. Advertising, credit, delivery, displays, private brands, and convenience are all example of tools used in nonprice competition. Businesspeople prefer to use nonprice competition rather than price competition, because it is more difficult to match nonprice characteristics.
Integrated marketing
How to select the best price
The Hertz Corporation knows when its rental cars will be gone and it knows when the lots will be full. How? By tracking demand throughout past six years. "We know, based on past performance and seasonal changes, what times of year there is a weak demand, and when there is too much demand for our supply of cars," says Wayne Meserue, director of pricing and yield management at Hertz. To help strike a balance, the company uses a pricing strategy called "yield management" that keeps supply and demand in check. The strategy looks at two aspects of Hertz's pricing: the rate that is charged and the length of the rental.
"Price is a legitimate rationing device,"says Meserue. "What we're really talking about is efficient distribution, pricing, and response in the marketplace." For example, there are times when cars are in great demand. "It's always a gamble, but it's definitely a calculated gamble. With yield management, we monitor demand day by day, and adjust (prices as necessary)," Meserue says.
Hertz also uses length of rental as a yield management device. For instance, in the US they established a three-night minimum for car rentals during President's Day weekend in February. "We didn't want to be turning away business for someone who wanted the car for five nights just because we had given our cars to people who came in first for one night," says Meserue, who adds that it is often better for Hertz to mandate a minimum number of days for a rental, because it ensures that cars will be rented for more days.
A smart pricing strategy is essential for increasing profit margins and reducing supply. Yet at last count, only 15 per cent of large corporations were conducting any sort of pricing research, reports Robert Dolan, professor at Harvard Business School. "People don't realize that if you can raise your prices by just 1 percent, that's a big increase in your profit margin," he says. For example, if a supermarket is operating with a 2 per cent net margin, raising the prices by 1 per cent will increase profitability by 33 per cent. "The key is not taking one percent across the board, but raising it 10 per cent for 10 per cent of your customers," says Dolan, "Find those segments of the market that are willing to take the increase." That doesn't mean that companies can automatically pass their cost increases on the customer, notes Dolan. If the costs are affecting an entire industry, then those costs can be passed through easily to the consumer, because competitors will likely follow the lead.
A fundamental point in smart pricing, according to Dolan: base prices on the value to the customer. As much as people talk about customer focus, they often price according to their own costs, Companies can profit from customizing prices to different customers. The value of a product can vary widely depending on factors such as age and location.[1]
AD 1: An example of nonprice competition.
Competing on the basis of price may also have a deleterious impact on company profitability. Unfortunately, when most businesses think about price competition, they view it as matching the lower price of a competitor, rather than pricing smarter. In fact, it may be wiser not to engage in price competition for other reasons. Price may simply not offer the business a competitive advantage (employing the value equation).
Competitive pricing
Once a business decides to use price as a primary competitive strategy, there are many well established tools and techniques that can be employed. The pricing process normally begins with a decision about the company's pricing approach to the market.
Approaches to the market
Price is a very important decision criteria that customers use to compare alternatives. It also contributes to the company's position. In general, a business can price itself to match its competition, price higher, or price lower. Each has its pros and cons.
Pricing to meet competition
Many organizations attempt to establish prices that, on average, are the same as those set by their more important competitors. Automobiles of the same size and having equivalent equipment tend to have similar prices. This strategy means that the organization uses price as an indicator or baseline. Quality in production, better service, creativity in advertising, or some other element of the marketing mix are used to attract customers who are interested in products in a particular price category.
The keys to implementing a strategy of meeting competitive prices are an accurate definition of competition and a knowledge of competitor's prices. A maker of hand-crafted leather shoes is not in competition with mass producers. If he/she attempts to compete with mass producers on price, higher production costs will make the business unprofitable. A more realistic definition of competition for this purpose would be other makers of handcrafted leather shoes. Such a definition along with a knowledge of their prices would allow a manager to put the strategy into effect. Banks shop competitive banks every day to check their prices.
Pricing above competitors
Pricing above competitors can be rewarding to organizations, provided that the objectives of the policy are clearly understood and that the marketing mix is used to develop a strategy to enable management to implement the policy successfully.
Pricing above competition generally requires a clear advantage on some nonprice element of the marketing mix. In some cases, it is possible due to a high price-quality association on the part of potential buyers. Such an assumption is increasingly dangerous in today's information-rich environment. Consumer Reports and other similar publications make objective product comparisons much simpler for the consumer. There are also hundreds of dot.com companies that provide objective price comparisons. The key is to prove to customers that your product justifies a premium price.
Pricing below competitors
While some firms are positioned to price above competition, others wish to carve out a market niche by pricing below competitors. The goal of such a policy is to realize a large sales volume through a lower price and profit margins. By controlling costs and reducing services, these firms are able to earn an acceptable profit, even though profit per unit is usually less.
Such a strategy can be effective if a significant segment of the market is price-sensitive and/or the organization's cost structure is lower than competitors. Costs can be reduced by increased efficiency, economics of scale, or by reducing or eliminating such things as credit, delivery, and advertising. For example, if a firm could replace its field sales force with telemarketing or online access, this function might be performed at lower cost. Such reductions often involve some loss in effectiveness, so the tradeoff must be considered carefully.
Historically, one of the worst outcomes that can result from pricing lower than a competitor is a "price war". Price wars usually occur when a business believes that price-cutting produces increased market share, but does not have a true cost advantage. Price wars are often caused by companies misreading or misunderstanding competitors. Typically, price wars are over reactions to threats that either are not there at all or are not as big as they seem.
Another possible drawback when pricing below competition is the company's inability to raise price or image. A retailer such as K-mart, known as a discount chain, found it impossible to reposition itself as a provider of designer women's clothiers. Can you imagine Swatch selling a USD 3,000 watch?
How can companies cope with the pressure created by reduced prices? Some are redesigning products for ease and speed of manufacturing or reducing costly features that their customers do not value. Other companies are reducing rebates and discounts in favor of stable, everyday low prices (ELP). In all cases, these companies are seeking shelter from pricing pressures that come from the discount mania that has been common in the US for the last two decades.
1. [1]Sources: Ginger Conlon, "Making Sure the Price is Right;' Sales and Marketing Management, May 1996, pp. 92--93 Thomas T. Nagle and Reed K. Holden, The Strategy and Tactics of Pricing, 2nd ed., Upper Saddle River, N.J.: Prentice Hall, Inc. 1995; William C. Symonds, "'Build a Better Mousetrap' is No Claptrap;' Business Week, February 1, 1999, p. 47; Marcia Savage, "Intel to Slash Pentium II Prices," Company Reseller News, February 8, 1999, pp. 1, 10. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/09%3A_Pricing_the_Product/9.03%3A_Developing_pricing_strategy.txt |
A somewhat different pricing situation relates to new product pricing. With a totally new product, competition does not exist or is minimal. What price level should be set in such cases? Two general strategies are most common: penetration and skimming. Penetration pricing in the introductory stage of a new product's life cycle means accepting a lower profit margin and to price relatively low. Such a strategy should generate greater sales and establish the new product in the market more quickly. Price skimming involves the top part of the demand curve. Price is set relatively high to generate a high profit margin and sales are limited to those buyers willing to pay a premium to get the new product (see Exhibit 30).
Newsline: The risk of free PCs
There is no such thing as a free PC. However, judging from the current flood of offers for free or deeply discounted computers, you might think that the laws of economics and common sense have been repealed. In fact, all of those deals come with significant strings attached and require close examination. Some are simply losers. Others can provide substantial savings, but only for the right customers.
The offers come in two categories. In one type, consumers get a free computer along with free Internet access, but have to accept a constant stream of advertising on the screen In the other category, the customer gets a free or deeply discounted PC in exchange for a long-term contract for paid Internet services.
Most of these are attractive deals, but the up-front commitment to USD 700 or more worth of Internet service means they are not for everyone. One group that will find little value in the arrangement is college students, since nearly all schools provide free and often high-speed Net access. Others who could well end up losing from these deals are the lightest and heaviest users of the Internet. People who want Internet access only to read e-mail and do a little light Web browsing would likely do better to buy an inexpensive computer and sign up for a USD 10-per-month limited-access account with a service provider.
People who use the Internet a lot may also be poor candidates. That is because three years is a long commitment at a time when Internet access technology is changing rapidly. Heavy users are likely to be the earliest adopters of high-speed cable or digital subscriber line service as it becomes available in their areas.[1]
Which strategy is best depends on a number of factors. A penetration strategy would generally be supported by the following conditions: price-sensitive consumers, opportunity to keep costs low, the anticipation of quick market entry by competitors, a high likelihood for rapid acceptance by potential buyers, and an adequate resource base for the firm to meet the new demand and sales.
A skimming strategy is most appropriate when the opposite conditions exist. A premium product generally supports a skimming strategy. In this case, "premium" does not just denote high cost of production and materials; it also suggests that the product may be rare or that the demand is unusually high. An example would be a USD 500 ticket for the World Series or an USD 80,000 price tag for a limited-production sports car. Having legal protection via a patent or copyright may also allow for an excessively high price. Intel and their Pentium chip possessed this advantage for a long period of time. In most cases, the initial high price is gradually reduced to match new competition and allow new customers access to the product.
1. [1]Sources: Stephen H. Weldstrom. " High Cost of Free PCs." Business Week, September 13, 1999. p. 20; Steven Bruel. "Why Talk's Cheap," Business Week, September 13. 1999, pp. 34-36; Mercedes M. Cardona and Jack Neff, " thing's at a Premium," Advertising Age, August 2. 1999, pp. 12-13.
9.05: Price lines
You are already familiar with price lines. Ties may be priced at USD 15, USD 17, USD 20, and USD 22.50; bluejeans may be priced at USD 30, USD 32.95, USD 37.95, and USD 45. Each price must be far enough apart so that buyers can see definite quality differences among products. Price lines tend to be associated with consumer shopping goods such as apparel, appliances, and carpeting rather than product lines such as groceries. Customers do very little comparison-shopping on the latter.
Price lining serves several purposes that benefit both buyers and sellers. Customers want and expect a wide assortment of goods, particularly shopping goods. Many small price differences for a given item can be confusing. If ties were priced at USD 15, USD 15.35, USD 15.75, and so on, selection would be more difficult; the customer could not judge quality differences as reflected by such small increments in price. So, having relatively few prices reduces the confusion.
From the seller's point of view, price lining holds several benefits. First, it is simpler and more efficient to use relatively fewer prices. The product/service mix can then be tailored to selected price points. Price points are simply the different prices that make up the line. Second, it can result in a smaller inventory than would otherwise be the case. It might increase stock turnover and make inventory control simpler. Third, as costs change, either increasing or decreasing the prices can remain the same, but the quality in the line can be changed. For example, you may have bought a USD 20 tie 15 years ago. You can buy a USD 20 tie today, but it is unlikely that today's USD 20 tie is of the same fine quality as it was in the past. While customers are likely to be aware of the differences, they are nevertheless still able to purchase a USD 20 tie. During inflationary periods the quality/price point relationship changes. From the point of view of salespeople, offering price lines will make selling easier. Salespeople can easily learn a small number of prices. This reduces the likelihood that they will misquote prices or make other pricing errors. Their selling effort is therefore more relaxed, and this atmosphere will influence customers positively. It also gives the salesperson flexibility. If a customer cannot afford a USD 2,800 Gateway system, the USD 2,200 system is suggested. | textbooks/biz/Marketing/Introducing_Marketing_(Burnett)/09%3A_Pricing_the_Product/9.04%3A_New_Product_Pricing.txt |
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