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BATCH 2008 – 2010
PRINCIPLES OF MANAGEMENT
Evolution of Management The real development of management thought began with scientific management approach put forward by Frederick Winslow Taylor though some concepts have been developed by early thinkers. However it was only by the end of the nineteenth century that the stage was set for systematic study of management and the beginning was made by Taylor. Scientific management In 1911, Frederick Winslow Taylor published his work, The Principles of Scientific Management, in which he described how the application of the scientific method to the management of workers greatly could improve productivity. Scientific management methods called for optimizing the way that tasks were performed and simplifying the jobs enough so that workers could be trained to perform their specialized sequence of motions in the one "best" way. Prior to scientific management, work was performed by skilled craftsmen who had learned their jobs in lengthy apprenticeships. They made their own decisions about how their job was to be performed. Scientific management took away much of this autonomy and converted skilled crafts into a series of simplified jobs that could be performed by unskilled workers who easily could be trained for the tasks. Taylor became interested in improving worker productivity early in his career when he observed gross inefficiencies during his contact with steel workers. He is often called the father of scientific management.
His contribution consists of the features and principles of Scientific Management Taylor conducted experiments at his work places to find out how human beings could be made more efficient by standardising the work and through better method of working. Taylor argued that even the most basic, mindless tasks could be planned in a way that dramatically would increase productivity, and that scientific management of the work was more effective than the "initiative and incentive" method of motivating workers. The initiative and incentive method offered an incentive to increase productivity but placed the responsibility on the worker to figure out how to do it. To scientifically determine the optimal way to perform a job, Taylor performed experiments that he called time studies, (also known as time and motion studies). These studies were characterized by the use of a stopwatch to time a worker's sequence of motions, with the goal of determining the one best way to perform a job. The following are examples of some of the time-and-motion studies that were performed by Taylor and others in the era of scientific management. Pig Iron If workers were moving 12 1/2 tons of pig iron per day and they could be incentivized to try to move 47 1/2 tons per day, left to their own wits they probably would become exhausted after a few hours and fail to reach their goal. However, by first conducting experiments to determine the amount of resting that was necessary, the worker's manager could determine the optimal timing of lifting and resting so that the worker could move the 47 1/2 tons per day without tiring. Not all workers were physically capable of moving 47 1/2 tons per day; perhaps only 1/8 of the pig iron handlers were capable of doing so. While these 1/8 were not extraordinary people who were highly prized by society, their physical capabilities were well-suited to moving pig iron. This example suggests that workers should be selected according to how well they are suited for a particular job. The Science of Shoveling In another study of the "science of shoveling", Taylor ran time studies to determine that the optimal weight that a worker should lift in a shovel was 21 pounds. Since there is a wide range of densities of materials, the shovel should be sized so that it would hold 21 pounds of the substance being shoveled. The firm provided the workers with optimal shovels. The result was a three to four fold increase in productivity and workers were rewarded with pay increases. Prior to scientific management, workers used their own shovels and rarely had the optimal one for the job.
Taylor's 4 Principles of Scientific Management After years of various experiments to determine optimal work methods. Henry Ford applied Taylor's principles in his automobile factories. working conditions. Drawbacks of Scientific Management While scientific management principles improved productivity and had a . Scientifically select. physical strength etc.period and amount of work. Divide work nearly equally between managers and workers.This requires a mental change in both parties from the traditional attitude of conflict to cooperation. and families even began to perform their household tasks based on the results of time and motion studies. cost of production etc as this would enhance efficiency .These experiments gave rise to the following features of scientific management 1) Separation of planning and doing: Emphasized the importance of this. 6) Mental revolution: Scientific management depends on mutual cooperation between the workers and management. Taylor proposed the following four principles of scientific management: 1. work experience. Cooperate with the workers to ensure that the scientifically developed methods are being followed. 2) Functional foremanship 3) Standardisation: Standardisation should be maintained in instruments and tools. train. Planning should be left to the supervisor and the doing to the worker. 4) Scientific Selection and training of workers: Workers should be selected on a scientific basis considering their education. 4. and develop each worker rather than passively leaving them to train themselves. These principles were implemented in many factories.He suggested the differential piece rate system which should be based on individual performance and not on the position occupied by the worker. 2. often increasing productivity by a factor of three or more. Provide higher wages for extra effort. 5) Financial incentives: These act as a motivating factor. Proper training is needed to ensure efficiency and effectiveness. 3. Replace rule-of-thumb work methods with methods based on a scientific study of the tasks. so that the managers apply scientific management principles to planning the work and the workers actually perform the tasks.
Administrative Theory Perhaps the real father of modern management theory is the French industrialist Henri Fayol. Responsibility arises from the assignment of activities. in the majority of cases workers plan to do as little as they safely can. and forms of it continue to be used today. According to him specialisation belongs to natural order. task identity. coordinating. sureness. selling and exchange) 3) Financial(search for capital and its optimum use) 4) Security(protection of person and property) 5) Accounting 6) Managerial( planning.His contribution is termed as administrative management.substantial impact on industry. They are 1) Division of work: this leads to the advantage of specialisation. His contributions were first published in the book titled “Administration Industrielle at Generale” in French Fayol found that the activities of an organisation can be divided into 1) Technical(production related) 2) Commercial(buying. organising. Despite its controversy. 2) Authority and responsibility: Official authority is derived from the mangers position in the organisation. autonomy. Taylor`s attitude towards workers had a negative bias. nor rigid. they also increased the monotony of work. The methods of motivation started and finished at monetary incentives only. There should be parity between the two. This help to acquire an ability. 3) Discipline: Discipline may be self imposed or command discipline. The core job dimensions of skill variety. These principles according to Fayol are not exhaustive.this reductionist approach dehumanizes the worker. Self imposed comes from within while command stems from recognised authority and uses rules. task significance. scientific management changed the way that work was done. and feedback all were missing from the picture of scientific management. This will help .According to him. accuracy and increase in output. The workers always work on the same part and a particular manager is concerned with the same matters. regulations and deterrents etc to ensure compliance 4) Unity of Command: A person should get orders from only one boss. leading and controlling) Fayol recognized the need for management teaching and developed fourteen principles of management.
7) Remuneration: fair and adequate remuneration is needed to provide satisfaction. In social order the right man should be in the right place. 6) Subordination of individual to general interest: Workers individual interest must bow down before general organisational interest and must be aligned with the interest of the organisation. Bureaucratic Management (1864-1920) A bureaucracy is a highly structured. Efforts should be made to ensure that unnecessary turnover does not take place. In material order there should be a place for everything and everything should be in its right place. employees should be encouraged to take initiative. Fayol also favoured non financial benefits. 11) Equity: Equitable. In small firms centralisation is natural but in large ones decentralisation of authority and a taller organisation structure is needed. 10) Order: This is the principle relating to the arrangement of things and people. It can be shortcircuited only in circumstances where following it would be detrimental. Weber focused on dividing organizations into hierarchies. It is a formal organisation structure with set of rules and regulations. 5) Unity of Direction: Each group of activities with the same objective must have one head and on plan. and of establishing team work. The different departments must work in tandem towards the common goal. It suggests that each communication going up or down must flow through each position in the line of authority. 14) Espirit de Corps: This is the principle that ‘union is strength’. He suggested organizations develop comprehensive and . 9) Scalar chain: There should be a scalar chain of authority and of communication ranging from highest to lowest. just treatment and behaviour towards employees brings loyalty to the organisation.to avoid conflict in instructions and will lead to greater personal responsibility of managers and workers. formalized. 8) Centralisation: The extent of centralisation or decentralisation should be appropropriately determined. 13) Initiative: Within the limits of authority and discipline. establishing strong lines of authority and control. Max Weber embellished the scientific management theory with his bureaucratic theory. and impersonal organisation. 12) Stability of tenure: Reasonable job security should be provided.
fragmented responsibility and hierarchical control means that it is all too easy to neglect the larger purpose for which the smaller effort is being put. • It is a matter of principle that members of the administrative staff should be separated from the ownership of the means of production and administration. Human Relations School Behavioural or human relations management emerged in the 1920s and dealt with . Features • A continuous organisation of official functions bound by rules. feelings of failure and conflict • Over emphasis on process rather than purpose. Specialized training is needed. Advantages • Removes ambiguity and inefficiency owing to clarity of work and processes • Highly structured • Very formalized • Impersonal organisation Drawbacks • Overemphasis on rules and procedures. record keeping and paperwork as an end rather than a means to an end • Dependence on bureaucratic status. • Systematic division of labour rights and power • Principle of hierarchy • The rules governing the conduct of an organisation may be technical rules or norms. symbols and rules • Lack of initiative due to lack of accountability in many cases • Position in the organisation often gives rise to officious bureaucratic behaviour • Impersonal organisation leads to stereotype behaviour and lack of responsiveness to individual incidents and problems • Red tapism • The compartmentalisation of work restricts psychological growth of the individual and may cause frustration.detailed standard operating procedures for all routinized tasks. • There should be complete absence of appropriation of official position by the incumbent. Bureaucratic organisation emphasizes the need for organisations to function on rational basis.
Worker attitude was found to be important. The intent of these studies was to determine the effect of working conditions on productivity. Whitehead. identified the Hawthorne Effect or the bias that occurs when people know that they are being studied. The Hawthorne Studies are significant because they demonstrated the important influence of human factors on worker productivity. There were four major phases to the Hawthorne Studies: the illumination experiments. The conclusion was that there was no cause-and-effect relationship between working conditions and productivity. The human relations movement began with the Hawthorne Studies which were conducted from 1924 to 1933 at the Hawthorne Plant of the Western Electric Company in Cicero. in the relay and bank wiring phases. As a major outcome of these interviews.N. the relay assembly group experiments. The Human Group. The bank wiring group studies were analyzed thoroughly by Homans and were included in his now classic book. Again. separate area. In the relay assembly group experiments. The bank wiring groups involved fourteen male employees and were similar to the relay assembly group experiments. supervisors learned that an employee's complaint . Elton Mayo. and George Homans. productivity increased and was attributed to group dynamics. six female employees worked in a special. It has been referred to as the neoclassical school because it was initially a reaction to the shortcomings of the classical approaches to management. It was discovered that this increased productivity was a result of the attention received by the group.the human aspects of organizations. and were continuously observed by a researcher who served as the supervisor.000 interviews was conducted to determine employee attitudes toward the company and their jobs. except that there was no change of supervision. Both the control group and the experimental group of female employees produced more whether the lights were turned up or down. were led by Fritz Roethlisberger. An extensive employee interviewing program of 21. T. Illinois. known as the Father of the Hawthorne Studies. were given breaks and had the freedom to talk. the interviewing program. The illumination experiments tried to determine whether better lighting would lead to increased productivity. Elton Mayo. and the bank wiring group studies. The Hawthorne Studies Harvard Business School researchers. The supervisor consulted the employees prior to any change.
popularized the concept of managerial skills. Hence. Skill is not necessarily inborn. or in the person's past. Analytical. . The skills that managers possess are the most valued resources of the organisation. It can be developed through practice and through relating learning’s to one’s own personal experience and background. which was developed by Henri Fayol. a famous management theorist. These abilities are essential to effective decision making. Katz. his creative and innovative ability and his ability to assess the environment and the changes taking place in it. human skill is necessary for a good leader. These are: • Conceptual Skill • Human Relations Skill • Technical Skill Robert L.frequently is a symptom of some underlying problem on the job. While both conceptual and technical skills are needed for good decision-making. at home. creative and intuitive talents make up the manager’s conceptual skills. a teacher and business executive. technical skill with things and human skill with people. Conceptual skill deals with formulation of ideas. Conceptual Skill The conceptual skill refers to the ability of a manager to take a broad and farsighted view of the organisation and its future. a manager should possess three major skills. his ability to think in abstract. and anticipating how its parts depend on one another. In order to be able to successfully discharge his roles. MANEGERIAL SKILLS A skill is an individual’s ability to translate knowledge into action. his ability to analyse the forces working in a situation. It involves the ability to see the organisation as a whole. and anticipating how a change in any of its parts will affect the whole. understanding how its parts depend on one another. Also to solve problems in a way that benefits the entire organisation. it is manifested in an individual’s performance.
and computer scientists. the organisation.It is this conceptual requirement that enables an executive to recognize the interrelationships and relative values of the various factors intertwined in a managerial problem. completing accounting statements. writing legal documents. It refers to a person’s knowledge and proficiency in any type of process or technique. it is his ability to conceptualise the environment. engineers. Examples of technical skills are writing computer programs. for himself. Managers may acquire these skills initially through formal education and then further develop them by training and job experience. In short. possess technical skills. It enables person to accomplish the mechanics demanded in performing a particular job. and his own job. Technical Skills The technical skill is the manager’s understanding of the nature of job that people under him have to perform. This skill seems to increase in importance as manager moves up to higher positions of responsibility in the organisation. this would mean an understanding of the technicalities of the process of production. its relative importance as a part of the managerial role diminishes as the manager moves to higher positions. analysing marketing statistics. as examples. so that he can set appropriate goals for his organisation. or drafting a design for a new airfoil on an airplane. a competitor’s change in marketing strategy. or the reorganisation of one department which ultimately affects the activities of other departments in the organisation. . Examples of situations that require conceptual skills include the passage of laws that affect hiring patterns in an organisation. Technical skills usually consist of specialised knowledge and the ability to perform within that speciality. Whereas this type of skill and competence seems to be more important at the lower levels of management. market researchers. and for his team. entering the international market. Accountants. Technical skills are usually obtained through training programs that an organisation may offer its managers or employees or maybe obtained by way of college degree. In a production department. suggesting a new product line for the company.
It involves the ability to work with. Some managers are naturally born with great human skills. This skill develops in the manager sufficient ability (a) to recognise the feelings and sentiments of others.Human Relations Skill Human relations skill is the ability to interact effectively with people at all levels. and outcomes of various courses of action he may undertake. turning off lights. The figure below gives an idea about the required change in the skill-mix of a manager with the change in his level. Human relations skills can be developed through an understanding of human and group behaviour. peers. it is teamwork. reusing old files. motivate. It is cooperative effort. This type of skill remains consistently important for managers at all levels in order to interact and communicate with other people successfully. build acceptance of one’s co-workers. while others improve their skills through classes or experience. or obtaining support from an office and clerical staff to save money on supplies and energy costs (e.g. and relate to them in a way that their behaviour is consistent with the needs of the organisation. and conceptual skills.. human. Human relations skills are used to build positive interpersonal relationships. A manager's level in the organization determines the relative importance of possessing technical. The application of human skill may involve persuading a sales force to accept a revised sales presentation. (b) to judge the possible reactions to. . solve human relations problems. setting thermostats lower in the winter). or superiors. A manager with good human skills has a high degree of selfawareness and a capacity to understand or empathize with the feelings of others. and (c) to examine his own concepts and values which may enable him to develop more useful attitudes about himself. it is the creation of an environment in which people feel secure and free to express their opinions. and direct individuals or groups in the organisation whether they are subordinates.
New Delhi.F. P C Tripathi and P N Reddy. Human skills are equally necessary at each level of the management hierarchy. Daniel R. Conceptual skills are critical for top managers because the plans. James A. Chapter 1. Gilbert. R. . Patience Hall of India Private Limited. Part One. New Delhi. policies. References Principles of Management. Although all three management skills are important at all three levels of management.The relative importance of conceptual. people at the top shift with great ease from one industry to another without an apparent fall in their efficiency. to middle. to top management. human and technical skills changes as a person progresses from lower. Stoner. 7 and 8) Management. technical skills become least important at the top level of the management hierarchy.. and decisions developed at this level require the ability to understand how a change in one activity will affect changes in other activities. where technical expertise is in greatest demand. (Pg No. This skill is replaced with a greater emphasis on conceptual skills. Jr. Technical skills are most pronounced at lower levels or supervisory levels of management because first-line managers are closer to the production process. Second Edition. Edward Freeman. Tata McGraw-Hill publishing Company. That is why. Sixth Edition.
Franklin.com/management-skills-id1586.T. Pg No.I. George R.B. Pg No. Delhi.Part 1. Terry and Stephen G. Prof. Chapter 1. Deep & Deep Publications Pvt. 7 & 8 Principles of Management.htm Ohioonline..edu/~mgtexcel/Function.article-8848.html En.articlesgratuits. Techniques. Nirmal Singh. edu/MGMT1374/ book_contents/1 overview/management_skills/mgmt_skills.com/WileyCDA/CliffsReviewTopic/Functions-of-Managers.php Cliffnotes. Eighth Edition.html INDIAN BUSINESS ENVIRONMENT . Chapter 1. Practices.Pg No.topicArticleId8944.osu. New Delhi. Part 1. A. 17 Principles of Management. Theories.S Publishers & Distributors.dcccd. Ltd. 51 Ollie.
via the multiplier effect.) This may lead to further growth of the economy through the stimulation of consumer incomes and purchases. That is. increased sales and cash flow. i. cash flow. worsening a recession by the multiplier effect. This in turn discourages fixed investment. This is because high levels of aggregate demand hit against the limits set by the existing labor force. the availability of natural resources. This model assumes that the stock of capital goods (K) is proportional to the level of production (Y): K = k×Y This implies that if k (the capital-output ratio) is constant. In equals: . and the technical ability of an economy to convert inputs into products. The accelerator effect also goes the other way: falling GDP (a recession) hurts business profits.Accelerator effect The accelerator effect in economics refers to a positive effect on private fixed investment of the growth of the market economy (measured e. (This expenditure is called fixed investment. Accelerator models The accelerator effect is shown in the simple accelerator model. sales. use of capacity and expectations. an increase in Y requires an increase in K. This usually implies that profit expectations and business confidence rise.. encouraging businesses to build more factories and other buildings and to install more machinery. net investment. and greater use of existing capacity.e.g. The accelerator effect fits the behavior of an economy best when either the economy is moving away from full employment or when it is already below that level of production. the existing stock of capital goods. by Gross Domestic Product). Rising GDP (an economic boom or prosperity) implies that businesses in general see rising profits.
Similarly. Because the existing capital stock grows over time due to past net investment. then net investment may be depressed for a long time. the desired capital stock is derived from the aggregate production function assuming profit maximization and . an actual fall in output depresses the desired stock of capital goods and thus net investment. a slowing of the growth of output (GDP) can cause the gap between the desired K and the existing K to narrow. Because the expected level of output plays a role. the transition to a recession. causing current net investment to fall. Finally. Businesses are described as engaging in net investment in fixed capital goods in order to close the gap between the desired stock of capital goods (Kd) and the existing stock of capital goods left over from the past (K-1): In = x(Kd . since that reduces aggregate demand. Obviously. the interest rate (the cost of finance). this model exhibits behaviour described by the accelerator effect but less extreme than that of the simple accelerator. If Y then rises by only 5. This means that the simple accelerator model implies that fixed investment will fall if the growth of production slows. as suggested by the accelerator effect. close.K-1) where x is a coefficient representing the speed of adjustment (1 ≥ x ≥ 0). and technology. a rise in output causes a rise in investment. or even become negative. the expected level of output. the equation implies that the level of investment will be 5×2 = 10. The desired stock of capital goods is determined by such variables as the expected profit rate. then net investment will equal 10×2 = 20. In the Neoclassical accelerator model of Dale Jorgenson. Thus. Modern economists have described the accelerator effect in terms of the more sophisticated flexible accelerator model of investment. such a fall in output will result if slowing growth of production causes investment to fall. An actual fall in production is not needed to cause investment to fall. if the desired capital stock is less than the actual stock. This equation implies that if Y rises by 10.In = k×ΔY Suppose that k = 2. ceteris paribus. the simple accelerator model implies an endogenous explanation of the business-cycle downturn. However.
In the cycles before World War II or that of the late 1990s in the United States. Despite being named cycles. Juglar cycle In the Juglar cycle. and prices. the Kondratieff wave or cycle (45–60 years) — after Nikolai Kondratieff. Types of business cycle Traditional business cycle models The main types of business cycles enumerated by Joseph Schumpeter. often as multiples of the Kondratieff cycle. the Juglar fixed investment cycle (7–11 years) — after Clement Juglar. and periods of relative stagnation or decline (contraction or recession). the growth periods usually ended with the failure of speculative investments built on a bubble of confidence that bursts or deflates. the Kuznets infrastructural investment cycle (15–25 years) — after Simon Kuznets. Even longer cycles are occasionally proposed. Business Cycle The business cycle or economic cycle refers to the fluctuations of economic activity about its long term growth trend. These fluctuations are often measured using the real gross domestic product. these fluctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity). Nobel Laureate.after Jay Wright Forrester. the Toffler civilisation cycles (1000-2000 years) . In . have been named after their discoverers or proposers: the Kitchin inventory cycle (3–5 years) — after Joseph Kitchin. and others in this field. the Forrester cycles (200 years) .after Alvin Toffler. aggregate demand.perfect competition. consumer confidence. which is sometimes called "the" business cycle. recovery and prosperity are associated with increases in productivity.
being replaced by Party A. and the downwards swing of the cycle. The political business cycle is an alternative theory stating that when an administration of any hue is elected. Politically-based business cycle models Another set of models tries to derive the business cycle from political decisions. adopts contractionary policies reducing inflation and growth. Cycles between 1945 and the 1990s in the United States were generally more restrained and followed political factors.these cycles. It then adopts an expansionary policy in the lead up to the next election. Regime B. The replacement. which had been similarly paid for by the United States. with that of Black Monday in New York eleven years after the First World War. pressure arises for politicians to try to smooth out the oscillations. An important goal of all . but is voted out of office when inflation becomes unacceptably high. such as fiscal policy and monetary policy. which had been bankrolled by Britain. the periods of contraction and stagnation reflect a purging of unsuccessful enterprises as resources are transferred by market forces from less productive uses to more productive uses. the nearest equivalent in time and intensity was the recession of 1958. however. it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. It is voted out of office when unemployment is too high. The partisan business cycle suggests that cycles result from the successive elections of administrations with different policy regimes. Automatic stabilisation due to the government's budget helped defeat the cycle even without conscious action done by policy-makers. The phrase was noted during the Great Depression due to the similarity of the coming of the Panic of 1825 in London ten years after the end of the Napoleonic Wars. After the Second World War. resulting in growth and inflation. A colloquial term for a crisis of this time scale is a "decennial crisis" (meaning one that occurs after about ten years). hoping to achieve simultaneously low inflation and unemployment on election day. Preventing business cycles Because the periods of stagnation are painful for many who lose their jobs. Regime A adopts expansionary policies.
According to some theorists. all that the government can do is to change the timing of economic crises. Alternative interpretations of business cycles Marxist Michal Kalecki's Marxian-influenced "political business cycle" theory blames the government. even when Keynesian theory is applied. however. some of Herbert Hoover's efforts (including tax increases) are widely. potentially . Additionally. Neoclassical economics plays down the ability of Keynesian policies to manage an economy. government policy is seen as making it more dramatic and thus more painful. Government intervention in the economy can be risky. (Friedman calls the Great Depression the "Great Contraction" because of this). though not universally.Western nations since the Great Depression has been to limit the dips. The stagflation of the 70's supported their theory by flying in the face of Keynesian predictions. Friedman has gone so far as to argue. In this view. Worse. For instance. for example as severe inflation or a steadily increasing government deficit. that all the Federal Reserve System can do is to avoid making large mistakes. The crisis could also show up in a different form. economists like Nobel Laureate Milton Friedman or 2006 Nobel Laureate Edmund Phelps have made ground in their arguments that inflationary expectations negate the Phillips Curve in the long run. this difficulty is insurmountable. notably nineteenth-century advocates of communism. by delaying a crisis. in which they made what would have been a recession into a great depression. Challenging the Phillips Curve since the 1960s. believed to have deepened the depression. Karl Marx in particular claimed that the recurrent business cycle crises of capitalism were inevitable results of the system's operations. Managing economic policy to even out the cycle is a difficult task in a society with a complex economy. He argued that no democratic government under capitalism would allow the persistence of full employment. so that recessions would be caused by political decisions: persistent full employment would mean increasing workers' bargaining power to raise wages and to avoid doing unpaid labour. as he believes they did by contracting the money supply very rapidly in the face of the Stock Market Crash of 1929.
it is fluctuations in real GDP. which is not useful for measuring well-being and also generates distortions in the perception of economic growth because the price changes of the various products are disproportional. it is often useful to use the anticipated business cycle as a baseline. and which must fund itself by cashflow in late years. Circular flow of income In economics. Accordingly. real gross domestic product. unemployment. so that unreasonable assumptions. economic issues which are their main concern of business cycle experts.e. After all.and make the citizens pay for it with recessions afterwards. e. which most likely drives them further apart politically. which would use direct force to destroy labour’s power.g. (He did not see this theory as applying under fascism. i. interest rates.. the inter-dependent entities of producer and consumer are referred to as "firms" and "households" respectively (In some models. constant exponential growth. the economists and bankers may be right to use real GDP when studying business cycles.hurting profitability. Business cycle theory has been most effective in microeconomics where it aids in the preparation of risk management scenarios and timing investment. not those of measures of well-being. When planning such large investments. However. Problems of measurement Some argue that modern business cycle theory often measures growth by using the flawed measure of the economy's aggregate production. there is a mismatch between the state of economic health as perceived by many individuals and that perceived by the bankers and economists.e. especially in infrastructural capital that must pay for itself over a long period. i. these are referred to as the residential and business sectors) and . are more easily eliminated. unlike with issues of long-term economic growth. In the circular flow model. the term circular flow of income or circular flow refers to a simple economic model which describes the reciprocal circulation of income between producers and consumers. and inflation. proponents of the "electoral business cycle" theory have argued that incumbent politicians encourage prosperity before elections in order to ensure re-election -. that cause changes in employment.) In recent years.
. The circle of money flowing through the economy is as follows: total income is spent (with the exception of "leakages" such as consumer saving).e. Firms provide consumers with goods and services in exchange for consumer expenditure and "factors of production" from households. while that expenditure allows the sale of goods and services. They would explicitly include the roles of government and financial markets. . ending up in the hands of the households. Assumptions The basic circular flow of income model consists of six assumptions: The economy consists of two sectors: households and firms. Labor and other "factors of production" are sold on resource markets. Households spend all of their income (Y) on goods and services or consumption (C).provide each other with factors in order to facilitate the flow of income. Or Simplified Diagram More complete and realistic circular flow models are more complex. purchased by firms. helping them to supply resources. "injections" such as fixed investment – can add to total spending. along with imports and exports. are then used to produce goods and services. These resources. The latter are sold on product markets. which in turn allows the payment of income (such as wages and salaries). Expenditure based on borrowings and existing wealth – i.
expenditure (E) and output (O) to change. This is due to the factors that are not considered as part of the model.There is no saving (S). For example. All output (O) produced by firms is purchased by households through their expenditure (E). capital and raw materials. the flow of income from the household is assumed to be complete. A typical model for a circular flow of income also does not account for taxes and similar expenses that do absorb a portion of the income flow of any household. that is: Y=E=O This means that the expenditure of buyers (households) becomes income for sellers (firms). The factor owners spend this income on goods which leads to a circular flow of income. There is no government sector. the model is very limited. There is no financial sector. Two Sector Model In the simple two sector circular flow of income model the state of equilibrium is defined as a situation in which there is no tendency for the levels of income (Y). "transferring" their income to the factor owners. The model also assumes that all products produced by the firms are actually consumed by domestic households. The firms then spend this income on factors of production such as labour. There is no overseas sector. Five sector model . Drawbacks: While the exercise of calculating a circular flow of income can be helpful in demonstrating the strength or weakness of domestic goods to meet the needs of domestic customers. There are no provisions for households choosing to save part of the income in some form.
Unlike the two sector model where there are six assumptions the five sector circular flow relaxes all six assumptions. For this reason they are a leakage because it is a leakage out of the current income thus reducing the expenditure on current goods and services. The first is the Financial Sector that consists of banks and non-bank intermediaries who engage in the borrowing (savings from households) and lending of money. The leakage that the Government sector provides is through the collection of revenue through Taxes (T) that is provided by households and firms to the government. The injection provided by the government sector is Government spending (G) that provides collective services and welfare payments to the community. In terms of the circular flow of income model the leakage that financial institutions provide in the economy is the option for households to save their money. state and federal governments. . The injection that the financial sector provides into the economy is investment (I) into the business/firms sector. This is a leakage because the saved money can not be spent in the economy and thus is an idle asset that means not all output will be purchased.All leakages and injections in five sector model Leakages Injections Saving (S) Investment (I) Taxes (T) Government Spending (G) Imports (M) Exports (X) The five sector model of the circular flow of income is a more realistic representation of the economy. The next sector introduced into the circular flow of income is the Government Sector that consists of the economic activities of local. An example of a tax collected by the government as a leakage is income tax and an injection into the economy can be when the government redistributes this income in the form of welfare payments. Since the first assumption is relaxed there are three more sectors introduced.
In terms of the five-sector circular flow of income model the state of equilibrium occurs when the total leakages are equal to the total injections that occur in the economy. China pays the exporter of the wool (the farmer) therefore more money enters the economy thus making it an injection. The final sector in the circular flow of income model is the overseas sector which transforms the model from a closed economy to an open economy. which represent spending by residents into the rest of the world. This state can be contrasted to the state of disequilibrium where unlike that of equilibrium the sum of total leakages does not equal the sum of total injections. Therefore since the leakages are equal to the injections the economy is in a stable state of equilibrium. The main injection provided by this sector is the exports of goods and services which generate income for the exporters from overseas residents. Another example is China processing the wool into items such as coats and Australia importing the product by paying the Chinese exporter. The main leakage from this sector are imports (M). An example of the use of the overseas sector is Australia exporting wool to China.which is a form of government spending back into the economy. By giving values to the leakages and injections the circular flow of income can be used to show the state of disequilibrium. Disequilibrium can be shown as: S+T+M≠I+G+X Therefore it can be shown as one of the below equations where: Total leakages > Total injections Or . This can be shown as: Savings + Taxes + Imports = Investment + Government Spending + Exports OR S + T + M = I + G + X. since the money paying for the coat leaves the economy it is a leakage.
taxation for the higher threshold will increase and they will be able to spend more on imports. output. This will lead to a fall in the leakages until they equal the injections and a lower level of equilibrium will be the result. As the income falls households will cut down on all leakages such as saving. expenditure and output will greatly rise causing a boom in economic activity. But if S + T + M < I + G + X the levels of income. An example of this is if: S + T + M > I + G + X the levels of income. expenditure and employment will rise causing a boom or expansion in economic activity.Total Leakages < Total injections The effects of disequilibrium vary according to which of the above equations they belong to. output. . In this case when the leakages increase they will continue to rise until they are equal to the level injections. The other equation of disequilibrium. expenditure and output will fall causing a contraction or recession in the overall economic activity. they will also pay less in taxation and with a lower income they will spend less on imports. changes in expenditure and output will lead to equilibrium being regained. if disequilibrium were to occur in the five sector circular flow of income model. As the households income increases there will be a higher opportunity to save therefore saving in the financial sector will increase. if S + T + M < I + G + X in the five sector model the levels of income. If S + T + M > I + G + X the levels of income. The end result of this disequilibrium situation will be a higher level of equilibrium. expenditure and employment will fall causing a recession or contraction in the overall economic activity. To manage this problem.
An increase in disposable income leads to an increase in consumption. Consumption is generally measured by household consumption expenditures (known as personal consumption expenditures in the United States) and is determined by the consumption function. consumption is altered by the ability of individuals to take advantage of the gains from trade to adjust their consumption activities with others in the economy. Consumers choose the group of goods and services that make them happiest. Changes in plans. It can also be defined as "the selection. Increases in consumption follow the famous marginal propensity to consume. Autonomous consumption refers to consumption spending done as part of long-term plans for the future (smoothing out income fluctuations. production is directed towards those goods and services that the individual prefers. or the purchase of currently produced goods and services out of income. All activities are directed towards consumption. out of savings (net worth). and geographical analysis.) and as a result of habits and contractual commitments. disposal and recycling of goods and services". habits. production and marketing. or from borrowed funds. etc. With the advent of exchange. use. environmentalism. In Keynesian economics. consumption is the total personal consumption expenditure. etc. It is part of aggregate demand or effective demand. which sees a consumption as consisting of two main parts: Induced consumption refers to increases in consumer spending occurring as disposable income rises. or of personal and perhaps unique activities. In a one-person world. providing for retirement and other expected future events. adoption. leads to shifts of the . expectations. History John Maynard Keynes developed the idea of the consumption function. especially by the marginal propensity to consume. It refers to that part of disposable income (income after taxes paid and payments received) that does not go to saving. moving along the consumption function in a graph. either of traditional goods and services. Analyzing human consumption of available resources play an important role in economics. as opposed to their design.Consumption In economics consumption is primary motivating force in the wealth or utility maximizing paradigm.
consumption was seen as rather unimportant compared to production. Mackay) Critical Theory is an important influence on contemporary studies. advertising. increasing consumer power in the market place. it is recognised as central to modern life. Often. Consumer studies attempt to help marketing. Traditionally. A counter theory highlights the subversive aspects of consumption. Feminist studies highlight the importance of women as consumers. with consumers buying and using goods. places etc in ways unintended by the producers. Cultural Studies is interested in the role of material goods in culture (e. and the 'consumer' society (e. as development of an approach that sees consumers as 'victims' of producers and their social situation. Current theories investigate the role of economic and cultural factors in constraining consumption (Bourdieu). Studies of consumption come from a variety of backgrounds. Studying consumption can be done through traditional survey methods. Douglas et al). and music sharing on the internet. With the development of a consumer society. User research aims to improve product design. Examples include city squares turned to skateboard parks. as in the permanent income hypothesis. Sociology of consumption has moved well beyond Veblen's early work on 'conspicuous' consumption. and how this affects society and human relationships. Contemporary studies focus on meanings of goods. and the political and economic issues surrounding it. role of consumption in identity making.g. Additional Reading Material on Consumption Sociological Studies of Consumption Studies of consumption investigate how and why society and individuals consume goods and services. ethical consumption etc. Domestication theory focuses on mass market technologies. as consumption is central to contemporary culture.consumption function in a graph. or various ethnographic techniques. the growth in marketing. Consumption studies are difficult because they involve . and particularly the role of the domestic arena in consumption. sophisticated consumers. Media studies try to understand the consumption of media products such as television and video games. the word "consumption" refers instead to the benefit received from consumer goods and services (as opposed to the amount spent on such products).g.
The marginal propensity to consume is measured as the ratio of the change in consumption to the change in income. Mathematically. For example. The MPC relies heavily upon the real (inflation-adjusted) rate of interest. where a is the change in consumption. and the marginal propensity to consume is 0. The MPC can be more than one if the subject borrowed money to finance expenditures higher than their income. your marginal propensity to consume will be 0. then of that dollar. the family will spend 65 cents and save 35 cents. You suddenly have $500 more in income than you did before. .8 ($400 / $500). the marginal propensity to consume (MPC) function is expressed as the derivative of the consumption (C) function with respect to disposable income (Y). A high rate of interest causes spending in the future to become increasingly attractive due to the intertemporal substitution effect on consumption.65. and b is the change in disposable income that produced the consumption. Suppose you receive a bonus with your paycheck. both of which are crucial to Keynesian economics and are key variables in determining the value of the multiplier. rather than formalised settings such as the workplace. If you decide to spend $400 of this marginal increase in income on a new business suit. Let's give an example. and it's $500 on top of your normal annual earnings. thus giving us a figure between 0 and 1. if a household earns one extra dollar of disposable income. bringing research into the private domain. Because a rate increase primarily . Marginal propensity to consume The marginal propensity to consume (MPC) refers to the increase in personal consumer spending (consumption) that occurs with an increase in disposable income (income after taxes and transfers).investigating everyday life situations. One minus the MPC equals the marginal propensity to save (in a two sector closed economy).
hence aggregate demand will rise as well. 4178). which in turn will mean more spending and so on. so does future income[C= -(1+r)c +we(1+r)]. In a two period model. The money does not disappear. the multiplier is 2. Economists often distinguish between the marginal propensity to consume out of permanent income. This can be done in a period of recession or economic uncertainty. What is more. and the marginal propensity to consume out of temporary income. Say that all of these workers combined spend $2 million dollars in total. revenue to suppliers etc. This implies that the Keynesian multiplier should be smaller in response to permanent changes in income than it is in response to temporary changes in income (though the earliest Keynesian analyses ignored these subtleties). as S(1+r) increases with the interest rate. since there was an initial $1 million input which created a $2 million output. In other words. . the multiplier effect refers to the idea that an initial spending rise can lead to an even greater increase in national income. an initial change in aggregate demand can cause a further change in aggregate output for the economy. the marginal propensity to consume should also be affected by factors such as the prevailing interest rate and the general level of consumer surplus that can be derived from purchasing. The money invested by a government creates more jobs. However. every dollar of current income spent by the consumer is 1(1+r) dollars the consumer will not be able to spend in the second period. p. For example: a company spends $1 million to build a factory. because if a consumer expects a change in income to be permanent. the distinction between permanent and temporary changes in income is often subtle in practice. Multiplier In economics. The multiplier effect is a tool used by governments to restimulate aggregate demand. The builders will have higher disposable income as a result. but rather becomes wages to builders. the consumer relies on becoming a lender to offset this effect.decreases the present value of lifetime wealth. so consumption. Therefore. and there is in some cases hardly any way to assign to income data a socalled permanent or temporary character. then they have a greater incentive to increase their consumption (Barro and Grilli.
which may have knock-on economic effects for the city or region. book in at the hotel. catch a taxi from the airport to the hotel. particularly in the long run. It must be noted that the extent of the multiplier effect is dependent upon the marginal propensity to consume and marginal propensity to import. the hotel needs to hire the staff. and the movies and tourist destinations need staff and cleaners. Motives to hold money. marginal utility is the utility added to the total utility of a stock of goods by the addition of one unit of the good. building a new factory may lead to new employment for locals. Therefore. The basic formula for the economic multiplier. so an initial fall in spending can trigger further falls in aggregate output.e. The concept of the economic multiplier on a macroeconomic scale can be extended to any economic region. some other schools of economic thought reject. Liquidity Trap and Unemployment MEC – Marginal Efficiency of Capital Investment levels depend on two factors: rate of interest and marginal efficiency of capital. the initial increase in spending). or downplay the importance of multiplier effects. The taxi driver needs petrol (gasoline) for his cab.Another example is when a tourist visits somewhere they need to buy the plane ticket. For example. For example. is the change in equilibrium GDP divided by the change in investment (i. the restaurant needs attendants and chefs. The word “marginal” in economics means “on the borderline”. eat at the restaurant and go to the movies or tourist destination. in macroeconomics. The multiplier has been used as an argument for government spending or taxation relief to stimulate aggregate demand. MEC is defined as the percentage yield earned on an . It is particularly associated with Keynesian economics. Also that the multiplier can work in reverse as well. MEC.
he will incur a loss. In other words. expressed as a rate of return on investment. an individual makes a variety of payments for rent or a mortgage. which is the demand for money to meet unforeseen contingencies. the number of currency bills they hold. If the person does not have money with which to pay. • The precautionary motive. • The speculative motive. In the course of each month. The tradeoff here is between the amount of interest an individual forgoes by holding money and the costs and inconveniences of holding a small amount of money. These theories of money demand are built around a tradeoff between the benefits of holding more money versus the interest costs of doing so. which arises from uncertainties about the money value of other assets that an individual can holds. it is profit. Transactions Demand The transactions demand for money arises from the use of money in making regular payments for goods and services. groceries. . Motives to hold money The demand for money is a demand for real balances. In other words. Money generally earns no interest or less interest than other assets. or need to take a cab in the rain. or have. and other purchases. or have to pay for a prescription. Realistically. The person might decide to have a pizza. the less money we expect the individual to hold. expected from the last increment of capital. The higher the interest loss from holding a rupee of money. They are not concerned with the nominal money holdings. the newspaper. people hold money for its purchasing power. There are three major motives underlying the demand for money: • The transactions motive. that is. Precautionary Motive Here we concentrate on the demand for money that arises because people are uncertain about the payments they might want.additional unit of capital. which is the demand for money arising from the use of money in making regular payments. for the amount of goods they can buy with it. to make. an individual does not know precisely what payments (s)he will be receiving in the next few weeks and what payments will have to be made.
By contrast. An individual who has wealth has to hold that wealth in specific assets. The added consideration is that greater uncertainty about receipts and expenditures increases the demand for money. The Speculative Demand for Money The transactions and precautionary demand for money emphasize the medium of exchange function of money. people prefer to hold ready cash with them because they cannot earn much in terms of interest on their savings. The demand for money – the safest asset – depends on the expected yields as well as on the riskiness of the yields on other assets. The Liquidity Trap This is a phenomenon that occurs in the money market of an economy. The theory states that the equilibrium rate of interest is arrived at when the demand for money is equal to its supply. An investor’s aversion to risk certainly generates a demand for a safe asset. the more interest (from banks or other such sources) he or she is giving up. We are back to a tradeoff similar to that examined in relation to the transactions demand. if the rate of interest is low. The supply of money is decided upon by the central bank of the country and is assumed to not be affected by any other factors. Money is a safe asset in that its nominal value is known with certainty. not having money immediately available). Similarly. One would think an investor would want to hold the asset that provides the highest returns. it is unwise to hold the entire portfolio in a single risky asset. the return lost by holding money) – lowers money demand. An increase in the expected return on other assets – an increase in the opportunity cost of holding money (that is. people want to hold less of liquid cash because they can earn more by keeping their money in the bank. The demand for money is a function of rate of interest.The more money an individual holds. But sometimes due to certain reasons. among other things. But the more money the person holds. the rate of . This is why the money supply curve in the diagram is a straight vertical line. This implies that when the rate of interest is high. for each refers to the need to have money on hand to make payments. Now we move over to the store of value function of money and concentrate on the role of money in the investment portfolio of an individual. the less likely he or she is to incur the costs of illiquidity (that is. It would be held as the safe asset in the portfolios of investors. However. an increase in the riskiness of the returns on other assets increases money demand. given that the return on most assets is uncertain. Those assets make up a portfolio.
That is to say. It hopes that this will result in greater spending and consumption by people and also greater investment thereby giving stimulus to the economy. the government tries to use its monetary policy in order to stimulate demand and correct the problems in the economy. Consequently. and stress. But the rate of interest does not move. Unemployment Rate – Unemployment rate measures the number of jobless persons actively seeking work compared to the total number of working-age persons participating in the labor force. High interest rates discourage private investment in the economy and widen the output gap. In such a case. Unemployment Cost of unemployment – • For the economy: There is loss of aggregate output in the economy. and just prefer to hold liquid cash with them. When the economy is in a liquidity trap. and one of the most effective ways of overcoming this situation is known to be fiscal expansion. the demand for money becomes independent of the ROI. Basic Types of Unemployment Frictional Unemployment . people do not care what the ROI then is.interest goes so low that it is not expected to go any lower. This is usually a spiral. Banks also behave in the same way because they do not get much benefit from lending out money. • For people at individual level: Loss of income. self respect. real interest rates are expected to rise because according to the speculative theory the ROI cannot fall any further. This is when the money demand curve becomes flat. So it pumps in more cash into the market which results in a rightward shift of the money supply curve. and the all the extra money supplied is held by the people because the opportunity cost of holding money is minimum. so they hoard money.
Cyclical Unemployment •Happens when we have less than full utilization of all productive resources in the economy due to recession. •This type of unemployment is a productive activity that has benefits as well as costs: (1) Benefit: information about job opportunities and pay (2) Cost: foregone wage associated with the first job opportunity available. quitting jobs. it may be wise for an unemployed person to refuse his/her first job offer. • By searching. • They can get improved information by searching the market. and relocating from one community to another. an unemployed person gains valuable information about the labor market.Occurs because people will always be fired. •It is highest when economy is growing as there are more job opportunities in the market. •Unemployment resulting from business recessions that occur when aggregate demand is insufficient to create full employment. summer resorts •Agriculture. •Workers do not have perfect information about all available jobs and possible rates of pay. • With little job market information. •Construction •Tourism. •Better information about alternative sources of jobs and available workers could help to reduce length of such unemployment. • People are more optimistic about finding better job opportunities. Voluntary Frictional Unemployment •Time is needed to find the “right” job. Canning . taking time to look for the right job. Seasonal Unemployment •This kind of unemployment occurs due to seasonal pattern of products or services of an industry.
Demand for a product could fall drastically so that workers specializing in the production of it become unemployed. •Does not mean the unemployment rate is zero. 3. There will always be some frictional unemployment. Structural unemployment can last for a long time. • Significant retraining time. . 4. Some of the unemployed people lack proper skills and training while others lack the geographic mobility to take advantage of job opportunities. 2. 5. May result from technological changes that reduce the demand for labor to do specific tasks (production welders). •Industries -Automobiles -Steel -Banking Full Employment/Natural Rate of Unemployment •An arbitrary level of unemployment that corresponds to “normal” friction in the labor market. An imbalance exists between the skills possessed by workers and the skills demanded in the labor markets. Some are unemployed because they are covered by a mandated wage/benefit package so high that they become unqualified for work because their value to employers is less than the mandated minimum. •Reasons: 1.Structural Unemployment •Occurs due to fundamental change in the structure of the economy.
the increased costs are passed on to consumers. A company may need to increases wages if labourers demand higher salaries (due to increasing prices and thus cost of living) or if labour . capital. 3. reflecting consumer choices or preferences and changing costs. Increase in the aggregate demand for goods and services. Production Costs To understand better their effect on inflation. Types of Inflation There are 2 kinds of inflations in which we ignore the effects of money supply and concentrate specifically on the effects of aggregate supply and demand: cost-push and demand-pull inflation. This is caused by four possible factors. Inflation is defined as the rate at which the general price level of goods and services is rising. This is different from a rise and fall in the price of a particular good or service. one must understand how and why production costs can change. this is not considered inflation. causing a rise in the general price level (inflation). 4. When there is a decrease in the aggregate supply of goods and services stemming from an increase in the cost of production. increases because demand for it is high. causing purchasing power to fall. Cost-Push Inflation Aggregate supply is the total volume of goods and services produced by an economy at a given price level. companies cannot maintain profit margins by producing the same amounts of goods and services. Increase in the money supply. Decrease in the demand for money.INFLATION Persistent tendency for the general level of prices to rise is known as Inflation. So if the cost of one item. we have cost-push inflation. each of which is related to basic economic principles of changes in supply and demand: 1. Cost-push inflation basically means that prices have been “pushed up” by increases in costs of any of the four factors of production (labour. Individual prices rise and fall all the time in a market economy. Decrease in the aggregate supply of goods and services. land or entrepreneurship) when companies are already running at full production capacity. say a particular model car. Inflation occurs when most prices are rising by some degree across the whole economy. 2. As a result. With higher production costs and productivity maximized.
causing inflation. businesses. The graph below shows the level of output that can be achieved at each price level. increasing prices is a way for companies to constantly increase their bottom lines and essentially grow. When these four sectors concurrently want to purchase more output than the economy can produce. we can use a simple price-quantity graph showing what happens to shifts in aggregate supply. Another factor that can cause increases in production costs is a rise in the price of raw materials. they will need to raise the retail price paid by consumers. This could occur because of scarcity of raw materials. which is caused by a depreciation in their home currency. As production costs increase. categorized by the four sections of the macro economy: households. The rationale behind this increase is that. they compete to purchase limited amounts of goods and services. making retail prices higher. Factors Pulling Prices Up The increase in aggregate demand that causes demand-pull inflation can be the . The government may also increase taxes to cover higher fuel and energy costs. the company has to allocate more resources to pay for the creation of its goods or services. forcing companies to allocate more resources to paying taxes. usually occurs in an expanding economy. Putting It Together To visualize how cost-push inflation works. also referred to as “too much money chasing too few goods”. the company passes the increased costs of production on to the consumer.becomes more specialized. This excessive demand. To continue to maintain (or increase) profit margins. a factor of production. Demand-Pull Inflation Demand-pull inflation occurs when there is an increase in aggregate demand. aggregate supply decreases from AS1 to AS2 (given production is at full capacity). Buyers in essence “bid prices up”. thereby causing inflation. Along with increasing sales. for companies to maintain (or increase) profit margins. an increase in the cost of labour and/or an increase in the cost of importing raw materials and labour (if the they are overseas). If the cost of labour. increases. governments and foreign buyers. causing an increase in the price level from P1 to P2.
If aggregate demand increases from AD1 to AD2. as represented by the change from P1 to P2. Just like cost-push inflation. For example. an increase in government purchases can increase aggregate demand. As companies increase production due to increased demand.result of various economic dynamics. the ‘quantity supplied’ will increase (given production is not at full capacity). we can see the relationship between aggregate supply and demand. As a result. thus increasing aggregate demand and eventually causing demand-pull inflation. Cost-push inflation is a result of decreased . When aggregate demand increases without a change in aggregate supply. The rationale behind this lack of shift in aggregate supply is that aggregate demand tends to react faster to changes in economic conditions than aggregate supply. thus pulling up prices. in the short run. There are endemic and perhaps diverse reasons at the root of inflation. which further increases aggregate demand. pass on the higher cost of production to consumers’ prices. thereby raising the overall level of aggregate demand (we are assuming aggregate supply cannot keep up with aggregate demand as a result of full employment in the economy). thereby increasing the cost of production. Inflation is not simply a matter of rising prices. Rapid overseas growth can also ignite an increase in demand as more exports are consumed by foreigners. for foreigners. Putting It Together Demand-pull inflation is a product of an increase in aggregate demand that is faster than the corresponding increase in aggregate supply. to maintain profit levels. the purchasing of imports decreases while the buying of exports by foreigners increases. households are left with more disposable income in their pockets. the cost to produce each additional output increases. but cause a change in the quantity supplied as represented by a movement along the AS curve. this will not change (shift) aggregate supply. if government reduces taxes. overtime) and/or invest in additional equipment to keep up with demand. demand-pull inflation can occur as companies. The rationale behind this change is that companies would need to pay workers more money (e. This in turn leads to increased consumer spending. Finally. The results of reduced taxes can lead also to growing consumer confidence in the local economy. reduces the price of exports. which raises the price of imports and. Looking again at the price-quantity graph. Another factor can be the depreciation of local exchange rates.g.
or trading in foreign exchange markets. Monetary policy is generally referred to as either being an expansionary policy. These two policies are used in various combinations in an effort to direct a country's economic goals Fiscal policy Fiscal policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation's economy. An expansionary fiscal policy will expand the economy's growth. or a contractionary policy. then the economy may be better able to rectify (if necessary) rising prices and the loss of purchasing power. The increase in aggregate supply causing demand-pull inflation can be the result of many factors. It contrasts with monetary policy. Monetary theory provides insight into how to craft optimal monetary policy. A contractionary fiscal policy will constrict the economy's overall growth. or contractionary. A decrease in government purchases or an increase in taxes shifts the aggregate demand curve to the left. thus expanding output (national income). which describes policies concerning the supply of money to the economy. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates. Monetary Policy It is the process by which the government. If an economy identifies what type of inflation is occurring (cost-push or demand-pull). while contractionary policy has the goal of raising interest . Fiscal policy and Monetary measures. expansionary. thus lowering output (national income). Fiscal policy is described as being either neutral. central bank. and a contractionary policy decreases the total money supply.aggregate supply as well as increased costs of production. Fiscal policy is the deliberate and thought out change in government spending. including increases in government spending and depreciation of the local exchange rate. A contractionary fiscal policy occurs when the government raises taxes and/or lowers spending. or monetary authority manages the supply of money. CONTROLS OF INFLATION There are 2 main methods used to control the inflation in an economy. government borrowing or taxes to stimulate or slow down the economy. itself a result of different factors. An increase in government spending or a cut in taxes shifts the aggregate demand curve to the right. where an expansionary policy increases the total supply of money in the economy. An expansionary fiscal policy occurs when the government lowers taxes and/or increases spending.
if the RBI raises the discount rate this lowers the amount of money in circulation because fewer loans are expended as the Prime goes up. This has a corresponding effect on inflation. the discount rate is interest rate that the RBI charges banks on money the banks borrow from the RBI. more to lend and more money goes into circulation. If the government prints money it increases the amount in circulation and if it destroys money it restricts the amount in circulation. If the RBI lowers the discount rate. Monetary policy should be contrasted with fiscal policy.One of the most important functions of the RBI is the changing of the discount rate. These institutions may borrow money from the RBI because they either have an unexpected drop in their member bank reserves or because they are faced with seasonal demands for loans. does exist. The power. speeds up the economy and increases inflation. .The process of changing the liquidity of base currency through the open sales and purchases of (government-issued) debt and credit instruments is called open market operations. or percentage.The simplest and clearest of all the RBI’s operations. Conversely. the discount rate. If the RBI raises its reserve requirements then banks have less money on hand and thus have less to lend. print money or destroy money in order to effect changes in the economy. of deposits that its member banks must keep in reserve at them.rates to combat inflation (or cool an otherwise overheated economy). Member banks borrow money from the RBI to pay out loans and other investments but they must pay a fee. banks have more money on hand. Changing of discount Rates . banks are charged less for the money they borrow and thus more people borrow. The government does not. as a matter of sound economic policy. Changing the Cash Reserve Ratio – The RBI has the power to set an amount. spending and taxation. however to do so. Conversely if the fed lowers the reserve requirement . This lowers the amount of money in circulation and could have the impact of slowing the economy and inflation. This slows the economy and lowers inflation. This increases the amount of money in circulation. which refers to government borrowing. thus increasing spending and possibly inflation. Printing Money . The reason this can be done is because the RBI acts as the central bank and makes loans to other depository institutions. There are different types of monetary policies: Open market operations .
non-banking financial institutions. As a result.money supply. Besides. This leads to a rise in aggregate supply and reduces the amount of excess demand in the long run. the RBI also announces norms for the banking and financial sector and the institutions which are governed by it. This would involve controlling total spending by either increasing interest rates or raising taxation. In banking and economic terms money supply is referred to as M3 . • An improvement in the supply-side performance of the economy would also achieve this. financial institutions. through which the Reserve Bank of India seeks to ensure price stability for the economy.INFLATIONARY GAP Inflationary Gap may be defined as a situation in which the demand of the economy exceeds productive potential. • Monetary Policy: Higher interest rates to curb consumer demand • Fiscal Policy: A rise in the burden of taxation to reduce real disposable incomes • Supply-side Policy: Measures to increase productivity and efficiency. interest rates and the inflation. Nidhis and primary dealers (money markets) and dealers in the foreign exchange (forex) market. actual GDP may exceed potential GDP leading to a positive output gap in the economy. Monetary policy can be summarized as the central bank’s actions to influence the availability and cost of money and credit in the economy. These factors include . MONETARY POLICY The Monetary and Credit Policy is the policy statement. The primary objective of .which indicates the level (stock) of legal currency in the economy. Controlling an inflationary Gap The government may use monetary and or fiscal policy to help reduce the size of the inflationary gap. Total spending may rise faster than the economy's ability to supply goods and services. Inflationary gaps can arise when the economy has grown for a long time on the back of a high level of aggregate demand. traditionally announced twice a year. These would be banks. leading immediately to inflation and an unfavorable balance in trade.
In this situation. growth in employment and income are also looked into. This is also referred to as overheating of the economy: a situation that typically happens in the boom phase when GDP (gross domestic product) growth exceeds the long-term growth potential of the economy. The Monetary Policy regulates the supply of money and the cost and availability of credit in the economy. The monetary policy affects the real sector through long and variable periods while the financial markets are also impacted through short-term implications. The resultant demand-supply mismatch creates inflationary pressures in the economy. consider that an economy is growing too fast. The Reserve Bank of India is responsible for . This situation is regarded as unsustainable. full employment and economic growth. HOW DOES MONITARY POLICY WORK As an illustration. The producers of goods are not able to make enough goods to meet the rising demand. Stability for the national currency (after looking at prevailing economic conditions). 2. DIFFERENCE BETWEEN MONETARY AND FISCAL POLICIES Two important tools of macroeconomic policy are Monetary Policy and Fiscal Policy. OBJECTIVES OF THE MONETARY POLICY The objectives are to maintain price stability and ensure adequate flow of credit to the productive sectors of the economy. 3.these actions is to ensure price stability. The Monetary Policy aims to maintain price stability. the RBI raises interest rates to depress spending and reduce the pressure on inflation. There are four main 'channels' which the RBI looks at: • Quantum channel: money supply and credit (affects real output and price level through changes in reserves money. It deals with both the lending and borrowing rates of interest for commercial banks. money supply and credit aggregates) • Interest rate channel • Exchange rate channel (linked to the currency) • Asset price 4. as the high growth translates into higher inflation.
Changes in bank rate affect credit creation by banks through altering the cost of credit. The Monetary Policy is different from Fiscal Policy as the former brings about a change in the economy by changing money supply and interest rate. an increase in bank rate results in commercial banks increasing their lending rates. Fiscal policy aims at changing aggregate demand by suitable changes in government spending and taxes. whereas fiscal policy is a broader tool with the government. 5. It can increase or decrease the supply of currency as well as interest rate. SOME MONETARY POLICY TERMS 5. the borrower sells the securities to the lending bank for cash.1 Bank Rate Bank rate is the minimum rate at which the central bank provides loans to the commercial banks.2 Repo & Reverse Repo A repurchase agreement or ready forward deal is a secured short-term (usually 15 days) loan by one bank to another against government securities. On the other hand.formulating and implementing Monetary Policy. For instance. control credit and vary the reserve requirements. Usually. Reverse repo rate is the rate that RBI offers the banks for parking their funds with it. the difference in price representing the interest. with the stipulation that at the end of the borrowing term. Repo rate is the rate that RBI charges the banks when they borrow from it. It may be defined as a deliberate change in government revenue and expenditure to influence the level of national output and prices. at the time of recession the government can increase expenditures or cut taxes in order to generate demand. The annual Union Budget showcases the government's Fiscal Policy. Reverse repo operations suck out . it will buy back the securities at a slightly higher price. the government can reduce its expenditures or raise taxes during inflationary times. Repo operations increase liquidity in the system. 5. carry out open market operations. It is also called the discount rate. Legally. The Fiscal Policy can be used to overcome recession and control inflation.
This percentage is called the cash reserve ratio. they are liquid as they can be traded in the secondary market. The buying and selling of these securities laid the foundations of the 1992 Harshad Mehta scam. These are collectively known as SLR securities. 5. Unlike repo and reverse repo rates. and thereby.5 Inflation Inflation refers to a persistent rise in prices. due to scarcity of goods and the presence of many .3 Cash Reserve Ratio All commercial banks are required to keep a certain amount of its deposits in cash with RBI. inflation. 5. Although the bonds are long-term in nature. which act as signaling devices. banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. This serves two purposes. the RBI sucks out liquidity from the system and puts upward pressure on interest rates. it is a situation of too much money and too few goods. 5. The current CRR requirement is 8 per cent.liquidity from the system. CRR. refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. CRR is a blunt instrument that directly acts on liquidity. Thus. or cash reserve ratio. Simply put. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system. The government securities (also known as gilt-edged securities or gilts) are bonds issued by the Central government to meet its revenue requirements. Besides the CRR. By raising CRR.4 Statutory Liquidity Ratio Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities.
The RBI has adopted four concepts of measuring money supply. The second. and personal current accounts. the RBI buys or sells government bonds in the secondary market. demand deposits with the public and other deposits with the public. primary placements and changes in the CRR are the most popular instruments used.plus government deposits and deposits in currencies other than rupee. M2. and conventionally comprises currency with the public and demand deposits (current account + savings account) with the public.buyers. deflation. 5. RBI can reduce the supply of money or increase interest rates to reduce inflation. 6. . including M1. The converse of inflation. The first one is M1. M3 includes net time deposits (fixed deposits). OMO. is quite popular. to increase the supply of money. 5. changes in banks' CRR and primary placements of government debt to control the money supply. OMO. the prices are pushed up. RBI sells securities to mop up the excess money in the market. is the persistent falling of prices. Simply put M1 includes all coins and notes in circulation. as it is also known. MEASURES TO REGULATE MONEY SUPPLY The RBI uses the interest rate. that is. savings deposits with post office saving banks and all the components of M1. plus personal deposit accounts . the Reserve Bank of India purchases and sells securities in open market operations. Similarly. The third concept M3 or the broad money concept. Under the OMO. supply. In times of inflation. which equals the sum of currency with the public.7 Open Market Operations An important instrument of credit control. RBI purchases securities. is a measure of money.6 Money Supply (M3) This refers to the total volume of money circulating in the economy.
When inflationary pressures exist. it drives up bond yields and injects money into the market. banks would immediately increase their lending and borrowing rates. 7. The changes in CRR affect the amount of free cash that banks can use to lend reducing the amount of money for lending cuts into overall liquidity.By absorbing bonds. followed by the RBI. When it sells bonds. Earlier. however. IMPACT OF MONETARY POLICIES 7. driving interest rates up. if there were to be an increase in interest rates. the monetary policy is very important to them also. But over the past 2-3 years. the RBI tries to limit the rise in interest rates that higher government borrowings would lead to. it would offer it at a lower rate of interest. the policy had gained in importance due to announcements in the interest rates.1 Impact on Individuals In recent years. their bottom lines (profits). By directly buying new bonds from the government at lower than market rates. Primary deals in government bonds are a method to intervene directly in markets. This means that banks are free to decide on interest rates on term deposits and loans. Being the central bank. . depending on the rates announced by the RBI. lowering inflation and sucking money out of markets. it does so to suck money out of the system. On the other hand. RBI Governor Bimal Jalan has preferred not to wait for the Monetary Policy to announce a revision in interest rates and these revisions have been when the situation arises. the RBI would have a say and determine direction on interest rates as it is an important tool to control inflation. the RBI sells securities to mop up excess cash from the system. So if you want to place a deposit with a bank or take a loan. Since the rates of interest affect the borrowing costs of corporate and as a result. the interest costs of banks would immediately either increase or decrease. and vice-versa in case of tight liquidity/shortage of funds. Since the financial sector reforms commenced. . A reduction in interest rates would force banks to lower their lending rates and borrowing rates. the RBI has moved towards a market-determined interest rate scenario.
the bank rate is the rate at which banks borrow from the RBI. Besides. The RBI conducts open market operations (OMO) by offering to buy or sell gilts. 7.3 Impact of change in SLR and gilts products on interest rates SLR reduction is not so relevant in the present context for two reasons: First. for the purpose of determining the interest rates. The central bank can influence the cost of funds and availability of credit in the economy by altering the repo/reverse repo rates. bank investment in gilts continues to be high despite the RBI bringing down the minimum SLR to 25 per cent a couple of years ago. the government has begun borrowing at marketrelated rates. Second. it is not the SLR requirement that is important but the size of the government's borrowing program.2 Impact of cut in CRR on interest rates From time to time. The CRR is fixed as a percentage of total deposits. RBI prescribes a CRR or the minimum amount of cash that banks have to maintain with it. If it feels interest rates are too high. and engaging in open market operations. As a result. This means that despite a lower SLR requirement. Therefore. Therefore. 7. banks are still the main source of funds for the government.The bank rate is a tool used by RBI for this purpose as it refinances banks at this rate. interest rates. gilts also provide another tool for the RBI to manage interest rates. rise. . In other words. banks' investment in government securities will go up as government borrowing rises. interest rates come down. as part of the reforms process. changing the reserve requirements. it may bring them down by offering to buy securities at a lower yield than what is available in the market. As government borrowing increases. too. banks get better interest rates compared to earlier for their statutory investments in government securities. As more money chases the same number of borrowers.
The RBI's policies have maximum impact on volatile foreign exchange and stock markets. however.5 Impact on jobs.7. An increase in the money supply . which means that its money market operations as well as changes in the bank rate are generally designed to minimize the inflationary impact of money supply changes. This in turn ramps up production and employment. 7. 8. when inflation fell.increases prices all round because there is more currency moving towards the same goods and services. demand deposits and time deposits .4 Impact on domestic industry and exporters Exporters look forward to the monetary policy since the central bank always makes an announcement on export refinance. higher inflation will drive real wages lower and encourage employers to hire more people. or the rate at which the RBI will lend to banks which have advanced pre-shipment credit to exporters. Typically. the price level in the economy is determined by the amount of money floating around. Since most people can generally see through this strategy. unemployment increased. Jobs. This was the theoretical justification of a long-term trend that showed that higher inflation and employment went together.currency with the public. wages and output are affected over the long run. in some ways. if the trends of high inflation or low liquidity persist for very long period. move to the RBI's tune because of the link between interest rates and capital market yields. If wages move slower than other prices. it limits the impact of the RBI's monetary moves to affect jobs or production. STOCK MARKET AND MONEY MARKET The stock markets and money move similarly. Most people attribute . the RBI follows a least-inflation policy. wages and output At any point of time. A lowering of these rates would mean lower borrowing costs for the exporter. The markets.
the link between the amount of money in the economy and movements in stock markets to the amount of liquidity in the system. This is not entirely true. The factor connecting money and stocks is interest rates. People save to get returns on their savings. In true market conditions, this made bank deposits or bonds (whose returns are linked to interest rates) and stocks (whose returns are linked to capital gains), competitors for people's savings. A hike in interest rates would tend to suck money out of shares into bonds or deposits; a fall would have the opposite effect. This argument has survived econometric tests and practical experience. 9. TRANSMISSION MECHANISM It is the ‘how’ of monetary policy impacting the economy through various channels, directly as well as indirectly. At the cost of simplification, let us take an illustration. Assume that inflation is rising in the economy and the RBI, to tackle it, decides to signal a rate hike by raising the reverse repo rate. This reduces money supply in the economy as banks are induced to park their cash with the RBI. That puts pressure on the longer term interest rates in the economy — for example, the lending rates for housing, consumer loans, etc. These rates tend to go up. The impact of RBI actions on longer-term commercial rates also depends on the expectations of financial market participants, which are shaped by both actions and statements of the central bank. 9.1 Flip side to controlling inflation Continuing the example, higher interest rates discourage consumption and investment, leading to a reduced aggregate demand (GDP growth) in the system. As a consequence of reduced demand, the pressure on inflation eases. The policy objective of reducing inflation is achieved but at the cost of growth. This is often referred to as the growth-inflation trade-off.
9.2 Time taken by monetary policies to attain its objective Monetary policy impulses do not impact the real sector and inflation immediately but with a lag, which varies across countries and sectors. In economies such as the US, the lag of monetary policy transmission to the real sector is estimated to be around one-and-a-half years. In India, the transmission mechanism of monetary policy and the lags involved are not very well understood. 9.3 Other challenges for the conduct of monetary policy face in India Apart from the issues related to monetary policy transmission, the huge inflow of foreign capital has complicated the conduct of monetary policy. The capital inflows have increased the supply of dollars, which makes the rupee stronger.
10. STERILIZATION It refers to the selling of securities to suck liquidity. The extent of sterilization depends on the stock of securities with the government available for intervention. The entire process is quite cumbersome. To understand the dilemma faced by the RBI, one needs to bring in the macroeconomic dilemma of ‘impossible trinity’. Impossible Trinity states that a country cannot simultaneously have an inflexible exchange rate, independent monetary policy, and free capital mobility. With massive capital inflows, the RBI is finding it difficult to simultaneously protect the currency and pursue its monetary policy objectives.
11. CONSTITUENTS OF INDIAN MONEY MARKET Mumbai, Kolkata, Delhi, Chennai, Ahmedabad and Bangalore are the principal centers of the organized sector of the Indian money market, of which Mumbai is the most prominent. The Mumbai money market has now become synonymous with the Indian money market. Today the Mumbai money market occupies the same position in India as the London money market in England and New York money market in the U.S.A. The presence of the head offices at the Reserve Bank and other commercial banks, the leading stock exchange, well organized market of the government securities, the bullion exchange and cotton exchange have made Mumbai the most
prominent financial centre of the country. • The Call Money Market • The Treasury Bill Market, • The Repo Market, • The Commercial Bill Market, • The Certificate of Deposits Market, • The Commercial Paper Market, • Money Market Mutual Funds. • Government Securities Market
11.1 The Call Money Market The call mane market exists in almost all developed money markets. It is generally the most sensitive part of the financial system. Any change in flow of funds and the demand for them clearly reflected in it and the response is generally quick. In India, the call money market is centered at mainly Mumbai, Kolkata and Chennai. Among these the market at Mumbai is the most important. In the call money market borrowing and lending transactions are carried out for one day. These loans, often called as call loans may or may not be renewed the next day. The call money market is also known as inter-bank call money market. Scheduled commercial banks, cooperative banks and the Discount and Finance House of India (DFHI) operate in it. As a special case, institutions like the UTI, the LIC, the mc, the IDBI and the NABARD were allowed to operate in the call money market as lenders. Among the banks the State Bank of India on account of its strong liquidity position is on the lender's side of the market. Brokers lay an important role in the call money market as they keep in touch with banks in the city and continuously try to bring borrowing and lending banks together. In the banking system there are no permanently surplus or deficit banks. In fact, their cash position keeps on changing from hour to hour. Therefore, there has to be a system whereby temporary cash surpluses of some banks should be available to
State governments and semi-government bodies do not hold them in large quantities.A. Except the Reserve Bank of India there are no major holders of Treasury bills. such as the LlC and the UTI and corporate and non-corporate firms do not hold Treasury bills. Non-bank financial intermediaries. 82-day and 364-day) liability of the Central government.3 The Repo Market Repo is a money market instrument which helps in collateralized short-term borrowing and lending through sale/purchase operations in debt instruments. even the Reserve Bank as been a passive or captive holder of these bills which implies that it is under an obligation to purchase all the Treasury bills which are being offered to it by the government. therefore. in the U. In India. Other holders.2 The Treasury Bill Market The Market which deals in Treasury bills is known as the treasury bill market. The call money market provides an institutional arrangement which serves this purpose. The Reserve Bank of India. 11. Treasury bills are the most important money market instrument. securities are sold by their holder to an investor with an . and as a result the open market operations of the central bank in these countries are quite effective. Treasury bills are short term (l4-day. and the U. such as commercial banks. In contrast. Under a repo transaction. Theoretically Treasury bills should be issued for meeting temporary benefits which a government faces due to its excess of revenue over expenditure at some point of time.others who have temporary deficit. In fact. On account of its highly sensitive nature is considered to be the most appropriate indicator of the liquidity position of the money market.S. 2lday.K. It is also required to rediscount whatever Treasury bills are presented to it by banks and others for this purpose.. The Treasury Bill Market in India is very much undeveloped. At present Treasury bills are largely held by the Reserve Bank. This has resulted in the monetization of public debt and has become a major source of inflationary expansion of money supply. takes note of it in adjusting its day to day monetary policy. 11.
public undertaking bonds and private corporate securities have been made eligible for repos to broaden the repo market. Initially repos were allowed in the Central government treasury bills and dated securities created by converting some of the treasury bills. The commercial bill is a bill drawn by one merchant firm on the other. the commercial bill market is undeveloped. During times of foreign exchange volatility. the RBI gradually allowed repo transactions in all government securities and treasury bills of all maturities. since the drawees of the bill usually manage to recover the cost of the goods form their resale or processing and sale during the time it matures. In order to make the repo market an equilibrating force between the money market and the government securities market.agreement to repurchase them at a predetermined rate and date. The old bill market scheme introduced in January 1952 was not correctly designed to . Repos have been used to provide banks an avenue to park funds generated by capital inflows to provide a floor to the call money market. the bill acquires a self. Generally commercialize out of domestic transactions. Secondly. The legitimate purpose of a commercial bill is to reimburse the seller while the buyer delays payment. securities are purchased with a simultaneous commitment to resell at a predetermined rate and date. repos have been used to prevent speculative activities as the funds tend to flow from the money market to the foreign exchange market. Lately State government securities. In India. 11. Under reverse repo transaction.liquidating character.4 The Commercial Bill Market The commercial big market is the sub-market in which the trade bills or the commercial bills are handled. ¬ Repos help to manage liquidity conditions at the short-end of the market spectrum. The two major factors which have arrested the growth of a bill market are: (i) popularity of cash credit system in bank lending and (ii) Unwillingness of the larger buyer to associate himself to bind himself to payment discipline associated with the commercial bills. The commercial bills as instruments are useful to both business firms and banks.
Banks pay a high interest rate on CD’s. They are further freely transferable by endorsement and delivery. In the mid-1980s. maturity of this instrument is flexible. Thus CDs are similar to traditional term deposits but are negotiable and tradable in the short-term money markets. as a corrective measure revised upwards the rate of interest on term deposits of 46 to 90 days. It is essentially a sort of unsecured promissory note sold by the issuer to a banker or a security house. In 1988-89. 11. the Reserve Bank of India took a decision to introduce Certificates of Deposit (CD) with the objective of widening the range of money market instruments and to provide investors eater flexibility in the deployment of their short-term surplus funds. the RBI came up with a new scheme in 1970. Not satisfied. Once this was done in March 1989.6 The Commercial Paper Market The Commercial Paper (CP) is a hart-term instrument of raising funds by corporate.5 The Certificate of Deposit (CD) Market A Certificate of Deposit (CD) is a certificate issued by a bank to depositors of funds that remain on deposit at the bank for a specified period. CD’s are issued at a discount to face value and the discount rate is freely determined. Usually borrowers and lenders adapt the maturity of a CP to their needs.develop a bill market. The Vaghul Committee stressed that it was necessary for the introduction of the CD that the short-term bank deposit rates were aligned with other inter rates. In order to increase the use of the same. the RBI advised banks that at least 25% of their inland credit purchases should be through these bills. the short-term bank deposit rates were much lower than other comparable interest rates. 11. Highly rated corporate which can obtain funds at a cost lower than the cost of borrowing from banks are particularly . Therefore. in this the bills covered under the scheme are genuine trade bills and the scheme provided for their rediscounting. It merely provided for further accommodation to banks in addition to facilities they had already enjoyed. the Reserve Bank. The issuance of CP is not related to any underlying self-liquidating trade.
interested in it. The possibility of raising short-term. With maturity ranging from three to six months they can be issued in multiples of 25 laks subject to a minimum size of Rs. Currently there are three MMMFs functioning in the . The MMMFs have been brought/under the purview of the SEBI regulations since March 7. 2000. A CP can be issued by a listed company with a working capital of more than 5 Crore. treasury bills and government dated securities having an unexpired maturity up to a year. 11. stipulated earlier has been withdrawn. finance or relatively cheaper cost would provide an adequate incentive to the corporate clients to improve the financial position and in the process the financial health of the corporate sector should show visible improvement. The ceiling of Rs. The existing guideline allows banks. Banks are not allowed to set up MMMFs as a separate entity. Commercial bills arising out of genuine trade transactions. Hence. As the initial guidelines were not attractive. Resources mobilized by the MMMFs are now required to be invested in call/notice money. The objective of the Scheme was to provide an additional short-term avenue to the individual investors. 50 crore on the size of MMMFs. The Vaghul Committee had strongly recommended the introduction of CP’s in the Indian money market. CPs.1 Crore. MMMFs are allowed to issue units to corporate enterprises and others on par with other mutual funds. CDs. the Reserve Bank permitted certain relaxations in November 1995. Institutional investors also find CP’s as an attractive outlet for their short-term funds.7 Money Market Mutual Funds A scheme of Money Market Mutual Funds (MMMFs) was introduced by the Reserve Bank in 1992. In its observations on this instrument. "the issue of commercial paper imparts a degree of financial stability to the system as the issuing company has an incentive to remain financially strong. the scheme did not receive a favorable response. with a view to making the scheme more flexible. Since April 1996. the Committee had stated. public financial institutions and also the institutions in the private sector to set up MMMFs. The prescription of limits on any investments in individual instruments by MMMF’s has been generally deregulated.
DEFICIENCIES OF THE INDIAN MONEY MARKET • Lack of integration • Lack of rational interest rates structure • Absence of an organized bill market • Shortage of funds in the money market • Seasonal stringency of funds and fluctuating interest rates. these are the most liquid debt instruments. As the two sectors are completely separate from each other. It consists of two parts – the new issues market and the secondary market.. viz. Thus there is no scope for speculation or manipulation in the market.8 Government Securities Market It is also known as the gilt-edged market. Since the RBI manages the entire public debt operations of the Central as well as the State governments. Many private sector mutual funds have entered this market because of the risk. In the government securities market RBI plays a dominant role and its position is that of a monopolist. Since the securities guaranteed by the government are risk-free they are known as gilt-edged. the organized sector and the unorganized sector. These are commercial banks. 12. their financial operations are quite independent. Many individual investors too have welcomed this opportunity due to better liquidity and exemption from tax on dividends.country. Also. LIC.free returns. The investors in the government securities market are predominantly institutions which are required statutorily to invest a certain portion of their funds in government securities. and . • Inadequate banking facilities 12. 11. the Indian money market is divided into two sectors. and provident funds.1 Lack of Integration As already stated. GIC. it is responsible for all the new issues of the government loans.
However. To make matters worse. particularly in the countryside. it cannot be said that an organized bill market exists in the country. the prevailing system of interest rates suffers from various defects. This was particularly due to lack of adequate coordination between different banking institutions. Moreover. 12.2 Lack of rational interest rates structure For a long time a major defect of the Indian money market has been lack of rational interest rates structure in it. 12. standardization of interest rates has also introduced some rationality in the structure of interest rates. These defects in interest rates have led to a situation in which there is often excess demand for credit. particularly the bank rate policy has not been found sufficiently effective. (2) certain concessional rates of interest. then it is the lack of adequate integration in' the money market that we shall have to blame.whatever goes on in one sector has little effect on the other. Commercial banks not only compete among themselves but also with the foreign banks.' if even after around six and a half decades of the establishment of the Reserve Bank its monetary policy. This sorry state of affairs in the banking system is most regrettable in the context of development needs of the country. the indigenous bankers have absolutely no connections with the Reserve Bank of India. For example. Lately situation has somewhat improved due to the authority of the Reserve Bank. There is more of competition than cooperation and coordination between various components of the Indian money market. Only a limited bill market that has been created by the Reserve Bank of India under its schemes of 1952 and 1971 now exists but it has failed to popularize bill finance in this country. These are: (1) relatively low yield on government securities. Before the first Bill Market Scheme was introduced in .3 Absence of an organized Bill market Though both inland and foreign bills are purchased and discounted by the commercial banks. The policy of subsidizing bank lending has also led to displacement of labor by capital and is thus responsible for sub-optimal utilization of productive resources. cooperative banks compete with the commercial banks. and (3) inappropriate deposit and lending rates of commercial banks. Further.
lack of banking habit among the people and absence of ample diversified investment opportunities have contributed to the shortage of funds.1952 by the Reserve Bank very few banks other than Foreign Banks discounted bills of approved parties fulfilling certain conditions. banks had either to keep them until they matured or they got them rediscounted in the London money market. Those of the people who have the ability to save often indulge in wasteful consumption. farm operations have a large bearing on the demand as well as the supply of funds in the money market. 12. further dealings in bills were not possible. savings are small due to low per capita income. 12. In the first place. Some say popularity of cash credit system and lack of uniformity in commercial bills proved to be serious obstacles to the development of the bill market. interest rates would have been much more stable. Mobilization of small savings is both difficult and .6 Inadequate Banking facilities Though commercial banks have opened branches on a huge scale. 12. From October to June when farm operations and trading in agricultural produce require additional finance there is a stringency created in the market. Invariably demand for loanable funds in the money market far exceeds its supply. and if the supply of funds could be augmented more o less automatically in response to seasonal rise in the demand. The latter was possible only in respect of export bills.5 Seasonal stringency of funds Being an agricultural country. If the money market had been sufficiently elastic. Therefore. inadequate banking facilities. emergences of a large parallel economy and vast amount of black money in the country have also caused shortage of financial resources in the money market. Since no bill market existed in the country. Because of widespread poverty a vast multitude of population has virtually no ability to save.4 Shortage of funds in the Money Market The Indian money market is characterized by shortage of funds. yet banking facilities are somewhat inadequate. Secondly. This is attributed to a variety of factors. Finally.
This is one of the main reason of India's growth process. financial stability has become crucial and there are concerns relating to credit flows to the agricultural sector and small-scale industries.uneconomic. Banking facilities have to be expanded. 13. the RBI resorted to direct instruments like interest rates regulation. Thus. selective credit control and CRR (cash reserve ratio) as monetary instruments. History of Banking in India Without a sound and effective banking system in India it cannot have a healthy economy. The policy now concentrates mostly on structural issues in the banking industry. Interest rate announcements since 199899 were based on economic and market developments. In fact. The most striking is its extensive reach. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. but in an underdeveloped country like ours where very bit of saving is to be used for productive purposes. . One of the risks emerging in the past 5-7 years (through the capital flows and liberalization of the financial sector) is that potential risk has increased for institutions. SCENARIO PRIOR TO RECENT LIBERALISATION Prior to recent liberalization. Indian banking system has reached even to the remote corners of the country. 14. It is no longer confined to only metropolitans or cosmopolitans in India. For the past three decades India's banking system has several outstanding achievements to its credit. IS THE MONETARY POLICY LOSING ITS IMPORTANCE Considering that interest rates are now tweaked looking at market conditions is the Monetary Policy losing its importance? Bimal Jalan has said he would make the Credit Policy a 'non-event' and would use the policy only to review developments in the banking industry and money markets.
and Bank of Mysore were set up. Between 1906 and 1913. Not long ago. mostly Europeans shareholders. Next came Bank of Hindustan and Bengal Bank. The first bank in India. an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. though conservative. he has a choice. Reserve Bank of India came in 1935. To make this write-up more explanatory. was set up in 1894 with headquarters at Lahore. Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. During the first phase the growth was very slow and banks also experienced periodic . Money have become the order of the day. Bank of India. was established in 1786. Gone are days when the most efficient bank transferred money from one branch to other in two days. Phase II and Phase III. • New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India. Canara Bank. I prefix the scenario as Phase I. The East India Company established Bank of Bengal (1809). These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks. From 1786 till today. Punjab National Bank Ltd. PhaseI The General Bank of India was set up in the year 1786. Now it is simple as instant messaging or dial a pizza. Today. Bank of Baroda. Indian Bank. In 1865 Allahabad Bank was established and first time exclusively by Indians. Central Bank of India. They are as mentioned below: • Early phase from 1786 to 1969 of Indian Banks • Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. the journey of Indian Banking System can be segregated into three distinct phases.
There were approximately 1100 banks. • 1980 : Nationalisation of seven banks with deposits over 200 crore. PhaseII Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July. • 1969 : Nationalisation of 14 major banks. major process of nationalisation was carried out. • 1975 : Creation of regional rural banks. Indira Gandhi. the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11. Reserve Bank of India was vested with extensive powers for the supervision of banking in india as the Central Banking Authority.000%. It was the effort of the then Prime Minister of India. 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. • 1971 : Creation of credit guarantee corporation. Moreover funds are largely given to traders. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. As an aftermath deposit mobilisation was slow. After the nationalisation of banks. 14 major commercial banks in the country was nationalised.failures between 1913 and 1948. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: • 1949 : Enactment of Banking Regulation Act. • 1955 : Nationalisation of State Bank of India. . • 1961 : Insurance cover extended to deposits. • 1959 : Nationalisation of SBI subsidiaries. To streamline the functioning and activities of commercial banks. 23 of 1965). 1969. mostly small. Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. During those days public has lesser confidence in the banks. Mrs. This step brought 80% of the banking segment in India under Government ownership. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions. the Government of India came up with The Banking Companies Act.
As far as the present scenario is concerned the banking industry is in a transition phase. Time is given more importance than money. Since then the growth of the banking industry in India has been a continuous process. under the chairmanship of M Narasimham. On the other hand the Private Sector Banks in India are witnessing immense . a committee was set up by his name which worked for the liberalisation of banking practices. Efforts are being put to give a satisfactory service to customers. The Public Sector Banks (PSBs). there was a nationalization of 14 major banks in 1969. The entire system became more convenient and swift.000 branches of Scheduled banks spread across India. and banks and their customers have limited foreign exchange exposure. This crucial step led to a shift from Class banking to Mass banking. Phone banking and net banking is introduced. which are the foundation of the Indian Banking system account for more than 78 per cent of total banking industry assets. During the first phase of financial reforms. the foreign reserves are high. the capital account is not yet fully convertible. Scheduled banks constitute of commercial banks and co-operative banks. BANKING TODAY: Banks in India can be categorized into non-scheduled banks and scheduled banks.PhaseIII This phase has introduced many more products and facilities in the banking sector in its reforms measure. This is all due to a flexible exchange rate regime. Unfortunately they are burdened with excessive Non Performing assets (NPAs). The financial system of India has shown a great deal of resilience. The country is flooded with foreign banks and their ATM stations. There are about 67. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. In 1991. massive manpower and lack of modern technology.
ING Vyasa Bank. phone banking. There has been a decrease of 20 percent in the employee strength of the private sector in the wake of the Voluntary Retirement Schemes (VRS). Dhanalakshmi Bank Ltd. ATMs. Indusland Bank was the first private bank to be set up in India. UCO Bank. Financial and Banking Sector Reforms The last decade witnessed the maturity of India's financial markets. They are leaders in Internet banking. Oriental Bank. Competition among financial intermediaries gradually helped the interest rates to . On the other hand the Public Sector Banks are still facing the problem of unhappy employees. With the openings in the insurance sector for these institutions. Allahabad Bank. The important achievements in the following fields is discussed under serparate heads: • Financial markets • Regulators • The banking system • Non-banking finance companies • The capital market • Mutual funds • Overall approach to reforms • Deregulation of banking system • Capital market developments • Consolidation imperative Financial Markets In the last decade. Vijaya Bank. IDBI. Private Sector Institutions played an important role. Andhra Bank etc. As far as foreign banks are concerned they are likely to succeed in India. Since 1991. they started making debt in the market. mobile banking. every governments of India took major steps in reforming the financial sector of the country. They grew rapidly in commercial banking and asset management business. SBI Commercial and International Bank Ltd. Bank of Rajasthan Ltd etc are some Private Sector Banks. Banks from the Public Sector include Punjab National bank. Karur Vysya Bank Ltd.progress.
Shares of the leading PSBs are already listed on the stock exchanges. The real interest rate was maintained. It was something between the nominal rate of interest and the expected rate of inflation. The borrowers did not pay high price while depositors had incentives to save. PSBs are still dominating the commercial banking system. Hence. The Reserve Bank of India (RBI) has become more independant. Now they have to approach the capital market for debt and equity funds. Opinions are also there that there should be a super-regulator for the financial services sector instead of multiplicity of regulators. retail trade.decline. The Government accepted the important role of regulators. The banking system Almost 80% of the business are still controlled by Public Sector Banks (PSBs). Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) became important institutions. the onus is on the Government to encourage the PSBs to be run on professional lines. Regulators The Finance Ministry continuously formulated major policies in the field of financial sector of the country. The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constrait of limited number of branches. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance. in order to achieve an efficient banking system. The RBI has given licences to new private sector banks as part of the liberalisation process. . The RBI has also been granting licences to industrial houses. Development finance institutions FIs's access to SLR funds reduced. small business and agricultural finance. Convertibility clause no longer obligatory for assistance to corporates sanctioned by term-lending institutions. Deregulation added to it.
up. Several measures have been initiated and include new money market instruments. the SEBI has now decided to concentrate on the development of the debt market. the money market in India was narrow and circumscribed by tight regulations over interest rates and participants. The RBI has introduced a liquidity adjustment facility (LAF) in which liquidity is injected through reverse repo auctions and liquidity is sucked out through repo auctions.edged market occupies an important position in the financial set. asset management and insurance through separate ventures. which started operations in June 1994 has a mandate to develop the secondary market in government securities. Long-term debt market: The development of a long-term debt market is crucial to the financing of infrastructure. After bringing some order to the equity market. the gilt. Stamp duty is being withdrawn at the time of dematerialisation of debt instruments in order to encourage paperless trading. DFIs such as IDBI and ICICI have entered other segments of financial services such as commercial banking. The secondary market was underdeveloped and lacked liquidity. the requirement of minimum net owned funds. The RBI conducts its sales of dated securities and treasury bills through its open market operations (OMO) window. . Primary dealers bid for these securities and also trade in them.Capital adequacy norms extended to financial institutions. has been raised to Rs. On account of the substantial issue of government debt.2 crores. Non-banking finance companies In the case of new NBFCs seeking registration with the RBI. The Securities Trading Corporation of India (STCI). The move to universal banking has started. The DFHI is the principal agency for developing a secondary market for money market instruments and Government of India treasury bills. Until recently. strengthening of existing instruments and setting up of the Discount and Finance House of India (DFHI).
There has been a dramatic improvement in the country's stock market trading infrastructure during the last few years. but its share is going down. They are introducing new products.000 crores. Expectations are that India will be an attractive emerging market with tremendous potential. but it can be expected that the customer will gain from improved service. the industry had a framework for the establishment of many more players. With the growth in the securities markets and tax advantages granted for investment in mutual fund units. which has led to retail investors deserting the stock markets. Mutual funds The mutual funds industry is now regulated under the SEBI (Mutual Funds) Regulations. with participation restricted to 26 per cent of equity.The capital market The number of shareholders in India is estimated at 25 million. The new players will need to bring in innovative products as well as fresh ideas on . 1996 and amendments thereto. both Indian and foreign players. It is too early to conclude whether the erstwhile public sector monopolies will successfully be able to face up to the competition posed by the new players. However. Foreign companies can only enter joint ventures with Indian companies. The biggest shock to the mutual fund industry during recent times was the insecurity generated in the minds of investors regarding the US 64 scheme. mutual funds started becoming popular. With the issuance of SEBI guidelines. only an estimated two lakh persons actively trade in stocks. The foreign owned AMCs are the ones which are now setting the pace for the industry. setting new standards of customer service. The insurance industry is the latest to be thrown open to competition from the private sector including foreign players. during recent times the stock markets have been constrained by some unsavoury developments. The Unit Trust of India remains easily the biggest mutual fund controlling a corpus of nearly Rs.70. Unfortunately. improving disclosure standards and experimenting with new types of distribution.
Further. Good regulation will. The phenomenon of rich industrialists and bankrupt companies continues. the political and legal structures hve to ensure that borrowers repay on time the loans they have taken. The entry of foreign players has assisted in the introduction of international practices and systems. In order to reach the stipulated capital adequacy norms. the cumulative effect of the developments since 1991 has been quite encouraging. The fate of the Fiscal Responsibility Bill remains unknown and high fiscal deficits continue. substantial capital were provided by the Government to PSBs.marketing and distribution. an active corporate debt market and a developed derivatives market). Deregulation of banking system Prudential norms were introduced for income recognition. which is often not the case in India. . punishment has to follow crime. financial stability cannot be ensured. The government and the regulatory authorities have followed a step-by-step approach. On the whole. Overall approach to reforms The last ten years have seen major improvements in the working of various financial market participants. However. Interest rates on the deposits and lending sides almost entirely were deregulated. However. Some tough decisions still need to be taken. financial liberalisation alone will not ensure stable economic growth. be essential. in order to improve the low per capita insurance coverage. An indication of the strength of the reformed Indian financial system can be seen from the way India was not affected by the Southeast Asian crisis. asset classification. Some gaps however remain (for example: lack of an inter-bank interest rate benchmark. Technology developments have improved customer service. Without fiscal control. of course. provisioning for delinquent loans and for capital adequacy. Government pre-emption of banks' resources through statutory liquidity ratio (SLR) and cash reserve ratio (CRR) brought down in steps. even with the best of regulation. In the case of financial institutions. frauds cannot be totally prevented. not a big bang one.
market and operational risks. Banks asked to set up asset liability management (ALM) systems. office of the Controller of Capital Issues were abolished and the initial share pricing were decontrolled. Capital market developments The Capital Issues (Control) Act.New private sector banks allowed to promote and encourage competition. clearing and settlement facilities was established. Recovery of debts due to banks and the Financial Institutions Act. Companies were required to disclose all material facts and specific risk factors associated with their projects while making public issues. Bank lending norms liberalised and a loan system to ensure better control over credit introduced. Foreign institutional investors (FIIs) were allowed to invest in Indian capital markets after registration with the SEBI. and special recovery tribunals set up to facilitate quicker recovery of loan arrears. A credit information bureau being established to identify bad risks. . RBI guidelines issued for risk management systems in banks encompassing credit. 1947. Private mutual funds permitted The Depositories Act had given a legal framework for the establishment of depositories to record ownership deals in book entry form. The National Stock Exchange (NSE). PSBs were encouraged to approach the public for raising resources. with nationwide stock trading and electronic display. 1993 was passed. SEBI. Indian companies were permitted to access international capital markets through euro issues. Derivative products such as forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced. the capital market regulator was established in 1992. Dematerialisation of stocks encouraged paperless trading. Several local stock exchanges changed over from floor based trading to screen based trading. repealed.
First. underwriting by the issuer were made optional. The merger of Punjab National Bank and New Bank of India was a difficult one. and made rules for making client or broker relationship more transparent which included separation of client and broker accounts. Buy back of shares allowed The SEBI started insisting on greater corporate disclosures. which at one . A system of rolling settlements introduced. introduced capital adequacy norms for brokers. No one expected so many employees to take voluntary retirement from PSBs. SEBI empowered to register and regulate venture capital funds. but the situation is different now. there is no need for 27 PSBs with branches all over India. Steps were taken to improve corporate governance based on the report of a committee. Consolidation imperative Another aspect of the financial sector reforms in India is the consolidation of existing institutions which is especially applicable to the commercial banks. A number of them can be merged. 10 and Rs. In India the banks are in huge quantity. 100 were abolished. The practice of making preferential allotment of shares at prices unrelated to the prevailing market prices stopped and fresh guidelines were issued by SEBI.To reduce the cost of issue. subject to conditions. Standard denomination for equity shares of Rs. Companies given the freedom to issue dematerialised shares in any denomination. Derivatives trading starts with index options and futures. SEBI reconstituted governing boards of the stock exchanges. 1999 issued for regulating new credit rating agencies as well as introducing a code of conduct for all credit rating agencies operating in India. The SEBI (Credit Rating Agencies) Regulations. SEBI issued detailed employee stock option scheme and employee stock purchase scheme for listed companies.
while the four public sector general insurance companies will probably move towards consolidation with a bit of nudging. the Life Insurance Corporation of India is a behemoth. and most other public sector players are already exiting the mutual fund business. Private sector banks will be self consolidated while co-operative and rural banks will be encouraged for consolidation. It is not possible to play the role of the Oracle of Delphi when a vast nation like India is involved. with the RBI having already come out with detailed guidelines for entry of banks into insurance. even though facing difficult times. as there is a great deal of synergy among these businesses. and the coming decade should be as interesting as the last one. The UTI is yet again a big institution. and anyway play only a niche role. This phenomenon is expected to grow rapidly in the coming years. the new buzzword internationally. There are a number of small mutual fund players in the private sector. . a few trends are evident. it will take some time. However.time were much sought after jobs. alliances between organisations may be effective. Various forms of bancassurance are being introduced. Both banks and insurance companies have started entering the asset management business. The pensions market is expected to open up fresh opportunities for insurance companies and mutual funds. In India organisations such as IDBI. Where mergers may not be possible. Hi-tech and the need to meet increasing consumer needs is encouraging convergence. but the business being comparatively new for the private players. We finally come to convergence in the financial sector. HDFC and SBI are already trying to offer various services to the customer under one umbrella. The LIC has bought into Corporation Bank in order to spread its insurance distribution network. even though it has not always been a success till date. ICICI. In the case of insurance.
MARKETING Evolution of marketing A brief history: .
in fact. markets. however. in competition. Era III: A Paradigm Shift—Marketing. 1950–1980. Perhaps marketing thought development has lagged behind shifts in the market environment and has become less relevant for managers. . marketing thought leaders have pointed the way toward a customer-oriented. consumers. development. marketing thought leaders have variously emphasized commodities. particularly those who are responsible for strategy and general management. management of firms. marketing has not always been viewed from a management perspective. two perspectives that need not be but often are. There is evidence that marketing has lost its importance and relevance as a management function in many companies . Four eras of marketing thought development: Era I: Founding the Field. Management. Most recently. with origins as a form of support for the sales function.As a field of study. Era IV: The Shift Intensifies—A Fragmentation of the Mainstream. and the Sciences. Era II: Formalizing the Field. In the academic arena as reflected in its literature over the past three decades or so (late Era III into Era IV). 1900–1920. and delivery of customer value that focuses on marketing as a set of business processes rather than as a separate management function. At different phases in its evolution. institutions. Marketing as Management A distinct view of marketing as a management discipline (rather than an economic activity) emerged in the 1950s though marketing management had certainly been evolving as a practice for some time. 1920–1950. and society at large. service-dominated concept of marketing as the definition. marketing has trended from a managerial focus to an analytical one. 1980–Present. functions.
The two lines of development—the marketing (management) concept and quantitative analysis—can be identified as equally important and influential at the outset of Era III. two path setting studies of business education advocated a shift from a narrow vocational and skills emphasis to a deeper and more rigorous analytical approach based on quantitative analysis and the behavioural sciences. the dominant culture in most leading business school faculties. Marketing Management as an Optimization Problem Of equal importance as environmental forces. they have developed in a very different fashion. With the active support of their colleagues in economics and finance. and the second was the integration of quantitative methods and behavioural science into the marketing discipline. Two significant environmental trends drove this transition. Allocating resources until marginal returns . Market segmentation strategy was entirely consistent with the philosophy of customer orientation. one in the marketplace and one in education.This transition was marked by two major developments: first was the perspective of the marketing concept as a management philosophy emphasizing customer orientation. marketing academics eagerly adopted a price–theory-based view of marketing management as essentially an optimization problem. and the dramatic development of television as a low-cost mass medium. Rigorous analytical methods proved to have greater appeal to many marketing educators than the “softer” and more conceptual approaches of customer orientation and the marketing concept and their managerial and organizational implications. Marketing strategy came to rely increasingly on statistical analysis of market research data. the post-World War II marketplace offered huge business opportunities that were created by pent-up demand. rapidly increasing consumer affluence (with commensurate economic and political power). In the economic and social environment.
Return on investment became the dominant criterion for evaluating business performance and for budgeting expenditures including marketing. Attributing revenue and profit results to marketing expenditures is known to be especially difficult because of multiple causation. seeking two benefits: to make the marketing concept and customer orientation strategically operational and to make strategic planning more customer . lagged effects. An important element of this approach was the famous DuPont model of management.Aided by the availability of large-scale computers and increasingly large and reliable databases. A central feature of most of these formal strategic planning approaches was the “product portfolio. could optimize each of the four P’s. and similar measurement and estimation problems. by which large companies could be effectively controlled through the careful allocation of financial resources across strategic business units (SBUs) competing for these limited funds. The Rise and Fall of the Strategic Planning Empire On the general management and business policy side of the academic field. quantitative methods of data analysis. the area of formal strategic management was emerging. marketing scholars were strongly encouraged by the academic culture to emphasize empirical data. and mathematical modelling in their research. the discipline of strategic planning was in full bloom. which was based on return on investment. if only the analyst could accurately estimate the demand curve. It was not uncommon for the corporate marketing function to merge formally into strategic planning. By the mid-1970s.” a matrix that depicted firms’ SBUs on two dimensions: their position relative to those of competitors (market share) in their respective markets and the rate of growth in those markets.were equal across spending opportunities. evidenced by the proliferation of corporate strategic planning departments.
Measurement problems in making operational such central constructs as market share and the definition of “served market” also proved to be difficult and a continuing source of disagreement and debate between corporate analysts and SBU-level management In many companies. marketers were unlikely to use their tools and concepts to address strategic management issues because of their orientation to methodological rigor. They questioned whether marketers were interested in raising their level of aggregation to the business unit or industry level and to their time horizon over the long run. That appears to be what happened. however. By the early 1980s. These trends prompted strategists to contend that with their bias toward marketing tactics and optimization. which left little or no customer advocacy or marketing management competence at the top level of the organization.focused and market driven. according to Drucker (1954). Part of the rationale for eliminating marketing as a corporate function was embedded in the fundamental assertion of the marketing concept that customer orientation should pervade the organization and. and he concluded that it would be up to strategic management students to make the transfer of marketing concepts and methods to strategic issues. thus was not a separate function at all but rather the entire business as seen from the customer’s point of view. unless the chief executive officer happened to come from that background. responsibility for marketing strategy was delegated to SBU managers. The bureaucratic strategic planning process had proved to be an expensive undertaking in management time and organizational and administrative costs. formal strategic planning as an activity at the corporate level was in decline. Corporate marketing departments were also widely downsized or eliminated. often causing serious lags in responding to a changing market environment (“paralysis by analysis”). . and most strategic planning departments were being dismantled.
Although strategic planning departments at the corporate level have disappeared, the discipline of strategic management and the related field of strategic management consulting have continued to have the ear of practicing managers. Today, it is a literature more widely read and valued by managers than the marketing literature, evidenced by the large number of management subscribers compared with those of the marketing journals. Throughout the 1970s and 1980s, the marketing discipline continued to emphasize the development of enhanced methodological sophistication and analytical rigor, whereas the strategic management journals were more likely to report interesting, new conceptual developments and (perceived) best business practices. The Changing Role of Marketing There is no question that marketing management has experienced significant changes during Era IV: “A Fragmentation of the Mainstream.” Among the many environmental forces that have reshaped the marketing function within the firm during the past two decades are as follows: •Evolution from bureaucratic to more flexible organizational forms; •Rapid diffusion of computer and telecommunications technology, including the Internet; •Dominance of large, low-cost retailers in most product categories; •The stock-market boom of the 1990s, followed by a dramatic decrease in stock prices; •Continued emphasis on quarterly earnings per share as a measure of business performance and company value; •Globalization and increased competitive pressures; and •Outsourcing of many parts of value-creation and value-delivery processes. As corporate structures have moved away from centralized bureaucratic control to a stronger emphasis on SBUs and strategic partnering, marketing at the corporate level has
become much less important. Either marketing management responsibilities have been shifted outward to the field sales organization or into SBUs, or they have simply been eliminated as a distinct activity. Marketing communications dollars have been reallocated to short-term price incentives and other sales promotional activities and to the selling function, to support increased field sales effort and larger discounts to increasingly powerful resellers. For example, the product-level brand management function in many consumer packaged-goods companies has been redefined and relocated to the field sales organization, with primary responsibility for working with major resellers on in-store promotional activities, rather than to the traditional roles of brand development in which consumer advertising is heavily used. At the corporate level, remaining marketing management positions tend to focus on global brand strategy (across SBUs and geographies) and marketing communications. Product and pricing strategy, sales management, and channel strategy and management are SBU-level responsibilities, often with a relatively short-term, tactical focus. Innovation for long-range product development tends to lose priority. Production concept: It is the oldest concept. This concept came into being during the industrial revolution when manufacturing started for the first time. The demand exceeded the supply, therefore marketers expected their entire produce to be bought by the consumers. This concept simply suggests that customers prefer inexpensive products that are readily available. In effect, "if we make it, they will come." This orientation makes sense in developing countries, where consumers are more interested in obtaining the product than in its features. THE PRODUCTION CONCEPT WAS THE IDEA THAT A FIRM SHOULD FOCUS ON THOSE PRODUCTS THAT IT COULD PRODUCE MORE EFFICIENTLY AND AT A LOW COST, WHICH IN THE END WOULD ITSELF CREATE THE DEMAND FOR THE PRODUCT.
Their focus is to: PRODUCE the product PRODUCE enough OF the product / at the low cost. MASS DISTRIBUTION Product concept: It suggests that companies that build the "better mousetrap" will gain favour. The thinking here is that customers want products that have higher quality, that offer better performance or do something unique. Still demand was higher than the supply. Improvement in product quality as per the notions and understanding of the seller and not the buyers. Changes were brought about just to differentiate their own product from that of their consumers as competition started making its way into the market. This orientation holds that consumers will favor those products that offer the most quality, performance, or innovative features. Managers focusing on this concept concentrate on making superior products and improving them over time. They assume that buyers admire well-made products and can appraise quality and performance. However, these managers are sometimes caught up in a love affair with their product and do not realize what the market needs. Management might commit the “better-mousetrap” fallacy, believing that a better mousetrap will lead people to beat a path to its door. Developing products that are aligned with current or emerging customer needs . Technology companies are often challenged to develop competitive new products while meeting short windows of opportunity. Success requires effective decision making about product features, packaging, positioning, and pricing. Product CONCEPT involves: Exploratory research Needs Segmentation Opportunity Assessment Voice of the Customer Concept Viability Competitive Assessment Concept Optimization Ideation Portfolio Management
What we often saw in the Selling Concept was the "hard sell" and the belief that consumers wouldn't purchase unless they were sold. and 3) using the information to create customer value. Their aim is to sell what they make rather than make what the market wants. most firms had a sales orientation. It also assumes that the company has a whole battery of effective selling and promotional tools to stimulate more buying. but little effort was made to coordinate any overall marketing function. makes an effort to provide products of high value to its customers. and markets its products and services in a coordinated holistic program across all departments. It holds that consumers and businesses. This concept assumes that consumers typically sho9w buyi8ng inertia or resistance and must be coaxed into buying. Sales could mean everything from sales people to advertising to public relations. The organization must. Their focus is -can we sell the product -can we charge enough for the product. therefore. 2) sharing this information across departments. undertake an aggressive selling and promotion effort." the company embraces a philosophy that the . Marketing concept: An organization with a market orientation focuses its efforts on 1)continuously collecting information about customers' needs and competitors' capabilities.Business Case Rationale Product Retrieval Market Research Trend Monitoring Selling concept: From the 1920's until the 1950's. The market orientation simply defines an organization that understands the importance of customer needs. if left alone. and there was a need to pursue the scarce customer. Most firms practice the selling concept when they have overcapacity. will ordinarily not buy enough of the selling company’s products. Competition had grown. In what we call the "Marketing Concept. The firm sold what one produce and try to convince the customers through advertising and personal selling.
increase in population. skins. In the 20th century there is a mass production of goods and increased advertisement for their sales. a company makes every effort to best understand the wants and needs of its target market and to create want-satisfying goods that best fulfill the needs of that target market and to do this better than the competition. The term market refers to the place where buyers and sellers meet for the purpose of satisfying their respective needs."Customer is King. Goods are now produced to satisfy the needs of the customers. Via the Marketing Concept. It is the most desirable orientation: 1) Understands existing and potential needs of the customers-meaningful direction to business. Before industrial revolution. People were almost self sufficient in their daily requirements for goods. the scope of the market has greatly widened due to increase in production of goods. . A few products which people needed were usually purchased from near their houses either on barter system or on cash. It's a philosophy that is driven down throughout the organization from the very top of the management structure. increase in competition. 2) Selection of better market opportunities where they can give better products/services than their customers. Marketing here occupies an important position with the business executives and is now an accepted feature of commerce. better than the competition." The Marketing Concept is an attitude. The goods in those days were produced and sold with very little thought of the customers. The luxury products of that time such as spices. It is the philosophy that the firm should analyze the needs of their customers[ current /potential ] and then make the decisions to satisfy those needs . increase in fashion. The Marketing Concept communicates that "the customer is king. increase in income. improvements in the means of communication and transport etc. the market for goods was very limited. furs. In the early days of business the market concept was product oriented." Everything that the company does focuses on the customer. After the Industrial Revolution. expensive cloth were brought into the market on a very small scale and these were purchased by the rich people.
servicing etc 5) Market the right values t the customers 6) Customer satisfaction along with profit for the firm Its central tenets crystallized in the 1950s. Without customers. The marketing concept rests on four pillars: target market. The societal marketing concept can be defined as the organizations task which tries to identify the needs and interests of the consumers and delivers quality services or products as compared to its competitors and in a way that consumer's and society's well being is maintained. The Marketing Concept is preoccupied with the idea of satisfying the needs of the customer by means of the product as a solution to the customer’s problem (needs). pricing. its customers. Societal marketing concept: This is embraced in the 21st century results in companies looking at their overall marketing efforts. The Sales Concept focuses on the needs of the seller. a company will quickly flounder -. The Marketing Concept focuses on the needs of the buyer. integrated marketing and profitability.3) Design an appropriate production capacity to suit the need of their chosen market. and the society in which it operates. The Marketing Concept represents the major change in today’s company orientation that provides the foundation to achieve competitive advantage. 4) Design an appropriate marketing program-distribution. customer needs. The Sales Concept is preoccupied with the seller’s need to convert his/her product into cash. In other words organizations have to balance consumer . Distinctions between the Sales Concept and the Marketing Concept: 1. 2. Holistic marketing looks at the connectivity of the company. delivering.thus the importance of the relationship. This philosophy is the foundation of consultative selling. Marketing is also done internally within the company. its people. as a whole. This includes how their marketing affects society. and communicating customer value to its selected target customers. It holds that the key to achieving its organizational goals (goals of the selling company) consists of the company being more effective than competitors in creating.
The societal marketing concept questions whether the pure marketing concept is adequate in an age of environmental problems. It asks if the firm that sense. but societal marketing concept is hard to implement as not all companies have a social conscience. This is a new marketing philosophy and tries to reduce the inequalities at various levels. company profits and long term welfare of society.satisfaction. It should always be remembered that consumer's needs are of paramount interest. the pure marketing concept overlooks possible conflicts between consumer short run wants and consumer long run welfare. Societal marketing can be achieved by following a few principles. In this way the focus shifts from transaction to relationships. wants. Improvements in products which are both real and innovative should be carried out to give long term value to the product. French fries and most other foods sold by fast food restaurants are high in fat and salt. serves and satisfies individual wants is always doing what's best for consumers and society in the long run. The products are wrapped in convenient packaging. If a client 'repeats business' a bond is created between him and the product and is worth its while for the organization to nurture this bond. It may sound appropriate and ethical. It should then deliver superior value t customers in a way that maintains or improves the consumer's and the society's well being. Yet many consumer and environmental groups have voiced concerns. The societal marketing holds that the organization should determine the needs. and neglected social services. This theory emphasizes that organizations should not only think of cut-throat policies to achieve targets and jump ahead of competitors but should have ethical and environmental policies and then back them up with action and regulation. do what is good for the society with a sense of mission and trust. and interests of target markets. Most people see today's giant fast food chains as offering tasty and convenient food at reasonable prices. The societal marketing concept is the newest of the five marketing management philosophies. but this leads to . fried chicken. Whether it is legal and essential in industries like the tobacco and liquor industry needs analysis as they have a tremendous influence on consumer welfare. Consider the fast food industry. According to the societal marketing concept. Critics point out that hamburger.
and long-run societal welfare. Just consider: The fast-food hamburger industry offers tasty but unhealthy food. and interests of target markets and to deliver the desired satisfactions more effectively and efficiently than competitors (this is the original Marketing Concept). there is cause for cautious optimism. from transactions to relationships.waste and pollution. Conclusion: For the marketing educators eager for a rejuvenation of a managerial point of view within the field. and sales force management. it holds that this all must be done in a way that preserves or enhances the consumer’s and the society’s well-being. these restaurants may be hurting consumer health and causing environmental problems. This orientation arose as some questioned whether the Marketing Concept is an appropriate philosophy in an age of environmental deterioration. resource shortages. The hamburgers have a high fat content. The products are wrapped in convenient packaging. from manufacturing . channel strategy. discussed. two products high in starch and fat. consumer interests. wants. and written about by marketing thought leaders. such as new product development. Fundamentally new paradigms of marketing management are being offered that shift the core focus of the field from firms to customers. which leads to much waste. This concept holds that the organization’s task is to determine the needs. explosive population growth. In satisfying consumer wants. Are companies that do an excellent job of satisfying consumer wants necessarily acting in the best long-run interests of consumers and society? The marketing concept possibly sidesteps the potential conflicts among consumer wants. from products to services and benefits. Additionally. is increasingly recognized. and the restaurants promote fries and pies. world hunger and poverty. The issue of the decline of relevance and the relative lack of attention to important areas of marketing strategy. and neglected social services.
will be meaningful communication among marketing scholars. The organisation. The biggest challenge in the future.to the co creation of value with business partners and customers. they will not return it or bad- . if left alone will ordinarily not buy enough of the organisation’s products. and from physical resources and labour to knowledge resources and the firm’s position in the value chain. goods that buyers do not normally think of buying. must therefore undertake an aggressive selling and promotion effort. Most firms practise the selling concept when they have overcapacity. Marketing: The purpose of marketing is to sell more stuff to more people more often for more money in order to make more profit. Properly developed and communicated. marketing based on hard selling carries high risks. However. marketing managers. such as insurance and encyclopaedia. It assumes that customers that are coaxed into buying a product will like it and that if they do not. Their aim is to sell what they make. as in the past. to integrate rigor and relevance. rather than make what the market wants. this new conceptualization has the potential to bridge the gap between managers and scholars. The selling concept is practised most aggressively. and general managers so that rigorous work becomes more relevant while the practical becomes more analytical and marketing decisions become better informed by better marketing science Core Concepts Selling Vs Marketing Selling Concept: The selling concept holds that consumers and businesses. Coca-Cola’s former Vice President. with unsought goods. The selling concept is epitomised in the thinking of Sergio Zygman. and to reinvigorate a managerial view of marketing.
Theodore Levitt of Harvard drew a perceptive contrast between the selling and marketing concepts: Selling focuses on the needs of the seller. He calls this a proactive marketing orientation. but the right product for your customers. Several scholars have found that companies who embrace the marketing concept achieve superior performance. business shifted to customer centred. serve and satisfy the customer. for without customers at the centre of the company. or might even buy it again.understanding and meeting customers’ expressed needs. delivering and communicating superior customer value to its chosen target markets. The marketing concept holds that the key to achieving organisational goals consists of the company being more effective than the competitors in creating.mouth it or complain to consumer organisations. Companies such as 3M. Companies that practise both reactive and proactive marketing orientation are implementing a “total market orientation” and are likely to be the most successful. They argue for a customer orientation in which all functions work together to respond to. HP and Motorola have made a practise of researching or imaging latent needs through a “probe and learn” process. A few enthusiasts go further and say that marketing is the major function of the enterprise. This was first demonstrated by companies practising a reactive market orientation. slow learning and fast forgetting. Initially. In the course of converting to a marketing orientation. The job is not to find the right customers for your product. marketing with the idea of satisfying the needs of the customer by means of the product and the whole cluster of things associating with creating. Instead of a product centred “make and sell” philosophy. marketing on the needs of the buyer. Marketers argue that their function is more important. a company faces three hurdles: organised resistance. the marketing function is seen as one of several equally important functions in a check-and-balance relationship. Some critics say this means companies develop only low level innovation is possible if the focus is on customer’s latent needs. Marketing Concept: The marketing concept emerged in the mid 1950’s. finance and R&D) believe a stronger marketing function threatens their power in the organisation. delivering and finally consuming it. Selling is pre-occupied with the seller’s need to convert his product into cash. Instead of “hunting” marketing is “gardening”. Some company departments (often manufacturing. . “sense and respond” philosophy.
One can self-produce the product or service. as when lawyer Jones writes a will for physician Smith in return for a medical examination. This is a classic monetary transaction. There are atleast two parties.Exchange. Transaction A person can obtain a product in one of four ways. Each party is capable to communication and delivery. and place of agreement. 3. people would approach transactions with some distrust. A gives X to B and receives Y in return. Exchange is a value creating process because it normally leaves both parties better off. Each party is free to accept or reject the exchange offer. five conditions must be satisfied: 1. as in a holdup or burglary. Professional . One can use force to get a product. 2. a time of agreement. subsidies and charitable contributions are all transfers.000 to Pratap. One can beg. In a transfer. a service or money in exchange for something he or she desires. but transactions do not require money as one of the traded values. Pratap sells a TV set to Samir and Samir pays Rs. Without a law of contracts. 20. A transaction involves several dimensions: at least two things of value. Typically. 4. Two parties are engaged in exchange if they are negotiating. as happens when a homeless person asks for food. Each party believes it is appropriate or desirable to deal with the other party. which is the core concept of marketing. Transfer behaviour can also be understood through the concept of exchange. fishes or gathers fruits. Gifts. A transaction is a trade of valued between two or more parties. Whether exchange actually takes place depends on whether the two parties can agree on terms that will leave both better off (or atleast not worse off) than before. Transfer.for example.trying to arrive at mutually agreeable terms. A barter transaction involves trading goods or services for other goods or services. or one can offer a product. gratitude or changed behaviour in the recipient. Exchange. we say a transaction takes place. agreed upon conditions. and everyone would lose. When an agreement is reached. A transaction differs from a transfer. the transferer expects to receive something in exchange for his or her gift. A legal system supports and enforces compliance on the part of the transactors. is a process of obtaining a desired product from someone by offering something in return. 5. as one hunts. Each party has something that may be of value to the other party. For exchange potential to exist. A gives X to B but does not receive any thing tangible in return.
marketers seek to elicit a behavioural response from another party. Marketers have broadened the concept of marketing to include the study of transfer behaviour as well as transaction behaviour. on-time payment and positive word of mouth. The buyer chooses between different offerings on the basis of which is perceived to deliver the most value. marketers analyse what each party expects from the transaction. These benefits include high quality equipment. called the “customer value triad. M&M’s task is to formulate an offer that motivates the farmer to buy an M&M tractor. a political candidate wants a vote. Value is a central marketing concept. Marketing consists of actions undertaken to elicit desired responses from a target audience. a church wants an active member. a fair price. The process of negotiation leads to mutually acceptable terms for a transaction. To make successful exchanges. donor magazines and invitation to events. such as thank you notes. service and price (QSP). and reliable parts and service. creation. Simple exchange situations can be mapped by showing the two actors and the wants and offerings flowing between them. Marketing can be seen as the identification. Mahindra & Mahindra is a leader in the tractor market in India. and the social group wants the passionate adoption of some cause. Value can be seen as primarily a combination of quality. Satisfaction reflects a person’s comparative judgements resulting from a product’s perceived . The items on this want list are not equally important and may vary from buyer to buyer.” Value increases with quality and service and decreases with price. Value & satisfaction The offering will be successful if it delivers value and satisfaction to the target buyer. M&M also has a want list. A business firm wants a purchase. The farmer might in turn make a counter offer. timely delivery. delivery and monitoring of customer value. although other factors can also play an important role. good financing terms. Suppose its farm-equipment division researches the benefits that a typical farmer wants when he buys a tractor. Value reflects the perceived tangible and intangible benefits and costs to customers. If there is sufficient match or overlap in the want lists. It wants a good price for the tractor. In the most generic sense. communication.fund raisers provide benefits to donors. a basis of transaction exists. One of M&M’s tasks is to discover the relative importance of these different wants to the buyer.
People need food.performance (or outcome) in relation to his or her expectations. We can distinguish among 5 types of needs: 1. the customer is highly satisfied or delighted. clothing and shelter to survive. along with other societal factors. State Needs (the customer wants an inexpensive car) 2. lentils and beans. A person in Mauritius needs food but may want mango. Needs. education and entertainment. the customer is dissatisfied and disappointed. Many people want a Mercedes. the customer is satisfied. Marketers. An American needs food. Some customers have needs of which they are not fully conscious. not its initial price. Needs are the basic requirements. only a few are willing and able to buy one. These needs become wants when they are directed to specific objects that might satisfy the need. or they can not articulate these needs or they use words that require some interpretation. a fast lathe or an attractive bathing suit or a restful hotel? Consider the customer who says he wants an inexpensive car. Demands are wants for specific products backed by an ability to pay. People also have strong needs for recreation. If the performance exceeds the expectations. Wants are shaped by one’s society. They do not however create the need for social status. These distinctions shed light on the frequent criticism that “marketers create needs” or “marketers get people to buy things they don’t want. air. but may want a hamburger. Wants and demands The marketer must understand the target market’s needs. wants and demands. Understanding customer needs and wants is not always simple. Marketers might promote the idea that a Mercedes would satisfy s person’s needs for social status. Companies must measure not only how many people want their product but also how many would actually be willing and able to buy it. influence wants. If the performance matches the expectations. rice. is low) . If the performance falls short of expectations. What does it mean when customers ask for a powerful lawnmower. Real Needs (the customer wants a car whose operating cost. French fries and a soft drink. The marketer must probe further. water.” Marketers do not create needs: Needs pre-exist marketers.
Secret Needs (the customer wants to be seen by friends as a savvy consumer) Responding only to the stated need may short-change the customer.” . “responding to customer needs” meant studying customer needs and making a product that fits these needs on the average. Rather. Many consumers did not know what they want in a product. Delight needs (the customer would like the dealer to include onboard navigation system) 5. it provides product platforms on which each person customises the features he or she desires in the computer.3. Unstated needs (the customer expects good service from the dealer) 4. Nokia and Ericsson fought to shape consumer perceptions of cellular phones. This is a change from a “make-and-sell” philosophy to philosophy of “sense-and-respond. Dell computer does not prepare a perfect computer for its target market.to gain an edge companies must help customers what they want” In the past. “Simply giving customers what they want isn’t enough anymore. Consumers were in a learning mode and the companies’ forger strategies to shape their wants. As stated by Carpenter. but some of today’s companies respond to each customer’s individual needs. Consumers did not know much about Cellular phones when they were first introduced.
THE MARKETING ENVIRONMENT- MACRO & MICRO
The marketing environment surrounds and impacts upon the organization. There are three key perspectives on the marketing environment - Macro-environment - Micro-environment - Internal environment.
MACRO ENVIRONMENT: Macro Environment refers to the external factors that affect an organization’s planning and performance. Successful companies recognize and respond to profitably to unmet needs and trends that shape opportunities and pose threats. These forces represent the “uncontrollables”, which the company must monitor. It is constantly changing and the company needs to be flexible to adapt to it. Globalization means that there is always the threat of substitute products and new entrants. The wider environment is also ever changing, and the marketer needs to compensate for changes in culture, politics, economics and technology. Companies conduct what is known as the “PESTEL” study which covers the six arenas of the macro environment namely: - Political - Economic - Socio- cultural - Technological - Environmental - Legal POLITICAL- LEGAL ENVIRONMENT Marketing decisions are strongly affected by developments in the political and legal environment. This environment is composed of laws, government agencies, and
pressure groups that influence and limit various organizations and individuals. Sometimes these laws also create opportunities. The companies have to keep up with the changing political environment in order to utilize these opportunities to their full potential. To many companies, domestic political considerations are likely to be of prime concern. However, firms involved in international operations are faced with the additional dimension of international political developments. Many firms export and may have joint ventures or subsidiary companies abroad. In many countries, particularly in the ‘Developing Nations’, the domestic political and economic situation is usually less stable than in the developed countries. Marketing firms operating in such volatile conditions clearly have to monitor the local political situation very carefully. ECONOMIC ENVIRONMENT: Markets require purchasing power as well as people. The available purchasing power in an economy depends on current income, prices, savings, debt, and credit availability. Marketers must pay careful attention to trends affecting purchasing power because they can have a strong impact on business, especially the companies whose products are geared to high income and price- sensitive consumers. Political and economic forces are often strongly related to the economic environment. A much quoted example in this context is the ‘oil crisis’ caused by the Middle East War in 1973 which produced economic shock waves throughout the Western world, resulting in dramatically increased crude oil prices. This, in turn increased energy costs as well as the cost of many oil-based raw materials such as plastics and synthetic fibres. This contributed significantly to a world economic recession, and it all serves to demonstrate how dramatic economic change can upset the traditional structures and balances in the world business environment. As mentioned earlier, an understanding of economic changes and forces in the domestic economy is also of vital importance as such forces have the most immediate impact. Economic changes pose a set of opportunities and threats, and by understanding and carefully monitoring the economic environment, firms should be in a position to guard against potential threats and to capitalize on opportunities. SOCIO- CULTURAL ENVIRONMENT Purchasing power is directed towards certain goods and services and away from others according to people’s tastes and preferences. Society shapes the beliefs, values and norms that largely define these tastes and preferences. Core cultural values are
firmly established within a society and are therefore difficult to change. They are perpetuated through family, the church, education and the institutions of society and act as relatively fixed parameters within which marketing firms are forced to operate. Secondary cultural values, however, tend to be less strong and therefore more likely to undergo change. Marketers have some chance of changing the latter than the former. For example, Mothers against drunk drivers (MADD) does not try to stop the sale of alcohol, but it does promote the idea of appointing a designated driver who will not drink that evening. Changes in attitudes towards working women have led to an increase in demand for convenience foods, ‘one-stop’ shopping and the widespread adoption of such time-saving devices as microwave cookers. Marketing firms have had to react to these changes to be successful. TECHNOLOGICAL ENVIRONMENT: One of the most dramatic forces shaping people’s lives is technology. Technology is a major macro-environmental variable which has influenced the development of many of the products we take for granted today, for example, television, calculators, video recorders and desk-top computers. Marketing firms themselves play a part in technological progress, many having their own research department or sponsoring research through universities and other institutions, thus playing a part in innovating new developments and new applications. One example of how technological change has affected marketing activities is in the development of electronic point of sale (EPOS) data capture at the retail level. The ‘laser checkout’ reads a bar code on the product being purchased and stores information that is used to analyze sales and re-order stock, as well as giving customers a printed readout of what they have purchased and the price charged. Manufacturers of fast-moving consumer goods, particularly packaged grocery products, have been forced to respond to these technological innovations by incorporating bar codes on their product labels or packaging. In this way, a change in the technological environment has affected the products and services that firms produce and the way in which firms carry out their business operations. ENVIRONMENTAL FACTORS The deterioration of the natural environment is a major global concern. In many world cities, air and water pollution have reached dangerous levels. There is a great concern about “green house gases”. Organizations have to be responsible towards the environment in order to protect it. Other environmental factors to be considered are
In other words. research and development. such as management.pollution pressures. increased energy costs. This is accomplished through the manipulation of the variables over which a company has control in such a way as to optimize this objective.Publics COMPANY The company aspect of microenvironment refers to the internal environment of the company.Competitors . research and development have input as to the features a product can perform and accounting approves the financial side of marketing plans and budgets. in order to provide fuller satisfaction to the company’s customers. MICRO ENVIRONMENT The term micro-environment denotes those elements over which the marketing firm has control or which it can use in order to gain information that will better help it in its marketing operations. Purchasing worries about getting supplies and materials whereas operations are responsible for producing and distributing the desired quality of products.Customers . The marketing manager has to build relationships with customers and this is done by creating customer values and satisfaction. these are elements that can be manipulated.The company . etc.Marketing intermediaries . operations and accounting. or used to glean information. This includes all departments. Accounting has to measure revenues and costs to help . For example. finance. The objective of marketing philosophy is to make profits through satisfying customers.Suppliers .shortage of raw materials. Each of these departments has an impact on marketing decisions. anti. purchasing. Marketing success will require building relationships with the following microenvironments: . However this cannot be done alone.
labor strikes and other events can cost sales in the short run and damage customer satisfaction in the long run. physical distribution firms. The consumer market is made up of individuals who buy goods and services for their own personal use or use in their household. sell. Marketing services agencies are companies that offer services such as conducting marketing research. and consulting. There are different types of customer markets including consumer markets. and Best Buy. Target. advertising. Marketing managers must watch supply availability and other trends dealing with suppliers to ensure that product will be delivered to customers in the time frame required in order to maintain a strong customer relationship. Most marketers today treat their suppliers as partners in creating and delivering customer value.marketing know how well it is achieving its objectives. and financial intermediaries. and distribute its products to final buyers. This is different from the . Wal-Mart goes to great length to test new products in its stores. SUPPLIERS Suppliers form an important link in the company’s overall customer value delivery system. These are the people that help the company promote. international markets. credit companies and insurance companies. Business markets include those that buy goods and services for use in producing their own products to sell. supply shortage. MARKETING INTERMEDIARIES Marketing intermediaries refers to resellers. CUSTOMERS Customers are the most important publics of the organization. The marketing department has to work closely with the all these departments because together all these departments have an impact on the marketing department’s plan and actions. Resellers are those that hold and sell the company’s product. business markets. Physical distribution firms are places such as warehouses that store and transport the company’s product from its origin to its destination. Financial intermediaries are institutions such as banks. and reseller markets. The suppliers of a company are an important aspect of the microenvironment because even the slightest delay in receiving supplies can result in customer dissatisfaction. In other words. They match the distribution to the customers and include places such as Wal-Mart. government markets. marketing services agencies.
Include environmental groups and minority groups and can question the actions of a company and put them in the public spotlight.Includes neighborhood and community organizations who will question a company’s impact on the local area and the level of responsibility of their actions. COMPETITORS The basic rule in marketing is that to be successful.Government public. .Citizen action public. The government market consists of government agencies that buy goods to produce public services or transfer goods to others who need them.Include newspapers and magazines that can publish articles of interest regarding the company and editorials that may influence customers’ opinions. .Can greatly affect the company as any change in their attitude. International markets include buyers in other countries and includes customers from the previous categories.General public. .internal and external.Can affect the company by passing legislation and laws that put restrictions on the company’s actions. Thus marketers must do more than simply adapt to the needs of target customers. can cause sales to go up or down because the general public is often the company’s customer base.Financial public. . External public can further be divided into the following: . Internal public includes all those who are employed by the company and deal with the organization and construction of the company’s product. a company has to offer a better value and customer satisfaction than its competitors. PUBLICS A public is any group that has an interest in or impact on the organization’s ability to meet its goals. whether positive or negative. The company has to first discover their competitors and then adapt a strategy that would put them in a better position as compared to their competitors in the minds of the consumers. Every organization has two publics.Can hinder a company’s ability to obtain funds affecting the level of credit a company has.Media public.reseller market which includes businesses that purchase goods to resell as is for a profit.Local publics. These are the same companies mentioned as market intermediaries. . .
which leads to lowest costs. Thus. Niches. Segment MarketingA market segment consists of a group of customers who share a similar set of needs and wants. mass distribution and mass promotion of one product from all buyers. The marketer’s task is to identify them and decide which one(s) to target.5 ounce bottle. local areas and individuals. more companies are turning to ‘micro marketing’ at one of the four levels: Segments. The company can offer . proliferation of advertising media and distribution channels are making it difficult and increasingly expensive to reach a mass audience. Example. However. An argument for mass marketing is that it creates the largest potential market. Segment marketing offers key benefits over mass marketing.Coca cola practiced Mass marketing when it sold only one kind of coke in a 6. which may lead to lower prices or higher profits. splintering of markets.MARKET SEGMENTATION LEVELS OF MARKET SEGMENTATIONIn Mass Marketing. the seller engages in the mass production.
disclose. However reality differs. A perfect market segment should be Homogenous.The basic product or service elements that all segment members value. The Himalaya Drug Company serves a niche market. is a fabric washing product for woolen clothes. The price. Examples1) By focusing on ‘Ayurvedic’ medicines and health supplements. Similarly. It can also fine. and deliver the product or service. The versions have different features.Some discretionary options that some members value. Domestic Airlines in India offer business and executive class for travelers. etc. For the models that have these features the buyer has to pay a higher price.better design. A Flexible market offering consists of two parts.Automobile companies in India offer different versions of the same car. Business-to-business marketing experts Anderson and Narus have urged marketers to present ‘flexible market offerings’ to all members of a segment. better menu. Thus.segments. business class passengers have to pay is higher as they get extra facilities such as more comfortable seats. The basic version may not have power steering or power windows. 2) Ezee. . Everyone. which may . Example. price. the liquid detergent from Godrej. Because of its mildness.tune the marketing programs and activities for the product/ service according to the needs and attitudes of the segment. customers use it to wash delicate clothes. Marketers usually define niches by dividing market segments into sub. even within the same segment may not want the same thing. Niche MarketingA niche is more narrowly defined customer group seeking distinctive mix of benefits. Each option may have an additional charge.
XL. the niche is fairly small but has size. bengalimatromony. it emphasized on offering customized services addressing to specific requirements of customers. Thus. Individual marketingThe ultimate level of segmentation leads to ‘segments of one’. 2) The movie Spiderman 3 was released in five different languages in India. 3) Exclusive sports channels like Ten Sports. 4) Magazines like ‘Better Photography’ which target niche segment of serious amateur photographic enthusiasts. Niche marketers aim to understand their customers’ needs so well that they are willing to pay a premium. The concept gave women pride and self confidence. pioneered the concept of ‘plus sized women’ and name the apparel size categories as -2. the service provider has initiated 15 regional websites such as punjabimatrimony. Ltd. 3) Bharatmatrimony. XXL. profit and growth potential and is unlikely to attract many other competitors. 3. neighborhoods and even individual stores. Revolution Clothing Pvt. Local MarketingTarget marketing is leading to marketing programs tailored to the needs and wants of local customer groups in trading areas. ‘customized marketing’ or ‘one-to-one marketing’. 2.com is a successful matrimony website. marriages are mostly community based. Examples1) Many banks in India have specialized ‘NRI branches’ to cater to the needs of families whose relatives remit money from abroad. etc.A regional dialect. including Bhojpuri. It realized that in India. 1.get damaged by harsh and strong detergents.com. -1. 4 instead of L. An attractive niche has customers with distinct set of needs. Today. and STAR cricket tend to the audiences who have very high interest in sports. customers are taking initiative in determining . ESPN. 0. STAR sports. they will pay a premium to the firm that best satisfies them.com. Thus.
In arid regions of India and Pakistan. Geographical segments vary in logistics. look up for information and evaluations of product. and the desired colors are mixed in quantities as per the requirement of customer using equipment installed in retail points. psychographic. Example. . and many customers want to see the product before they buy it.what and how to buy. . air coolers are used. use occasions Geographic Segmentation: Division of market into different geographical units such as nations. during hot and dry summer seasons. . But. Nerolac. Demographic. this product is ineffective where climate is hot and humid. Wind and Rangaswamy see a movement towards ‘Customerizing’ the firm. It can raise cost. culture and food habits. It combines operationally driven mass customization with customized marketing in a way that empowers consumers to design the product and service offering of their choice. Customization is not for every company as it may be difficult to implement for complex products like automobiles.thus providing a wide range of colors to customers to choose from. Berger paints) follow the mass customization strategy in paint retailing. BASIS FOR SEGMENTING CONSUMER MARKETS: There are two broad groups of variables to segment consumer markets.Behavioral Segmentation: Consumer responses to benefits. But Customization has worked well for some products like Paint Companies (Asian paints. They log onto internet. etc. cities and villages. Air Conditioners are preferred.Descriptive Characteristics: Geographic. They facilitate customers to mix and match colors of their choice from catalogue. product requirement. Thus. critics. states. regions. users. size. talk with suppliers.
occupation. Example. planning to retire and so on. deciding to marry their children. Many marketers develop schemes for such people.Demographic Segmentation: Division of market into groups on the basis of variables such as age. Even when the consumers belong to same demographics they may differ according to their Lifestyle. utensils become necessary. Psychographic segmentation: Psychographics is the science of using psychology and demographics to better understand consumers.Johnson and Johnson’s baby soap and talcum powder are classic examples of products for infants and children. Gender. cooking gas. Channels like Aastha and Sanskar are focused on older generation. many services such as furniture. income. Thus these are important variables to define segments. Thus. Life Stage.Nirma washing powder was launched as the lowest priced detergent in India primarily targeted at middle income segment. etc. Age and life cycle stage. education. nationality and social class. such as getting married.In India even non-vgetarian Indians avoid Beef. Example. These life stages help marketers who can help the consumers cope with their major concerns. gender. Some traditionally male oriented markets like two wheeler markets are beginning to recognize gender discrimination. there are insurance-cum-savings schemes to help young parents plan for their children’s education. Bajaj Wave DTSi.Consumers wants and abilities change with age.It defines a person’s major concern. McDonalds . Similarly. Example.determines the ability of consumers to participate in market exchange.When a person gets married and shifts in a new home. family size. Income. They have come up with women oriented two wheelers like scooty pep. sending child to school. values and personality.Men and women have different attitudes and behave differently based on their genetic make-up and socialization. Example.
Buyer and user. 4) Switchers. 2) Split Loyals. medium or heavy usage rate? Heavy users offer small percentage of market but high percentage of revenue. Example.user. Behavioral Variables: Many marketers use behavioral variables. Benefits. benefits. Dettol soap provides total protection. BEHAVIORAL SEGMENTATIONDecision Roles: People play five role in buying decision: Initiator. Example.Customers can be classified by the benefits they seek.In mobile services. Mobile services target these users by special schemes. Influencer.No loyalty to any brand. retails provides . etc. potential user.light. Special gift packs are provided by chocolate companies like Cadburys at occasions. Example: Doctors prescribe medicines. User Status. See the following points: Occasions. Split loyals show which companies are in competition.There are four kinds of loyalty groups: 1) Hard core loyals. Decider.Loyal to two or three brands.shift loyalty from one brand to another.occasions. Understanding roles is vital for marketers.Festivals and anniversaries require greeting cards.Who buy only one brand every time. non-user. Hard core loyals help identify the company its products’ strength. Companies like Archies and Hallmark provide them.Ex. Loyalty stage. Likewise companies can identify the weaknesses and strengths in its products. Patients’ relatives buy and patient uses product.Liril soap offers freshness.removed beef items from their menu and also introduced vegetarian burgers in India. heavy users account for high revenue. first time user or regular user? Mothers to be are potential users for infant product companies. Usage rate. pharmacy companies influence doctors’ prescription behavious by providing technical information about product. 3) Shifting loyals. Many services like clubs.
service or price. usage rate.loyalty schemes to retain customers. 10) Purchasing Criteria: Should we serve companies that are seeking quality. light users or nonusers? 6) Customer capabilities: Should we serve customers needing many or few services? Purchasing approaches7) Purchasing. Situational Factors11) Urgency: should we serve companies that need quick and sudden delivery? 12) Size or order: Should we focus on large or small orders? Personal Characteristics13) Attitude risk: Should we serve risk taking or risk avoiding customers? 14) Loyalty: Should we serve companies that show high loyalty to their suppliers? .function organization. BASIS FOR SEGMENTING BUSINESS MARKETS: Some variables used in consumer markets can be used here also like geography. benefits sought. but business marketers also use other variables Demographic1) Industry: which industry should we serve? 2) Company size: What size company should we serve? 3) Location: What area should we serve? Operating Variables4) Technology: what customer technologies should we focus on? 5) User Status: should we serve heavy users. medium users.Should we serve companies with highly centralized or decentralized purchasing organization? 8) Power Structure: should we serve companies that are engineering dominated. financially dominated and so on? 9) General Purchasing Policies: should we prefer companies that prefer leasing or service contract or sealed bidding and so on.
By marketing products that appeal to customers at different stages of their life ("life-cycle"). By segmenting markets. businesses can raise average prices and subsequently enhance profits Better opportunities for growth Market segmentation can build sales. For example. customers can be encouraged to "trade-up" after being introduced to a particular product with an introductory.why segment markets? There are several important reasons why businesses should attempt to segment their markets carefully. trucks.15) Should we serve companies whose people and values are similar to us? A rubber tire company can sell tires to manufacturers of automobiles. different in how sensitive they are to price. They are. therefore. for example they grow older. lowerpriced product Retain more customers Customer circumstances change. change their buying patterns. etc. form families. change jobs or get promoted. MARKET TARGETING Market segmentation . a business can retain customers who might otherwise switch to competing products and brands Target marketing communications . Within the chosen segment the company can further segment by company size. Creating separate offers for each segment makes sense and provides customers with a better solution Enhanced profits for business Customers have different disposable income. aircraft. tractors. These are summarised below Better matching of customer needs Customer needs differ.
The segment should be homogenous within itself and different from others.if married and unmarried woman respond similarly to a perfume’s sales program. EFFECTIVE SEGMENTATION Even after applying segmentation variables to a consumer or business market. By segmenting markets.segments should be reachable. to be useful. Actionable. Accessible.Businesses need to deliver their marketing message to a relevant customer audience. they may be in a same segment.Size. businesses can often achieve competitive production and marketing costs and become Once the firm has decided its market segments. Minor brands suffer from lack of scale economies in production and marketing.segments should be large and profitable enough to serve. Example. Substantial. pressures from distributors and limited space on the shelves. market segments must rate favourably on five key criteria: Measurable. If the target market is too broad.It may not be useful for an automobile company to make cars for people who are less than 4 feet tall. it is unlikely to be maximising its profitability. . Example.Effective programs can be formulated for attracting and serving segments. the target customer can be reached more often and at lower cost Gain share of the market segment Unless a business has a strong or leading share of a market. Differentiable. Through careful segmentation and targeting. purchasing power and characteristics of the segments can be measured. it must decide how many and which ones to target. there is a strong risk that (1) the key customers are missed and (2) the cost of communicating to customers becomes too high / unprofitable. However.
• Actionable: Effective programs can be formulated for attracting and serving the segments. Specialty hospitals may focus on cardiology or cancer care. One market segment is served with one marketing mix. • Substantial: The segments are large and profitable enough to serve. purchasing power. To be useful. This is also known as concentrated marketing.the Zodiac Shirts focus on formal shirts for executives and professionals. It should see how well the segment scores on the above stated five point criteria and also see if investing in that segment makes sense with firm’s objectives. they do not constitute separate segments. and would pay only one price for salt. A segment should be the largest possible homogeneous group worth going after with a tailored marketing program. . the firm should look at. believe all salt is the same. this market would be minimally segmentable from a marketing perspective. and characteristics of the segments can be measured. After evaluating different segments. For example.the segment’s overall attractiveness. but hair colour is not relevant to the purchase of salt. • Accessible: The segments can be effectively reached and served. and the objectives and resources with firm. company can consider five patterns of target market selection: 1) Single Segment Concentration. Evaluating and Selecting Market Segments: For evaluation.marketers must realize that not all segmentations are useful. table salt buyers could be divided into blond and brunette customers. • Differentiable: The segments are conceptually distinguishable and respond differently to different marketing mixes. Furthermore. If two segments respond identically to a particular offer. market segments must be: • Measurable: The size. if all salt buyers buy the same amount of salt each month. competition and resources. through which firm gains strong knowledge about needs of segment and achieves strong market presence.
The term 'positioning' refers to the consumer's perception of a product or service in relation to its competitors. positioning has come to mean the process by which marketers try to create an image or identity in the minds of their target market for its product.firm specializes in one product and tailors it to different market segments. It is the 'relative competitive comparison' their product occupies in a given market as perceived by the target market. brand. labs. You need to ask yourself. relative to the identity of competing products. There may be little or no synergy between products. They could be price (variable one) and quality (variable two). or organization. goes after whole market) or differentiated marketing( operates in different segments and offers different products) POSITIONING In marketing. De-positioning involves attempting to change the identity of competing products. General Motor Company for vehicle marketing. Example. 5) Full market Coverage. The individual products are then mapped out next to each other Any gaps could be regarded as possible areas for new products. Example. . in the collective minds of the target market. It can reach segments by undifferentiated marketing (ignores segments. etc. 4) Market specialization.firm specializes in serving many needs of a market group.firm select number of objectives. government. The marketer would draw out the map and decide upon a label for each axis. what is the position of the product in the mind of the consumer? Re-positioning involves changing the identity of a product. or Comfort (variable one) and price (variable two).A microscope manufacturer can sell the product to universities.2) Selective specialization. 3) Product Specialization. each objectively attractive and appropriate. Example.Firm attempts to serve all customer groups with all the products they might need.firm can sell an assortment of products only to university laboratories.Microsoft company for softwares. Firm gains good reputation and becomes a channel for additional products for this customer group.
For example. To understand competitive frame of reference.paras pharmaceuticals launched Moov as a balm for relieving joint pains that trouble older people. Deciding to target a certain type of consumer can also define competition. Example Apple has design as its POD. Mercedes is positioned as a luxury brand. POPs are associations that are not necessarily unique to a brand but may be shared with other brands. They are points unique to a brand. based on consumer research. Positioning is a concept in marketing which was first popularized by Al Ries and Jack Trout in their bestseller book " Positioning . If Rolex reduces its prices. Developing and Communicating a positioning StrategyCompetitive frame of reference: The firm may decide the category membership of its products.a battle for your mind". Points of Difference and Points of Parity: PODs are attributes or benefits consumers strongly associate with a brand. and have become a symbol for accomplishment in life. The brand communicates the pain relieving promise of “ek minute moov ki malish” in ads that go with tagline “ah se aaha tak” (from pain to relief). When Marlboro reduced its prices. in the collective minds of the target market. Each brand has thus to be 'Positioned' in a particular class or segment. positively evaluate. Later. They iterate that any brand is valued by the perception it carries in the prospect or customer's mind. sales dropped immediately because its customers began associating it with the generic segment. repositioned brand as ‘backache specialist’ that addresses the problems of backache that housewives encounter. . and Volvo is positioned for safety. marketers need to understand consumer behaviour and how they choose products. and believe they could not find same extent’s benefit with competitive brand. it will reduce brand cachet and sales.the products with which brand competes and which function as close substitutes.relative to the identity of your own product. The position of the brand has to be carefully maintained. Example. Rolex watches are even more dramatically positioned as a luxury items.
Suppose now that the competitors products offer the same benefits. It had attributes of stinging when applied. no sting. personal selling. promotions. display. The Concept of the Marketing Mix. which is its key POD. same quality. Jerome McCarthy later grouped these ingredients into the four categories that today are known as the 4 P's of marketing. For example. distribution channels. In general.Dettol dominated antiseptic market in India. pricing. warranties. thus promising soft skin. advertising. PRODUCT This is an object an idea or a service that is mass produced or manufactured on a large scale with a specific volume of units. physical handling. . differentiation is mainly related to: -The design: It can be a decisive advantage but it changes with fads. A good product makes its marketing by itself because it gives benefits to the customer. features. turning cloudy when poured in water and strong smell. When Savlon was introduced. it had none of these attributes. packaging. Consumers associated these attributes with efficiency of antisepic. Thus. servicing. same price. Borden published his 1964 article. The ingredients in Borden's marketing mix included product planning. depicted below: 1. You have then to differentiate your product with design. No strong smell. packaging. branding. MARKETING MIX Marketing decisions generally fall into the following four controllable categories: • Product • Price • Place (distribution) • Promotion The term "marketing mix" became popularized after Neil H. to obtain consumer satisfaction it had to counter the perception by communication. Dove has established itself as a very gentle soap having ¼ moisturizing cream. return and so on. It advertised the superior efficacy of product and highlighted the ‘no-sting’ property. services. and fact finding and analysis. E.
Sometimes. maintenance service. material costs. when the products are basically the same. return policy. product identity and the customer's perceived value of the product. In fact. -The safety: It matters a lot for products used by kids. PRICE The price is the amount or a consideration a customer pays for the product. the higher the price. -The packaging: It must provide a better appearance and a convenient use. you can charge high prices to the customer. The success of competitive pricing strategy depends on achieving high volume and low costs. So the profit is decided first. Pricing strategies -Competitive pricing: If your product is sold at the lowest price amongst all your competitors. -Cost-plus-profit pricing: It means that you add the profit you need to your cost. you are practicing competitive pricing. the more . For example. It is determined by a number of factors including market share. The business may increase or decrease the price of product if other stores have the same product. This practice is also called skimming. when a new technology has a very large success. 2. It is also called cost-orientated strategy and is mainly used by the big contractor of public works. Value pricing is also common in luxury items. the best mean of differentiation are warranties. The authority may have access to the costing data and should like to check if the profit added to the cost is not too high. this strategy is only good for a business whose customers are public bodies or government agencies.Nokia has to keep changing the designs of the cellphones to surpass customer expectations. For instance. -The "green": A friendly product to environment gets an advantage among some segments. this strategy will usually succeed. competitive pricing is essential. Sometimes. competition. products often differ mainly by packaging. In food business. In business to business and for expensive items. time payments and financial and insurance services linked to the product. -Value pricing: It means that you base your prices on the value you deliver to customers.
yellow pages. A crucial decision in any marketing mix is to correctly identify the distribution channels. PLACE Place represents the location where a product can be purchased. It can include any physical store as well as virtual stores on the Internet. PROMOTION Promotion represents all of the communications that a marketer may use in the marketplace. and discounts and is linked to the sales strategy. It is the relationship maintained with these various organisations. geo-economics. Advertising. professional associations). These four P's are the parameters that the marketing manager can control. It is often referred to as the distribution channel. internet. fraternal organizations. Sales Promotion: It includes fair trades. newspapers. coupons. public relations and so on are included in promotion and consequently in the 4Ps. and so on. including a list of some of the aspects of each of the 4Ps. radio. futurology to several organizations (civic groups. you can deliver public speeches on subjects such as economics. 4.you sell: Fashionable clothing or restaurants for the snobbish appeal. The goal is to make decisions that center the four P's on the customers in the target market in order to create perceived value and generate a positive response. Summary of Marketing Mix Decisions Product Price Place Promotion Functionality/ Features . Public Relations: Public relations are more subtle and rely mainly on your own personality. political groups. The following table summarizes the marketing mix decisions. 3. For example. It is an unpaid form of promotion. Advertising: It takes many forms: TV. In a customer-centric era where organisations aim at gaining competitive advantage by creating and managing excellent customer relationships the emphasis is as much on customer retention as customer acquisition. subject to the internal and external constraints of the marketing environment.
for a motor vehicle manufacturer like Audi: • Produces products that are of the highest quality and fit for the needs of different groups of consumers.Appearance Quality Style Size Options Packaging Brand Warranty Returns Service/Support List price Discounts Allowances Financing Payment Period Credit Terms Channel members Channel motivation Market coverage Locations Logistics Inventory Transport Advertising Personal selling Public relations Sales Promotion Message Media Budget The marketing mix is the combination of marketing activities that an organisation engages in so as to best meet the needs of its targeted market as it helps to create and communicate the differential advantage effectively. Traditionally the marketing mix consisted of just 4 Ps. For example. .
Getting the mix of these elements right enables the organisation to meet its marketing objectives and to satisfy the requirements of customers. i. with activities for young children etc. shops. but they also often expect a good standard or presentation. • Air passengers expect attractive and stimulating environments. In addition to the traditional four Ps it is now customary to add some more Ps to the mix to give us Seven Ps. • Sells the cars through appropriate outlets such as dealerships and showrooms in prime locations. As a result colleges and universities pay far more attention to creating attractive learning environments. The additional Ps have been added because today marketing is far more customer oriented than ever before. record stores. in the right places. such as interesting departure lounges. These 3 extra Ps are particularly relevant to this new extended service mix.e. student accommodation. and • Supports the marketing of the products through appropriate promotional and advertising activity.e. depending on the market segmented they are targeted at. PHYSICAL LAYOUT / PHYSICAL EVIDENCE Today consumers typically come into contact with products in retail units . The three extra Ps are: 1. The importance of quality physical layout is important in a range of service providers. clothes shops etc.and they expect a high level of presentation in modern shops . bars and other facilities.g. and because the service sector of the economy has come to dominate economic activity in this country.• Offers a range of cars at value for money prices. Not only do they need to easily find their way around the store. . including: • Students going to college or university have far higher expectations about the quality of their accommodation and learning environment than in the past.
product. place. consumers no longer have a well-defined set of products and vendors that they will consistently seek out to fulfill a need. physical evidence. in which a telephone query is handled. etc. promotion. but also to the layout and structure of virtual stores. processes for handling customer complaints. Plus. 3. it is certainly better than a couldn't care less approach to customer relations. parity can be established between how the 4 P's of marketing deliver a customer benefit and can pave way for the 4 C's of marketing . • Physical layout is not only relevant to stores. to direct face-to-face interactions. Consumers are constantly being interrupted by thousands of marketing messages.from the way. and websites. access to coffee for customers. From a buyer’s point of view.price.g. Call centre staff and customer interfacing personnel are the front line troops of any organisation and therefore need to be thoroughly familiar with good customer relation's practice. etc. people and processes comprise the modern marketing mix that is particularly relevant in service industry. The four Ps represent the seller’s view of the marketing tools available for influencing buyers. The 7 Ps . each marketing tool is designed to deliver a customer benefit.• Hair dressing salons are expected to provide pleasant waiting areas. Although the 'have a nice day' approach is a bit corny. 2. PROCESSES Associated with customer service are a number of processes involved in making marketing effective in an organisation e. but is also relevant to any form of business where meeting the needs of customers is given priority. processes for handling orders. In the words of Philip Kotler. with attractive reading materials. processes for identifying customer needs and requirements. which we visit. PEOPLE Customers are likely to be loyal to organisations that serve them well . making it easy for one message to get lost in the overwhelming clutter of communications.
Success will arrive at a company's doorstep when it uses the correct combination of the 4 C's and by developing products as per customer needs. provides economically viable options conveniently to it's customers through the appropriate means of communication.Four P's vs Four C's Product=Customer Solution/ Value Price=Customer Cost Place=Convenience Promotion=Communication Winning companies are those that can meet customer needs economically and conveniently and with effective communication. .
It helps to understand the psychology of different types of customers based on age. or services of some organization. education . preferences especially on occasions like marriage. For instance a person living in Mumbai or Delhi thinks differently from person living in Bihar. their rural or urban buy ace. goods. perceptions. Psychology of consumers is commonly known as study of lifestyle of consumers. his level of learning. large . For instance. personality. Study of consumer psychology is the most important part of the consumer behaviour research. their psychology is different. The study of psychology helps marketers to segment markets and produce goods according to their requirement rather than thrusting same product on all. his motivation of buying a particular product or service. Similarly. sex. income level. their thinking about product and services are different and their needs and perceptions are different from urban elite. A consumer is an individual who uses the products. attitudes of individuals or groups. . life style. knowledge. The demonstration influence is also dependent upon psychology of an individual.CONSUMER BEHAVIOUR Consumer Psychology: Consumer psychology can be defined as the scientific study of the behaviour of consumers. taste. they will not buy trousers whatever efforts are made. psychology of rural population of older generation is to wear only dhoti. It decides the personality. Jharkhand or Chhattisgarh. because it helps to know the attitude of the customers.
However. Farmers have adopted tractors. Psychographic research. Therefore its intelligent to manufacture fabrics in these colours for the rural area.studies life style of consumers to find out markets for certain products like items of personal health care. Therefore in north India. blue and yellow. many milkmen have purchased motorbikes to deliver milk. Study od psychology is an important tool for researchers and if one does not have resources to go in depth. Children are psychologically vulnerable to specific advertisements but before making such advertisements.percentages of them do not wear shoes or chappals. But. If for social purpose . Psychographics is another discipline which has to be used for study of consumer behaviour. eg. at the same tie. study of consumer psychology can help in great deal. their psychology will have to be studied first to market products and services needed by them and secondly by the state to protect them against misuse of their psychology. India has to reduce consumption of alcohol one has to find out through research why people drink? When in our country number of states prohibited drinking from time to time it was utter failure because prohibition was imposed without studying the psychology of the drinkers. items of . Why they have thinking and practice as they have can be understood only by studying their psychology and there after draw a sales promotion or marketing strategy accordingly. cosmetics. when it was told that smoking is injurious to health and can cause cancer. they do not use toothpaste to clean their teeth. “How do we make the market work better so that customers can make better decisions about what to buy”. in case of cigarettes. If prohibition was imposed after studying how often and what problems are faced by discontinuing drinking alcohol and what have been their responses to their problems and their solutions might have been found. For. It seems that villagers are as much concerned about commercials as the urban dwellers. the psychology of rural masses in our country is to like bright colours especially red. for cultivation. Many of them depend on Neem or babul stick (Datun) for cleaning teeth and some use tooth powder. thrashers. it had some impact and the absolute consumption of cigarettes has declined. psychology is to try a product out which is advertised because TV has reached every corner of the country. the result would have been more encouraging. If this is not done marketing efforts will go waste and will not give results expected from advertisements and other sales promotion offers. The study of consumer psychology will make us understand. Similarly.
this might appear frustrating to the budding consumer psychologist. that consumer behaviour was not merely the result of the cost of the product. the characteristics of the advertisement of the product. consumer behaviour is considered to be the consequence of patterns or constellations of stimuli. a customer follows his stimulus. Emotion is a state of arousal involving conscious experience and visceral changes. and so on. Memory refers to the retention of information regarding past events or ideas. in reality. Studies have shown that More than 90% of learning and advertisement is incidental. the placement of the product on the shelf. then he thinks and acts accordingly. Cognition refers to the processes of knowing or thought. Perception is typically defined as the psychological processing of information received by the senses. and confusing choices. drawing room furniture. However. Emotions are result of priori assumption or instincts. or awareness of attributes of the product. The result of this internal . Instead. retention. the individual's past experiences with the product. when the consumer purchases a can of "Coca-cola" brand beverage. and remembering of product information. The result of cognition is a collection of beliefs about or evaluations of the product. Advertisement does its job in the human brain and human brain does it in the memories.daily consumption like TV. the stimulus situation that impacts upon the consumer seems to be unman¬ age ably complex. Moods are of less psychological urgency and are less intensive. it is important to recognize that the world in which consumers behave is. The stimulus situation is the complex of conditions that collectively act as a stimulus to elicit responses from the consumer. pretty packaging. The result of the internal process of perception is aware¬ness of the product. extremely complex. we would have to consider the cost of the product. car. The result of this process is the acquisition. Rather. At first glance. Learning de¬ scribes a relatively permanent change in responses as a result of practice or experience. The result of this internal process is the formation of associations between stimuli or between stimuli and responses. For example. filled with continual commer¬cials. Sub consciously. Advertising is all about playing with the consumers emotions which are loosely termed as expression of feelings. This suggests that consumer behaviour is not typically thought of as being elicited by a single stimulus. Consumer has a conscious and a sub conscious mind. Consciously he becomes aware of a product or company. the packaging of the product. creates a perception.
Derived belief is any belief that stems out of central belief like Ftv should not be banned (core belief is freedom of choice) Central free belief is not an exclusive category and constantly keeps overlapping into the rest two. etc. the higher the level of continuing loyalty it experiences. thereby increasing brand equity and market share. Like cold milk cures acidity. the more likely it is to be purchased. and maintains behaviour toward a goal. for example. The stronger the association of features or attributes with the product or brand. It is through positioning brands in the minds of consumers that marketers attempt to establish or change consumer beliefs about them. Broadly there are three kinds of beliefs – central belief. and. central free belief. Brand equity is a measure of the strength of those associations in the marketplace. the stronger the consumer’s belief. Some marketers aim to make their products synonymous with. In terms of brand associations that brands are organised in the consumer’s memory. . in most cases. The result of this internal process is desire or need for the product. performance attributes that make consumers buy. This differentiates them from private labels commonly found in chain supermarkets. the more readily it is retrieved from memory.process is feelings about the product. discipline. Reebok shoes are aerodynamic and Volvo cars are safe. The stronger a brand is. Central beliefs are based on the core rigid beliefs in life like health. Motivation is a state of tension within the individual that arouses. and derived belief. Belief: Belief is based on cognition and knowledge as opposed to to affective (based on feelings). directs. The marketers use the following positioning strategies thereby strengthening or weakening beliefs. Product attributes – The simplest and most common way of positioning products is through association of specific attributes with a brand. It stays inspite of the rest of factors.
. By discovering the most common use of the product. a lunch or supper drink. A brand of shampoo with natural protein (an attribute) is positioned to highlight the fact that it’s the only shampoo that will not damage hair. They recalled not the detailed specifications they had read. A computer with touch – screen entry (an attribute) attracts consumers looking for ease of use (a benefit). Price. Car advertising typically relies on the power of intangibles to build brand equity. a break between meals. and value for money are all intangibles – non-functional factors or bundles of factors the consumer associates with a brand. a break with friends. Detailed information was provided clearly showing that the easy – to – use brand was. In an interesting study of consumer beliefs. demonstrating the power of intangible attributes to influence consumer beliefs. influences the way we retrieve brand information from memory. When asked to recollect each brand two days later. particularly price relative to that of competitors. but the advertising they had read. Price Consumers associate certain brands with a particular price or price range. subjects simply remembered one as easy to use and the other as technically sophisticated. in fact.Consumer benefits – Marketers attempt to influence consumer beliefs about brands by associating them with important consumer benefits. no matter how frequently it is used (a benefit). Intangible attributes Product quality. technically superior. but the advertising claims. etc. technological leadership. marketers position brands to gain market share. Application Consumers associate particular uses or applications with different brands. Eg: coffee is a drink to start the day. subjects were shown two brands of cameras described in terms of intangible attributes – one was technically sophisticated and the other easy to use.
all. Through celebrity recognition. A market follower tries to capitilize on the well. familyoriented. Consumers ultimately respond to the brand in the same positive way in which they respond to the brand in the same positive way in which they respond to the celebrity. marketers associate brands with a celebrity endorser and so connect the celebrity’s personality and values with them.established image of the market – leader. Coke is associated with a strong. Country or Geographic area Brands can be associated with a particular country or geographic locale with a . product category. hoping this well persuade consumers to make positive inferences about its product. Product category Marketers create identifies for brands through strong association with a particular. Competitors Marketers can purposely associate their brands with competitors in order to share the consumer perceptions enjoyed by market leaders. sometimes unexpected. The most obvious example is the positioning of 7up soft drink as the ‘uncola’ . whereas Pepsi is positioned as exciting.American image. and somewhat brash and pushy. In a long and enduring rivalry.the logical alternative to colas but with better taste.Celebrity recognition We perceive celebrities in terms of their personalities and the values they represent. innovavtive. fast-growing. Brand personality Several successful campaigns manufacture a “personality’ with which to associate brands.
• High degree of family orientation. They are not tied to specific situations 5. for example. our parents. and our environment at schooling and college. They are enduring and difficult to influence 3. This extends to extended family and friends as well. France with perfumes and fashion. E. Even luxury brands like Swatch have to design a unique pricing strategy for India. Colgate • Values of nurturing and care are far more dominant than values of ambition and achievement. an attitude is . Values differ from beliefs1. Brands with identities that support family values tend to b strong. etc. Thus. The value element attempts the marketer to build a personality for the product or create an image of the product user. Value Values are what are imbibed in us from childhood as a function of our surroundings.g. They are fewer in number 2. is associated with high quality cars and electronic goods. They orient the individual towards beahaviour which is acceptable to his/ her culture 4. They are accepted by members of a society Attitude An attitude expresses how a person feels towards an object. family and friends. Japan.reputation for quality. Indians and value • High degree of value orientation has labeled Indians as the most discerning consumers in the world. An attitude is primarily a learned predisposition to respond in a consistently favorable or unfavorable manner with respect to a given object. Germany with cars. Hence communication with feelings and emotions will gel better with the consumers.
the way we think, feel, and act towards some aspect of our environment, such as a product (teabags), a brand (Tata tea), an advertisement for it, etc.
Characteristics of attitude • Attitudes have an object Attitudes must have a focal point. It could be a physical object (say, a Maruti), or a service (ex. Customer care of ICICI Bank), or an action (ex. smoking) • They have direction, intensity and degree - Direction : the person is either for or against (favorably or unfavorably inclined towards) an object - Degree : the extent of like or dislike towards the object - Intensity : how strongly a person feels about his conviction. The direction, degree and intensity of a persons attitude towards an product provide marketers with an estimate of how ready the customer is as far as purchase of a product is concerned. • They have a structure Attitudes display a certain amount of organization. This implies that they have internal consistency, are fairly stable, have varying degrees of salience and are generalisable. • They are learned. Learning precedes attitude formation and change. They are also derived from both direct and indirect experiences in life. Components of attitude 1. Cognitive component it primarily consists of a consumers belief about an object. These may or may not conform to reality. 2. Affective component A consumers feelings or emotional reactions towards an object represent the affective component. It could be a vague, general feeling or something as a result of
cognitive evaluation. 3. Behavioural component It is ones tendency to respond in a certain manner towards an object or activity. A series of decisions to purchase or not to purchase a brand reflects this component of attitude. Habit Often we find a convenient way of doing things, we tend to repeat it without really thinking. A habitual decision making is characterized bya. Little or no information seeking, and b. Little or no evaluation of alterbnatives. Habit does not require a strong preference for an offering; rather, it is simply repetitive behaviour and regular purchase. Habit helps a consumer becausea. He does not have to evaluate the brand every time, it saves time and effort for him. b. It reduces risk for him.
Behaviour There are three important implications for a marketer • He should try to develop a repeat purchase behaviour among users • He should try to wean away habitual purchasers of other brands. • He should make sure that habitual purchasers of his own brand continue to do so.
Personality Research into over the last decade has been dominated by semiotics, the study of signs and their meanings. Consumer semiotics focuses on issues such a how consumers use symbols to interpret the world, how those symbols are chosen and given meaning, and how they provide insight into certain aspects of consumer’s life. Consumer semioticians study not only immediate, spontaneous consumer actions or response, they research the reasons behind such responses behind such responses,
they research the reasons behind thus, introspection, and repressed attitudes and motives are all a part of consumer semiotics. By understanding the relationship between the personality for consumers and their purchase behaviour, marketers are better equipped to target and promote their products effectively. Psychologists use two approaches : the state approach and the trait approach. State approach - it advocates understanding the individual in the context of the whole. It is the study of personality that allows us to predict what a person will do in a given situation. Trait approach – the fundamental assumption of this approach is that we all share the same traits, but they are expressed at different levels, resulting in different personalities. Researchers analyze market segments to ascertain the extent of influence of specific personality trait or combination of traits on the behaviour of consumers in that segment. An important fact to be taken into account when a consumer buys a brand is that he is likely to select a brand which is in congruence with his/ her personality. Now, though a brand is built on a functional platform, it is possible to develop a personality for the brand using appropriate imagery. E.g. In the category of scooters, LML Vespa created a personality around itself when the scooter category was dominated by Bajaj. LML projected its personality as ‘ suave, sophisticated and standing apart from the crowd”. Self concept In almost any category in consumer products, symbolism makes sue of the concept of ‘self’. Self- concept is the image an individual holds of himself or herself. Consumers are likely to buy brands which enhance his or her self- image. These possessions may be bought for functional or symbolic purposes, or both. For eg. A young executive about to build his career in the corporate world may choose from Van Heusen if he believes that the brand is likely to enhance his self-image. There are a variety of self-concepts which are useful in marketing communication. They are-
The marketing strategy is successful if consumers can see a need which a company’s product can solve and. A group of consumers may perceive themselves as rebellious non. The brand which matches the desired image of a target market sells well. The thin line of difference is that the ideal self-concept is based on a future aspiration. information search is carried out. Actual self-concept: this is the way the individual perceives himself or herself. First of all. .1. Consumer Decision Process The decision-making process consists of a series of steps which the consumer undergoes. the decision is made to solve a problem of any kind. 2. The expected self. Thereafter the purchase is made and the product is used by the consumer. Ideal self-concept: This is concerned with how an individual would ideally like to perceive himself. offers the best solution to the problem. For a successful strategy. The constant use of the product leads to the satisfaction or dissatisfaction of the consumer. which leads to repeat purchases. For this.conformists who seek individuality and freedom in their lifestyles. It is more likely to be useful to marketers because changing the actual self-image radically to the ideal image is difficult.image is the one that the consumer can actually identify with. The individual may use status to impress others. Thus a line of “Born Free” will appeal to them. Position the product according to the customers’ likes and dislikes. the marketer must lay emphasis on the product/brand image in the consumer’s mind. and can take care of the problem suitably and adequately. but will resist from doing so ina situation where he feels others do not matter 3.images. or to the rejection of the product. deeper than the active self-image. . Expected self-concept: this is midway between the actual and ideal self. This leads to the evaluation of alternatives and a cost benefit-analysis is made to decide which product and brand image will be suitable.
It is more profitable to retain existing customers. rather than looking for new ones. The Process of Decision Making . is important for repeat purchase. Problem recognition: Problem recognition is that result when there is a difference between one's desired . Satisfaction of the consumer.Sales are important and sales are likely to occur if the initial consumer analysis was correct and matches the consumer decision process. The figure below gives an idea of the above discussion. after the sales have been effected.
what type of message and media strategy will increase the likelihood that consumers are exposed to our message. Consumers are motivated to address this discrepancy and therefore they commence the buying process. and interprets information to create a meaningful picture of the world' Selective exposure consumers select which promotional messages they will expose themselves to. that they will understand the message.state and one's actual state. attitudes. Selective comprehension consumer interpret messages in line with their beliefs. . motives and experiences. Information Search: Once the consumer has recognised a problem. Sources of information include: • Personal sources • Commercial sources • Public sources • Personal experience The relevant internal psychological process that is associated with information search is perception. Sources of problem recognition include: • An item is out of stock • Dissatisfaction with a current product or service • Consumer needs and wants • Related products/purchases • Marketer-induced • New products The relevant internal psychological process that is associated with problem recognition is motivation. Selective attention consumers select which promotional messages they will pay attention to. Perception is defined as 'the process by which an individual receives. Understanding the consumers’ perception is essential for the development of an effective promotional strategy. selects. and remember our message. Selective retention consumers remember messages that are more meaningful or important to them. A motive is a factor that compels action. which sources of information are more effective for the brand and second. they search for information on products and services that can solve that problem. that they will pay attention to the message. First. Consumers undertake both an internal (memory) and an external search. organises.
A feedback mechanism is thus considered so as to understand the needs of the consumers and improve the product accordingly. or a sales promotion such as the opportunity to receive a premium or enter a competition may provide an incentive to buy now. The multi-attribute attitude model explains how consumers evaluate alternatives on a range of attributes. The provision of credit or payment terms may encourage purchase. The marketing organization must facilitate the consumer to act on their purchase intention. Sometimes purchase intention does not result in an actual purchase. The marketing organization needs to understand what benefits consumers are seeking and therefore which attributes are most important in terms of making a decision. Purchase decision: Once the alternatives have been evaluated.Information evaluation: Consumers evaluate alternatives in terms of the functional and psychological benefits that they offer. The relevant internal psychological process that is associated with the alternative evaluation stage is attitude formation. Post purchase evaluation: This is an important stage as this will let the marketer know whether the consumer was satisfied with the product.that is both what you think and how you feel about something. The marketing organisation should know how consumers evaluate alternatives on salient or important attributes and make their buying. the consumer is ready to make a purchase decision. Creating satisfied customers . The relevant internal psychological process that is associated with purchase decision is integration. Attitudes are 'learned predispositions' towards an object. Attitudes comprise both cognitive and affective elements .
Different Views on Consumer Decision Making An Economical View or Model Economists believe that consumers derive some utility (feeling of satisfaction) from consuming a particular product and so their consumption activity will be directed towards pursuing maximisation of utility. A Cognitive View or Model This model of a man as a thinker. While. a consumer will allocate his expenditure over different products at given prices rationally so as to maximise utility. The consumer will finally take the decision based on his satisfaction of the information received. In other words. And all the focus is on the processes by which consumers seek and evaluate information about the concerned brands and the respective retail outlets. would actually seek ‘satisfactory information’ and thereby attempt to make satisfactory decisions accordingly. The process by which a person is required to make a choice from various alternative options is referred to as decision making. providing consumers with alternatives is a good business strategy and can also result in substantial increase in sales. This the reason why if given a certain amount of purchasing power.CONSUMER BUYING ENVIRONMENT Almost all of us are involved in taking decisions related to the various aspects of our lives. For firms. An Impulsive or Economic View of Consumer . the consumer will be pleased when able to choose and decide on the best from the alternatives available. views consumer as an information processor. in the absence of the total information or knowledge of the available product alternatives. and a set of needs and tastes. this model talks about a person who.
it is the absence of a search for pre-purchase information. CONSUMER NEEDS AND MOTIVATION Marketers want to know what motivates the consumers. or the retail brand or outlet or product. Hence the consumer will make the decision based on the name of the particular brand which will add to his feeling of status. pre-existing state already present. Emotional decisions could be rational to some extent also. For emotional or impulsive purchases. while mood is an unfocused. more than rationality it the feeling (emotion) which will make the consumer purchase a particular brand of designer clothing. Even when consumers are purchasing various types of products. For such emotional buying. when the consumer gets motivated or experiences a positive feeling about an advertisement. Such consumer decisions are said to be emotionally driven.Consumers can be emotional or impulsive while taking purchase decisions. Mood may be defined as a feeling or a state of mind. this is needed so that they can shape and influence human behavior. That is. Basically. Concept of Motivation . Rather he is most likely to purchase the product (brand) based on a whim or an impulse. For instance. very often when purchasing apparel or dresses. The basic difference between an emotion and a mood is that the former is a response to a particular environment. the consumer may take an emotional decision to purchase a product but he will be rational while deciding or choosing one brand over the other. they may not be rational in their decision making. Related to consumer emotions and feelings is the ‘mood’ of the person. evaluating and then deciding on the brand or outlet to purchase from. it is the mood and feelings of the consumer which decide on the emotional purchase decision. the consumer may not undergo the usual process of carefully searching. Consumers are involved in purchases by impulse or by whim.
the ability to buy something. No one observing your behavior knows for sure why you are behaving in a particular manner. Components of Motivation are: Before we go in deep. even if people are motivated the shopkeeper is giving very little opportunity to act on their motivation. Goals and Motives Motivation can also be described as the driving force within individuals that impels . Why are you reading this book?. It is important for marketers to realize that motivation is only one of the essential elements that contribute to buying behavior as given above. let us know the place of motivation in Buying Behavior. the wish. Very few answers to question “why?” are simple and straightforward. Needs.. if a shopkeeper is offering sale on all the items but he / she is open on weekdays only up to 6.m. No amount of love or money or other incentive could motivate the person who is not able to walk. For example. Similarly. why do they prefer McDonald's hamburgers than Nirula's Burgers?. the need or the desire to do so. Following diagram shows that a given instance of buying behavior is the result of three factors multiplied by each other. suppose a company is offering a new product line and spending much on heavy advertisement but not ensuring that the products are available in all the outlets.Motivation asks the question 'why' about human behavior. Similarly. the opportunity to buy it and the motivation i.e.00 p. "A person is said to be motivated when his or her system is energized (aroused). Why he buys only from Bigjos? etc. made active and behavior is directed towards a desired goal".
(b) Product specific goals — For washing hands what kind of product is used. To reduce tension. they are innate and acquired. every individual strives for fulfilling his or her needs. For example. in which country he is i. water. if in India cannot eat steak. if a person has a strong hunger need. etc. These may include need for power. (a) Generic goals — General classes of goals that consumers select to fulfill their needs. etc.them to action. individual thinking and learning (experiences). For example. Goal Selection — The goals selected by individuals depend on their personal experiences. goal's accessibility in the physical and social environment and above all the individual's cultural norms and values. physi¬cal capacity. For example. for affection. Therefore. therefore they are also called as secondary needs. or would not like to own are often perceived in terms of how closely they are congruent with the person's self image. air. to be purchased.e. As shown in the figure. would like to own. Needs Every individual has needs. It is seen that usually that product is selected by an . which include food. An individual's own perception of his/her also influence the selection of the goal. (d) Store specific goals — From where that product must be purchased. his/her goal will depend on what is available at that moment. as it is against his values and beliefs. liquids etc. shelter or sex. there are four types of goals. this driving force is the result of tension.. marketers try to influence the consumer's cognitive processes. (c) Brand specific goals — For example. depends on each individual how he or she fulfills his or her needs i. which in turn is because of unfulfilled needs. He will have to select a substitute goal that is more appropriate to the social environment. for prestige. Pears etc. Innate needs are also called physiological needs or primary needs. Goals Goals are the end result of motivated behavior. use soap. which soap .Lux.e. The products a person owns. From marketer point of view.. This basi¬cally. Acquired needs are those needs that we learn from our surroundings / environment or culture. need for washing hands. These are psychological in nature. As in the above diagram every individual's behavior is goal-oriented.
One reason for this can be that individuals are more aware of their physiological needs than they are of their psychological needs. Therefore. Needs and goals are interdependent. Motives Consumer researchers have given two types of motives-rational motives and irrational (emotional) motives. if an individual purchases a product to enhance self-image and considers this to be a rational decision and if behavior does not appear rational to the person at the time of purchasing then he would have not purchased. This is also known as economic man theory. fear of owning the product (from society). The consumers decided for themselves that the psychological satisfaction obtained from using the cockroach spray was more important to them than the need for a cleaner and more efficient product. Can Needs be Created? This is a very ancient question about marketing and motivational research can help us provide an answer to it. For example.individual that has a greater possibility of being selected than one that is not. desire for status. pride. etc. affection. It is seen that what may appear irrational to others may be perfectly rational in consumer's opinion. Emotional motives imply the selection of goals according to personal or subjective criteria. individuality. Like the products ‘Hit’ spray for cockroaches and ‘Hit’ for mosquitoes. For example. To some extent one can influence the consumer through subliminal percep¬tion. Marketers meaning of rationality is when consumers select goals based on totally objective criteria such as size. based on the individual's own needs structure as well as on past behavioral and social experiences. For example. The measurement of satisfaction is a very personal process. weight or price. People say that needs are created for them by the marketer through subliminal. existence of one is impossible without the other. it is very difficult to distinguish between rational and emotional consumption motives. They say. a woman may not be aware of her achievement needs but may strive to have the most successful boutique in town. etc. It is assumed that consumers always attempt to select alternatives that in their view serve to maximize satisfaction. the . sometimes people join a club but is not consciously aware of his social needs. that consumers behave rationally when they consider all alternatives and choose those that give them the greatest utility.
Needs and goals are constantly changing because of an individual's physical condition. Nature of Motivation Motivation means the driving force within individuals that impels them to action. they continually impel them to attain or maintain satisfaction. Marketers and advertisers can only try to stimulate an existing need or can channel consumers need in a certain direction towards one product or brand rather than another. either they keep striving for them or finds out the substitute goal. the next need emerges. color of rooms. 1. For example. an individual tries to attain the new ones. Some re¬searchers say that new needs emerge as old needs are satisfied. researcher McGuire's Psychological Motives The classification of motives by McGuire is more specific and used more in marketing. (2) As one need is satisfied. So. there is no evidence whatsoever that anyone can create a need in a consumer. When one goal is achieved. most people need continuous approval from others to satisfy their social needs. If they are unable to attain. . He would prefer sophisticated instead of flashy objects. social circle. environment and other experiences. Need for consistency People try to buy things that are consistent with their liking and taste. (3) An individual who achieves their goals set new and higher goals for themselves. but the results are unpredictable. A sophisticated person will be consistent in his choice of colors of clothing. paintings on the wall. There are various examples in our surroundings that show temporary goal achievement does not fully satisfy the need for power and every individual keeps striving to satisfy the need more fully. Psychologists have given certain reasons to support the statement "Needs and goals are constantly changing"— (1) An individual's existing needs are never completely satisfied. It is considered to be dynamic in nature as is constantly changing in reaction to life experiences. In motivational theories.effects are probably not very great or very specific. Needs are never fully satisfied— Most of the human needs are never permanently satisfied.
500.2. 8. the causes are attributed to other factors. We use hair dye to look younger better. Need for independence Consumers like to own products that give them a feeling of independence. 6. 5. attitudes. clothing can be a cue to adopt a desired lifestyle. Cars can be classified around Rs. 3. we use products in our defense. The most popular is the price. Need for ego defense When our identity is threatened or when we need to project a proper image. It can be attributed to you. Need for novelty We sometimes want to be different in certain respects and want to be conspicuous. A different kind of travel with many novelties offered by a traveling agency. 7. false teeth to protect our image.5 lakhs. We may buy a suit not only for warmth but also for expressing our identity to others. Providing proper cues to the purchasers can enhance the use of products. etc. 2 lakhs or above Rs. impressions. This is practiced in shoes mainly by Bata and others. If you buy a dress by the advise of your friends and companions. For instance. symbols like a white bird flying may predict one to be free and independent. Deodorants are used for ego defense. You can buy shoes by your choice and may not like them. . Many products are categorized at 499. and do not like it. This is evident in impulse purchasing or unplanned purchasing.00 to keep them under Rs. novelty experiences. 5. Need for cues These are hints or symbols that affect our feelings. Mouthwash for fresh breath or. We go in for novelty products. Need for self-expression We want to identify ourselves and go in for products that let others know about us. Need to attribute causation We often attribute the cause of a favorable or unfavorable outcome to ourselves or to some outside element. Need to categorize The objects are categorized in a number of ways. 4.
More products can be sold if their reinforcement is greater by their purchases. our behavior. it reinforces our views. We can buy an expensive car. 13. which may be for esteem. but. warmth etc that define product performance. Need for assertion Engaging in those kinds of activities that bring self esteem and esteem in the eyes of others fulfills these needs.e. For utilitarian . We base our behavior on the behavior of others. We rely on well-known brands to give a correct social image of ourselves. "Sportsman rely on boost for their energy" and such captions are used regularly and repeatedly. Marketer's use these themes for selling their product. 10. A Hedonic Need is more experiential—The desire to be more masculine or feminine etc. "Lux is used by heroines". Individuals with a strong need for self-esteem tend to complain more with the dissatisfaction of the product. our choice and we go in for repeat purchases. Marketers use the-affiliation themes in advertisements that arouse emotions and sentiments in the minds of the consumers for their children and families. we tend to complain bitterly. if it does not perform well. Utilitarian and Hedonic Needs Utilitarian needs are to achieve some practical benefit such as durability economy. 11.etc. Need for affiliation We like to use products that are used by those whom we get affiliated to. 9. Need for reinforcement When we buy a product that is appreciated by others. Hedonic advertising appeals are more symbolic & emotional. If one's friend appreciates and wears a certain brand then one also tries to use the same brands or objects for affiliation. Need for modeling We try to copy our heroes and our parents and those we admire. It is the need to develop mutually helpful and satisfying relationships with others. 12. Hedonic needs achieve pleasure from the product they are associated with Emotions & fantasies is derived from consuming a product. i.
Power.shoppers the acquiring of goods is a task whereas for Hedonic shoppers it is a pleasurable activity. failure. Needs Concerned With Human Power Dominance Deference Similance (suggestible attitude) Autonomy Contrariance (to act differently from others) 4. And Prestige Superiority Achievement Recognition Exhibition Inviolacy (inviolate attitude) Infavoidance (to avoid shame. Needs Concerned With Affection Between People . Sadomasochistic Needs Aggression Abasement 5. ridicule) Defendance (defensive attitude) Counteraction (counteractive attitude) 3. Needs Associated With Inanimate Objects Acquisition Conservancy Order Retention Construction 2. Shopping Malls may be considered as gathering places and consumers/buyers derive pleasure from these activities besides the selection of goods. humiliation. Murray's List of Psychogenic Needs 1. Accomplishment. Needs That Reflect Ambition.
He has stated five basic levels of human needs which rank in order of importance from lower level (psychological) needs to highest level (physiological) needs. the individual gets motivated and fulfills it. When this needs is satisfied. drink. Maslow's hierarchy of needs in diagrammatic form (1) Physiological — housing. . as no need is ever completely satisfied. higher need emerges and the process goes on in the life span of an individual. holiday packages. or sympathy) 6. however. or protect the helpless) Succorance (to seek aid. a new i. To reduce this tension. (2) Safety — insurance. goods or services like owning microwave etc (5) Self-actualization — educational services etc. then a higher level need emerges and again tension appears. the prime motivator— the major driving force within the individual is the lowest level of needs that remains largely unsatisfied. Needs Concerned With Social Intercourse (The Needs To Ask And Tell) Cognizance (inquiring attitude) Exposition (expositive attitude) Maslow's Hierarchy of Needs Human needs tend to be diverse in content as well as in length. though all levels of need below the dominant level continue to motivate behavior to some extent. (3). protection. burglar alarms. When this need is satisfied.. cars with air bags. food. (4) Self-esteem — high status brands. fire alarms. This theory suggests that all individuals try to satisfy the lower level needs before higher level needs emerge. Social — greeting cards.Affiliation Rejection Nurturance (to nourish. Dr. The lower level of unsatisfied needs that an individual experiences serves to motivate his or her behavior. According to this theory. team sports equipment. clothing. which is universally accepted.e. there is some overlap between each level. For this reason. Abraham Maslow has formu¬lated a widely accepted theory of human motivation based on hierarchy of human needs. aid.
house garments. clothing. Egoistic Needs Products are furniture. This is the fourth level of Maslow's hierarchy of needs. control over one's life and environment. For example. retirement investments. which are called Physiological needs. this . food. medicines. order. a man who is very hungry. affection. he perceives only food. 2. burglar alarms. water. for example. foods. sex (all biogenic needs). drinks. Safety Needs Products are locks. physiological needs are dominant when they are chronically unsatisfied. He dreams food. clothing. jewellery. belonging and acceptance. and certainty. fancy cars. This means a person will eat lunch not only that day but also every day far into the future. insurance policies. Advertisers of personal care products often emphasize all these social motives in their advertisements. After the physiological needs are fulfilled. clothing cosmetics. liquor. Social Needs Products are general grooming. etc. guns. The third level of Maslow's hierarchy includes such needs as love. routine. he remembers food. These needs are also called primary needs. insurance. According to Maslow. Safety means not only healthwise but individual needs. shelter.1. fashion garments. other securities like need for saving accounts. etc. According to Maslow. stability. health foods. This is the first and most basic level of needs. which are required for sustenance for example. hobbies. safety and security needs become the driving force behind an individual's behavior. entertainment. 4. familiarity. then no other thing interests him than food. air. 3. Physiological Needs Products in this category include. These are concerned with physical safety. etc.
Egoistic needs can be inward or outward or both oriented. for self-esteem. The more self-actualized people become. for success. Marketers have generally found Maslow's hierarchy to be conceptually stimulating in understanding consumer motivation and for framing out advertising strategies. for recognition from others.becomes operative when the social needs of a person are more or less satisfied. Specific products are often targeted at specific level of need. sports. vacations. Maslow explained the term in brief. for status. not satisfaction. garments. very few of the people reached this level. the more they want to become. He says that the same person can experience more than one level of need at the same time. (2) This theory cannot be tested empirically: This means that there is no way to measure precisely how satisfied one need must be before the next higher need . independence etc. An individual with inward -directed ego needs reflect need for self-acceptance. like An Evaluation of the Need Hierarchy and Marketing Applications Maslow's hierarchy-of-needs theory postulates a five-level hierarchy of prepotent human needs Higher-order needs become the driving force behind human behavior as lower-level needs are satisfied The theory says. moreover. This need can rarely be fulfilled. The five levels of need postulated by the hierarchy are sufficiently generic to encompass most lists of individual needs The major problems with this theory are (1) Concepts are too general: It is said that hunger and self-esteem are considered to be similar needs but the former is urgent and involuntary in nature whereas latter is a conscious and voluntary type. 5. motivates behavior The need hierarchy has received wide acceptance in many social discipline because it appears to reflect the assumed or inferred motivations of many people in our society. in effect that dissatisfaction. An outward-directed ego needs includes need for reputation. art. This is a motivation with its own inner dynamic. Self-Actualization Products are education. foods. This was not coined by Maslow but was done by Gestalt theorist called Kurt Goldstein but he popularized it. Maslow did not say these five levels to form a totally rigid hierarchy. by saying that individual at this stage has need to actualize or realize all of one's unique potential and what one can be.
Consumer choice is very important in satisfying all these needs. education and vocational training etc. They buy motive satisfaction or problem solutions. These may be (d) they show that I have money (e) they make one look sexy and desirable (f) they show I am young (g) they project my slimness. even the physiological ones is of particular importance to marketing. It is also used for positioning products policies. and build their products and marketing mixes around these motives. Therefore a marketer tries to find out: (a) The motive for buying. She can say that (a) they are in style (b) they fit well (c) they are worn by her friends. Manifest and latent motives . It is also important to note that many products can be used to satisfy several different levels of needs for example. telephone etc. One of them could be reward for oneself or to self indulge in them or for a gift. Marketing Strategies Based On Motivation Consumers do not buy products. a book. often stress a social appeal by showing a group of young people sharing good times as well as the product advertised. you ask a lady why she wears designer jeans. (b) How to formulate a strategy to fulfill these motives (c) How to reduce conflict between motives. For instance.a car. others are not divulged or are hidden.. For examplecigarette ads. A person does not buy cosmetics but he buys hope for looking good. soft drink ads etc. We can see that how the cola companies have replaced themselves with tap water to quench people's thirst. Latent motives may not be disclosed. A person does not buy a sofa set but he buys comfort. Need hierarchy is also used for the basis of market segmentation with specific advertising appeals directed to individuals on one or more need levels. Multiple motives are involved in consumption. How to discover motives This is found out by asking questions from the respondent. A person may buy a product for a number of motives. And in particular why choose coke rather than Pepsi or vice versa.becomes active. Marketers therefore try to find the motives for buying. etc. Some motives are disclosed by the respondent. These motives are disclosed.
This can be reduced by the timely release of an advertisement. there are conflicts in his mind as to which motive must be given more importance. Approach avoidance motivational conflict In this the consumer is faced both by positive and negative consequences in the purchase of a particular products. Since there is more than one motive. These two choices create a conflict in the minds of the consumers. more than one benefit should be communicated by advertising and other methods of promotion. b. Approach-approach motivational conflict There may be two acts of equally attractive choices to make. so that both alternatives can be given importance. Usually. the target market has to be decided and the communication has to be chosen for the said target market. Once the motives have been known. indirect appeals for latent motives. This is done by unstructured disguised interviews or questionnaires. If one likes chocolates and is diabetic. Motivational conflicts A consumer wants to fulfill a variety of needs by using a product. While designing the strategy. a. a fridge with a deepfreeze—double door fridge.Another important method to find out the motives may be by "Motivational Research" where indirect questions are asked to elicit the information from the respondents. the marketing strategy is designed around the appropriate set of motives. Sometimes dual appeals are used and the target market has to be kept in mind. A consumer may want a medium size fridge with a lot of space inside or. This conflict can be resolved by taking sugar free chocolate. or in the case of Coca Cola-Diet free Coke may resolve the conflict. maneuverability. . direct appeals are used for manifest motives and. In case of a Maurti car as shown in the figure the benefit of economy. It is a conflict that has to be resolved. therefore. There are three types of motivational conflicts. modern ideology must all be communicated. A consumer may want a spacious car that is not large—Uno.
Positive And Negative Motivation Motivation can be positive or negative in direction We may feel a driving force toward some object or condition or a driving force away from some object or condi¬tion For example. a person may be impelled toward a restaurant to fulfill a hunger need. and away from motorcycle transportation to fulfill a safety need Some psychologists refer to positive drives as needs. they are basically similar in that both serve to initiate and sustain human behavior For this reason. the wife s actions are designed to achieve the positive goal of health and fitness. taking a bitter medicine a number of times. researchers often refer to both kinds of drives or motives as needs. although positive and negative motivational forces seem to differ dramatically in terms of physical (and some¬times emotional) activity. or desires and to negative drives as fears or aversions However. wants. and desires Some theorists distinguish wants from needs by defining wants as product-specific needs Others differentiate between desires.c. her husband's actions are designed to avoid a negative goal—a flabby physique Sometimes people become motivationally aroused by a threat to or elimination of a behavioral freedom. on the one hand. and so he starts exercising as well In the former case. thus. in the latter case. wants. Avoidance-avoidance conflict It faces the consumer with two undesirable consequences. or desires may create goals that can be positive or negative A pos¬itive goal is one toward which behavior is directed. Because both approach and avoidance goals are the results of motivated behavior. Taking an injection once or. A negative goal is one from which behavior is directed away and is referred to as an avoidance object. most researchers refer to both simply as goals Consider this example A middle aged woman may have a positive goal of fitness and joins a health club to work out regularly Her husband may view getting fat as a negative goal. and desires Needs wants. This can be avoided by choosing a lesser painful alternative according to the convenience of the consumer. such as the freedom to make a product choice This motiva¬tional state is called psychological reactance A classic example occurred in 1985 when the Coca-Cola Company changed its traditional formula and introduced "New Coke " Many people reacted negatively to the notion that their "freedom to . it is often referred to as an approach object. there is no uniformly accepted distinction among needs wants. and needs and wants on the other Thus.
or status) The assumption underlying this distinction is that subjective or emotional criteria do not maximize utility or satisfaction However. price. as well as on past behavioral and social (or learned) experiences What may appear irrational to an outside observer may be perfectly rational in the context of the consumer's own psycholog¬ical field For example. They use the term rationality in the traditional economic sense which assumes that consumers behave rationally by carefully considering all alterna¬tives and choosing those that give them the greatest utility In a marketing context. the term rationality implies that consumers select goals based on totally objective criteria such as size. it is reasonable to assume that consumers always attempt to select alternatives that. a person who pursues extensive plastic facial surgery in order to appear younger is using significant economic resources. such as fun. the pursuit of the goal of looking younger and utilization of the resources involved are perfectly rational choices However. thus. weight. these choices appear completely irrational Consumer researchers who subscribe to the positivist research perspective tend to view all consumer behavior as rationally motivated. or sensuality They study . and certainly to persons from other cultures that are not as preoccupied with personal appearance as Westerners are. based on the individual's own need structure. such as the surgical fees. or fantasy. fear. and they try to isolate the causes of such behavior so that they can predict and. pride. in their view. influence future behavior Experientialists are often interested in studying the hedonistic pleasures that certain consumption behaviors provide. time lost in recovery. the assessment of satisfaction is a very personal process. inconvenience. to many other persons within the same culture who are less concerned with aging. affection. and the risk that something may go wrong To that person. serve to maxi¬mize their satisfaction Obviously. and they refused to buy New Coke Company management responded to this unexpected psychological reaction by reintroducing the original formula as Classic Coke and gradually developing additional versions of Coke RATIONAL VERSUS EMOTIONAL MOTIVES Some consumer behaviorists distinguish between so-called rational motives and emotional motives.choose" had been taken away. or miles per gallon Emotional motives imply the selection of goals according to personal or subjective criteria (e g.
etc. she may strive to work for a state legislator or even to run for political office herself In this instance temporary goal achievement does not adequately satisfy the need for power and the individual strives harder in an effort to satisfy her need more fully B. thus. a man who has largely satisfied his basic physiological needs (e g. food. environment interactions with others. a person may partially satisfy a power need by working as administrative assistant to a local politician. they develop new ones If they do not attain their goals. but this vicarious taste of power may not sufficiently satisfy her need. and experiences As individuals attain their goals. they continually impel actions designed to attain or maintain satisfaction (2) As needs become satisfied. higher-order needs emerge as lower-order needs are fulfilled For example. Needs Are Never Fully Satisfied Most human needs are never fully or permanently satisfied For example.consumers in order to gain insights and understanding of the behaviors consumers display m various unique circumstances The Dynamics of Motivation Motivation is a highly dynamic construct that is constantly changing in reaction to life experiences Needs and goals change and grow in response to an individual's physical condition. New Needs Emerge As Old Needs Are Satisfied Some motivational theorists believe that a hierarchy of needs exists and that new. housing. they continue to strive for old goals or they develop substitute goals. at fairly regular intervals throughout the day individuals experience hunger needs that must be satisfied Most people regularly seek companionship and approval from others to satisfy their social needs Even more complex psychological needs are rarely fully satisfied For example. Some of the reasons why need-driven human activity never ceases include the following (1) Many needs are never fully satisfied. new and higher-order needs emerge that cause tension and induce activity (3) People who achieve their goals set new and higher goals for themselves A. he then may seek recognition by giving lavish parties or build¬ing a larger house .) may turn his efforts to achieving acceptance among his new neighbors by joining their political clubs and supporting their candidates Once he is confident that he has achieved acceptance.
they raise their level of aspiration. she even¬tually may upgrade her camera by several hundred dollars On the other hand. it may be sufficient to dispel uncomfortable tension Continued deprivation of a primary goal may result in the substitute goal assuming primary-goal status For example. a con¬sumer is likely to regard a mediocre product with greater satisfaction than it war¬rants if its performance exceeds her expectations D. in turn are often based on past experience A person who takes good snapshots with an inexpensive camera may be motivated to buy a more sophisticated camera in the belief that it will enable her to take even better photographs In this way. behavior may be directed to a substitute goal. a person who has not been able to take good photographs is just as likely to keep the same camera or even to lose all interest in photography These effects of success and failure on goal selection have strategy implications for marketers Goals should be reasonably attainable Advertisements should not promise more than the product will deliver Products and services are often evalu¬ated by the size and direction of the gap between consumer expectations and objec¬tive performance Thus. Success And Failure Influence Goals A number of researchers have explored the nature of the goals that individuals set for themselves Broadly speaking. they have concluded that individuals who successfully achieve their goals usually set new and higher goals. This may be due to the fact that their success in reaching lower goals makes them more confident of their ability to reach higher goals Conversely.C. goal selection is often a function of success and failure For example. a college senior who is not accepted into medical school may try instead to become a dentist or a podiatrist The nature and persistence of an individual's behavior are often influenced by expectations of success or failure in reaching certain goals Those expectations. even a good product will not be repurchased if it fails to live up to unrealistic expectations created by ads that "over-promise " Similarly. Although the substitute goal may not be as satisfactory as the primary goal. a woman who has stopped drinking whole milk because she is dieting may actually begin to prefer skim milk A man who cannot afford a BMW may convince himself . those who do not reach their goals sometimes lower their levels of aspiration Thus. Substitute Goals When an individual cannot attain a specific goal or type of goal that he or she antic¬ipates will satisfy certain needs. that is.
by selecting a substitute goal Others are less adaptive and may regard their inability to achieve a goal as a personal failure Such people are likely to adopt a defense mechanism to protect their egos from feelings of inadequacy G. and repression This listing of defense mechanisms is far from exhaustive. autism. Other defense mechanisms include regression. identification. our clothing fulfills a . everyone has experienced the frustration that comes from the inability to attain a goal The barrier that prevents attainment of a goal may be personal to the individual (e g limited physical or financial resources) or an obstacle in the physical or social environment (e g a storm that causes the postponement of a long-awaited vacation) Regardless of the cause. because individuals tend to develop their own ways of redefining frustrating situations to protect their self-esteem from the anxieties that result from experiencing failure Marketers often consider this fact in their selection of advertising appeals and construct advertisements that portray a person resolving a particular frustration through the use of the advertised product H. Defense Mechanisms People who cannot cope with frustration often mentally redefine their frustrating situ¬ations in order to protect their self-images and defend their self-esteem For example. projection. Frustration Failure to achieve a goal often results in feelings of frustration At one time or another. defense mechanisms that people some¬times adopt to protect their egos from feelings of failure when they do not attain their goals. individuals react differently to frustrating situa¬tions Some people manage to cope by finding their way around the obstacle or. of aggression and rationalization. a young woman may yearn for a European vacation she cannot afford The coping individual may select a less expensive vacation trip to Disneyland or to a national park The person who cannot cope may react with anger toward her boss for not paying her enough money to afford the vacation she prefers. it is likely that spe¬cific goals are selected because they fulfill several needs We buy clothing for protection and for a certain degree of modesty. in addition. withdrawal.that a Mazda Miata has an image he clearly prefers E. if that fails. Multiplicity Of Needs A consumer's behavior often fulfills more than one need In fact. or she may persuade herself that Europe is unseasonably warm this year These last two possibilities are examples respectively.
the second may be concerned about an increase in counterfeit merchandise. and the fifth may seek attention by monopolizing class room discussions The Measurement of Motives How are motives identified? How are they measured? How do researchers know which motives are responsible for certain kinds of behaviors? These are difficult questions to answer because motives are hypothetical constructs—that is. For this reason. the fourth may take professional dance lessons. the second may become active in a political organization. just one of the reasons (e g . people with the same needs may seek fulfillment through different goals Consider the following examples Five people who are active in a consumer advocacy organization may each belong for a different reason The first may be genuinely concerned with protecting consumer interests. that would be the prepotent need. however there is one overriding (pre-potent) need that initiates behavior For example. the third may seek social contacts from organizational meetings.wide range of personal and social needs. I. handled. no single measurement method can be considered a reliable index Instead researchers usually rely on a combination of various qualitative research techniques to establish the presence and / or the strength of various motives. and she wants to meet men outside a bar setting If the cumulative amount of tension produced by each of these three reasons is sufficiently strong. such as acceptance or ego needs Usually. she will probably join a health club However. a young woman may consider joining a health club because she has nothing special to do most evenings. Some . Needs and Goals Vary Among Individuals One cannot accurately infer motives from behavior People with different needs may seek fulfillment through selection of the same goal. touched. she wants to wear midriff-baring clothes. and the fifth may enjoy the status provided by membership in an attention-getting organization Similarly. they can¬not be seen. smelled or otherwise tangibly observed. the desire to meet new men) may serve as the triggering mechanism. five people may be driven by the same need (e g an ego need) to seek fulfillment in different ways The first may seek advancement and recognition through a professional career. the third may run in regional marathons. the fourth may enjoy the power of directing a large group.
psychologists are concerned that many measurement techniques do not meet the crucial test criteria of validity and reliability (Remember. they focus not only on the data themselves but also on what the analyst thinks they imply By using a combination of assessments (called triangulation) based on behavioral data (observation). motivational research attempts to discover underlying feelings. For example. and qualitative data (projective tests. others are convinced that qualita¬tive studies are more revealing than quantitative studies However there is a clear need for improved methodological procedures for measuring human motives Motivational Research The term motivational research.) Constructing a scale that measures a specific need. subjective data (self-reports). attitudes. while meeting both criteria. a recent research project employed six different studies to develop and validate a seemingly simply five-item scale to measure status consumption (defined as the ten¬dency to purchase goods and services for the prestige that owning them bestows). service. reliability refers to the consis¬tency with which the test measures what it does measure. collage research. and emo¬tions concerning product. validity ensures that the test measures what it purports to measure. has become a "term of art" used to refer to qualitative research designed to uncover the consumer's subconscious or hidden motivations Based on the premise that consumers are not always aware of the reasons for their actions. etc). which should logically include all types of research into human motives. Respondents are asked to indicate their level of agreement or disagreement (a Likert scale) on the following five items 1. can be complex. I would buy a product just because it has status 2 I am interested in new products with status 3 I would pay more for a product if it had status 4 The status of the product is irrelevant to me 5 A product is more valuable to me if it has some snob appeal The findings of qualitative research methods are highly dependent on the analyst. or brand use The Development of Motivational Research . many consumer researchers feel confident that they are achieving more valid insights into consumer motivations than they would by using any one technique alone Though some mar¬keters are concerned that qualitative research does not produce hard numbers that objectively "prove" the point under investigation.
and usually surprising explanations offered for consumer behavior. entertaining. marketers realized that motivational research had a number of drawbacks Because of the intensive nature of qualitative research.e. formerly a psychoanalyst in Vienna. almost every major advertising agency in the country had a psychologist on staff to conduct motivational research studies By the early 1960s. marketers soon realized that the analysis of protective tests and depth interviews was highly subjective The same data given to three different analysts could produce three different reports. quantitative. psychoanalytic theory was struc¬tured specifically for use with disturbed people. each offering it< own explanation of the consumer behavior examined Critics noted that many of the projective tests that were used had originally been developed for clinical purposes rather than for studies of marketing or consumer behavior (One of the basic criteria for test development is that the test be developed and validated for the specific purpose and on the specific audience profile from which information is desired ) Other consumer theorists noted additional inconsistencies in applying Freudian theory to the study of consumer behavior First. samples necessarily were small. that men regarded convertible cars as surrogate mistresses.Sigmund Freud's psychoanalytic theory of personality pro¬vided the foundation for the development of motivational research This theory was built on the premise that unconscious needs or drives—especially biological and sexual drives—are at the heart of human motivation and personality Freud con¬structed his theory from patients' recollections of early childhood experiences. however. thus. adapted Freud's psychoanalytical techniques to the study of consumer buying habits Up to this time marketing research had focused on what consumers did (i. there was concern about generalizing findings to the total market Also. analysis of their dreams. descriptive studies) Dichter used qualitative research methods to find out why they did n Marketers were quickly fascinated by the glib. especially since many of these expla¬nations were grounded in sex For example. and the specific nature of their mental and physical adjust¬ment problems Dr Ernest Dichter. marketers were told that cigarettes and Lifesaver candies were bought because of their sexual symbolism. and that women baked cakes to fulfill their reproductive yearnings Before long. whereas consumer behaviorists were interested in explaining the behavior of "typical" consumers .
researchers asked women to draw pictures of roaches and write stones about their sketches They found that. its principal use today is in the development of new ideas for promotional campaigns. Freudian theory was developed in an entirely different social context (nineteenth-century Vienna). means-end analysis. there are a number of associated qualitative research techniques that are used to delve into the consumer's unconscious or hidden motivations These include collage research. motivational research is still regarded as an important tool by marketers who want to gain deeper insights into the whys of consumer behav¬ior than conventional marketing research techniques can yield Since motiva¬tional research often reveals unsuspected consumer motivations concerning product or brand usage. too many motivational researchers imputed highly exotic (usually sexual) reasons to rather prosaic consumer purchases Marketers began to question their recommendations (e g . Is it better to sell a man a pair of suspenders as a means of holding up his pants or as a "reaction to castration anxiety"? Is it easier to persuade a woman to buy a garden hose to water her lawn or as a symbol of "geni¬tal competition with males?") Though they are not usually identified as motivational research techniques. for many of their respondents roaches symbolized men who had left them feeling poor and powerless The women reported that spraying the roaches and "watching them squirm and die" allowed them to express their hostility toward men and gave them feelings of greater control Motivational research also provides marketers with a basic orientation for new product categories and enables them to explore consumer reactions to ideas and advertising copy at an early stage to avoid costly errors. whereas motivational research was introduced in the 1950s in postwar America Finally. quantitative . as with all qualitative research techniques. metaphor analysis. Furthermore. m trying to discover why women bought traditional roach sprays rather than a brand packaged in lit¬tle plastic trays. and laddering All of these qualitative research techniques provide invaluable insights to marketers who want to understand the motives underlying consumer behavior Evaluation Of Motivational Research Despite its criticisms. ideas that can penetrate the consumer's conscious awareness by appealing to unrecognized needs For example.Second. motivational research findings provide consumer researchers with basic insights that enable them to design structured.
form emotional responses. there is new and compelling evidence that the unconscious is the site of a far larger portion of mental life than even Freud envisioned Research studies show that the unconscious mind may understand and respond to nonverbal symbols. more representative samples of consumers.marketing research studies to be conducted on larger. and guide actions largely independent of conscious awareness. Despite the drawbacks of motivational research. .
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