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Evolution of marketing from Production Era to relationship Era, Marketing Concepts, Customer Value and Satisfaction Marketing Environment analysis
Session II (November 24,2007)
Introduction to the Elements of Marketing Mix Product classification Understanding Consumer Behaviour
Session IV (November 25,2007)
Product Life Cycle Strategy(managing a growing product ) Product Life Cycle Strategy(managing a dying brand)
Corporate Planning, Business Planning & Strategies Marketing Planning including BCG, GE & Ansoff Models. Case study New Product Development Process
Session VI Product Product mix ,line length and width Pricing methods and factors Promotion and communication mix Distribution
Session VII Students presentation
DEVELOPING A NEW PRODUCT New product planning has been defined by the American Marketing Association as "the act of making out and supervising the search, screening, development and commercialization of new products; the modification of existing lines; and the discontinuance of marginal or unprofitable items". Simply stated, product planning decides the nature and other related aspects of the articles produced and sold. Product development is a more limited term but includes the technical activities of product research, engineering and design. Product planning and development is the result of the co-ordinated efforts of large number of specialists - engineers, scientists, marketers, etc. Product planning is usually described as 'Merchandising' and it covers both, the existing and potential products. This activity, therefore, must deal with the proper balance between the old and the new products. New product planning is a very long and complex process, and it deals with changes in : 1. The kinds of goods or services offered by a marketer for various segments. 2. The number or kinds of products, or different lines, that the company offers in various segments. 3. The width of product line offered. 4. The quality levels or levels acceptable to various classes of consumers in various target markets. 5. The degree of distinctiveness. 6. Increased societal and governmental constraints. 7. The growing shortage of new product ideas in certain areas. 8. Shorter time spans between the emergence of the idea and the physical launch of the product. 9. The costliness of the new product development process. The following decisions are important in new product planning : 1. 2. 3. 4. 5. Improving the existing product lines and services, Weeding out unprofitable items in the product line (simplification), Expansion of the current product line (diversification), New product development for the present customers, and New product development for new customers (diversified products).
THE ROLE OF NEW PRODUCT DEVELOPMENT
Whatever may be the size and nature of operations of a firm, product planning and development is necessary for its survival and growth in the long-run. Every product has a life cycle and it becomes obsolete after the completion of its life-cycle. Therefore, it is essential to develop new products and alter or improve the existing ones to meet the often-changing requirements of customers. The role of new product development can be stated in terms of : 1. Ensuring that the product mix, matches changing environmental conditions and that product obsolescence is avoided. 2. Enabling the marketer to compete in new and developing segments of the market. 3. Reducing the marketer's dependence upon particular elements of the product range or vulnerable market segments. 4. Filling excess capacity. 5. Achieving greater long-term growth and profit. Introducing new product is rather difficult as it involves long-range planning. Customers' need should be identified, competing and substitute products should be evaluated and, above all, the strength of the company should be examined before deciding to produce a new product. Product failure defeats the very objectives of a firm. In a survey conducted by Booze, Allen and Hamilton, it was revealed that firms with well-organized product planning programmes have only 4050 percent product failures. When this percentage is compared with the overall industry product failures (80 percent), one could easily be convinced of the need for product planning. STEPS IN NEW PRODUCT DEVELOPMENT The following are the usual steps involved in the planning of new products : 1. 2. 3. 4. 5. Idea generation, Screening the ideas, Business analysis, Developing the product, and Testing the product and commercialization of the product.
1. Idea Generation Stage The first stage of the new product's evolution begins with an idea for the product. Hence this stage is also termed as 'Idea Generation'. Ideas may originate from the following sources : Marketing research, Distributors,
Competitors, and Professional inventors.
All the ideas may not have immediate market potential. At the same time, a firm must always keep a collection of ideas ready in stock, because the creation of new products is a condition for survival in many industries. The specific activities performed in this stage are : A. Determining the product lines and ranges of interest to the company, B. Establishing a programme for planned idea generation, and C. Collecting ideas through an organized network. 2. Screening the Ideas At this stage, the ideas collected are scrutinized to eliminate those inconsistent with the product policies and objectives of the firm. Some ideas may already be protected by patents and some others may not be it, for consideration because of the non-availability of raw materials for production. Thus, most of the ideas screened need not essentially be good. They may be further subjected to a more detailed examination. The main intention of this phase is only to eliminate unsuitable ideas as quickly as possible. The procedure adopted includes : A. Expanding each idea into full product concept and service, B. Collecting facts and figures to decide whether the product idea could be converted into a business proposition, and C. Assessing each idea for its potential value to the company and its impact on the overall profitability. 3. Business Analysis It is a continuation phase of the above. At this stage, the product features are analyzed and a rough programme for its development is finalized. This stage emphasizes : A. Further study on each idea in a detailed manner with competitors' analysis. B. Determining the desirable market features for the product and its feasibility. C. Developing specifications and establishing a definite programme for the product. 4. Developing the Product
During this stage, the 'idea-on-the-paper' is turned into a 'producton-hand'. In other words, the idea is converted into a product that is productable and demonstrable. This stage is also termed as 'Technical Development'. It is during this period that all developments of the product, from idea to final physical form, take place. The final decision whether a product should be developed on a commercial scale or not is decided at this stage because the timelag required to attain this stage is a long one and it is possible that some adverse developments might have taken place during this period. Once the management decides to go ahead with the product idea, the following activities are undertaken : A. Establishing development projects for each product. B. Building the product with the changed specifications, if necessary, and C. Completing laboratory evaluation and sending the product for testing and then launching. 5. Testing the Product It is at the stage of testing that one could testify the accuracy of the information on the basis of which various stages were completed. These commercial experiments are necessary to verify earlier business judgements. Thus, the object of this stage is basically to assess whether the product meets the technical and commercial objectives at various levels in order to ascertain the product acceptability. There are three types of tests usually conducted : A. Concept Testing, B. Product Testing, and C. Test Marketing Concept Testing This is concerned with measuring customer reactions to the idea or concept of a product. In fact, it is a kind of research in which the product idea is screened before any money, time or labour are committed to making the prototype products. The idea of a product with as many details as possible is made known to the customers either verbally or through the use of suitable blue prints. The response of the customers is checked and only if it is found encouraging, then the development of product prototype is taken up. For instance, when the rest of the world had largely gone in for
synthetic detergent in the powder form, it was decided by the Hindustan Lever Limited to test a detergent bar as a concept, because in India most people do not use washing machines or even buckets and are accustomed to using a bar to rub on the fabric. Concept testing can tell whether the product is likely to be a success or not. To achieve better results, however, the product concept should include the finished product itself with all details, viz. packaging, price range, the brand name, etc. On the basis of these details, interviews are conducted to collect the opinion of the would-be purchasers. The major advantage of concept testing is that the management could form early judgements on the likelihood of the market success of the new ideas. The other objectives of concept testing could be : A. To evaluate the relative merits of several new product proposals, B. To determine whether the product idea is to be abandoned or modified. C. To determine the size of the potential market, and D. To guide the management to adopt suitable marketing policies in advance. Concept testing has the following limitations or drawbacks : It entails some risk of disclosing the company plans to competitors. There is time-lag in obtaining and assessing the results. Respondents may overstate their interest and encourage unsound development. The validity of any measure of potential market size obtained through early stage concept testing may often be dubious. Findings may also be misleading if the test is not carried out properly. Product Testing Once the concept test of the product is successful, the next step is to put the real product into a few selected markets. This test will prove whether the product performs as expected or whether it lives up to the promise of the concept. Such a test enables the management to pick out the likes and dislikes of the consumers towards the product. It also gives an opportunity to the buyers to compare the product with the competitive products. The objectives of product testing are : A. To assess proper product performance,
B. To minimize the risks attached to full-scale launching of a new product, C. To identify the most productive market segments, and D. To collect necessary data about the responsiveness of the customers. However, this is not a foolproof system for predicting the future. It cannot help to forecast the market size, sales volume, brand share, repeat buying, etc. Correct pricing can also be assessed. Test Marketing Even the most favourable results from the two tests mentioned above are not a conclusive evidence for the success of a new product. For instance, even where the product is seen to possess a high quality, market failure is still a possibility if other important factors in the marketing mix show weakness. It is, therefore, logical to examine how the company's total marketing mix may be tested by conducting test marketing. Under test marketing, the product is introduced in selected areas often at different prices in different areas. These tests would provide the management, an idea of the amount and elasticity of the demand for the product, the competition it is likely to face, and the expected sales volume and profits it might yield at different prices. Experience shows that the chances of a new product being successful are 'significantly greater' if it is first put into a controlled test market where it is exposed to realistic competitive conditions. The objectives of test marketing are : A. To evaluate a complete marketing plan including advertising, distribution, sales, pricing, etc. B. To determine the promotional media mix, channels, etc., and C. To forecast the likely sales volume. Though test marketing has definite advantages, there are some limitations as well : A. Competitors' response and their defensive action may not allow test marketing to provide a conclusive result. B. Test marketing is a costly affair. C. It is a time-consuming method. Many firms avoid test marketing since they wish to be "the first in the market". Though test marketing is not a perfect simulation of full-scale production and distribution, yet it may provide very useful
information for better planning of the full-scale effort. It also permits initial pricing mistakes to be made on a small rather than on a large scale. "Test marketing does not eliminate risks, it only improves knowledge, and reduces chances of expensive mistakes." Therefore, most firms do resort to test marketing. For example, Liril Soap, introduced by Hindustan Lever Limited, was originally tested in two towns (Hyderabad and Lucknow). These towns were selected because of their different characteristics, which make them representative of a large spectrum of towns in India. The product was distributed in all normal outlets, in the whole town and supported by advertising to inform the improvements which were successfully incorporated before the product was nationally extended. To make test marketing more fruitful, a 'post-launching' survey should be conducted. The survey will reveal whether the earlier satisfaction continues to be derived, whether people like the product and make re-purchase, whether the advertising is appealing, etc. On the basis of the findings, changes will have to be incorporated before the product is finally launched in the market. The following procedures may be adopted for test marketing : 1. For determining the number of cities, the two factors which must be considered are : i. ii. representatives, and the cost of marketing
2. For selection of cities, they must essentially possess the following characteristics : i. ii. iii. iv. Average competition, Presence of chain and departmental stores, Existence of various types of basic industries, and Optimum size of population.
3. The duration of testing - it depends upon the following factors : i. ii. iii. Average purchase period The competitive situation, and Cost of testing.
4. Collection of necessary information - It is important to collect the necessary information with respect to the nature of the product,
the nature of customers, channels of distribution, buyers' behaviour, etc. 5. Launching of the new product Commercialization In this stage, the product is submitted to the market, and thus, commences its life-cycle. Commercialization is also the phase where marketing is most active in connection with the new product. This stage is considered to be a critical one, for any new product and should, therefore, be handled carefully. For instance, it should be checked whether advertising and personal selling have been done effectively and whether proper outlets have been arranged for the distribution. Despite the care with which the previous development stages have been planned, unforeseen events can impair commercialization seriously. The following activities are usually undertaken during this stage : 1. Completing final plans for production and marketing, 2. Initiating co-ordinated production and selling programmes, and 3. Checking results at regular intervals. It should be remembered that new products should be launched in the market only stage-by-stage. In other words, introduction may be restricted to a few regions in the first instance. This is to avoid short-supply of the product due to initial gaps in production and distribution. It is not prudent to extend a product nationally and then not be able to meet demand or to come across some unexpected deficiency. 'Gold Café' was heavily advertised nationally in 1987 but it was not available at retail stores. All the stage explained above stress the fact that the development of a new product must pass through certain logical stages. Innovation is necessarily an orderly and predictable process and could be performed only in a sequence. For example, commercialization cannot precede the development stage of a product. PRODUCT-LINE COVERAGE The need for multiple products. The need for multiple products can best be described in the words of Nickerson, who has compared the product range of a company with a family in which all children are not born with the same facility and aptitude. In the range of products (strong brothers) help less profit-intensive products (weak sisters) to
survive and yet enable the company to earn a reasonable return on its total investment consistent with the risk involved. With the passage of time, a company may find it difficult to maintain profitability with the existing range of products. A change in the product-mix may very often help overcome the situation. In fact, a change in the product-mix is one way of profit improvement. The important data to help managerial decisions regarding changes in product-mix are : a. Detailed cost data relating to each product in the product-line. b. Profitability and the contribution of each product. c. Product-wise plant capacity and the alternative uses to which it could be put in case a change in the product-mix is envisaged. d. Product-wise demand - present and potential. e. Prevailing market prices for similar products and the marketing strategies adopted to promote their sales. ADDING A NEW PRODUCT Excess Capacity as a Reason for Expanding Product-line The presence of excess production capacity is, perhaps, the most important single factor leading to product-line diversification. Broadly conceived, excess capacity is said to exist when it would cost the multiple-product firm less to make and sell the new product than it would cost a new company set up to produce only that product. Excess capacity may occur for several reasons. It may be the result of an unduly over-optimistic estimated market for the firm's products. In such a case, if anticipated level of demand is not forthcoming, the firm develops excess capacity. Excess capacity may be due to seasonal variations in demand also, the latter being a result of weather and custom, e.g., greeting cards, icecream, etc. Companies faced with seasonal demand for their products would certainly find it advisable to add to their product-line in offseason a new product to make up for the loss because of idle capacity. OCM, manufacturers of carpets, have taken up the manufacture of synthetic fibre fabrics to avoid the disadvantage of seasonal sales of worsted woollen fabrics. Over-capacity may further be caused by cyclical fluctuations in sales. Excess capacity may result from secular shifts in markets, tastes, buying habits, etc., leaving the firm with underutilized capacity and
know-how. TISCO management was fully aware of the vulnerability of the steel industry to business cycles. With this in view, the company promoted a large number of industries in and around Jamshedpur with a view to disposing of most of its steel at the minimum cost. In this process, a number of companies including India Tube Company, Tata Robins Fraser, TELCO and Tinplate Co. were established. Finally, the existence of an excess capacity may be the result of vertical integration. The reasons for vertical integration may, however, be many. The most obvious reason is to get a strategic market advantage. There may be an economic motive to integrate if fuller utilization of plant capacity or managerial, marketing and research capacities leads to lower production costs. Moreover, a purchasing firm can supply its own needs of raw materials and semi-finished components more economically through integration than by directly purchasing them from the market. Sometimes, a firm may have to pay lower prices if it purchases two or more products simultaneously. Vertical integration makes this possible. To utilize unused capacity, some units in the public sector have also added to their product lines. The Mining and Allied Machinery Corporation (MAMC), manufacturers of coal-mining equipment, have taken up manufacture of earth-moving equipment and washeries for the coal industry. Jessops, manufacturers of rail wagons, have added specialized cranes in their product-line. West Bengal Scooters has diversified into steel rolling. Profit as Criterion of Optimum Product-line Granted that there are sufficiently strong pressures on the part of the firm to diversify its product line, the question is : what are the goals sought to be achieved by the firm in increasing its product-line? In the long-run, profit maximization may be the objective of optimum product-line. In the short-run, however, income stability may be the more important goal. Other short-run objectives are continued existence of the firm, market share, volume growth, comfortable cash reserves, cordial labour relations, etc. Even these objectives, however, may merge with the long-run objective of the profit maximization. Thus, profitability is the crucial test of adding to the product-line. In fact, the decision about adding a new product is not different from other managerial decisions. Incremental costs of adding the product are to be compared with incremental returns. If the net return is more than the returns provided by alternative investment opportunities, a product may be added to the product-line, a forecast of the demand
for that product and the costs involved in the addition will have to be made. Diversification as Response to Change Many companies find it profitable to diversity and add to their productline in response to change. Changes may occur in the demand for their products, in the scope for further expansion or in the overall economic, political or social environment in which the company operates. Hindustan Lever started in the 18th century as a sales organization and became a marketing company early in the 19 th century. By 1930, it commenced manufacturing vanaspati and soaps. Between mid-fifties and the mid-sixties, it diversified its activities into synthetic detergents, convenience foods, animal feeds and dairy products. By the late sixties and early seventies, it was evident to the company that its future was more secure with further diversification into the 'core sector'. Facit India, manufacturers of adding machines and calculators, sensed in time, that its market domination for these products is likely to be eroded by electronic substitutes. Hence it took up the manufacture of typewriters. It was easier to switch over to the production of typewriters as some production techniques were overlapping. Due to the prohibition policy of the Government, Mohan Meakins, brewers and distillers, have taken to cement, steel products, dyes and chemicals, hotels and packaging machinery. Due to oil price hike and the resultant cost compulsion, Daimler-Benz that built its reputation on limousines, had to introduce a compact car for those who want "less the comfortable interior than the exciting driving experience'. The objective was to lure customers away from rivals such as BMW, Audi or Opel in Germany. Diversification Regulations as Response to Restrictive Government
To avoid the rigours of the various restrictive regulations, many multinational companies and those belonging to big houses, have decided to diversify. Associated Cement Companies have diversified into high technology areas like castable refractories. BASF, German multinational, has diversified to include leather chemicals in its product-line because they were compatible with the technological and marketing expertise of the company. ITC has added the Marine Foods Division, the Hotels Division and the General Exports Division to its traditional tobacco and cigarette
It also promoted a paperboard project, as a separate
The steadily increasing taxes and duties on major packaging raw materials and the reservation of much of the packaging industry for the small-scale sector, have led Metal Box to diversity into manufacture of a variety of engineering products like off-set printing machinery and automobile bearings. Other Considerations a. A company may take advantage of its own strong points, e.g. sound distribution network. WIMCO's diversification into processed food industry is an example of this type. Crompton Greaves took up TVs because their household products, lights and fans, had given them a lot of goodwill. A company may look for backward or forward integration and diversify into allied lines. OCM, manufacturer of woollen carpets and worsted woollen fabrics, went in for production of synthetic fibre fabrics. This also reduced the company's dependence on seasonal products. c. A company may go into totally unrelated products (i) because of incentives given by the Government for the growth of a particular industry or a region, or (ii) to provide a hedge against business cycles and recession. Brooke Bond diversified rapidly into nonbeverage lines. Shriram Fabrics is taking up manufacture of autoancillaries because of DCM-Toyota tie-up. In product-line decisions, the management should also keep in view, the following points: 1. The management should not introduce a new product if an even better new product is available. Before taking a final decision, all the available opportunities and alternatives should be explored and examined and the best one chosen. In other words, the opportunity costs of alternative uses of excess capacity must be estimated. 2. The management should also appraise the impact of the new product on the products already manufactured. If the product complements the product-line, it will increase the sales of other products. In such a case, the contribution to overheads and profits by introducing the new product will be greater than the direct
contribution of the product itself. If, however, the product competes with existing items of the product-line, the contribution estimates will have to be adjusted downward. 3. If the excess capacity is temporary, management must look whether the product can be abandoned when demand for other products recovers. For it may well be preferable to accept temporary excess capacity than to create production bottlenecks when the excess disappears. 4. Management must examine whether it has the requisite know-how to produce and sell the product. FACTORS DETERMINING THE SCOPE OF PRODUCT-LINE The extent to which a company can add new products is not unlimited. Very often, the scope for having new products is in some way related to the existing conditions of the firm. The goods may be : 1. 2. 3. 4. 5. cost related demand related advertisement and distribution related research related, and raw materials related
1. Cost Related Goods A company may decide to add a product which may be the result of a common production process. For example, a company which strikes oil may decide to produce petrol or mobil oil, kerosene, gas, wax, etc. A company producing sugar may decide to produce molasses. 2. Demand Related Goods A firm may decide to add a product which is jointly demanded. For example, manufacturers of Sulekha Ink have gone in for production of other related items of stationery like sealing wax. Food Specialities Ltd. added Maggi to their various food products. Weston Electronics, manufacturers of tape recorders, colour TV sets, two-in-ones, calculators, video games, audio duplicating machines, video tapes and cassettes. They plan to enter into medical electronics (e.g. blood pressure instruments).
Sometimes, a firm having earned reputation for its products may like to add to its product-line in the hope that people will continue to patronize its goods because of the reputation established by it. For example, Hindustan Lever Ltd., manufacturers of Dalda, went into production of dehydrated vegetables, pure ghee and mustard oil in the hope that consumers who are after quality will purchase ghee, oil and other products manufactured by them. Sometimes, manufacturers of quality products may add to their product-line to utilize raw materials found sub-standard for their quality product. While the quality product is sold under the company's brand name to attract quality customers, the inferior product may be sold under a different brand name without emphasizing the name of the manufacturers. Production of different brands of goods by the same manufacturer may be the result of a number of factors : (i) Merger or amalgamation of firms producing the same goods but under different brand names - the different brand names may be retained to retain customer loyalty. (ii) Known consumer preferences for different varieties - here the firm may like to cater to the requirements of most of the customers by producing different varieties according to the demand of the customers. (iii) The keenness of the firm to cater to the requirements of the customers who are choosy and want wide variety of goods to select from. Some brand variety may appeal to one class; the other variety to some others. Advertisement efforts may also be geared accordingly, to appeal to different types of customers. (iv) To retain dealer loyalty, a firm may produce goods of different brands, though more or less of the same quality, one brand being sold through exclusive dealers and the other one being sold to all other dealers. Bata produces two types of goods : one under the brand name of Bata to be sold exclusively at Bata shops, the other BSC (standing for Bata Shoe Company) for distribution through other dealers. 3. Commodities Related in Advertising and Distribution Frequently, firms may find it advantageous to handle multiple products because they are related in advertising or distribution. For example, a number of travel goods can be conveniently advertised together, say, holdalls, suitcases, etc. Likewise, one salesman can conveniently sell tea, coffee, Bournvita, etc. 4. Commodities Related in Research
Common research facilities may enable a company to produce an additional product or commodity. 5. Common Raw Materials Companies often decide to add products using the same raw materials or its by-products. Sometimes, the basic source of raw materials may be controlled by the companies and this also helps in the addition of a particular product. NEED FOR MARKET RESEARCH FOR PRODUCT ADDITION If decisions regarding product addition are taken without adequate planning, i.e. without adequate forecasting and market research, the added product may turn out to be a money loser rather than a moneyspinner. It may be useful to cite here, the example of the introduction of HIMA brand of packaged convenience goods by Hindustan Lever Ltd. The products failed because of lack of demand forecasting and market research. The launch of these products did not take into account, the peculiar sociological features of the Indian consumer. The Indian consumer, particularly the Indian housewife, perceived very little need for such conveniences because of the following factors : i. ii. iii. General preference for fresh foods in India. Easy availability of fresh foods in India unlike the West. High retail prices due to (a) avoidable packaging, and (b) lack of economies of scale. iv. Widely spread-out market segments posing distribution problems, and v. Diversified food tastes in India. It may be noted that other companies in packaged foods industry like Kissan and Dipy's have a small but established market constituting bulk sale to hotels, restaurants and canteens. There is not much demand for their products in the household sector due to high prices. Very often a company may introduce a new, improved product to justify a higher price tag. Very often this is done by changing its composition. However, it should be after thorough research through personal discussion with the consumers. If a change is made without thorough research a lot of unnecessary and avoidable expenditure would have to be incurred. Recently, Nestlé changed the composition of its Maggi Noodles. Children who are the core customers for the product did not like the taste of the improved (?) noodles. Nestlé had to return to the original composition and is now spending a lot on advertising to emphasize that everything is as before ----
Something similar was done by Coca-Cola in America in 1985 by introducing New Coke. Americans did not like the taste of the new coke. As a result the company had to revert to its original composition. Marketers would be well-advised to take a more active role in finding out what their customers want. Everytime they talk to their customers, they would be more knowledgeable and get away smarter. IMPROVE, BUY OR DROP A PRODUCT If a product is not showing profitable performance, the company may consider one of the alternatives, viz., improve, buy or drop the product. Improve If the firm continues to make the product, it may be required to make improvement in its production or distribution so as to yield adequate return. Improvement may mean re-designing the product or producing it at a lower cost. Product improvement is particularly necessary when the existing product has become apparently obsolete or out of fashion. Indian companies need to continuously upgrade their products and technology to withstand the pace of change in their business environment and to meet the challenges thrown up by the emergence of a buyer' market. Product improvement is very important in durable goods, for example, automobiles, refrigerators, etc. This explains the development of a camera with a built-in coupled exposure meter, which proved to be a more saleable product than a camera with a conventional exposure meter fitted to the outside case. Adapt Multinationals operating in India have found it necessary to adapt the product to Indian tastes or to suit to Indian psyche. McDonald has introduced McAloo tikki burger and vegetable nuggets. During Navratras, they serve only vegetable stuff. The Pilsbury chakki-fresh atta proposition illustrates the desi bug that has bitten the big white man on the prowl in Indian markets. They have realized that not only have the products to be tailor-made for local requirements with modifications that may be necessary, but the entire tone and tenor of the marketing mix seeks a distinct Indian identity. Harish Bijoor columnist has termed it as a Desi Customisation. Buy
A decision to buy the product rather than improve it, may be appropriate where the ailing product makes positive strategic or merchandising contribution. Buying the product is possible only if the supplying firm can provide the product in sufficient volume and at sufficiently low costs. In general, buying instead of making and improving, gives a firm certain flexibility, i.e. it can shop around and buy from the most economical source. It can also change its quality standards, if necessary. Further, buying gives the company the advantages of the supplying firm's specialization and large-scale production. For the buying firm, however, this decision may have the following consequences : 1. It makes the firm dependent upon others, which may be a disadvantage if the supply of the product is not assured and continuous. 2. If the supplying firm is part of an oligopolistic industry, its pricing practices may be erratic enough complicate profit, cost and sales planning by the buying company. Drop A planned and systematic product elimination programme may contribute substantially to the firm's profitability and future growth. Profits can be enhanced by eliminating certain costs associated with products in the later stages of their life as well as by increasing the productivity of the resources released from the older products. Very often product elimination is avoided out of sentiment and blinkers are developed in connection with products, which have been in the company's line of products for a large number of years. However, deletion of products is as important a consideration as introduction of new products. A sick product generally loses its market appeal. It requires a disproportionately larger amount of executive time merely to prop up the marginal product. Further, continuation of sick products would affect a company's profitability. Also such product may even spoil the company's reputation if they are unsuitable to the consumers. Besides, capital is tied up in such a sick product which could be released for more profitable products. Finally, if resources are scarce, the company can ill-afford sick products in the product-mix. A systematic approach is, therefore, required for considering the question of elimination of marginal or unprofitable products. It is also essential to first assign definite responsibility for selecting products which are to be considered for elimination. The next step would be to
collect the necessary information and analyze it so that a final decision can be taken regarding elimination. There are certain indicators, which suggest a careful analysis to determine whether or not to eliminate a particular product. These include the following : 1. 2. 3. 4. 5. 6. Reduction in product effectiveness; Emergence of a superior substitute product; Use of disproportionate executive time; Declining sales trend Decreasing price; and Downward profit trend.
These indicators can help management to identify products which should be considered for deletion. An analysis may, however, result in a decision not to eliminate but may suggest further improvements in the products. Let us now consider these indicators in some detail. Over a period of time, certain products lose their effectiveness for providing the benefits for which they were produced originally. This particularly happens in the case of pharmaceutical products and certain drugs may have to be eliminated or substituted by other drugs. Where a substitute product emerges which is a considerable improvement on the old product, management must consider this seriously even though the substitute product had been introduced by a competitor. A study of the executive time devoted to various products in the product-mix can highlight the product taking excessive time which may be due to the product being sick. However, this must be distinguished form the growing pains of a new product. A declining sales trend over a reasonably long time period would require a careful analysis of the product concerned. Similarly, decreasing price trend might indicate that obsolescence state cannot be warded off much further. A downward profit trend is a powerful indicator. The company may even work out a practical minimum profit standard for each of its products. However, all products need not show a profit, as at times a product is included to provide a "full line" for the customers. If the dropping of such a product forces the customer to purchase from another supplier products, which constitute a profitable group of the company, then elimination may not be justified. Again the declining trend in profits can be arrested by other tactics such as analyzing possible reductions in production costs, the use of more effective marketing and even by increasing the marketing expense provided the increased sale and profitability are greater than the extra marketing
expense involved. The decision to drop the product entirely, is warranted if its long-run net profit is below what would be attained from an alternative product using the same resources. In the long-run, there may be new products which would produce a greater contribution to overheads than the old product. The Electronics Corporation of India Ltd. decided to suspend production of certain microwave equipment on the ground of unremunerative price, low demand, obsolete technology and stiff competition from small-scale units. The Gramophone Company decided to phase out gradually, the manufacture of consumer electronic products like stereos and record players, as a part of re-adjustment and realignment of operations. ICI in the UK, decided to close two uneconomic plants and withdraw several unprofitable products in its synthetic fibres division to reduce losses. CONSUMER ADOPTION PROCESS In the process of new product development, a large number of factors are examined to know the reaction of consumers regarding adoption of a new product. The process of accepting new product idea is known as diffusion process. Diffusion is the process by which the acceptance of an innovation (a new product, a new service, new ideas or new practice) is spread by communication (mass media, sales people or informal conversations) to members of the social systems. Elements of diffusion process 1. The innovation 2. The channels of communication 3. The social system
DIFFUSION OF INNOVATIONS According to Rogers, the diffusion of innovations is “the process by which an innovation is communicated through certain channels over time among the members of a social system.”To understand that definition you must first understand some key terms.Innovation is used more generally here to mean an item, thought, or process that is new.Good examples of innovation would be automobiles, brain surgery, and a new kind of running shoe.It is important to realize that something can be an innovation in one place and have already been accepted in another.The other key term in the definition is diffusion.Diffusion is the process by which innovations spread from one locale or one social group to another.People do not just welcome into their homes every innovation that
is put in front of them.Every person reacts differently in the ways that they hear about, understand, and finally accept or do not accept an innovation.Before we dive right into the process of diffusion of innovations it is important to take a look at where the research and theories began. HISTORY With this huge increase in interest on the subject diffusion research was being done globally.At this point researchers saw similarities in all of the studies being done in different fields and realized that it is one basic communication process.With all of this research going on it made logical sense for marketing agencies to begin their own studies involving adoption and diffusion of new products.These studies have continued on through the past few decades answering many questions about the diffusion of innovation process as well as coming up with new questions to be answered in the future. ELEMENTS OF DIFFUSION There are four main elements to the diffusion of innovations: (1) the innovation, (2) its communication, (3) in a social system, (4) over a period of time. • Innovation – any item, thought, or process that is viewed to be new by the consumer • Communication – the process of the new idea traveling from one person to another or from one channel to the individual. • Social System – the group of individuals that together complete a specific goal (adoption) • Time – how long it takes for the group to adopt an innovation as well as the rate of adoption for individual Innovation When studying the diffusion of innovations it is important to understand that you are not just looking at the spread of an innovation through a society but rather the spread of different kinds of innovations through a society.As stated earlier, an innovation is an item, thought, or process that is new to a certain area but not necessarily to the world.There are three main types of innovations that are diffused in different ways. • Continuous Innovation This type of innovation is a simple changing or improving of an already existing product where the adopter still uses the product in the same fashion as they had before.An example of a continuous innovation is now seen in the automobile industry as it continues to change and develop. • Dynamically Continuous Innovation Here the innovation can either be a creation of a new product or a radical change to an existing one.Here the consumption patterns of people are altered some.An example of this type of innovation would be compact discs. • Discontinuous Innovation This is a totally new product in the market.This is the big idea innovation.In this situation, because the product has never been seen before, there are total changes to consumers buying and using patterns. After discussing the three types of innovations natural progression moves us straight to the next topic of the five different characteristics if innovations. Each characteristic effect
the rate of adoption of a innovation differently. Like a lot of things in life, the innovation does not have to be better or easier to use than the product it is competing with but only be perceived to be better or easier to use by the consumer. This idea of perception is stronger than information is seen throughout the advertising world. • Relative Advantage This characteristic expresses to what extent the new product is better than the one it is replacing. Of course the first thought would be greater profit potential. Although profit does fit into the equation, relative advantage can be judged on other factors like ease of use and storage as well . • Compatibility No matter how superior or efficient an innovation is it will not be successful if it does not take into consideration local values and customs of the adopters. Compatibility is the level of which an innovation fits into the specific society. The smoother the innovation fits into the culture, the faster the rate of adoption. The diffusion of certain types of birth control pills in certain areas is unattainable due to religious beliefs and cultural values. • Complexity This type of innovation is the extent of how difficult it is for an adopter to understand and use an innovation. It is very logical to think that the harder an innovation is to use, or at least perceived to use, the less likely that an adopter would be to consume it. A contemporary example would be the Internet. Although the Internet is easy to use, for someone who has never been on a computer it is extremely intimidating. • Divisibility This refers to the ability of the consumer to give the innovation a test run before deciding whether to adopt it or not. Being able to try out a product before purchase helps increase the rate of adoption drastically. • Communicability This characteristic is simply stated as the idea that when an innovations benefit does not directly or immediately solve or fix a consumers problem or need it will not diffuse through a society as quickly compared to an innovation that is more of solution to a problem. A fictional example that helps understand this principle would be a new drug on the market that you would take everyday to ward off headaches before they come. Although the drug may work, because the results do not fit into our first problem then solution ideal, it would take more time for it to be adopted. It is important to note that these five characteristics are not the only ones that affect the rate of adoption. Also the adoption of an innovation is not always a positive occurrence. Over-adoption, where adopters act irrationally without all the information or without full comprehension of an innovation can actually be harmful to the diffusion process. PRODUCT PLANNING AND PRODUCT LIFE CYCLE The consumer moves through five stages in arriving at a decision to purchase or reject a new product :
i. ii. iii. iv. v.
Awareness Interest Evaluation Trial Adoption (or rejection)
The stages in the adoption process can be described as follows : 1. Awareness : During the first stage of adoption process, consumers are explained about the product innovation. It gives information about the new product or service. 2. Interest : When consumers develop an interest in the product or product category, they search for information about how the innovation can benefit them. 3. Evaluation : The evaluation stage represents a kind of 'mental trial' of the product innovation. Only if the consumers' evaluation of the innovation is satisfactory, will they actually try the product. In case the evaluation is unsatisfactory, the product is automatically rejected. 4. Trial : At this stage, consumers use the product on a limited basis. Their experience with the product provides them with the critical information that they need to adopt or reject it.
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A PROFILE OF THE CONSUMER INNOVATOR
Who is the consumer innovator? What characteristics set the innovator apart from later adopters and from those who never purchase? How can the marketer reach and influence the innovator? These are key questions for the marketing practitioner about to
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introduce a new product or service. THE LIFE CYCLE OF A PRODUCT Many products generally have a characteristic known as 'perishable distinctiveness". This means that a product which is distinct when new degenerates over the years into a common commodity. The process by which the distinctiveness gradually disappears as the product merges with other competitive products, has been rightly termed by Joel Dean as "the cycle of competitive degeneration". The cycle begins with the invention of a new product and is often followed by patent protection, and further development to make it saleable. This is usually followed by a rapid expansion in its sales as the product gains market acceptance. Then competitors enter the field with imitation and rival products and the distinctiveness of the new product starts diminishing. The speed of degeneration differs from product to product. While some products fail immediately on birth or a little later, others may live long enough. BPL's picture in picture TV was eliminated at the introduction stage itself. The innovation of a new product and its degeneration into a common product is termed as the life cycle of a product. There are five distinct stages in the life cycle of a product as shown below :
1. Introduction. Research or engineering skill leads to product development. The product is put on the market; awareness and acceptance are minimal. There are high promotional costs. Sometimes a product may generate a new demand, for example, Maggi. Volume of sales is low and there may be heavy losses.
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2. Growth. The product begins to make rapid sales gains because of the cumulative effects of introductory promotion, distribution, and word-of-mouth influence. High and sharply rising profits may be witnessed. But to sustain growth, consumer satisfaction must be ensured at this stage. 3. Maturity. Sales growth continues, but at a diminishing rate, because of the declining number of potential customers who remain unaware of the product or who have taken no action. Also, the last of the unsuccessful competing brands will probably withdraw from the market. For this reason, sales are likely to continue to rise while the customers for the withdrawn brands are mopped up by the survivors. There is no improvement in the product but changes in selling effort are common. Profit margins slip despite rising sales. 4. Saturation. Sales reach and remain on a plateau marked by the level of replacement demand. There is little additional demand to be stimulated. 5. Decline. Sales begin to diminish absolutely as the customers begin to tire of the product and the product is gradually edged out by better products or substitutes, for example, dial telephones and petrol jeeps.
There are several reasons why the life-cycle of a product tends to be short : (a) continuous research for product development, (b) simultaneous attempts by several companies in the same direction, and (c) tendency of a new idea to attract competitors. Improvements offered by one company are likely to be met and, if possible, exceeded by competitors in a relatively short period. If a competitor hits upon a real improvement (perhaps based on an entirely new technology) and he markets it well, both sales and profits of the original technology) and he markets it well, both sales and profits of the original product innovator may decline drastically. It may be noted that products may begin a new cycle or revert to an early stage as a result of (a) the discovery of new uses, (b) the appearance of new users, and (c) introduction of new features. As the distinctiveness of the products fade, the pricing discretion enjoyed by their producers gradually declines. This is what happened in the case of many products like ball-point pens, transistors, radios, etc. Throughout the cycle, changes take place in price and promotional elasticity of demand as also in the production and distribution costs of the product. Pricing policy, therefore, must be adjusted over the various phases of the cycle. The following table shows the Product Life Cycle and its different stages and the various characteristics, which they reflect, in the varying stages. Marketing strategies which are used at the various stages of PLC as suggested by Prof. Philip Kotler are : Product life-cycle concentrates only the life-cycle of a product beginning with its introduction into the market to the post-marketing phase. However, a series of processes are to be undertaken by the management even prior to the introduction of a product in the market. These processes include exploration, screening, analysis, development, testing, etc. The concept of product life-cycle may be used as a managerial tool. Marketing strategies, however, have to be changed with changes in the phase of the life-cycle of a product. An understanding of the cycle is helpful to the managers for a rational understanding of the future sales activities as also planning of marketing strategies. Hence, PLC is synonymous with the pattern of demand for a product over time. The length of time that a product spends at anyone stage varies from product to product. A product might not pass through every stage in
the cycle. Some products, for instance, might not get past the introductory stage, while others might not get past the growth or even the maturity stage. There might be still other products that might pass through the introduction to maturity stages but might take a longer period to reach the saturation stage and hence might take a longer period to reach the decline stage. Some products, for instance, might not get past the maturity stage. There might be still other products that might pass through the introduction to maturity stages but might take a longer period to reach the saturation stage and hence might take a longer period to reach the decline stage. Some products might even hustle through the entire cycle in an amazingly short period. In certain cases, there might even be a repositioning of a product, which might trigger off a new growth cycle. Repositioning involves changing basically the image or the perceived uses of a product. STRATEGIC CONSIDERATIONS IN THE PLC CONCEPT Competition At the introductory stage, competition is given no importance. At the growth stage, it is given a little importance while at the maturity stage, there are many rivals in the market. Slowly, however, the number of competitors or rivals get reduced with the declining stage. Overall Strategic Focus At the first stage, emphasis is laid on market establishment. At the growth stage, market penetration and persuasion of mass market are emphasized. Creation of brand loyalty and brand preferences is focussed at the maturity stage. At the decline stage, the strategy aims at overall preparation for renewal. Profit At the introductory stage, profits are negligible but at the growth stage, they reach the peak levels as a result of growing demand. At the maturity stage, they decline due to the increasing competition. At the last stage, the declining volume pushes costs up and eliminates profits. Distribution Strategies At the introductory stage, distribution is selective. However, at the growth and maturity stages, it is intensive. At the decline stage, it becomes selective and hence low-end strategies are used.
Advertising Strategies At the introduction stage, advertising strategies aim at the needs of early adopters; at the growth stage, an attempt is made to make the mass market aware of brand benefits. At maturity stage, advertising is used as a vehicle for differentiating among otherwise similar brands. At the last stage, however, it emphasizes on low price of the product and minimum advertising expenditure.
To realize how an innovation diffuses through a society you must first understand how one person adopts an innovation.The adoption process is the steps a consumer take as they accept a new product, idea, or service.The process can be broken down into five stages.Keep in mind that these stages occur in all fields where adoption of innovation occurs.The first stage of the adoption process is awareness.At this stage the innovation is introduced to the person but there is no true knowledge of the product.Because of this lack of information the person does not feel the need to run out and find out more information, much less consider consuming it.The awareness stage merely sets the groundwork for the following stages.It is argued that a person often stumbles upon the innovation on accident during the awareness stage it will provide little incentive to get more information.Others feel that for a person to become aware, the innovation must fill a particular need in their life for them to notice.The second stage is interest.Here the person decides to invest time and energy into finding out more about the innovation.At this point the person feels good about the innovation but does not really know how or if it can be useful in their own life.The interest stage is purely to gather knowledge, not to decide whether to adopt.The third stage is evaluation.Here the person firsts begins to make a decision about the innovation.How could I use it?Do I really need it?Would it be to my advantage if I had it?These are all question the consumers ask themselves during the evaluation stage.Then if the innovation appears to be positive for their life they will
try it out.If the innovation has a negative connotation to the individual they may seek the advice and knowledge of their peers.This leads into the next stage called the trial stage.Here the individual physically gives the innovation a chance by trying it out for a limited basis.What they are looking to find out during this trial stage is how the innovation can fit into their needs and desires.Research proves that most people will not adopt an innovation without personally testing it first to see if it really “works”.The final stage is the adoption stage.Here the individual uses information that they have gathered in the interest and evaluation stages and with the outcome of the trial stage decides to adopt the innovation.At this point in the adoption process the individual not only adopts the innovation but embraces it for the future.There is, however, another possible stage to adoption process.After the individual adopts the innovation they may decide to reject it for whatever reason.This decision to reject the innovation after agreeing to adopt it is called discontinuance.
Now it is time to turn our attention to the adopters’ side of the diffusion process.Although this is not one of the four main elements of the diffusion of innovation it does have importance to the process.Like the innovations side, there are certain characteristics that break adopters down into categories, which help us understand who they are and how they consume.It is very clear that people adopt innovations at different times and for different reasons.An example of this for everyone who ever attended high school is fads.Although fads are not necessarily innovations it is a good example to begin to see the idea of adopters.When a fad starts to become popular, not everyone is immediately involved.Only a few people adopt the fad in the beginning.As time goes by, more and more people adopt the fad until the majority is included.The point to be made with this example is not only do people adopt a fad at different a time, each group affects the following group.Also it is important to note that not everyone is involved.Complete adoption is not required for the diffusion process to work.There are five main categories of adopters. • Innovators – These are the risk takers.They are the ones who put themselves up in front.Generally they are well educated and have a high income to absorb a mistake.They are the smallest in size of only two and half percent.They enjoy the rush of taking a risk but they also are willing to accept the consequences of failure. • Early Adopters – This group are the next thirteen and a half percent.They are highly educated and wealthy like the innovators but are more visible and respected among their peers.Early adopters play a key role in the adoption process determining the time an innovation will be adopted by others and to what extent.Because of this reason they are the best target market for new innovations. • Early Majority – They constitute thirty-four percent of adopters.They do not take the risk of being the first to adopt, like the innovators and early adopters, but do accept an innovation before the average person.They generally take a long time to
fully adopt an innovation.They are above average in education and income but are followers in their social groups. • Late Majority – They jump on right after the average person.Their education and income are limited and they are not willing to take a chance unless the majority has already fully adopted the innovation.Reasons for the late majority to adopt are either economic or peer pressure but are constantly weary.This group also contains thirty-four percent. • Laggards – This is the final adoption group and it consists of the final sixteen percent.They are more in-tuned with the past than the future.They are skeptical of all new ideas and frequently by the time they adopt an innovation there is a new one already beginning to take its place.Their educations are small and generally laggards are socially surrounded by other laggards. These five categories have developed through years of research and observation in the diffusion process in many different fields.Although there are exceptions in each group, this gives a good general breakdown of adopters of innovations.
THREE LEVELS OF STRATEGY : SIMILAR COMPONENTS BUT DIFFERENT ISSUES What is a Strategy? Although strategy first became a popular business buzzword during the 1960s, it continues to be the subject of widely differing definitions and interpretations. The following definition, however, captures the essence of the term :
A strategy is a fundamental pattern of present and planned objectives, resource deployments, and interactions of an organization with markets, competitors, and other environmental factors.2
Our definition suggests that a strategy should specify (1) what (objectives to be accomplished), (2) where (on which industries and product-market to focus), and (3) how opportunities and threats and to gain a competitive advantage). The Components of Strategy A well-developed strategy contains five components or sets of issues : 1. Scope. The scope of an organization refers to the breadth of its strategic domain - the number and types of industries, product lines, and market segments it competes in or plans to enter. Decisions about an organization's strategic scope should reflect management's view of the firm's purpose or mission. This common thread among its various activities and product-markets defines the essential nature of what its business is and what it should be. 2. Goals and objectives. Strategies also should detail desired levels of accomplishment on or more dimensions of performance - such as volume growth, profit contribution or return on investment - overspecified time periods for each of those businesses and productmarkets and for the organization, as a whole. 3. Resource deployments. Every organization has limited financial and human resources. Formulating a strategy also involves deciding how those resources are to be obtained and allocated, across businesses, product-markets, functional departments and activities within each business or product-market. 4. Identification of a sustainable competitive advantage. One important part of any strategy is a specification of how the organization will compete in each business and product-market within its domain. How can it position itself to develop and sustain a differential advantage over current and potential competitors? To answer such questions, managers and examine the market opportunities in each business and product-market and the company's distinctive competencies or strengths relative to its competitors. 5. Synergy. Synergy exists when the firm's businesses, productmarkets, resource deployments, and competencies complement
and reinforce one another. Synergy enables the total performance of the related businesses to be greater tan it would otherwise be : The whole becomes greater than the sum of its parts. THE HIERARCHY OF STRATEGIS
EXHIBIT - 1 .2
THE HIERARCHY OF STRATEGIES
Environmental factors Corporate mission
Corporate goals and objectives Corporate development strategy Deployment of resources
Strategic business unit 1
Business unit's objectives Competitive strategy Deploymentof resources across product-markets and functions
Marketing strategy for product-market entry X
R&D strategy and plans
Human resources strategy and plans
Operations strategy and plans
Tactical marketing plan for productmarket entry X
Explicitly or implicitly, these five basic dimensions are part of all strategies. However, rather than a single comprehensive strategy,
most organizations have a hierarchy of interrelated strategies, each formulated at a different level of the firm. The three major levels of strategy in most large, multi-product organizations are (1) corporate strategy, (2) business-level strategy, and (3) functional strategies focussed on a particular product-market entry. These three levels of strategy are diagrammed in Exhibit 1.2. In small single product-line companies or entrepreneurial start-ups, however, corporate and business-level strategic issues merge. Exhibit - 1.3
KEY COMPONENTS OF CORPORATE, BUSINESS AND MARKETING STRATEGIES Strategy Compone nts Scope Corporate Strategy Business Strategy Marketing Strategy • • • • Target market definition Product-line depth and breadth Branding policies Productmarket development plan Line extension and product elimination plans
Corporate domain -"Which businesses should we be in?"
Goals and objectives
Corporate development strategy Conglomerate diversification (expansion into unrelated businesses) Vertical integration Acquisition and divestiture policies Overall corporate objectives aggregated across businesses Revenue growth Profitability ROI (return on investment) Earnings per share Contribution to other stakeholders
Business domain "Which productmarkets should we be in within this business or industry? Business development strategy Concentric diversification (new products for existing customers or new customers for existing products)
Constrained by corporate goals • Objectives for a specific productmarket entries in the business unit Sales growth New product or market growth Profitability
Constrained by corporate and business goals • Objectives for a specific productmarket entry Sales
of resources bases
ROI Cash flow Strengthening n of • • Allocation among businesses in the corporate portfolio Allocation across functions shared by multiple businesses (corporate R&D, MIS) competitive adva ntage • Allocation among product-market entries in the business unit • Allocation across functional departments within the business unit • Primarily through competitive strategy, business unit's competencies relative to competitors in its industry • on
Market share Contribution margi Customer satisfacti
Sources of competitiv e advantage
Sources of synergy
Primarily through superior corporate financial or human resources; more corporate R&D; better organizational processes or synergies relative to competitors across all industries in which the firm operates
Allocation across components of the marketing plan (elements of the marketing mix) for a specific productmarket entry Primarily through effective product positioning; superiority on one or more components of the marketing mix relative to competitors within a specific productmarket Shared marketing resources, competencies or activities across productmarket entries
Shared resources, technologies or functional competencies across businesses within the firm
Shared resources (including favourable customer image) or functional competencies across productmarkets within an industry
Our primary focus is on the development of marketing strategies and programs for individual product-market entries, but other functional departments - such as R&D and production - also have strategies and plans for each of the firm's product-markets. Throughout this, therefore, we examine the inter-functional implications of productmarker strategies, conflicts across functional areas, and the mechanisms that firms use to resolve those conflicts. Strategies at all three levels contain the five components mentioned earlier, but because each strategy serves a different purpose within the organization, each emphasizes a different set of issues. Exhibit 1.3 on the previous page summarizes the specific focus and issues dealt with at each level of strategy; we discuss them. CORPORATE STRATEGY At the corporate level, managers must co-ordinate the activities of multiple business units and, in the case of conglomerates, even separate legal business entities. Decisions about the organization's scope and resource deployments across its divisions or businesses are the primary focus of corporate strategy. The essential questions at this level include - What business(es) are we in? What business(es) should we be in? and What portion of our total resources should we devote to each of these businesses to achieve the organization's overall goals and objectives? Thus, new CEO Gerstner and other toplevel managers at IBM decided to pursue future growth primarily through the development of Web-based services and software rather than computer hardware. They shifted substantial corporate resources - including R&D expenditures, marketing and advertising budgets and vast numbers of salespeople - into the corporation's service and software businesses to support the new strategic direction. Attempts to develop and maintain distinctive competencies at the corporate level focus on generating superior human, financial and technological resources; designing effective organization structures and processes; and seeking synergy among the firm's various businesses. Synergy can provide a major competitive advantage for firms where related businesses share R&D investments, product or production technologies, distribution channels, a common salesforce, and/or promotional themes - as in the case of IBM. Business-Level Strategy How a business unit competes within its industry is the critical focus of business-level strategy. A major issue in a business strategy is that of
sustainable competitive advantage. What distinctive competencies can give the business unit, a competitive advantage? And which of those competencies best match the needs and wants of the customers in the business's target segment(s)? For example, a business with lowcost sources of supply and efficient, modern plants might adopt a lowcost competitive strategy. One with a strong marketing department and a competent salesforce may compete by offering superior customer service. Another important issue a business-level strategy must address is appropriate scope; how many and which market segments to compete in and the overall breadth of product offerings and marketing programs to appeal to these segments. Finally, synergy should be sought across product-markets and across functional departments within the business. Marketing Strategy The primary focus of marketing strategy is to effectively allocate and co-ordinate marketing resources and activities to accomplish the firm's objectives within a specific product-market. Therefore, the critical issue concerning the scope of a marketing strategy is specifying the target market(s) for a particular product or product line. Next, firms seek competitive advantage and synergy through a well integrated program of marketing mix elements (primarily the 4 Ps of product, price, place, promotion) tailored to the needs and wants of potential customers in that target market.
THE NEW, IMPROVED INDIAN CONSUMER RAMA BIJAPURKAR
Consumer India has always been pretty tricky to double guess. Just when we believed that consumer spending was firmly on a high growth trajectory - based on the wonder years of 1993-98 - it spluttered and slowed to a crawl. For the next few years, marketers tried everything they knew to speed it up again. They dropped prices while improving product and service quality. "Buy-one-get-one-free", they offered. But that only helped them get volume growth at the expense of operating margins. The fast-moving consumer goods (FMCG) sector had a terrible time with some product categories actually shrinking in size, while consumer durable manufacturers struggled to reconcile capacity with demand. Sure, there was a fast growing yet minuscule population of the very rich, which continued to lap up everything from plasma TVs to Mercedes cars - but that was cold comfort for the majority of the marketers. After much agonising, marketers came to the conclusion that the five-year boom of 199398 was a one-time star burst, unlikely to be repeated in the near future. The growth spurt of those years was attributed to a confluence of events - release of pent-up demand of the rich who always had money but nothing much to buy before this; a television boom that fuelled aspirations; a distribution boom that brought products and services within easier reach; the discovery of the sachet strategy that made everything affordable to more people; and, finally, a string of good monsoons. They also shelved the idea of the huge homogeneous mass market made up by the great Indian middle class, which would be a tireless engine of growth. And, having come to terms with the new reality of the market, exhausted marketers worked hard on tactical actions to stimulate growth even while turning their gaze inwards, focussing on operational performance improvement and financial restructuring to keep the bottomline growing. Meanwhile, a lot of little changes were taking place in the market. Each change, when viewed in isolation, could easily be rejected as not being particularly significant. But over time, and taken together, they have provided a critical mass of change. And created a deep and distinctive consumer market. It is a market whose potential and desire to consume has perhaps moved ahead of the marketer's mental model of it. It continues to be a multi-tiered market, with the bicycle and the business class co-existing. It continues to require a portfolio of price/performance points. But it is a market that is now unified by certain common demographic characteristics and consumption desires. And which has enough mass to act as the springboard for the next stage of the consumption cycle. The question is: are there enough relevant products and services available to take advantage of this? In short, it does appear that the Great Indian Consuming Class has arrived, and is waiting to be served. Before we get into what this new class looks like, a quick look at some of the important changes that have taken place:
Income growth: Between 1996-97 and 2000-01, per capita income on an aggregate basis grew by a compounded annual rate of 3.2%. But high-income households grew much, much faster - by about 20% year after year - between 1995-96 and 1998-99, according to the National Council for Applied Economic Research (NCAER). Upper-middle-income households grew by 10% on a compounded annual growth basis during that period. In urban India, the trend is even more pronounced (See 'Upper Classes On The Fast Track'). Affordability growth: Supply-side changes also shape a market's buying power, and there have been a host of them - falling interest rates, easier consumer credit, increase in variety and quality of products and services at every price point.... The liberalisation children grow up: The post-liberalisation generation is coming of age. This year there are a 100 million, 17-21 year-olds in India, and six out of 10 households have a liberalisation child. This is a generation which has grown up with no guilt about consumption. The morphing of rural India beyond agriculture: Rural India has reduced its dependence on agriculture. A little less than half of rural GDP is from non-agricultural activities. This is creating a different kind of rural market. NCAER occupation data shows a decline in cultivators and there is enough evidence of dual-sector households. Add to this the exposure levels of the top end of rural society through television, and the rural market is becoming closer in its mindset to the urban market. This is already happening in the more developed higher-income states. The rise of the self-employed: Rural India has always been largely self-employed. But now the proportion of the self-employed in urban India has risen to 40% plus, replacing the employed salary earner as the new 'mainstream market'. A Hansa Research Group (HRG) study shows that even in the 'creamy layer', comprising the top two social classes in towns of 10 lakh plus population in urban India, 40% of chief wage earners of households are shopowners, petty traders, businessmen and self-employed professionals. Unlike the salary earner, the self-employed use products much more to signal success and are also fast adopters of any productivity tools, like cellphones and two-wheelers, that can help them earn more. Environmental changes drive aspiration: Better connectivity and communication, and the literacy leap, are together increasing the aspiration of the Indian consumers at every level. The reason why these changes drive aspiration is lucidly explained by the wellknown anthropologist, Arjun Appadurai, of Yale University: "Imagination is not about individual escape. It is a collective social activity. Informational resources are needed for people to even imagine a possible life, weave a story and a script around themselves, and place products in emerging sequences. Imagination may not always lead to action, but it is a prelude to action." Consumer India now has enough informational resources to concretely imagine a better life. Plurality of income, singular mindset: When marketers were waiting for the Great Indian Middle Class boom, its key trigger was expected to be a significant number of households above a certain level of income, which would become
the critical mass of consumption. But what is being increasingly apparent now is that what unifies Consumer India and gives it the consumption push is not so much its income level, but its key characteristics. And these are: Striving: Most Indian consumers, whether rich or poor, want to get ahead in a hurry. From being destiny-driven and resigned, they are now destination-driven and striving to grasp opportunities to earn more in order to construct a better life for themselves and their children. If one were to segment the country into the Arriving, the Striving and the Resigned, the proportion of Resigned has definitely decreased and become geographically concentrated, rather than well-dispersed, as it was earlier. " I can": The rise of the self-employed and the service economy requiring less capital and more sweat has changed the mindset of the Indian consumers from one of demanding social justice to one of grabbing economic opportunity. "The rise of the women": Like will," and emergingas partners in income (a mere 23% of Indian decreases as incomes increase) nurturers of the self-employed, women too are saying "I can and I family progress. Not so much from earning the second households have working wives and that proportion but by being CEOs of households and intellectual their children.
Education- and health-driven: Indian consumers are obsessed with giving their children the education and skills that will provide the escape velocity to move to a higher station in life - and they have seen enough evidence of this to know it is possible. Health is the other magnificent obsession - probably because ill health adversely impacts earning ability. (In fact, the less affluent are more concerned about staying healthy than the more affluent.) A study conducted by HRG in 2003 for the Media Research Users Council (MRUC) among 2,000 households in Mumbai shows interesting differences in household expenditure between the top social class (SEC A) and the lowest social classes (SEC D/E). Education and clothing attract the same proportion of expenditure in both the income groups, but the poor probably spend a bit more (proportionately) on medical expenses than the rich. (This could indicate a big time bottom-of-the-pyramid opportunity for nutrition and health building in the preventive rather than the curative area.) Pragmatism in consumption and preference for 'real value' products and services: In the past, marketers assumed that progress and evolution of a market meant adoption of 'feel good' products, susceptibility to razzle-dazzle branding, a Westernised self-image and identity, and bountiful days for FMCG categories. But the latest trends show that consumers are going more for real, 'life quality' improvement products and services. Consumer India wants a visibly better quality of life for themselves and their children, described in terms of durables that make life better; education, healthcare; transportation and communication. (NSS data shows that these are the three big growth areas in consumption expenditure.) Other priorities seem to be owning decent homes, better
clothes (not necessarily better brands) and the like. Status is signalled through the things that are visible to others. They are not beguiled by brands that are low on functionality and high on image. Pragmatism and functionality is the hallmark of their consumption expenditure. And the threshold of their expectations of how this functionality is delivered is high: low-priced motorcycles must look like motorcycles and deliver enough power. Basic cellphones must be small, even if they aren't feature-rich. And low-priced garments and footwear cannot get away with antiquated styles. Entertainment: Entertainment is becoming big. The country has traditionally been starved of family entertainment, with the only options being watching television or going to places of religious worship. But family entertainment is becoming a big issue for consumers as they try to find avenues of bonding in an era of nuclear families. Comfort with borrowing to fund future consumption: Being in debt used to be an area of high discomfort for everybody, but the very poor, who had no other choice but to borrow for survival. Now, however, the concept of EMI (equalised monthly installment) is legitimising borrowing in other groups too, especially to fund future consumption. EMI provides a certain discipline with predictable and planned outflows, and that is probably making indebtedness more acceptable. Comfort with consumption: Economists talk about the wealth effect - wherein it takes time before consumption decreases in response to decreasing income. Equally, it takes a while for comfort with consumption to happen, and consumption typically lags income increases. One reason for this could be that the country has celebrated abstemiousness for so long that it takes a supply explosion to spark desire, and then translate that desire into actual consumption. However, that has now happened. Comfort with technology: Infotech awareness, whether it is infotech power (what a computer can do to solve problems or improve life) or infotech-driven employment opportunities, has sunk in to the lowest social classes and to much of the rural population. It has happened through the demonstration effect of model projects of the NGO (nongovernment organisation) kind. And it has happened by watching the rich use it and prosper. It has also happened because of the mushrooming of call centres and other computer-related services offering employment. As these are located in geographical clusters they get noticed and talked about. Cyber grandmas from upper-middle and upper classes, who have become email literate to communicate with their scattered flock, is one example of this new comfort. Enough Of A Consumption Base Now Exists To Create A Springboard For More Consumption. Current levels of penetration influence the pace of future penetration. Penetration increases are not linear, instead they accelerate as base penetration increases till a point where saturation sets in. If only one out of 20 households in a given affluence grade have a washing machine or a two-wheeler, adoption will be slow. But when one out of every 10 has it, it becomes something that gets on the radar screen of aspiration for the rest. And when it gets to one in five families, it serves to rapidly penetrate the remaining households because it now becomes a 'must have now' product for them.
For consumer durables, the top (in terms of affluence grades) 40 million households in India - 24 million in urban India and 17 million in rural India - based on their penetration levels would constitute the core consuming class. The magic number of 200 million consumers (assuming five members to a household) has arrived at last! (See 'Consumer Durables Reaching Saturation'.) Within rural India, there are two different grades of overall affluence, which we can call the developed and the developing states. The developed states comprise Punjab, Haryana, Gujarat, Maharashtra, Karnataka and Kerala. They account for about one-third of the rural population and have shown higher penetration in most categories (See 'Tale Of Two Rurals'). The increase in penetration levels between 1997 and 2002 have been very impressive. 'Reaching Far And Wide' compares the two and shows the speed with which penetration increases are happening in Consumer India across income groups, although, obviously, differently for different products. For FMCG, penetration is certainly not an issue. NCAER data shows that for 1998-99, for a basket of 22 FMCG products it tracks, a total of over Rs 91,500 crore was spent. Of this, 37% was spent by the two lowest-income groups in rural India, and only about 20% by the top two income groups in urban areas. This is, perhaps, the best and only statement of the structure and potential of the Indian market. Changing Shapes Of Income Distribution Will Create A New Consumption Push By 2006-07 Why does the changing shape of income distribution herald a change in consumption behaviour? A traditional bottom-heavy triangle with most people in the lower income group and a few in the top indicates that the centre of gravity of market consumption and of the reference group, which defines aspirations, is very low. As the shape of income distribution starts bulging in the centre, both the centre of gravity of what is consumed, and of who the 'majority' that defines aspirations should be, shifts. NCAER income distribution data of what has happened so far and their modelling of the future of income distribution is invaluable. It is the only 'single source' data that also looks at inflation-indexed income and reliably shows shifts in shape. The projected shape of urban India in 2006-07 (See 'Getting Top Heavy') shows that the centre of gravity will be the upper-middle-income group and that there will be a large consumption push. Taken as an aggregate, the projected shape of income distribution in 2006-07 suggests that the centre of gravity of consumption and aspiration rests with those who have 'just escaped poverty'. To understand the full impact of the urban change, it is necessary to compute the arithmetic of increase or decrease in each income group as well as the increase (or decrease) in penetration in each group. Only when viewed together do we get the full
picture. In some categories, depending on supplier strategies and starkly lowering priceperformance points, the results could be counter-intuitive. However, for the rest, this is likely to be the typical arithmetic. The tale goes like this. NCAER estimates the number of households to increase by 8.6 million in the high-income group and 7.3 million in the upper-middle-income group, while the middle-income number grows by 4.3 million and the bottom two income groups will decrease by about 2.3 million and 7.5 million, respectively. (The total number of urban households is set to increase from 49.1 million to 60 million.) A 10% increase in the top income group penetration, a 15% increase in the second income group, and a 10% increase in the third income group could give incremental volumes of 7.5 million in the highest income group, 5 million in the next income group and a mere 2.7 million in the third income group. The urban market is indeed on the periphery of a huge consumption push. Rural India will have two points of significant household increases - 4.6 million highincome households and 13 million middle-income households will be added by 2006-07 (total number of rural households will increase from 122.8 million to 139 million). Let me present a sampler of the same typical arithmetic for a well-penetrated category, which has 45% penetration in the high-income group, 25% penetration in the upper-middleincome group, and 10% penetration in the middle-income group. By 2006-07, a reasonable estimate given the current penetration base and past patterns from urban areas, is that it would increase to 60%, 30% and just 13%. Therefore, the incremental volumes would be 3.3 million from the upper-income group, and 2.3 million from the middleincome one. Given the increasing urban exposure of rural India, the urban and the rural upper-income groups can form an interesting continuum market, giving it a scale of 23 million households, or 115 million population. In 2006-07, the consuming class, as we defined it earlier, would be about 60 million households, or 300 million consumers. However, a state-wise look at rural income shapes, show a totally different pattern (See 'Shape of Rural Income Distribution'). It shows that in states that account for about half the rural GDP of the country (as defined by the Crisil Centre for Economic Research Analysis), the centre of gravity of consumption and aspiration has already moved towards the middle/upper-middle-income classes, again suggesting that there is another inflection point of consumption that is about to happen. And that perhaps these states are far more ready for sophisticated consumption than we imagine them to be. Implications For Marketers I have said in the beginning that there is a new Consumer India waiting to be served with relevant products and services. Let us now look at some implications for marketers. Required: Mature market strategies. Two-wheelers have penetrated about 12% of all households. By this metric, it is clearly an underdeveloped market that should grow from first-time buyers and should not be lapping up (or even accepting) higher-level features. Yet half the sales in a year are from repeat buyers and half from first-time buyers, and about half from small markets (with populations below 1 lakh). In many categories, consumers exhibit 'plus one level up' behaviour - whatever you think they should be
buying given their affluence and the state of market development, they buy one level better than that. Outdated tech, low performance and plain looks are rejected, no matter how attractively priced. The answer to this puzzle is in the differential levels of penetration. Urban penetration is about 24%. But in the top 30 million households by affluence, penetration is 52%. And the trend of two-wheelers giving way to cars in this top urban affluence grade is expected to be picked up by the second affluence grade as prices of small cars drop further. In the case of refrigerators, the overall penetration is 10.4%, suggesting an underdeveloped market. But one out of every two of the top 30 million households have one. Therefore, while many companies are focussing on bottom-of-the-pyramid strategies to increase penetration and drive future growth, the current market, where much of the value today resides, needs to be viewed with a new pair of lenses. Maturing supply shifts the basis of competition and, hence, drivers of brand choice. Improved supply, 'performance, features and quality' parity of all major brands and the near price parity between them shifts the basis of competition to the augmented product from the basic product. Add- on services (like removing pain points, and not piped music in showrooms), and buying experience will be the driver of brand choice. Can the airconditioner be fixed without the usual hassle of chipped paint, five different contractors, broken walls et al in just a day? Does your cellphone company view your bills online when you call them so that it can advise you on what is the best tariff plan? Can the family be given 12 lessons at home after the personal computer arrives? These will be the issues based on which choices will be made. Changing markets need new bases of segmentation. As the market matures, and is subjected to multiple changes at the macro level and in related categories, segmentation has to go beyond the product-centric paradigm. Instead of looking at 'premium, popular, discount' price-performance bands, it is time to look at consumer groups, how they view the market and what drives their choices. The question to ask of research is not 'how is the market segmented?' (the answer to that is that it is segmented the way marketers have segmented it so far), but what is the new way in which to cut it up so customers can be served better? Take refrigerators. The context in which the category exists has changed. There's more eating out, more phone call deliveries of food and groceries; women are changing and reorganising their time and their household chores.... Clearly, there are segments beyond the modern mum and the good health-conscious housewife, which need to be identified (again on a functional usage and attitude basis rather than on whether she wears her hair short or gives parties - the lifestyle kind of variables). The same is true for almost any category. Usage patterns are now so different that they form a good basis for segmentation, product design, pricing and service design. From a mere psychographic point of view, Young and Rubicam has, in a cross-cultural study done years ago, identified groups that we see clearly in Consumer India, which could form a useful basis for segmenting the market. The study categorises people (and consumers are people first!) into the Resigned, whose main goal is survival; the
Struggling, whose objective is improvement and escaping hardships; the Mainstreamers, who are looking for security, conformity and honourably discharging family responsibility (the archetypal provider); the Aspirers, who want to be seen as successful and attain status and a lifestyle that they so envy in others; the Succeeders, for whom material success and recognition are the key; and the Explorers (I am not sure we have too many of those), who are in search of self-identity and self-satisfaction. These categories are linked to income, of course, but not driven by it. The Mainstreamers, Succeeders and Aspirers are correlated to occupation, to age and lifestage and to geography. Qualitative researchers say cities can be characterised this way too, hence, they show different consumption quantities and character even for a given income distribution. This is not just applicable to classical consumer goods. Doctors are also caught in a web of change (e-empowered patients, more professional alternative medicine, changing patient behaviour from the self-employed and younger generation). Within them, too, there is the cutting-edge doctor who treats with leading-edge medicines; the conservative curer who is into holistic healing; the 'time-saving effort-saving' add-on services, computerised doctor.... And each requires a different strategy. The same logic applies to B2B businesses too. Consumer value processing needs to be studied anew. The way consumers process value inside their heads - benefit worth and cost worth and, hence, overall worth - has changed. The EMI, the 'plus one level up' mentality, the selfemployed ROI processing ("Will this investment help me earn more?"), the familybonding need, the changing identities of women, the 'beyond farmers' market in rural India, the maturing of evaluation parameters - all point to the fact that we need to discover the new value processing, of different groups, anew. In fact, it is time to revive the discipline of Consumer Behaviour, so little practised and so little taught in the Indian Ivy League business schools. Market structures are easy to figure out. Yet consumer behaviour, the second part of the puzzle, is far from understood. This is, perhaps, because we look for changes in the model we know, while consumers make much larger strides. New opportunities to serve. If one were to look at the new Consumer India and the consuming class through the lens of 'what is not there but ought to be', several gaps show up. Here are some examples: Home utilities: I do not believe we have enough depth in offerings. Take the need for better living. The new home is characterised by less space and more things. In the US today are some interesting products: stoppers to place under beds to raise their height, and storage receptacles that fit under the bed smoothly with castors, thereby acting as extra cupboards! Tents with zips on the side, which become temporary cupboards when relatives come visiting. Modular furniture. Event the humble pegs that can be stuck behind doors. We need more of those here too. Women's liberation: When frozen foods took off in the US long ago, it was because it gave voice to a woman who saw her life being beyond the kitchen stove. We have a similar situation here today. As an FCB Ulka study recently said: "This Annapurna hates
to cook." Yet we do not have a reasonanble ready-to-cook/ready-to-eat product range. It is easy to blame consumers for not adopting. But now there's evidence that she is ready for it because she has more productive things to do with her time. Watchmakers tell us that wristwatch penetration is low among women - but conversations with women show they are more time-bound and schedule-bound than we think they are. In urban India, in the top three income groups, what can we do to help them get better organised? There is technology comfort. Is there another durables revolution waiting to happen? Self-employed: Are the financial services products we have varied enough, innovative and comprehensive enough for this group? I suspect not. Are there enough products to signal social and economic mobility? What can we offer them by way of productivity devices? This market is probably deep for B2B services, but these are micro enterprises, and need specially-designed services. Health foods, educational toys, simple cheap computers for women and children - it's time to revisit these again. Is there a large opportunity for functional, high-prestige, lowcost hotels? Is it time for a boom in budget holidays, in domestic tourism with an education focus for children? I would suggest that every idea that was dumped in the past 10 years because it was 'ahead of its time', and the 'consumer was not ready', be brought out of the closet. The consumer may just be ready for it now - if he hasn't already gone past that stage! Conclusion The market has enough scale to offer, and enough desire to consume. The consumer is ready and waiting to be served. The new Consumer India will pose a huge challenge to marketers because it offers a difficult revenue model of large but not enormous volumes, modest prices and high benefit expectations. It will reward real innovators and ignore marketing hype. Most of all, it will continue to comprise many markets at different stages of evolution, demanding a complexity of strategy that is far in excess of its worth. And yes, it will continue to throw up unexpected answers to the arithmetic of (medium penetration) x (large size of consumer base) x (low price-willing to pay) x (modest per capita consumption).
THE MARKETING ENVIRONMENT
Introduction In the previous chapter, marketing orientation was defined in terms of a firm's need to begin its business planning by looking outwardly at what its customers
require, rather than inwardly at what it would prefer to produce. The firm must be aware of what is going on in its broader marketing environment and appreciate how change in this environment can lead to changing patterns of demand for its products. An environment can be defined as everything that surrounds and impinges on a system. Systems of many kinds have environments they interact with. A central heating system operates in an environment where a key environmental factor will be the outside temperature. A good system will react to environmental change, for example by using a thermostat to increase the output of the system in response to a fall in the temperature of the external environment. The human body comprises of numerous systems which constantly react to changes in the body's environment; for example, the body perspires in response to an increase in external temperature. Marketing can be seen as a system that must respond to environmental change. Just as the human body may die if it fails to adjust to environmental change (for example by not compensating for very low temperatures), businesses may fail if they do not adapt to external changes such as new sources of competition or changes in stakeholders' expectations of companies. An organization's marketing environment is defined here as the individuals, organizations, and forces external to the marketing management function of an organization that impinge on the marketing management's ability to develop and maintain successful exchanges with its customers. Naturally, some elements in a firm's marketing environment are more direct and immediate in their effects than others. Sometimes parts of the marketing environment may seem quite nebulous and difficult to assess in terms of their likely impact on a company. It is therefore usual to talk about a number of different levels of the marketing environment. The micro-environment describes those elements that impinge directly on a company. The micro-environment of an organization includes customers, suppliers, and distributors. It may deal directly with some of these, while there is currently no direct contact with others, but they could nevertheless influence its policies. Similarly, an organization's competitors could have a direct effect on its market position and form part of its microenvironment. The macro-environment describes things that are beyond the immediate environment but can nevertheless affect an organization. A business may have no direct relationships with legislators as it does with suppliers, yet legislators' actions in passing new laws may have profound effects on the markets it seeks to serve, as well as affecting its production costs. The macro-environmental factors cover a wide range of nebulous phenomena-they represent general forces and pressures rather than institutions, to which the organization relates directly.
As well as looking to the outside world, marketing managers must also take account of factors within other functions of their own firm. This is often referred to as an organization's internal marketing environment. The micro-environment The micro-environment of an organization can best be understood as comprising all those other organizations and individuals that, directly or indirectly, affect the activities of the organization. The following key groups can be identified. Customers These are a crucial part of an organization's micro-environment. For a commercial organisation, no customers means no business. An organization should be concerned
about the changing requirement of its customer and should keep in touch with these changing needs by Using an appropriate information gathering system. In
an ideal world, an organization should know its customers so well that it is able to predict what they will require next, rather than wait until it is possibly too late and then follow. Most of this book is devoted to studying the interface between a company and its customers, for example in terms of customers' responses to promotional messages and prices. There is sometimes a strong argument that the customer is not always right in the goods and services they choose to buy from a company, and that organizations should act in a socially responsible manner by not exploiting customers. Taking a long-term and broad perspective, companies should have a duty to provide goods and services that satisfy these longer-term and broader needs rather than immediately felt needs. There have been many examples where the long-term interests of customers have been ignored by companies, either deliberately or inadvertently. Regulatory authorities have recognized the wider interests of customers, for example by requiring pensions companies to provide compensation to customers who were sold a pension policy that was inappropriate to their long-term needs. There are many more examples of situations where customers' long-term interests have been neglected by companies, including: .In 2002 the Consumers' Association launched a campaign against financial services companies which it claimed had mis-sold endowment policies to individuals. Sales- people may have been tempted by a high level of commission to sell a policy that the customer did not understand and was clearly not in their best interest (for example, a policy that would payout only some time after the customer's mortgage was due to be paid off). Manufacturers of milk for babies should make mothers aware of the significant long- term health benefits to children of using breast milk rather than manufactured milk products. Car manufacturers often add expensive music systems to cars as standard, but relegate vital safety equipment to the status of 'optional extra'. In each of these cases most people might agree that, objectively, buyers are being persuaded to make a choice against their own long-term self-interest. But on what moral grounds, can society say that consumers' choices in these situations are wrong? According to some individuals' sense of priorities, an expensive incar music system may indeed be considered to offer a higher level of personal benefit than an airbag. Competitors A competitor orientation is one of the defining characteristics of a marketing orientation. In highly competitive markets, keeping an eye on competitors and trying to understand their likely next moves can be crucial. Think of the maneuvering and out-maneuvering that appears to take place between competitors in such highly competitive sectors as soft drinks, budget airlines, and mobile phones. But who are a company's competitors? Direct competitors are generally similar in form and satisfy customers' needs in a similar way. Indirect
competitors may appear different in form, but satisfy a fundamentally similar need. It is the indirect competitors that are most difficult to identify and to understand. What is a competitor for a cinema? Is it another cinema? A home rental movie? Or some completely different form of leisure activity which satisfies a similar underlying need for entertainment.
Intermediaries Companies must not ignore the wholesalers, retailers, and agents who may be crucial interfaces between themselves and their final consumers. Large-scale manufacturing firms usually find it difficult to deal with each one of their final consumers individually, so they choose instead to sell their products through intermediaries. In some business sectors access to effective intermediaries can be crucial for marketing success. For ex- ample, food manufactures who do not get shelf space in the major supermarkets may find it difficult to achieve largevolume sales. Channels of distribution comprise all those people and organizations involved in the process of transferring title to a product from the producer to the consumer. Sometimes products will be transferred directly from producer to final consumera factory selling specialized kitchen units directly to the public would fit into this category. Alternatively, the producer may sell its output through retailers; or, if these are considered too numerous for the manufacturer to handle, it could deal with a wholesaler who in turn would sell to the retailer. More than one wholesaler could be involved in the process. Intermediaries may need reassurance about the company's capabilities as a supplier that is capable of working with them to supply goods and services in a reliable and ethical manner. Many companies have suffered because they have failed to take adequate account of the needs of their intermediaries. (For example, Body Shop and McDonald's have faced protests from their franchisees, which felt threatened by a marketing strategy that was perceived as being against their own interests.) Suppliers These provide an organization with goods and services that are transformed by the organization into value-added products for customers. For companies operating in highly competitive markets where differentiation between products is minimal, obtaining supplies at the best possible price may be vital in order to be able to pass on cost savings in the form of lower prices charged to customers. Where reliability of delivery to customers is crucial, unreliable suppliers may thwart a manufacturer's marketing efforts. In business-to-business marketing, one company's supplier is likely to be another company's customer, and it is important to understand how suppliers, manufacturers, and intermediaries work together to create value. The idea of a value chain is introduced later in this chapter. Buyers and sellers are increasingly
co-operating in their dealings with each other, rather than bargaining each transaction in a confrontational manner. There is an argument that companies should behave in a socially responsible way to their suppliers. Does a company favour local companies rather than possibly lower priced overseas producers? (For example, Marks & Spencer prided itself on sourcing nearly all of its supplies through long-standing supply arrangements with a number of UK manufacturers, so many suppliers felt let down when it started placing a high proportion of its orders with lower cost overseas producers.) Does it divide its orders between a large number of small suppliers, or place the bulk of its custom with a small handful of preferred suppliers? Does it favour new businesses, or businesses representing minority interests, when it places its orders? Taking into account the needs of suppliers entails a combination of shrewd business sense and good ethical practice. Government The demands of government agendas often take precedence over the needs of a company's customers. Government has a number of roles to playas stakeholder in commercial organizations: Commercial organizations provide governments with taxation revenue, so a healthy business sector is in the interests of government. Government is increasingly expecting business organizations to take over many responsibilities from the public sector, for example with regard to the payment of sickness and maternity benefits to employees. It is through business organizations that governments achieve many of their economic and social objectives, for example with respect to regional economic development and skills training. As a regulator that impacts on many aspects of business activity, companies often go to great lengths in seeking favourable responses from such agencies. In the case of many UK private-sector utility providers, promotional effort is often aimed more at regulatory bodies than at final consumers. In the case of the water industry, promoting greater use of water to final consumers is unlikely to have a significant impact on a water utility company, but influencing the disposition of the Office of Water Regulation, which sets price limits and service standards, can have a major impact. The financial community This includes financial institutions that have supported, are currently supporting, or may support the organization in the future. Shareholders, both private and institutional, form an important element of this community and must be reassured that the organization is going to achieve its stated objectives. Many market expansion plans have failed because the company did not adequately consider the needs and expectations of potential investors. local communities
Market-led companies often try to be seen as a 'good neighbours' in their local communities. Such companies can enhance their image through charitable contributions, sponsorship of local events, and support of the local environment. Again, this may be interpreted either as part of a firm's genuine concern for its local community, or as a more cynical and pragmatic attempt to buy favour where its own interests are at stake. If a fast food restaurant installs improved filters on its extractor fans, is it doing this genuinely to improve the lives of local residents, or merely to forestall prohibitive action taken by the local authority?
Members of pressure groups may have never been customers of a certain company and may never likely be. Yet a pressure group can detract seriously from the image of a com- pany that its marketing department has worked hard to develop. Pressure groups can be divided into those that are permanently fighting for a general cause, and those that are set up to achieve a specific objective and are dissolved when this objective is met. Pressure groups can also be classified according to their functions; for example, sectional groups exist to promote the common interests of their members over a wide range of issues (e.g. trades unions and employers associations), while promotional groups fight for specific causes (e.g., the Countryside Alliance campaigns for a range of countryside issues). Pressure groups can influence the activities of businesses in a number of ways: Propaganda is used to create awareness of the group and its cause (e.g. through press releases to the media). The pressure group can seek to represent the views of the group directly to businesses on a one-to-one basis. (Many environmental pressure groups seek to advance their cause by 'educating' companies that may be ignorant of the pressure group's concerns.) Increasingly, pressure groups have resorted to direct action against companies, which can range from boycotts to physical attacks on a company's property. Campaigners for animal rights, or those opposed to the use of genetically modified crops, have on occasions given up on trying to change the law and instead have sought to disrupt the activities of organizations giving rise to their concerns. Organizations targeted in this way may initially put on a brave face when confronted with such activities by dismissing them as inconsequential, but often the result is to change the organization's behaviour, especially where the prospect of large profits is uncertain. Action by animal rights protestors contributed to the near collapse of Huntingdon Life Sciences (an animal testing laboratory), and many farmers have been discouraged from taking part in GM crops trials by the prospects of direct action against their farms.
It should not be forgotten that businesses themselves are often active members of pressure groups, which they may join as a means of influencing government legislation that will affect their industry sector. The British Road Federation and the Tobacco Advisory Council are two examples of high-profile industry-led pressure groups. Pressure groups themselves are increasingly crossing national boundaries to reflect the influence of international governmental institutions such as the EO and the increasing influence of multinational business organizations. Friends of the Earth and Green peace are examples of multinational pressure groups. The macro-environment While the micro-environment comprises identifiable individuals and organizations with whom a company interacts (directly and indirectly), the macroenvironment is more nebulous. It comprises general trends and forces which may not immediately affect the relationships that a company has with its customers, suppliers, and intermediaries, but sooner or later, as this environment changes, will alter the nature of such micro-level relationships. As an example, change in the population structure of a country does not immediately affect the way in which a company does business with its customers, but over time it may affect the numbers of young or elderly people with whom it is aiming to do business. Most analyses of the macro-environment divide the environment into a number of subject areas. The subject headings that are most commonly used are described below. It must, however, be remembered that the division of the macroenvironment into subject areas does not result in water-tight compartments. The macro-environment is complex and interdependent. The macroeconomic environment An analysis of many companies' financial results will often indicate that business people attribute their current financial success or failure to the state of the economy. For example, in 2002 the house builder Taylor Woodrow reported increased profits, which it attributed to a buoyant housing market, based on a high level of consumer confidence within the economy. Ten years earlier, a weak economy and falling house prices had led to big losses for many house builders, and some went out of business. Economic growth and the distribution of income Few business people can afford to ignore the state of the economy, because it affects the willingness and ability of customers to buy their products. Marketers therefore keep their eyes on numerous aggregate indicators of the economy, such as Gross Domestic Product (GDP), inflation rates, and savings ratios. However, while aggregate changes in spending power may indicate a likely increase for goods and services in general, the actual distribution of spending power among the population will influence the pattern of demand for specific products. In addition to measurable economic prosperity, the level of perceived wealth and confidence in the future can be an important determinant of demand for some
high-value services. If consumers' confidence is low, a high pro- portion of income tends to be saved. If confidence is high, consumers are more likely to borrow, so that their expenditure is greater than their income (Figure 2.5). The effects of government policy objectives on the distribution of income can have profound implications for marketers. During most of the post-war years, the tendency has been for income to be redistributed from richer to less well-off groups. Higher rate taxation and the payment of welfare benefits have been instrumental in achieving this. Multiplier and accelerator effects Through models of national economies, firms try to understand how increases in expenditure (whether by government, households, or firms) will affect their specific sector. The multiplier effect of increases in government spending (or cuts in taxation) can be compared to the effects of throwing a stone into a pond of water. The initial spending boost will have an initial impact on households and businesses directly affected by the additional spending, but through a ripple effect will also be indirectly felt by households and firms throughout the economy. A small increase in consumer demand can lead, through an accelerator effect, to a sudden large increase in demand for plant and machinery as manufacturers seek to in- crease their capacity with which to meet this demand. Demand for industrial capital goods therefore tends to be more cyclical than for consumer goods, so when consumer demand falls by a small amount, demand for plant and machinery falls by a correspondingly larger amount, and vice versa.
Companies are particularly interested in understanding business cycles and in predicting the cycle as it affects their sector. If the economy is at the bottom of an economic recession, this may be the ideal time for firms to begin investing in new production capacity, ahead of the eventual upturn in demand. In the past, firms have often invested in new capacity only after overseas competitors have built up market share, and possibly created some long-term customer loyalty too. Adding new production capacity during a period of recession is also likely to be much cheaper than waiting until an upturn in the economy puts upward pressure on its input prices. During periods of economic boom, firms should look ahead to the inevitable downturn that follows. A problem of excess capacity and stocks can result when a firm fails to spot the downturn at the top of the business cycle. Analyzing turning points in the business cycle has therefore
become crucial to marketers. To miss an upturn at the bottom of the recession can lead to missed opportunities when the recovery comes to fruition. On the other hand, reacting to a false signal can leave a firm with expensive excess stocks and capacity on its hands. It is extremely difficult to identify a turning point at the time when it is happening. Following the UK economic recession of the early 1990s, there were many false predictions of an upturn. When the predicted revival in domestic consumer expenditure failed to transpire, marketers in product fields as diverse as cars, fashion clothing, and electrical goods were forced to sell off surplus stocks to low prices. Marketers try at react to turning points as closely as possible. Many subscribe to the services of firms that use complex models of the economy to make predictions about the future performance of their sector. Companies can be guided by key lead indicators which have historically been a precursor of change in activity levels for their business sector. For a company manufacturing process plant equipment, the level of attendance at major trade exhibitions could indicate the number of buyers that are at the initial stages in the buying process for new equipment. An alternative to trying to predict the economic performance of their sector a long way ahead is to manage operations so that a firm can respond almost immediately to changes in its macroeconomic environment. The us~ of short-term contracts of employment and outsourcing of component manufacture can help a company to downsize rapidly at minimum cost when it enters a recession, and to expand production when a recovery occurs. This approach is particularly important when an organization needs to respond to an unforeseen shock to the macroeconomic environment, as occurred following the terrorist attacks of 11 September 2001. Market competitiveness
An analysis of the macroeconomic environment will also indicate the current and expected future level of competitor activity. An over-supply of products in a market sector (whether actual or predicted) results in a downward pressure on prices and profitability. Markets are dynamic, and what may appear an attractive market today may soon deteriorate as the market matures. The political environment The political environment can be one of the less predictable elements in an organization's marketing environment. Marketers need to monitor the changing political environment because political change can profoundly affect a firm's marketing. Consider the following effects of politicians on marketing. • At the most general level, the stability of the political system affects the attractiveness of a particular national market. While western Europe is generally politically stable, the instability of many governments in less developed countries has led a number of companies to question the wisdom of marketing in those countries. Governments pass legislation that directly and indirectly affects firms' marketing opportunities. There are many examples of the direct effects on marketers, for example laws giving consumers rights against the seller of faulty goods. At other times the effects of legislative changes are less direct, as where legislation outlawing anti- competitive practices changes the nature of competition between firms within a market. Governments are responsible for protecting the public interest at large, imposing further constraints on the activities of firms (for example controls on pollution, which may make a manufacturing firm uncompetitive in international markets on account of its increased costs). The macroeconomic environment is very much influenced by the actions of politicians. Government is responsible for formulating policies that can influence the rate of growth in the economy and hence the total amount of spending power. It is also a political decision as to how this spending power should be distributed between different groups of consumers and between the public and private sectors.
Government policies can influence the dominant social and cultural values of a country, although there can be argument about which is the cause and which is the effect. (For example, did the UK government's drive for economic expansion and individual responsibility during the late 1980s change public attitudes away from good citizenship and towards those of 'greed is good'?) Increasingly, the political environment affecting marketers includes supranational organizations, which can directly or indirectly affect companies. These include trading blocs (e.g. the EV, ASEAN, and NAFTA) and the
influence of worldwide intergovernmental organizations whose members seek to implement agreed policy (e.g. the World Trade Organization). The social and cultural environment It is crucial for marketers to fully appreciate the cultural values of a society, especially where an organization is seeking to do business in a country that is quite different to its own. Attitudes to specific products change through time and at anyone time can differ between groups in society. Even in home markets, business organizations should understand the processes of gradual cultural change and be prepared to satisfy the changing needs of consumers. Consider the following examples of contemporary cultural change in western Europe and the possible responses of marketers. • • Leisure is becoming a bigger part of many people's lives, and marketers have responded with a wide range of leisure related goods and services. Attitudes towards the work/life balance are changing. The nature of work relation- ships can affect companies profits; for example, the dotcom bubble and dress-down Friday had a calamitous impact on the formal clothing retailer Moss Bros' fortunes as consumers' attitudes to work changed The role of women in society is changing as men and women increasingly share ex- pectations in terms of employment and household responsibilities. Examples of marketing responses include cars designed to meet the aspirational needs of career women and ready prepared meals, which relieve working women of their traditional role in preparing household meals. Greater life expectancy is leading to an ageing of population and a shift to an increasingly elderly culture. Or at this time with 60 % of the population being in the age of 15-40 years the Indian market is considered a youth market. The growing concern for the environment
Some indication of the minutiae of changing life-styles and their implications for marketing was revealed in a report, Complicated Lives II: The Price of Complexity , commissioned by Abbey National from the Future Foundation. The report brought together quantitative and qualitative research with extensive analysis of a range of trends affecting families and their finances. The findings show that, between 1961 and 2001, • • the average time women spent in a week doing cleaning and laundry fell from 12 hours and 40 minutes to 6 hours and 18 minutes; the average time that parents spent helping their children with homework had increased from 1 minute a day to 15 minutes a day;
time spent caring for children increased from 30 minutes a day to 75 minutes a day; .the average amount of time spent entertaining went up from 25 minutes to 55 minutes; .time spent cooking has decreased for women, down from more than 1 hour and 40 minutes to just over an hour (73 minutes) per day. At the same time, men marginally increased their time in the kitchen, from 26 to 27 minutes per day.
There has been much discussion recently about the concept of 'cultural convergence', referring to an apparent decline in differences between cultures. It has been argued that basic human needs are universal in nature and, in principle, capable of satisfaction with universally similar solutions. Many companies have sought to develop one core product for a global market, and there is some evidence of firms achieving this (for example Coca Cola, McDonald's). The desire of a subculture in one country to imitate the values of those in another culture has also contributed to cultural convergence. This is nothing new. During the Second World War many people in western Europe sought to follow the American life-style, and nylon stockings from the USA became highly soughtafter cultural icons by some groups. The same process is at work today in many developing countries, where some groups are seeking to identify with western cultural values through the purchases they make. Critics of the trend towards cultural convergence point to a growing need for cultural , identity which has been expressed, for example, in the rejection by some Muslim t fundamentalist groups of the values of western society. This poses new challenges for brand name and product offer will be the object of aspiration for the dominant groups in a country, rather than a hated symbol of an alien system of capitalism? The demographic environment Demography is the study of populations in terms of their size and characteristics. Among the topics of interest to demographers are the age structure of a country, the geographic distribution of its population, the balance between males and females, and the likely future size of the population and its characteristics. Changes in the size and age structure of the population are critical to many firms' marketing. Although the total population of most western countries is stable, their composition is changing. Most countries are experiencing an increase in the proportion of elderly people, and companies who have monitored this trend have responded with the development of residential homes, cruise holidays, and financial portfolio management services aimed at meeting this group's needs. At the other end of the age spectrum, the birth rate of most countries is cyclical, resulting in a cyclical pattern of demand for age-related products such as baby products, fashion clothing, and family cars Consider the following changes in the structure of the Indian population and their effects on marketers. 1. There has been a trend for women to have fewer children. There has also been a tendency for women to have children later in life. In addition, there has been an increase in the number of women having no children. Fewer children has resulted
in parents spending more per child (more designer clothes for children rather than budget clothes) and has allowed women to stay at work longer (increasing household incomes and encouraging the purchase of labour-saving products). 2. Alongside a declining number of children has been a decline in the average house- hold size . There has been a particular fall in the number of large households with five or more people and a significant in- crease in the number of one-person households . The growth in small or one-person households has had numerous marketing implications, ranging from an increased demand for smaller units of housing to the types and size of groceries purchased. A single person buying for him or herself is likely to use different types of retail outlets compared with the household buying as a unit. Marketers also need to monitor the changing geographical distribution of the population (between different regions of the country and between urban and rural areas). The current drift towards rural and suburban areas has resulted in higher car ownership levels and a preference for using out-of-town shopping centres. The technological environment .. The pace of technological change is becoming increasingly rapid, and marketers need to understand how technological developments might affect them in four related business areas: • New technologies can allow new goods and services tb be offered to consumers- internet banking, mobile telecommunications, and new anticancer drugs for example. • New technology can allow existing products to be made more cheaply, thereby .widening the market for such goods by enabling prices to be lowered. In this way, , more efficient aircraft have allowed new markets for air travel to develop. • • Technological developments have allowed new methods of distributing goods and services. (For example, amazon. com used the internet to offer book buyers a new way of browsing and buying books.) New opportunities for companies to communicate with their target customers have emerged, with many financial services companies using computer databases to target potential customers and to maintain a dialogue with established customers. The internet has opened up new distribution opportunities for many services-based companies. The development of mobile internet services offers new possibilities for targeting buyers at times and places of high readiness to buy.
Porters Model Generic Competitive Strategies In coping with the five competitive forces, there are three potentially successful generic strategic approaches to outperforming other firms in an industry: 1. overall cost leadership 2 differentiation 3. focus.
Sometimes the firm can successfully pursue more than one approach as its primary target, though this is rarely possible as will be discussed further. Effectively implementing any of these generic strategies usually requires total commitment and supporting organizational
arrangements that are diluted if there is more than one primary target. The generic strategies are approaches to outperforming competitors in the industry; in some industries structure will mean that all firms can earn high returns, whereas in others, success with one of the generic strategies may be necessary just to obtain acceptable returns in an absolute sense.
OVERALL COST LEADERSHIP The first strategy, an increasingly common one in the 1970s be- cause of popularization of the experience curve concept, is to achieve overall cost leadership in an industry through a set of functional policies aimed at this basic objective. Cost leadership requires aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on. A great deal of managerial attention to cost control is necessary to achieve these aims. Low cost relative to competitors becomes the theme running through the entire strategy, though quality, service, and other areas cannot be ignored. Having a low-cost position yields the firm above-average returns in its industry despite the presence of strong competitive forces. Its cost position gives the firm a defense against rivalry from competitors, because its lower costs mean that it can still earn returns after its competitors
have competed away their profits through rivalry. A low-cost position defends the firm against powerful buyers because buyers can exert power only to drive down prices to the level of the next most efficient competitor. Low cost provides a defense against powerful suppliers by providing more flexibility to cope with input cost increases. The factors that lead to a low-cost position usually also provide substantial entry barrier in term of scale economies or cost advantage . Finally, a low cost position usually places the firm in a favorable position vis-a-vis substitutes relative to its competitors in the industry. Thus a low-cost position protects the firm against all five competitive forces because bargaining can only continue to erode profits until those of the next most efficient competitor are eliminated, and because the less efficient competitors will suffer first in the face of competitive pressures. Achieving a low overall cost position requires a high relative market share or other advantages, such as favorable access to raw material. It may well require designing products for ease in manufacturing, maintaining a wide line of related products to spread costs, and serving all major customer groups in order to build volume. In turn, implementing the low-cost strategy may require heavy up-front capital investment in state-of-the art equipment, aggressive pricing, and start-up losses to build market share. High market share may in turn allow economies in purchasing which lower costs even further. Once achieved, the low-cost. position provides high margins which can be reinvested new equipment and modern facilities in order to maintain cost leadership. Such reinvestment may well be a prerequisite to sustaining a low-cost position. The cost leadership strategy seems to be the cornerstone of Briggs and Stratton's success in small horsepower gasoline engines, where it holds a 50 percent worldwide share, and Lincoln Electric's success in arc welding equipment and supplies. Other firms known for successful application of cost leadership strategies to a number of businesses are Emerson Electric, Texas Instruments, Black and Decker, and Du Pont. A cost leadership strategy can sometimes revolutionize an industry in which the historical bases of competition have been otherwise and competitors are ill-prepared either perceptually or economically to take the steps necessary for cost minimization.
Harnischfeger is in the midst of a daring attempt to revolutionize the rough-terrain crane industry in 1979. Starting from a 15 percent market share,
Harnischfeger redesigned its cranes for easy manufacture and service using modularized components, configuration changes, and reduced material content. It then established subassembly areas and a conveyorized assembly line, a notable departure from industry norms. It ordered parts in large volumes to save costs. All this allowed the company to offer an acceptable quality product and drop price by15 percent. Harnischfeger's market share has grown rapidly to 25 percent and is continuing to grow. Says Willis Fisher, general manager of Harnischfeger's Hydraulic Equipment Division: We didn't set out to develop a machine significantly better than anyone else but we did want to develop one that was truly simple to manufacture and was priced, intentionally, as a low cost ma- chine,' Competitors are grumbling that Harnischfeger has "bought" market share with lower margins, a charge that the company denies,
DIFFERENTIATION The second generic strategy is one of differentiating the product ( or service offering of the firm, creating something that is perceived industry wide as being unique. Approaches to differentiating can take many forms: design or brand image(Fieldcrest in top of the line towels and linens; Mercedes in automobiles ), technology (Hyster in lift trucks; Mac In stereo components; Coleman in camping equipment), features (Jennair in electric ranges); customer service (Crown Cork and Seal in metal cans), dealer network (Caterpillar Tractor in construction equipment), or other dimensions, Ideally, the firm differentiates itself along several dimensions. Caterpillar Tractor, for example, is known not only for its dealer network and excellent spare parts availability but also for its extremely highquality durable products, all of which are crucial in heavy equipment (where downtime is very expensive. It should be stressed that the differentiation strategy does not allow the firm to ignore costs, but rather they are not the primary strategic target.
Differentiation, if achieved, is a viable strategy for earning above-average returns in an industry because it creates a defensible position for coping with the five competitive forces, albeit in a different way than cost leadership. Differentiation provides against competitive rivalry because of brand loyality by customers and resulting in low price. It also increases margins, which avoids the need for a low-cost position. The resulting customer loyalty and the need for a competitor to overcome uniqueness t provide entry barriers. Differentiation yields higher margins with which to deal with supplier power, and it clearly mitigates buyer power, since buyers lack comparable alternatives and are thereby less price sensitive. Finally, the firm that has differentiated itself to achieve customer loyalty should be better positioned vis-a-vis substitutes than its competitors. Achieving differentiation may sometimes preclude gaining a high market share. It often requires a perception of exclusivity, which is incompatible with high market share. More commonly, however, achieving differentiation will imply a trade-off with cost position if the activities required in creating it are inherently costly, such as extensive research, product design, high quality materials, or intensive customer support. Whereas customers industrywide acknowledge the superiority of the firm, not all customers will be willing or able to pay the required higher prices (though most are in industries like earthmoving equipment where despite high prices,. Caterpillar has a dominant market share). In other businesses, differentiation may not be incompatible with relatively low costs and comparable prices to those of competitors.
FOCUS The final generic strategy is focusing on a particular buyer group, segment of the product line, or geographic market; as with differentiation. "focus may take many forms. Although the low cost and differentiation strategies are aimed at achieving their objectives industrywide, the entire focus strategy is built around serving a particular target very well, and each functional policy is developed with this in mind. The strategy rests on the premise that the firm is thus able to serve its narrow strategic target more effectively or efficiently than competitors who are competing more broadly. As a result, the firm achieves either
differentiation from better meeting the needs of the particular target, or lower costs in serving this target, or both. Even though the focus strategy does not achieve low cost or differentiation from the perspective of the market as a whole, it does achieve one or both of these positions vis-a-vis its narrow market target. The difference among the three generic strategies are illustrated in figure1 The firm achieving focus may also potentially earn above-aver- age returns for its industry. Its focus means that the firm either has a low cost position with its strategic target, high differentiation, or both. As we have discussed in the context of cost leadership and differentiation, these positions provide defenses against each competitive force. Focus may also be used to select targets least vulnerable to substitutes or where competitors are the weakest. For example, Illinois Tool Works has focused on specialty markets for fasteners where it can design products for particular buyer needs and create switching costs. Although many buyers are uninterested in these services, some are. Fort Howard Paper focuses on a narrow range of industrial-grade papers, avoiding consumer products vulnerable to advertising battles and rapid introductions of new products. Porter Paint focuses on the professional painter rather than the do-it-yourself market, building its strategy around serving the professional through free paint-matching services, rapid delivery of as little as a gallon of needed paint to the worksite, and free coffee rooms designed to provide a home for professional painters at factory stores. An example of a focus strategy that achieves a low-cost position in serving its particular targets is seen in martin-brower, the third largest food distributor in the United States. Martin-Brower has reduced its customer list to just eight leading fast-food chains. Its entire strategy is based on meeting the specialized needs of the customers, stocking only their narrow product lines, order taking procedures geared to their purchasing cycles, locating warehouses based on their locations, and intensely controlling and computerizing record keeping. Although MartinBrower is not the low-cost distributor in serving the market as a whole, it is in serving its particular segment. Martin-Brower has been rewarded with rapid growth and aboveaverage profitability. The focus strategy always implies some limitations on the over-all market share achievable. Focus necessarily involves a trade-off between profitability and sales volume.
Like the differentiate strategy, it may or may not involve a trade-off with overall cost position. Stuck in the Middle The three generic strategies are alternative, viable approaches to dealing with the competitive forces. The converse of the previous discussion is that the firm failing to develop its strategy in at least one of the three directions-a firm that is "stuck in the middle"-is in an extremely poor strategic situation. This firm lacks the market share, capital investment, and resolve to play the low-cost game, the industry wide differentiation necessary to obviate the need for a low- cost position, or the focus to create differentiation or a low-cost position in a more limited sphere. The firm stuck in the middle is almost guaranteed low profitability. It either loses the high-volume customers who demand low prices or must bid away its profits to get this business away from low-cost firms. Yet it also loses high-margin businesses the cream-to the firms who are focused on high-margin targets or have achieved differentiation overall. The firm stuck in the middle also probably suffers from a blurred corporate culture and a conflicting set of organizational arrangements and motivation system. Clark Equipment may well be stuck in the middle in the lift truck industry in which it has the leading overall U.S. and worldwide market share. Two Japanese producers, Toyota and Komatsu, have adopted strategies of serving only the high-volume segments, minimized production costs, and rock-bottom prices, also taking advantage of lower Japanese steel prices, which more than offset transportation costs. Clark's greater worldwide share (18 percent; 33 percent in the United States) does not give it clear cost leadership given its very wide product line and lack of low-cost orientation. Yet with its wide line and lack of full emphasis to technology Clark has been unable to achieve the technological reputation and product differentiation of Hyster, which has focused on larger lift trucks and spent aggressively on R&D. As a result, Clark's returns appear to be significantly lower than Hyster's, and Clark has been losing ground.2 The firm stuck in the middle must make a fundamental strategic decision. Either it must take the steps necessary to achieve cost leadership or at least cost parity, which usually
involve aggressive investments to modernize and perhaps the necessity to buy market share, or it must orient itself to a particular target (focus) or achieve some uniqueness (differentiation). The latter two options may well involve shrinking in market share and even in absolute sales. The choice among these options is necessarily based on the firm's capabilities and limitations. Successfully executing each generic strategy involves different resources, strengths, organizational arrangements, and managerial style, as has been discussed. Rarely is a firm suited for all three. Once stuck in the middle, it usually takes time and sustained effort to extricate the firm from this unenviable position. Yet there seems to be a tendency for firms in difficulty to flip back and forth" over time among the generic strategies. Given the potential inconsistencies involved in pursuing these three strategies, such an approach is almost always doomed to failure. These concepts suggest a number of possible relationships between market share and profitability. In some industries, the problem of getting caught in the middle may mean that the smaller (focused or differentiated) firms and the largest (cost leadership) firms are the most profitable, and the medium-sized firms are the least profitable. This implies a U-shaped relationship between profitability and market share, as shown in Figure 2. The relationship in Figure 2 appears to hold in the U.S. fractional horsepower electric motor business. There GE and Emerson have large market shares and strong cost positions, GE also having a strong technological reputation. Both are believed to earn high returns in motors. Baldor and Gould (Century) have adopted focused strategies, Baldor oriented toward the distributor channel and Gould toward particular customer segments. The profitability of both is also believed to be good. Franklin is in an intermediate position, with neither low cost nor focus. Its performance in motors is believed to follow accordingly. Such a U-shaped relationship probably also roughly holds in the automobile industry when viewed on a global basis, with firms like GM (low cost) and Mercedes (differentiate) the profit leaders. Chrysler, British Leyland, and Fiat lack cost position, differentiation, or focus-they are stuck in the middle. However, the U-shaped relationship in Figure 2 does not hold in every industry. In some industries, there are no opportunities for focus or differentiation-it's solely a cost gameand this is true in a number of bulk commodities. In other industries, cost is relatively
unimportant because of buyer and product characteristics. In these kinds of industries there is often an inverse relationship between market share and profitability. In still other industries, competition is so intense that the only way to achieve an above-average return is FIGURE 2
through focus or differentiation-which seems to be true in the U.S. steel industry. Finally, low overall cost position may not be incompatible with differentiation or focus, or low cost may be achievable without high share. For an example of the complex combinations that can result, Hyster is number two in lift trucks but is more profit- able than several of the smaller producers in the industry (Allis-Chalmers, Eaton) who do not have the share to achieve either low costs or enough product differentiation to offset their cost position. There is no single relationship between profitability and market share, unless one conveniently defines the market so that focused or differentiated firms are assigned high market shares in some narrowly defined industries and the industry definitions of cost leadership firms are allowed to stay broad (they must because cost leaders often do not have the largest share in every submarket). Even shifting industry definition cannot explain the high returns of firms who have achieved differentiation industrywide and hold market shares below that of the industry leader. Most importantly, however, shifting the way the industry is defined from firm to firm begs the question of deciding which of the three generic strategies is appropriate for the firm. This choice rests on picking the strategy best suited to the firm's strengths and one least replicable by competitors. The principles of structural analysis should illuminate the choice, as well as allow the analyst to explain or predict the relationship between share and profitability in any particular industry.
Risks of the Generic Strategies Fundamentally, the risks in pursuing the generic strategies are two: first, failing to attain or sustain the strategy; second, for the value of the strategic advantage provided by the strategy to erode with industry evolution. More narrowly, the three strategies are predicated on erecting differing kinds of defenses against the competitive forces, and not surprisingly they involve differing types of risks. It is important to make these risks explicit in order to improve the firm's choice among the three alternatives.
RISKS OF OVERALL COST LEADERSHIP Cost leadership imposes severe burdens on the firm to keep up its position, which means reinvesting in modern equipment, ruthlessly scrapping obsolete assets, avoiding product line proliferation and being alert for technological improvements. Cost declines with cumulative volume are by no means automatic, nor is reaping' all avail- able economies of scale achievable without significant attention. Cost leadership is vulnerable to the risks, such as relying on scale or experience as entry barriers. Some of these risks are • • • • technological change that nullifies past investments or learning; low-cost learning by industry newcomers or followers, through imitation or through their ability to invest in state- of-the-art facilities; inability to see required product or marketing change because of the attention placed on cost; inflation in costs that narrow the firm's ability to maintain enough of a price differential to offset competitors' brand images or other approaches to differentiation. The classic example of the risks of cost leadership is the Ford Motor Company of the 1920s. Ford had achieved unchallenged cost leadership through limitation of models and varieties, aggressive backward integration, highly automated facilities, and aggressive pursuit of lower costs through learning. Learning was facilitated by the lack of model
changes. Yet as incomes rose and many buyers had already purchased a car and were considering their second, the market began to place more of a premium on styling, model changes, comfort, and closed rather than open cars. Customers were willing to pay a price premium to get such features. General Motors stood ready to capitalize on this development with a full line of models. Ford faced enormous costs of strategic readjustment given the rigidities created by heavy investments in cost minimization of an obsolete model. Another example of the risks of cost leadership as a sole focus is provided by Sharp in consumer electronics. Sharp, which has long followed a cost leadership strategy, has been forced to begin an aggressive campaign to develop brand recognition. Its ability to sufficiently undercut Sony's and Panasonic's prices was eroded by cost increases and U.S. antidumping legislation, and its strategic position was deteriorating through sole concentration on cost leadership.
RISKS OF DIFFERENTIATION Differentiation also involves a series of risks: • the cost differential between low-cost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty. Buyers thus sacrifice some of the features, services, or image possessed by the differentiated firm for large cost savings; • • buyers' need for the differentiating factor falls. This can occur as buyers become more sophisticated; imitation narrows perceived differentiation, a common occurrence as industries mature. The first risk is so important as to be worthy of further comment. A firm may achieve differentiation, yet this differentiation will usually sustain only so much of a price differential. Thus if a differentiated firm gets too far behind in- cost due to technological change or simply inattention, the low cost firm may be in a position to make major inroads. For example, Kawasaki and other Japanese motorcycle producers have been able
to successfully attack differentiated producers such as Harley-Davidson and Triumph in large motorcycles by offering major cost savings to buyers.
RISKS OF FOCUS Focus involves yet another set of risks: • the cost differential between broad-range competitors and the focused firm widens to eliminate the cost advantages of serving a narrow target or to offset the differentiation achieved by focus; • the differences in desired products or services between the strategic target and the market as a whole narrows; competitors find submarkets within the strate
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