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University of Sunderland

BA (Honours) Business Management

MKT306

Marketing Strategy
Version 2.0
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Marketing Strategy

Contents

How to use this workbook

Introduction

Unit 1
What is Strategic Marketing?
Introduction 1
Defining marketing 2
Customers 3
Profit 5
Marketing mix 6
Marketing orientation 9
A definition of strategy 12
Linking corporate strategy to marketing strategy 13
Missions, visions and corporate objectives 17
From purpose to strategy 18
Marketing orientation revisited 19
Tactics 21
The traditional marketing concept versus the relationship marketing concept 22
The structure of a marketing strategy 23
References 29

Unit 2
Assessing the Internal Environment
Introduction 31
The value chain based view (VBV) 37
Working with customers to create value 39
Understanding the value chain 40
Developing the firm’s competitive advantage 43
Competition analysis in an industry using Porter’s 5-forces 47
Development of a dynamic benchmarking model, Hollensen (2003) 57
References 60

Unit 3
Assessing the External Environment
Introduction 61

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Consumer Behaviour 63
Influences on consumer decision making 73
Environmental influences 78
Environmental forces 80
Organisational forces 81
Measuring Customer Satisfaction 84
Competitor analysis and intelligence 88
Learning about our competitors 89
Identification of competitors’ chosen markets 91
Understanding relationships in the marketplace 93
Relationships with suppliers 95
PESTLE, PLESTIE, SLEPT or PEST Factors 97
References 102

Unit 4
Developing Marketing Strategies
Introduction 103
Corporate objectives 108
Managing a portfolio of products 111
Market segmentation and positioning 120
Segmenting the B2B market 125
References 133

Unit 5
Developing Marketing Programmes
Introduction 135
Service strategies 137
Product life cycle 141
Pricing 142
The economist’s view of pricing 144
Distribution 148
Criteria for choosing distribution channels 149
Controlling distribution channels 152
Marketing Communications 159
How to improve levels of response in marketing communications 162
Branding 166
Sponsorship 173
References 176

Unit 6
Organising, Implementing and Controlling the Marketing Effort
Organisational structures 179
Marketing audit 183
Setting sales targets 188

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Marketing strategies and programmes 190
Customer lifetime value 192
References 203

Unit 7
Focus on Direct Marketing and Customer
Relationship Management
Introduction 205
Defining direct marketing 206
Relationship marketing 208
The strategic role of direct marketing 213
Loyalty 216
What Creates Loyalty? 218
Loyalty schemes 221
Understanding lifetime value 227
Direct marketing strategy 231
Acquisition 233
Allowable marketing cost 237
Retention 249
References 258

Unit 8
Marketing, Technology and E-commerce
Introduction 259
Innovation and change 260
How innovation happens 263
Direct marketing and technology 269
Reasons for the growth of direct and relationship marketing approaches 270
The importance of the database 271
E-commerce and loyalty 275
The Internet and the marketing concept 277
The World Wide Web and web ‘presence’ 281
Buyer behaviour online 282
E-commerce marketing strategy 284
References 289

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How to use this workbook
This workbook has been designed to provide you with the course
material necessary to complete Marketing Strategy by distance
learning. At various stages throughout the module you will encounter
icons as outlined below which indicate what you are required to do to
help you learn.

This Activity icon refers to an activity where you are required to undertake a
specific task. These could include reading, questioning, writing, research,
analysing, evaluating, etc.

This Activity Feedback icon is used to provide you with the information
required to confirm and reinforce the learning outcomes of the activity.

This icon shows where the Virtual Campus could be useful as a medium for
discussion on the relevant topic.

It is important that you utilise these icons as together they will provide
you with the underpinning knowledge required to understand
concepts and theories and apply them to the business and management
environment. Try to use your own background knowledge when
completing the activities and draw the best ideas and solutions you can
from your work experience. If possible, discuss your ideas with other
students or your colleagues; this will make learning much more
stimulating. Remember, if in doubt, or you need answers to any
questions about this workbook or how to study, ask your tutor.

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Marketing Strategy

Introduction

LEARNING OUTCOMES
On successful completion of this module, students should be able to:

Knowledge and Understanding

· Explain the nature of marketing strategy and its significance for the
organisation.

· Assess the drivers and factors affecting the choice of marketing


strategies.

· Evaluate appropriate models and techniques that aid the strategic


marketing process.

· Analyse contemporary marketing issues and problems in a strategic


context.

Skills

· Research skills.

· Interpretation of advanced information and marketing data handling


skills.

· Assessing communications skills to develop effective relationship


marketing.

Content synopsis
The module aims to review the nature and scope of marketing strategy
and evaluate how strategies are developed, given different
organisational contexts. The module considers that strategy is a
fundamental pattern of present and planned objectives, resource
deployments and interactions of an organisation with markets,
competitors and other environmental factors. The module lays the
foundation by appraising the mechanics of marketing strategy,
considering the evolving models and practices that are essential to the
development and implementation of strategy. The module examines

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Marketing Strategy – Introduction Marketing Strategy

contemporary issues and problems that dominate the thinking of


marketing executives as they establish and execute a range of marketing
strategies.

Amplified content
Portfolio Analysis – the management of groups of brands, product
lines and services. The analysis focusing on the interrelationship of
products and services within a product / service mix. The performance
of the mix will be emphasized in the module.

Segmentation – the process of dividing a market into distinct groups of


buyers with similar requirements. The approach provides one of the
main ways of implementing the marketing concept but also directs a
firm’s marketing strategy and resource allocation among different
markets and products.

Environmental Analysis – the broad societal forces that shape


marketing activities. The external environment represents sources of
opportunities and threats. Marketers must be able to prioritize these
opportunities and threats according to such factors as the relevance to
the organisation, the cost effectiveness of strategies to deal with the
threats and opportunities, and the urgency of the threat and
opportunity.

New Product Development – new and improved products hold the key
to business survival. Many organisations develop new products based
on orderly procedures, employing comprehensive and relevant data,
and intelligent decision making.

Competitor Analysis – the process of identifying key competitors;


assessing their objectives, strategies, strengths and weaknesses, and
reaction patterns, and selecting which competitors to attack or avoid.

Value Chain Analysis – the chain of activities by which a company


brings in materials, creates a product or service, markets it and provides
a service after a sale is made. Each step creates more value for the
consumer. Building sustainable competitive advantage based on the
company’s positioning in the value chain.

Internal Marketing – marketing efforts aimed at a company’s own


employees with the purpose of ensuring that appropriate policies are in
place to support the marketing strategies aimed at customers and other
shareholders.

Marketing Audit – the systematic examination of a business marketing


environment, objectives, strategies and activities with a view to
identifying key strategic issues, problem areas and opportunities.

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Marketing Strategy Marketing Strategy – Introduction

Relationship Marketing – the process of creating, maintaining and


enhancing strong long­term relationships with customers and other
shareholders through mutual exchange and trust. It seeks to build a
chain of relationships between the company and its main stakeholders.

Evaluation and Implementation – considering drivers affecting


strategy, formulation, reflecting upon options available, and the
priority routes to be followed. The factors affecting how strategies are
implemented.

E­Technology in Marketing – considering the reasons for the rapid


development of e­commerce and evaluating the alternative routes for
profitable e­commerce strategies. Reviewing how the business vision
supported by advanced information technology can increase the
effectiveness of the business relationship between trading partners.

Contemporary Issues in Marketing – looking at the range of issues –


branding, marketing ethics, services marketing, not for profit
marketing, and small business marketing.

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Unit 1

What is Strategic Marketing?

Welcome to the strategic marketing module. This builds upon your


previous learning about marketing by looking in more depth, and with
a more critical eye, at the development of a marketing strategy.

This module combines theory with practice so that you can see how, by
definition, strategic decisions made at each stage have material
consequences on the long term health of a company or organisation.

To reflect an international student body that has a range of business


experiences to draw upon, the examples, activities and case studies
refer to a range of organisations of varying size and various currencies
(sterling, euros and dollars). In some instances, a calculator will be
needed to enable you to work through examples.

The core textbook for this module, Svend Hollenesen’s Marketing


Management: a relationship approach (2003) is used throughout but not
exclusively. The relationship approach is referred to, but is also
balanced by an acknowledgement of the traditional tools of strategic
marketing management. However, relationship marketing (RM) is an
important concept and in order to develop your understanding of the
practice of RM, a later unit focuses on direct marketing principles.

Two other units focus on the impact of technology on making strategic


marketing decisions and on the wider responsibilities of organisations
in terms of their social, ethical and environmental impact.

Introduction
In this first unit we will consider what marketing is and what marketing
organisations do. It is important to consider the definitions of marketing
and the marketing function since it varies from person to person and
from company to company. On the one hand marketing may be
considered to be a set of tools and techniques but on the other it can be a
philosophy that inspires the entire company and informs its corporate
strategy.

This unit summarises a number of ideas that are looked at in more depth
in later units to give you an overview of strategic marketing and how it
is planned.

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Unit 1 – What is Strategic Marketing? Marketing Strategy

LEARNING OUTCOMES
After studying this unit you should be able to

· Define marketing and marketing management.

· Describe the role of marketing in the wider company strategy.

· Distinguish between different marketing orientations.

· Distinguish between objectives, strategy and tactics.

· Demonstrate an appreciation of the complexity of strategy


development.

Defining marketing
In this section we think about the position and role of marketing within
an organisation.

Inevitably, the importance of marketing will vary from company to


company and, perhaps, between industries. This is hardly surprising
since the level of marketing expertise also varies widely.

It is, perhaps, useful at this stage to review what you understand by the
term ‘marketing’.

ACTIVITY
From memory, write as full and complete a definition as you can of marketing.

ACTIVITY FEEDBACK
It is highly likely that you wrote something like the following:

“Marketing is the management process which identifies, anticipates and satisfies


customer requirements efficiently and profitably.”

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This definition comes from the Chartered Institute of Marketing (CIM) in the
UK, the largest professional marketing body in the world. It contains many of
the key terms central to the marketing function.

“Marketing is a social and managerial process by which individuals and


groups what they need and want through creating, offering and
exchanging products of value with others.”

Kotler (1999)

“Marketing is an organisational function and a set of processes for


creating, communicating and delivering value to customers, and for
managing customer relationships in ways that benefit the organisation
and its stakeholders.”

American Marketing Association (AMA)

We will now consider some of the key terms used in these definitions.

Customers
Above all else, and more than any other functional department in an
organisation, marketing is concerned with customers.

In one sense it is easy to argue that without customers there would be no


company. They are, after all, the only source of income for companies.
Having the very ‘best’ product in terms of its performance or
specification means little if there are not enough customers willing and
able to buy the product. You will consider this at greater length in Units
2 and 3 and as you learn about segmentation in Unit 5.

However as Malcolm McDonald (McDonald 1999, p8) says –

“Cheapness, efficiency, quality (in the sense of international


standards such as ISO) or, indeed, any other measure, are
not criteria of effectiveness, since there is little point in
producing anything cheaply, efficiently or perfectly if
people don’t actually want it and don’t buy it.”

So, even where we can identify that there are many customers already
active in the market, that is buying similar products to meet similar
needs, we still need to understand the nature of these needs as fully as
possible.

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Unit 1 – What is Strategic Marketing? Marketing Strategy

Customer needs
Customer needs, or more properly their needs and wants, can only be
fully met by understanding how and why these needs arise. We also
need to understand how different customers seek to meet these needs
and wants in different ways.

Malcolm McDonald again –

“In the commercial sector, research has shown that there is


a direct link between long­run profitability and the ability of
a firm to understand its customers’ needs and provide value
for them. For industries previously protected from
competition, such as the airline industry and
telecommunications, many now know that sustainable
profitability can only come in the long run through
continuous customer satisfaction.”
(McDonald 1999)

Some may argue, however, whether marketing is really concerned with


needs or even wants. Critics of marketing suggest that its main role is to
stimulate demand. Furthermore in those organisations, such as
charities and government­related bodies such as health service
providers, whilst needs are very easy to define, the idea of a customer is
less easily understood. In some cases marketing techniques may be
employed to promote changes of behaviour – such as stopping smoking
– or to regulate demand of a finite resource such as benefits for elderly
people or health screening.

These issues will be looked at in Unit 8.

It is clear, however, that for virtually all firms customers or consumers


are a key variable in planning. In a competitive market, the company
that will experience most demand is that which best meets the needs of
the majority of customers. It follows then that a company must be aware
of what consumers need in order to be able to produce it.

As a result marketing is often depicted as the custodian of customer


interests within the firm. Despite this many companies do not have
marketing representation at a senior level and this can hinder the firm’s
responsiveness to customer demands.

The problem is exacerbated when one considers the lead time in


producing many products. Ideally marketers should be concerned with
customers before they become customers! They should also be looking
into the future to anticipate needs and help operational departments
produce products and services that will meet these needs.

Again these are issues dealt with at greater length in Units 2 and 3.

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Marketing Strategy Unit 1 – What is Strategic Marketing?

Having produced a product, the company also needs to be able to


distribute it and monitor its use – especially customer satisfaction levels.

Profit
The CIM definition above refers to the need to deal profitably with
customers and there is no doubt that lack of profitable customers is a
major cause of company collapse. Companies with very high levels of
turnover and very many customers inevitably fail if they make
insufficient profit. In the last ten years this has been graphically
demonstrated by the number of internet­based companies which have
grown rapidly handling millions of customer transactions but which
have failed to develop a business model that yielded profit. Even
Amazon, the online bookseller and arguably one of the most famous
‘dotcoms’, has only recently begun to break even. (The use of
technology and its impact on marketing is the subject of much of Unit 8).

At first, the desirability of profit may seem uncontroversial yet there are
many instances when transactions with customers do not result in a
profit for the company.

The basis of many sales promotions, as well as direct and relationship


marketing techniques, is to give the customer exceptional value in an
initial transaction with a view to securing future (more profitable) sales.

In the meantime, it is also clear that many organisations that utilise


marketing techniques do so without ever seeking to make a profit. Some
of these have been referred to above and are dealt with in Unit 9. For such
organisations it is very often difficult to implement marketing strategies
because the very idea of profit (and by implication marketing) is alien.

Internal marketing
Given the above spread of responsibilities it is clear that marketing
functions have a considerable influence on other parts of the company.

If new product features are demanded by the customer, marketing


needs to communicate these requirements to production and new
processes and new machinery may need to be employed.

Likewise, if consumers change their patterns of shopping or seek more


information regarding the safe use of the product, the marketing
department may require an organisation to employ new, or a different
kind of, salesperson or to employ a call centre.

Quite apart from the organisational impact, such changes have financial
consequences. It has often been said that every marketing decision
(with one exception) results in expenditure.

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Unit 1 – What is Strategic Marketing? Marketing Strategy

Marketing mix
The key elements of marketing decision making are often summarised
with reference to the 4Ps – product, price, place and promotion. These
are dealt with in greater depth in Unit 5.

In addition, a further three or four elements of the marketing mix have


been suggested – especially with regard to service industries.

ACTIVITY
List the four Ps and summarise what you understand them to be. Then list a
further three or four that apply to services.

ACTIVITY FEEDBACK
The marketing mix is, conventionally, –

· Product.

· Price.

· Place.

· Promotion.

In addition –

· People.

· Process.

· Physical evidence.

In addition, to cover the importance of the culture of an organisation

· Philosophy.

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ACTIVITY
Read the case study below and then answer the questions at the end.

Case study: Tyrells Potato Chips


Adapted from Sunday Times 9 January 2005

Tyrrells Potato Chips have just as much sodium and oil as its more downmarket
neighbours on the supermarket shelf, but made from potatoes grown on the
farm, hand-fried and packed immediately for maximum freshness, they look
like a ‘piece of the sunlit Herefordshire fields in a bag’.

Potato farmer William Chase had grown tired of growing for the supermarkets.
After travelling in the US, he came back with the concept of a premium,
hand-fried chip that was thicker and with more flavour than a crisp…and which
might shift the balance of power away from the retailer.

In 2002, Chase invested £1.2m to convert his potato sheds into a factory. He
sent samples to Fortnum & Mason, Harrods and a host of upmarket
delicatessens and cafes and began a designer snack boom. “People don’t just
want any old bag of crisps – they want a bag of the best,” said Chase, who
points out that the premium snacks market in the UK is growing at some 10% a
year.

Tyrells now has 25 staff and 3,000 independent customers with net margins of
23% on sales of £2m for the year ending March 2004. Current figures suggest
turnover of £6m for the year.

But the question for Tyrrell’s is ‘what next?’ There are now some 14 producers
of premium hand-fried potato crisps in the UK. Chase has kept ahead of them
by launching new products, including root vegetable crisps made from celeriac
and beetroot or parsnips, bags of salted broad beans and garlic grissini. A range
of dips, including caramelised red onion and red pepper are being made for
Tyrrell’s by a small external supplier.

Kettle, the UK’s number one player in premium potato crisps, has already
launched its own parsnip product and, more worryingly, Walkers, the market
leader in crisps, has successfully launched its ‘Sensations’ brand; thicker cut and
with exotic flavours.

Chase could expand his range, but he may not be able to manufacture them all
down on the farm. “The question is whether we would dilute that message by
moving into products made elsewhere.”

He could go after export markets – currently one third of sales. So far, export
sales have followed a personal visit to a very upmarket store in the target
country.

Now he is considering building a factory in eastern Europe to supply the


continent and reducing the cost of getting the product to market. “The big issue

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Unit 1 – What is Strategic Marketing? Marketing Strategy

for us” says Chase “is not whether there is a market; we know there is. The
problem is that I can’t be in two places at once. We can’t build a factory until we
have someone to run it.” Even now, Chase and his operations director can
sometimes be found frying and bagging up chips on the factory floor. “I’d rather
have a small well-paid well-motivated team doing double the work.”

However, Chase is ambitious. At the age of 40, he believes he can double the
size of the business each year for several years. The production capacity in
Herefordshire can take him to £30m sales. But to do this, over the next 18
months he will have to start hiring purchasing officers, quality officers,
production managers and others.

Perhaps the reason Chase is so driven is that ten years ago the farm he inherited
from his parents went bust and it took him some years of punishing work –
growing potatoes – to regain ownership.

www.tyrrellspotatochips.co.uk

Answer the following questions on the Tyrrells’ Potato Chips case.

1. To what extent do you believe that marketing is at the heart of


Tyrrells?

2. Who do you identify as Tyrell’s customers and consumers? Does this


distinction suggest any issues for the company?

3. What would you identify as William Chase’s main objectives? To what


extent are these based on customers and market opportunities?

ACTIVITY FEEDBACK
1. Tyrrells certainly started with the identification of a market
opportunity. William Chase saw a growing consumer demand for
premium snacks and allied this to his own ability to produce the key
product ingredient – potatoes.

In producing a product to meet a clear need, Tyrrells have grown to


generate significant profits. But they are increasingly under pressure,
and the recent entry of major competitors such as Walkers into the
premium chip market heralds a significant change. Although the
company began with the exploitation of a new market, marketing (as
we have defined it above) is no longer central in the company’s
strategic thinking.

2. Tyrrells’ main customers are the upmarket food stores and


supermarkets which require a high quality, more exclusive product.

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Tyrrells’ core values relate to this exclusivity and the perceived


product quality. The consumers are, by extension, those who purchase
the product in these upmarket outlets and who also value Tyrrells’
core values. Distinguishing between the two can lead to insight into
how value is delivered by/to partners in the value-chain. For example,
Tyrells may seek their customers’ involvement in developing new
products which can be displayed alongside their potato chips.

3. William Chase’s objectives are concerned with his company’s


expansion. This is an internal requirement and closely related, perhaps
as a result of Chase’s personal history, to his own needs and wants as
opposed to those of his customers. In addition Chase is clearly
concerned to maintain the culture of the company and this may have to
be balanced against market opportunities.

Marketing orientation
Marketing orientation is the “underlying marketing corporate
philosophy” (Sutherland and Canwell 2004) and is concerned with the
centrality of customer needs and wants to the corporate strategy.

Strategic level Unit of analysis Examples of major issues Examples of new organisational
forms

FUNCTIONAL Marketing Organising and coordinating Channel management.

subsystems sub-functions of marketing such


Logistics/services specialists.
as advertising, marketing research,
Information/technology
sales operations
specialists.

BUSINESS Marketing department The departmentalisation of Sector/segment management.

marketing and internal structure of Trade marketing. Investment

the marketing department. The specialists. Venture/new product

integration of marketing departments.

sub-functions. Relationships with

other functions.

CORPORATE Divisional marketing Centralisation/decentralisation of Marketing exchange and

responsibilities and marketing decision-making and coalition companies. Network

group-wide relationships between central and organisations

marketing issues peripheral marketing units

ENTERPRISE Strategic alliances and External relationships and Partnerships. Alliances.

networks boundary-spanning with stratgeic

marketing partners. Marketing

‘make-or-buy’ choices.

Figure 1.1: Levels and focus of organisational analysis in marketing.

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Unit 1 – What is Strategic Marketing? Marketing Strategy

Source: Piercy N and DW Cravens (1999) ‘Marketing Organisations and


Management’ in Encyclopaedia of Marketing. London, International
Thompson Business Press

The degree to which marketing thinking is ‘embedded’ in the company


culture, of course, depends upon the history of the firm but often also
depends on the level of familiarity with marketing concepts amongst
key personnel. This, in turn, often depends upon their level of business
and marketing education.

ACTIVITY
The following is adapted from McDonald (1999, pp18-19):

Choose 9 – 10 of the following as reflecting your views most accurately.

1. The planning and execution of all aspects and activities of a o


product so as to exert the optimum influence on the
consumer, to result in maximum consumption at optimum
price and thereby produce the maximum long-term profit.

2. Deciding what the customer wants; arranging to make it; o


distributing and selling it at a profit.

3. Marketing perceives consumption as a democratic process in o


which customers have the right to select…by casting their
money votes to those who supply the good or services that
satisfy their needs.

4. The planning, executing and evaluating of the external factors o


relating to a company’s profit objectives.

5. Adjusting the whole activity of the business to the needs of o


the customer or potential customer.

6. Marketing is concerned with the idea of satisfying the needs o


of the customer by means of the product and a whole cluster
of things associated with creating delivering and finally
consuming it.

7. The total system of interacting business activities designed to o


plan, price, promote and distribute products and services to
present and potential customers.

8. Marketing is the world of business seen from the point of o


view of its final result; that is, from the customer’s viewpoint.
Concern and responsibility for marketing must therefore
permeate all areas of the enterprise.

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9. The activity that can keep in constant touch with an o


organisation’ customers, read their needs and build a
programme of communications to express the organisation’s
purposes.

10. The management function which organises and directs all o


those business activities involved in assessing and converting
customer purchasing power into effective demand for a
specific product or service and moving the product or service
to the final customer or user so as to achieve the profit target
or other objectives set by the company.

11. The marketing concept emphasises the vital importance to o


effective corporate planning and control of monitoring both
the environment in which the offering is made and the needs
of the customers, in order that the process may operate as
effectively as is humanly possible.

12. The organisation and performance of those business o


activities that facilitate the exchange of goods and services
between maker and user.

13. The process of (1) identifying customer needs, (2) o


conceptualising these needs in terms of the organisation’s
capacity to produce, (3) communicating that
conceptualisation to the appropriate locus of power in the
organisation, (4) conceptualising the consequent output in
terms of the customer needs earlier identified, (5)
communicating that conceptualisation to the customer.

14. In a marketing company all activities – from finance to o


production to marketing – should be geared to profitable
consumer satisfaction.

15. The performance of those business activities that direct the o


flow of goods from producer to consumer or user.

16. The skill of selecting and fulfilling customer wants so as to o


maximise the profitability per unit of capital employed in the
enterprise.

17. The economic process by means of which goods and services o


are exchanged and their values determined in terms of
money prices.

18. The performance of business activities that direct the flow of o


goods and services from producer to consumer in order to
accomplish the firm’s objectives.

19. Marketing is concerned with preventing the accumulation of o


non-moving stocks.

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Unit 1 – What is Strategic Marketing? Marketing Strategy

20. The activity that can keep in constant touch with an o 


organisation’s customers, read their needs and build a
programme of communications to express the organisation’s
purposes…and means of satisfying them.

ACTIVITY FEEDBACK
The numbers below equate to the above statements. Tick how many of your
selected statements appear in each row –

Group A 1 2 4 7 10 12 15 17 18 19

Group B 3 5 6 8 9 11 13 14 16 20

Figure 1.2: Scoring statements relating to marketing orientation.

Malcolm McDonald describes group B definitions as making an “unambiguous


reference [to] identifying and satisfying customer needs and building systems
around this principle” (op cit) rather than ‘doing things to’ the customer for
internal purposes.

The more group B definitions you selected, the higher your personal marketing
orientation.

A definition of strategy
At this point it is worth defining, more precisely, what we mean by
‘strategy’ or ‘strategic’. It has been said that strategic issues are those
which are long­term and important. According to Michael Baker (Baker
2000), Igor Ansoff offered a more precise definition when he described a
‘policy’ as a contingent decision (a statement of what must to be done in
given circumstances) and a strategy as a ‘rule for making decisions’
(ibid, p53) – especially when the decision­maker’s knowledge was less
than complete.

This distinction is important in that almost all marketing decisions are


made on the basis of incomplete information. Nevertheless, such

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decisions must be made. An organisation that has strict rules about


marketing processes may stifle managers’ creativity. On the other hand,
poorly defined strategies – that do not lead to practical tactical plans –
can leave important tasks undone.

Linking corporate strategy to marketing


strategy
In order to understand how marketing fits into the wider organisation
we need to consider how corporate strategy is developed.

P ar t 1: P ar t 2:
The internal situation The external situation

SW OT

P ar t 3:

SWOT analysis

Feedback S t r at egy:
Corporate strategy

Business strategy

Other functional strategies


e.g. R&D

Marketing management
strategy

P ar t 4:
Marketing programme

P ar t 5:
Action planning

Figure 1.3: Strategy development.

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Unit 1 – What is Strategic Marketing? Marketing Strategy

Conventionally, corporate strategy is supposed to be determined before


marketing strategy. In many multinationals and companies with many
strategic business units (SBUs) this is indeed the case. A strategy for the
survival of the whole group must be at least considered independently
of the component subsidiary companies.

However, as we have seen, customers are the sole source of a company’s


wealth and so it is difficult to imagine any corporate strategy that does
not take into account the potential future revenues from the markets it
serves.

This conventional, hierarchical system of strategy development is


illustrated on page 3 of Hollensen (2003), reproduced in Figure 1.3.

Here we see that an audit of the internal and external situation is carried
out leading to an analysis of strengths, weaknesses, opportunities and
threats (SWOT). This forms the starting point for most business
planning processes. We look at this in more depth in Units 2, 3 and 4.

In the hierarchical process, corporate strategy leads to business strategy


which, in turn, leads to other functional strategies and to marketing.

In this framework then, a strategy is a statement of how particular


objectives are to be achieved. Whereas an objective is a destination, a
strategy is the route we are to follow in order to arrive there. It follows
then that the objectives have to be clearly defined.

Objectives
A simple mnemonic helps focus objectives. A statement of an objectives
should be:

S Specific It should be clearly stated.

M Measurable The scale of measurement should be in place.

A Aspirational It should be challenging (given the market


situation).

R Realistic It should not be over­optimistic.

T Time­based There should be a specified date of completion.

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ACTIVITY
Evaluate the following example objectives against the SMART checklist.

Objectives S  M  A  R  T 
tick as appropriate 
1 “To be the best ice cream manufacturer in the world” q q q q q

2 “To gain 35% increase in turnover by the end of next financial q q q q q


year”

3 “To be rated best by customers on safety and value for money q q q q q


by the year-end”

4 “To gain 12% markets share in the agricultural generators q q q q q


market in the Middle East”

5 “To treble in size by October 2006” q q q q q

6 “To continually exceed the expectations of our customers” q q q q q

7 “To become number one in our market and increase profitability q q q q q


by 9% within three months”

Figure 1.4: Some example objectives.

ACTIVITY FEEDBACK
You will notice that in all cases it is impossible to judge if the objectives are
realistic. Clearly one would have to have carried out some considerable
analysis, both internal and external, before being able to judge!(See Units 2, 3
and 4).

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Unit 1 – What is Strategic Marketing? Marketing Strategy

Objectives S  M  A  R  T 
tick as appropriate 
1  “To be the best ice cream manufacturer in the world” ý ý þ q ý
Comment: Whilst this is undoubtedly inspirational it may be difficult
to judge if or when this might be achieved.

2 “To gain 5% increase in turnover by the end of next financial year” þ þ q q þ


Comment: This objective is precise and very clearly expressed. As a
corporate objective, however, it should be treated with caution since
turnover could be increased at the expense of profit. Similarly, if
market growth is 20% this objective is hardly aspirational!

3 “To be rated best by customers on safety and value for money by the q þ þ q þ
year-end”

Comment: Given that such a rating was already in place this could be
a marketing objective. It combined two measurable outcomes,
however. Pursuing the ‘safety’ objective may add costs that impact on
customers’ perception of value for money.

4 “To gain 12% market share in the agricultural generators market in þ þ þ q ý


the Middle East”

Comment: A conventional objective such as this is often included in a


one-year marketing plan. The time-frame is therefore implied. It is
good practice to make the target date explicit. Again, profit is not
referred to.

5 “To double in size by October 2006” ý ý þ q þ


Comment: The objective does not specify what is to grow; overheads,
staff, turnover? This objective might also not seem so realistic if
expressed as 100% growth!

6 “To continually exceed the expectations of our customers” ý ý þ q ý


Comment: Whilst a fine, aspirational marketing sentiment, this fails to
define any measurable outcome. Even the best company will not
exceed all customers’ expectations
7 “To become number one in our market and increase net profit q q þ q þ
margins by 9% within three months”

Comment: This statement combines two objectives that should be


separated out. What measurement is to be used to define ‘number
one’?

Figure 1.5: Some example objectives evaluated.

Of course, any of the objectives above can be questioned, and should be,
especially in the context of the corporate objectives. The debate around
objective-setting during the planning process is almost as useful as the
objectives themselves.

Now we will consider how the marketing objectives might link to


broader, corporate objectives.

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Missions, visions and corporate objectives


The implication from the above diagram (Figure 1.3) is that all
objectives ‘cascade’ from the pre­determined corporate objectives, and
this is a popular view in management training. The formula is often
expressed as MOST or Mission, Objectives, Strategy, Tactics.

Campbell and Alexander (1997) suggested that developing a winning


strategy is messier than any text book allowed for. In their important
paper in the Harvard Business Review, the two directors of the Ashridge
Management Centre pointed out that many corporate­level objectives
are often simply statements of the ‘rules of the game’. For example, look
at the corporate objectives below.

ACTIVITY
Consider these, generic (but often used) aims or objectives. Can you think of
others?

· To provide superior returns to our shareholders.

· To provide better returns to all stakeholders.

· To pay above-average market salaries and create career


opportunities for our staff.

· To provide better value for our customers.

Can you now think of a company that might NOT want to achieve some or all of
these?

ACTIVITY FEEDBACK
You might also have added to the above something concerned with making
profit, but you should have found it difficult to add anything new. Campbell and
Alexander’s point was that such objectives point towards what all companies
should be aiming at – developing sustainable competitive advantage.

Rather than stating these as objectives, such statements could also be described
as constraints. A company must make profit in order to survive and so such
objectives do little to inform a strategy.

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Unit 1 – What is Strategic Marketing? Marketing Strategy

Campbell and Alexander suggested that a company needs to be aware


of its ‘purpose’. In part this comes from its internal strengths and the
forces driving it – especially ‘key implementers’ such as the executive
directors and senior managers. In smaller companies, and those with a
charismatic leader such as Virgin’s Richard Branson, it is often inspired
by one person.

For example, the Body Shop has a clear set of values originated by Anita
Roddick, the founder, that inspires most, if not all, of its strategic
decisions. ‘Making cosmetics without harming animals or the
environment’ imposes some limits on strategies that may be selected,
even before any objectives are determined.

It is not clear, from Campbell and Alexander, how the concept of


purpose is very different from, say, that of a mission, vision or a
statement of values. Nevertheless a company with a distinctive set of
shared aims and values has many advantages over its competitors.

From purpose to strategy


Defining purpose, however, is not the end of the strategy development
process. The hierarchical model suggests that strategies follow from
objectives as, in turn, do tactics. Inevitably strategies suggested to
achieve a given objective are tested, at least in debate, against known
market conditions and against managers’ experience. Subsequent
strategy suggestions are modified in this light.

Successful strategies, according to Campbell and Alexander, therefore


depend on ‘insight’ into creating more value than competitors. Since
this is essentially about marrying internal competencies to external
market opportunities (see Units 2 and 3), this is a process that must
involve marketing thinking.

Campbell and Alexander suggest that insight can come from anywhere
– from a production process, from relationships with suppliers or with
other stakeholders but, in the end, they must lead to superior value for
customers who are willing and able to purchase the product.

Perhaps most disturbing of all, Campbell and Alexander warn that


there is no single, systematic way to generate such insight. After all, if
one way proved to be best then all competitors would adopt it and the
competitive advantage would be lost!

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Marketing orientation revisited


To reiterate, the marketing concept places the customer and his or her
needs at the centre of the organisation – not simply at the heart of a
marketing plan.

Different organisations exhibit this orientation to different degrees.


Some still pursue a ‘production orientation’ where efficiency of
manufacturing or service delivery is paramount. Others focus on
selling, persuading more and more new customers to buy a standard
offering. These latter two approaches probably seem outmoded and this
is a measure of how far this debate has passed into history. However,
the reality for many organisations is that there is a constant struggle to
keep customer focus from being eroded by other concerns.

These concerns can be quite legitimate; for example, the loss of an


important supplier or cash worries caused by a client failing to pay.
However, many distractions are about internal systems, efficiencies and
politics where the organisation inhibits the meeting of customer need.

This philosophy or culture of marketing is often illustrated with


reference to major companies, indeed whole industries who succeeded
or failed because of their understanding of what constituted a market.

Famously, Theodore Levitt (1960) explained the decline of the railways


in the USA as the failure of the railways to recognise the need they were
meeting – convenience as much as comfort. Likewise, Charles Revson is
said to have redefined the Revlon business as manufacturing cosmetics,
but selling hope.

This ‘reframing’ of the whole organisation in terms of what it does for its
customers is closely related to the concept of ‘purpose’ discussed
already. However, the extent to which this purpose comes from
closeness to customers or from some wide­ranging research aimed at
predicting the future is a subject for debate.

The danger, it is argued, with staying close to customers is that larger,


more sweeping changes may not be immediately noticed. This is largely
the ‘myopia’ of Levitt’s influential paper. On the other hand, companies
that see to predict the next major market change may fail because they
do not have close understanding of what their customers really want
and need. (Slater and Narver 1998; Connor 1999; Slater and Narver
1999).

ACTIVITY
Re-read the case of Tyrells potato chips. William Chase has asked you to
analyse the company’s strategic marketing orientation. Do you think they are

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Unit 1 – What is Strategic Marketing? Marketing Strategy

suffering a form of marketing myopia? Is the company being customer-led,


market-led or is it not marketing orientated at all?

What practical steps could you suggest to correct the situation?

ACTIVITY FEEDBACK
You have already examined this case and, at the time, we suggested that the
driving force seems to be William Chase’s own desire to grow the company and
to build personal security.

In small and medium-sized companies this is not unusual. Nor is it possible to


say that this is wrong. Ownership of a business, over and above the wealth that
it may generate, is an important motivation for an entrepreneur.

However we might consider that much of the Tyrrell’s strategy is based on a


‘feeling’ for what the market wants. The company may engage in extensive
market research to discover what is likely to happen in the chip or snack market
over the next ten years (a market orientation) but this presupposes that Tyrrell is
in the snack business. Another way of viewing this is to attempt to understand
what customers are buying when they purchase a Tyrell product.

This is further complicated by the point previously made about the distinction
between customers (the retailers) and the consumers (the retailers’
customers). The Tyrell brand may perform a particular function for the retailer
by fitting into their image of sourcing high quality, handmade foods for example.
For the person who eats the chips, the product may be seen as a treat or as
being more healthy than conventional snacks.

Of course, these issues would have to be explored more fully in order to make
important strategic decisions, but the key is that they must be explored and
debated.

Companies that are truly customer focused may have to undergo


considerable, and uncomfortable, change in order to ensure that the
change is not superficial.

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READING ACTIVITY
Read Hollensen, exhibit 16.2, page 660-661. Examine figure 16.7 on page 661.

Think about the possible effects on a company of undergoing such change.


What are the possible disadvantages?

ACTIVITY FEEDBACK
Effects of changes such as those undergone by Ciba Speciality Chemicals may
include –

· Loss of focus on the day-to-day business issues. During a period of


change, staff may feel overworked and suffer stress.

· Staff unrest and dissatisfaction may lead to resignations of key staff


and loss of specialist knowledge. In extreme cases, staff may take
industrial action.

· Customers may be confused. Having dealt with a particular


department they may now lose that contact.

· Customer groupings may be inaccurate or may not reflect


customers’ own perceptions.

All these possible pitfalls point to the need for change to be managed. If the
change is led by marketers and marketing departments, it is still necessary to
win the hearts and minds of as many people as possible within an organisation. If
the whole organisation shares a marketing orientation, then this should be
easier.

Tactics
Although this unit is module is about strategic marketing we feel it is
worth mentioning a further distinction that is often the source of
confusion. That between strategy and tactics.

We have defined strategies as being the route towards an objective.


Tactics, therefore, can be considered to be the vehicles used along the

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Unit 1 – What is Strategic Marketing? Marketing Strategy

way. So whilst the planned route will remain broadly the same (unless
the destination is changed), the tactics will be picked up and set down at
different times and in different stages of the journey.

Confusion often arises because, in developing a plan, it is tempting to


allocated budget and to decide on concrete tasks, before fully resolving
the interdependent objective­strategy issue.

To reiterate, strategies can only be evaluated against objectives with the


addition of some insight into their likely effect in the real world. This is
an iterative and messy process. However, having determined SMART
objectives and the strategies to achieve them, the tactics can then be
specified.

Another way of distinguishing strategy and tactics is to think of the


former as the way we will do things and the latter as what we will do to
customers, intermediaries and so on.

As the effects of an implemented plan are measured and monitored, the


strategy may be judged to be wrong, in which case those who
developed the strategy must be involved in taking corrective action.

On the other hand the strategy may be right, but progress is insufficient
or, possibly, too rapid. In this case, tactics (what we do to actors in the
marketplace) can be changed.

Many of the issues surrounding implementation are dealt with in Units


5 and 6.

The traditional marketing concept versus


the relationship marketing concept
Perhaps the most developed expression of the marketing orientation
concept is that of relationship marketing (RM). This is discussed more
fully in Units 7 and 8.

RM addresses some of the issues raised above about the


‘embeddedness’ of the marketing concept by conceiving all
relationships as customer­type relationships. As such they can be
managed by modified marketing techniques.

RM is distinguished by the tendency towards co­operative modes of


working between companies, between companies and customers and
within companies. In addition, RM places less stress than traditional
marketing upon gaining new customers, and more stress upon keeping
customers and increasing their value to the company.

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In Hollensen (2003) as in this module, the two approaches, traditional


and relationship, are dealt with together since most companies mix
their use.

The structure of a marketing strategy


What ever process is used to arrive at a marketing strategy, part of the
marketer’s job is to present it in a clear and logical way. Unit 6 looks at
the implementation of a marketing plan but, at this stage, it is worth
summarising the main form and function of a strategic marketing plan.

The outline recommended on page 651 of Hollensen is –

· Title page.
· Table of contents.
· Executive summary.
· Introduction.
· Situational analysis.
· Marketing objectives and goals.
· Marketing strategies and programmes.
· Budgets.
· Implementation and control.
· Conclusion.

Remember a plan may be an internal document dealing with the whole


of a corporation or it may be concerned with a particular SBU or brand.
A plan may be produced for an investor or to convey marketing plans to
a parent company. Whatever its immediate purpose, the principles
remain the same and it should follow much the same format. In all cases
it is wise to bear in mind that the document should contain an actionable
plan; that is, it should be compiled such that a competent marketer or
business person could pick up the plan and discover from it everything
he or she needed to know in order to start.

READING ACTIVITY
Hollensen goes into some detail about the content of each section of such a plan
in section 16.3, pages 651-655. Read the description of each section and bear
these in mind as you work through the remaining units in this module.

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Unit 1 – What is Strategic Marketing? Marketing Strategy

REVIEW ACTIVITY 

Review questions
1. From memory, write a definition of marketing.

2. Which parts or departments of a large organisations should a marketing


department communicate with most? Which ‘assets’ does a marketing
department manage?

3. What are the main differences between production, selling and


marketing orientations?

4. Why do you think it might be useful to think about ‘purpose’ and


‘insight’ as much as objectives and strategy?

5. What do the initials ‘SMART’ stand for in relation to objectives?

6. Read the following simplified case study and answer the questions that
follow.

Case study: S&J Printers.
S & J Printers have one printing press in their small workshop. Currently they
print anything and everything that comes their way – although the press only
prints two colours at a time they have printed very complex four-colour work
for large companies. They didn’t make much money on those jobs because they
had to buy in finishing services such as folding and stitching; so-called ‘outwork’.

The two-man company has worked out that the press can run for a maximum
of 8 hours in a day and needs a minimum of around 2 hours ‘make-ready’
between jobs, although for complex jobs this can be longer.

Apart from dealing with finishing suppliers (outwork such as folding and
binding, etc) John Jones gets all the work in for the company by visiting local
businesses. Ted Smith runs the press, but also deals with suppliers of ‘repro’
services, more outwork, such as plate-makers and sometimes typesetters.

Early on they decided not to charge on a cost basis, rather they wanted to
charge what a job was worth. They pride themselves on printing a very clean
job and always delivering at the agreed time.

A rough breakdown of their current work is given by the examples in Figure


1.6.

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Type of client Type of Make-ready Printing Value of Cost of £


job time time job outwork profit*
(%)
Local garage Business 2hrs 2hrs £850 £50 400
For directors of cards (47)
company

Local florists Greetings 4hrs 4hrs £1000 £200 0


Designs and artwork for cards for (0)
local company to bouquets
promote itself through
its own selection of
cards

Local estate agent Property 2hrs 4hrs £1200 £120 480


Background sheets to details (40)
be overprinted on
photocopier

Large financial Business 2hrs 6hrs £2000 £150 1050


services HQ cards (53)
Cards for managers and
directors

Large financial Brochure 6hrs 48hrs £8500 £1200 1900


services regional (22)
office
Colour brochure
showing company as
local employer

Figure 1.6: Examples of work done by S&J printers.

*Profit is calculated after deduction of outwork and after overheads are


allocated on an hourly basis.

There are many competitors in the area – some with better facilities, some with
the same or similar equipment to Smith & Jones. Their main aim is to be able to
pay themselves a little more and to pay off the debts incurred in setting up.

a. Describe their current marketing mix. How do they use the ‘Four Ps’?

b. How would you suggest the company adapt its marketing mix and why?

ACTIVITY FEEDBACK
1. From memory write a definition of marketing.

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Unit 1 – What is Strategic Marketing? Marketing Strategy

Whilst you may have memorised a definitions such as “anticipating and


meeting customers needs, profitably”, you may also have constructed
your own. Your definition should have focused on customers and may
have specified profit. If you are more familiar with non-profit
organisations, then your definition may have been different. You may
also have stressed the need for marketing to retain customers as well
as acquire them.

2. Which parts or departments of a large organisations should a marketing


department communicate with most? Which ‘assets’ does a marketing
department manage?

A marketing department should be involved in every aspect of a


business, since every part of a business can be, and arguably should be,
orientated towards delivering customer satisfaction. Customers are
the most valuable asset a company has since they are the primary
source of future income.

3. What are the main differences between production, selling and


marketing orientations?

A production orientation is about making products more efficiently.

A selling orientation is about finding more customers to buy products.

The marketing orientation is concerned with what is necessary to


succeed in the market – meeting customer needs.

4. Why do you think it might be useful to think about ‘purpose’ and


‘insight’ as much as objectives and strategy?

Purpose defines the core beliefs and aims of a company, and acts as a
‘filter’ for future strategic decisions. Insight into the source of value,
both now and in the future, from business processes and from
customers, generate possible strategic directions. Once evaluated and
chosen, these can be expressed as objectives and strategies.

5. What do the initials ‘SMART’ stand for in relation to objectives?

S Specific
M Measurable
A Aspirational
R Realistic
T Time-based

6. Case study: S&J Printers.

The following is an outline which you can follow to compare with your own
answer and to organise further thoughts you have.

In common with the owners of many small companies it is likely that John and
Ted don’t really consider what they do as marketing. It clearly is, since they are

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attempting to identify and meet customers’ needs, but there is little evidence in
the case as to their current marketing plan.

Essentially they need to have an appreciation of the internal marketing factors


and the external marketing factors; on the one hand their strengths and
weaknesses and on the other the opportunities and threats – a SWOT analysis.

Internally...

They must examine their own motives, their ‘purpose’ – whilst they wish to be
able to generate more profit, they also take pride in the work they do and they
deliver on time.

They must look at their own competencies and skills – their skills in marketing
to the different kinds of customer and the ease with which they can meet
certain customers’ needs. There may be a source of insight that suggests
opportunities.

S&J must look at the resources they have available for marketing (principally
time, but they may also see the need for some investment in the marketing mix
– see below).

Crucially they must determine their competitive advantage – perhaps clean,


accurate high quality work delivered on time.

Externally...

Who are the customers? They need to be examined closely in terms of their
characteristics and buying behaviour. Business cards for large local companies
seem to offer a good combination of profitable and regular work. With little in
the way of outwork and simple set-ups, John will be free to pursue more clients
– and may also be in a better position to gain the larger jobs that they can do
profitably.

How big is the market and what is happening? In other words, is the chosen
target market sufficient, sustainable, growing or declining? This will demand
research. The printers may choose to look at the trends in the industry they are
serving; for example, what is happening to financial organisations? It may pay
them to look more closely at why financial organisations have been good
customers in the past. Is it because they have a large salesforce and/or a high
turnover of staff? Is this likely to continue?

The competition must also be monitored. Not only might the target market be
already well served but there may be competition from in-house print facilities.
Again what is their competitive advantage?

Finally, S&J must also look at the wider environment. For example.
technologically, are they likely to be left behind? What economic factors may
present threats or opportunities?

They must strike a balance between serving the customers they know and
looking more widely at the market.

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Unit 1 – What is Strategic Marketing? Marketing Strategy

Marketing strategy

Having looked at the broad picture, some strategic choices will emerge.
Crucially the company needs to set out some marketing objectives which must
be SMART.

1 The current marketing mix

S&J currently have a muddled marketing mix. They do not offer a distinctive
product (printing anything that comes along), their promotion relies solely on
personal selling and word of mouth. However, their pricing policy seems to be
based on their understanding of what the customer will pay (indicative of a
customer focus rather than a production focus), and their approach to delivery
(which reflects on the product) seems to offer some potential competitive
advantage.

2 Suggestions for adapting the marketing mix

Having been through a strategic review, S&J need to orientate their marketing
mix towards their chosen marketing objectives. The company must not
standardise their marketing mix, but must have a strategy. Their advantage is
that they know each of their customers; each is different, each can be
developed in a relationship approach.

Product.

They may choose to redefine their product as a quality on-call print facility.
Effectively offering their clients the advantages of in-house printing without the
overheads. They may augment the product by taking away the difficulties their
corporate clients have with ordering small items, by offering a stock call-off
system and telephone ordering. They should be continually improving the
product quality for the customer – perhaps recommending new stock (paper)
upon which to print. This is essentially about adding value through service or
augmenting the product; giving a tailored product. It is the continual
improvement that is the key, not just the quality of paper or ink.

Place.

With guaranteed delivery built into the product and telephone ordering, place
ceases to be an issue.

Price.

Pricing is already flexible but this may encourage customers to pressure for
discounts. Hence, prices need to be defended by increasing the perceived
quality in the other elements of the mix). The company may try structuring the
price so that they agree to invoice on delivery but print stock to call off when
the need arises. Hence, the customer is paying for the ready availability of new
stock and deals with a lower unit of price (per invoice) – it also helps cash flow.

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Promotion.

John should be able to spend more time developing relationships with


customers. The value of networking should not be underestimated – especially
with a complex buying process. Promotional techniques should be low-key in
accordance with the emphasis on a quality service and personal/direct.
‘Discount’ promotions would be inappropriate but trials may be. Existing,
satisfied customers, should be encouraged to recommend other potential
customers, perhaps with some kind of appropriate incentive.

In their marketing plan S&J should be seeking to build barriers around their
customers, making it difficult for them to go to competitors. At the same time
they should be continuously seeking to improve the level of satisfaction
amongst their customers so that they want to stay with them.

References
Baker, M. (2000). Marketing Strategy and Management. Basingstoke,
Macmillan.

Campbell, A. and M. Alexander (1997). “What’s Wrong with Strategy?”


Harvard Business Review Nov­Dec: 42­51.

Connor, T. (1999). “Customer­led and Market­oriented: A Matter of


Balance.” Strategic Management Journal (20).

Gracie S. (2005) “Tyrells Potato Chips” Sunday Times, 09/01/2005


www.enterprisenetwork.co.uk/knowledge_store

Hollensen, S. (2003). Marketing Management: a relationship approach.


Harlow, Person Education.

Levitt, T. (1960). “Marketing Myopia.” Harvard Business Review


(July/August).

McDonald, M. (1999). Marketing Plans. How to Prepare Them: How to Use


Them. 4th edition. Oxford, Butterworth­Heinemann/CIM.

Slater, S. F. and J. C. Narver (1998). “Customer­led and Market­oriented:


Let’s not confuse the two.” Strategic Management Journal (19).

Slater, S. F. and J. C. Narver (1999). “Market­orentated is more than


being Customer­led.” Strategic Management Journal (20).

Sutherland, J. and D. Canwell (2004). Key Concepts in Marketing.


Basingstoke, Palgrave Macmillan.

U n iversity of
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Unit 2

Assessing the Internal


Environment

LEARNING OUTCOMES
After studying this unit you should be able:

· Demonstrate an understanding of how firms create competitive


advantage using the resource-based view (RBV) and the market
orientation view (MOV).

· Demonstrate an understanding of the core competencies of


organisations and how they are used in competition.

· Make an assessment of the competitive capabilities of companies.

· Analyse an industry using the Porter’s 5-forces model.

· Show how companies are able to gain competitive advantage in the


market and to compete internationally.

Introduction
In order to assess a firm’s competitiveness it is essential to consider its
current situation. The purpose of carrying out an internal audit is to
establish which resources it possesses in terms of its people, its finances
and its products or services. For many this is similar to carrying out
stock control, but instead of just looking at products or services, we
must also consider the capabilities of the staff who work for us, how we
manage our finances and how we are developing our products or
services in order to satisfy our customers now, and in the future.

In carrying out our internal assessment we can identify our key


competencies and also highlight some areas of weakness. In looking at
the Microsoft and Lego case study, we will see that both companies are
considered to be global players with strong brands, widespread
distribution and obvious competitive advantages. However the use of
an alliance allows both companies to improve their strength in a market
place, by buying into the reputation of the other company.

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CASE STUDY ACTIVITY
Read the Microsoft and Lego case study in Hollensen, page 27, and answer the
following questions:

1. Which of the two partners will benefit most from the alliance?

2. What kind of further joint marketing exercises could both companies


benefit from in the future?

CASE STUDY FEEDBACK
1. This is an alliance of two very powerful global brands. Without doubt
Lego is the most established of the two brands, in terms of age, and on
a global basis enjoys widespread recognition and is known for its
excellent product quality. It holds a unique position in terms of its
appeal to children as well as parents who grew up with the brand.
However, in terms of turnover and overall brand value, Microsoft is the
more powerful of the two.

2. There are significant benefits for both parties from this alliance. There
are a number of joint marketing exercises which they might wish to
undertake:

a) Both Microsoft and Lego could benefit from joint exercises


linked to the marketing of the X-box. This could easily be a
promotional campaign to highlight the new alliance between
X-box and Lego.

b) There is scope to increase distribution through joint sales


promotions with existing and new suppliers. The addition of
either name would be sufficient to attract new distribution
outlets.

Creating Competitive Advantage


In order to understand how firms might gain competitive advantage by
using their internal resources, Hollensen (2003) considers two
approaches. These are a market orientation view (MOV) and the
resource­based view (RBV).

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Resource-based view (RBV)


In order to further categorise resources, we can break them down into
two different categories. These are tangible, meaning that they we are
able to touch them, or that they exist in a physical state and that
ultimately can be quantified. These include things such as the people
employed within the organisation, the means of production,
manufacturing equipment, finance and access to the raw materials
needed to make our goods. Intangible resources are, therefore, those
which do not exist physically but contribute to the resource base of our
organisation. Think about our reputation and brand image, our
trademarks and any patents that set us apart from competitors and even
the organisational culture (Hollensen 2003).

Let us imagine the resources of a company like Microsoft. The value of


its reputation, its copyrights and the knowledge of the people who
design and create their physical products might be considered to be
their key resources, and none of these are tangible or exist in a physical
state. However, without the physical resources of their people, their
means of production and their financial resources, they wouldn’t be
able to make and market their software.

In order for us to consider the most important resources, Hollensen


(2003) in considering the work of Grant (1991), and Prahalad and Hamel
(1994), proposes the following as the most important. See Figure 2.1:

Competitive Factors to take into consideration


Resources
Competitive Considers the extent to which research carried out by the firm has contributed to
Superiority Test differentiating the company from its competitors. This includes average annual
spend on market research, and on research and development costs.

Imitation Test This looks at the potential competitor and considers how difficult it would be to
recreate our resources in such areas as its physical difference or any economic
barriers to imitating our resources.

Duration Test Measures to what extent our resources will be produced in the future. This will
include such factors as recruitment and training in relation to competitors.

Appropriateness Considers whether the company is able to take advantage of the resource in the
Test market. Is this a new market for the company or do they have existing networks of
suppliers?

Substitutability To what extent can a competitor introduce a produce or service with an alternative
Test but with similar advantages. The company’s success in introducing new products or
services can be taken into consideration.

Figure 2.1: Competitive Analysis model.

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Finding the figures


Companies who carry out research are usually in a position to answer
the question posed in Figure 2.1 In order to establish how our resources
are perceived in the market place or how they stand in relation to our
competitors, we must be able to produce data through are research
activities. In some cases, by simply monitoring our internal resources
against those of our competitors, we will be able to establish workable
comparisons. We will need to consider tools of measurement such as
percentage of turnover spent on research and development or on
research and training. We might also be able to consider awards for
training or innovation by industry bodies.

CASE STUDY ACTIVITY
Read the Honda case study on page 33, Hollensen (2003), and briefly say what
you think Honda’s core competencies are:

CASE STUDY FEEDBACK
Honda’s core competence, and an area where they enjoyed competitive
advantage, was in the area of small engine production. While the company was
associated predominantly with motorcycle engine manufacture, they had a key
competitive advantage in perhaps a less glamorous market, such as small
engines, but ultimately one which enabled them to develop a key competitive
advantage and which was more profitable.

Core Competence
A core competence is considered by Hollensen (2003), in reviewing the
work of Prahalad and Hamel (1990), to have three main traits: it makes a
contribution to perceived customer benefits: it is difficult for
competitors to imitate: and it can be leveraged to a wide variety of
markets. There have been numerous examples of companies who,
having identified their core competencies as being marketing and
distribution, have contracted out the manufacture of their products to
other companies.

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The roots of competitive advantage


If you look at Hollensen, page 34, he considers the main resource
categories and the roots of their competitive advantage.

Technical Resources
These include areas such as Research and Development capabilities,
process engineering and worldwide patents. Companies who enjoy
such resources are Microsoft, Hewlett Packard and IBM.

Financial Resources
These cover areas such as having a reputation for paying and being
creditworthy as well as being able to put their plans into operation.
Consider the many millions of dollars that companies such as Gillette
put into the production of their new razors.

Human Resources
We need to cover areas such as managerial skill, the capabilities of
employees and the companies focus on group or individual learning.
This latter point relates to corporate culture and the way in which the
organisation approaches staff training and development.

Marketing Resources
We need to be able to evaluate our relationships with customers, how
loyal our customers are, and the value of our brand or brand equity.

Information Systems
This covers the area of decision support within the organisation and the
importance it places in managing information within the organisation

Resource-based strategy options


Having considered the ways in which we might measure our resources
in relations to those of our competitors, we can now consider the
strategic options available to us. If we look at Hollensen’s model (2003)
we are faced with four different options, based on using either new or
current resources versus looking to attract current or new customers.

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New 3. Renew and nurture the resource base 4. Further business developments

(example: Epson) (example: Virgin)

Current 1. Exploit resources in existing business 2. Stretch resource base to new customer
groups

Establishing relationships
(example: Dassault/Falcon)
with suppliers (case: Siemens, Boeing)

Upstream

Downstream Establishing
relationships

with customers
(case: Lockheed
Martin)

Current New

Figure 2.2: Customer types.

Current resources for existing customers


It is important to develop relationships with existing customers and
suppliers. By working closely with our customers we might be able to
take advantage of their expansion plans. If our customer uses our
products or services in the manufacture of their products, an expansion
in their sales should lead to a similar increase in our sales as well.
Hollensen (2003) talks about the strong relationship that Lockheed
Martin (USA) enjoys with its customers. By working closely with its
customers, this can create significant barriers for our competitors.
Companies who tie in their customers to their products can guarantee
the future sales of the products needed to service the main product.

Current resources for new customers


The opportunity to exploit its existing resources for new customers has
arisen for many new technology­based companies. Specialist software
producers have been able to target new customers using the success of
their existing products as leverage.

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New resources and current customers


With this strategic option companies look to expand their existing
resource base in order to serve existing customers. This may be as a
result of an opportunity to do this or due to increased competitive
activity which forces the company into looking for new resources. This
strategy can present some problems to firms and may put pressure on
its existing resource base, particularly where this involves the cost of
developing new products.

New resources and new customers


This is very often the most problematic strategic option for companies
as this involves stretching resources to target new customers as well as
developing the existing product or service to satisfy these customers.
Both represent new areas and are, therefore, difficult to achieve
successfully.

The value chain based view (VBV)


Having considered the resource­based view (RBV) which takes into
account what the firm has, we now must look at the value chain based
view (VBV) which looks at what exactly the firm does in the market
place. We must look at this from a value point­of­view or the value that
the company adds for the customer. Hollensen (2003)

If we consider Hollensen’s view then, if the benefits of a product or


service exceed the costs, there is a good chance that the customer will at
least consider buying from us. It is important for us to focus on the
benefits that our products or services offer potential customers and
compare these with those of our competitors.

Consider a commercial or industrial product and how we might add


value. A good example is the German manufacturer of industrial
dishwashers, Winterhalter, used in large hotels, educational
establishments and restaurants. Winterhalter approached their market
from a value point of view and their research findings helped them to
identify the value which they needed to add to their current service. The
traditional approach was to be competitive on price and to focus on the
capabilities of their dishwashers over those of their competitors. What
their clients told them in research was that they wanted their
dishwasher to be reliable and they feared that if it broke down then this
would have a dramatic impact on the running of their business. Imagine
a large restaurant with one of its dishwashers out of action and the
impact that it might have on the service to their customers. They also
worried about keeping enough stock of dishwasher cleaning products,
which became another product which they had to remember to

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purchase. Again if they ran out of these products then it would disrupt
the smooth running of the kitchen.

Winterhalter then reconsidered their product from a value point of view


and changed their focus. They offered a monthly charge which included
the use of a dishwasher, a guaranteed repair time or indeed replacement
of the machine, if they weren’t able to repair it, and constant supplies of
cleaning products for their customers. They had added value by dealing
with the customer’s fear of machine breakdown and taking away the task
of ordering cleaning products. By offering these additional benefits they
were also able to charge a higher overall price as their customers were
very happy with this additional value. As a result of this strategy they
retained more customers and more importantly achieved competitive
advantage in a highly competitive market. Their reputation within the
marketplace improved which enabled them to make more sales.

In order to use this approach we need to consider our products or


services from the customer’s point of view, which challenges the more
traditional approach. Consider another example: large firms spend
considerable sums on fresh flowers for their offices, which they use to
create a more welcoming reception area. The traditional approach is to
sell them flowers, which they arrange and dispose of, and then order
them more which we supply them. The value­based approach is to
supply them flowers on agreed dates, already displayed in vases and
then to dispose of them and replace immediately with new displays.
This increases our sales revenue and means that our customers enjoy a
ready­made professional presentation.

CASE STUDY ACTIVITY
Let us reflect upon the value chain and the way in which we can add value to our
products and services.

Read the short case study on the value chain of Acme Axles, Inc, page 41 in
Hollensen (2003), and state how you think Acme’s internal value chain can be
broken down.

CASE STUDY FEEDBACK
You will see that Acme’s internal value chain can be broken down into six
components of which only two, manufacturing and custom axle design, are
directly related to the production of their core product, the axle. They
differentiate their product from those of their competitors through the
customisation of axles for a range of clients.

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Working with customers to create value


The key to providing customers with added value is to work closely
with them on the development of new products and services. Spending
time trying to understand their problems and designing a new product
or service to meet those problems, not only delivers customer
satisfaction but also can provide a barrier to competitors.

The problem facing a number of print companies is the need for


constant customer feedback during the printing process. It was not
uncommon for the printers to produce a sample for a client and to send
it off for comment by motorcycle courier. This incurred extra costs and
while it was possible to get relatively quick feedback a solution was
needed to improve this process. It was innovative printers, who by
looking at the problem from their client’s position, came up with a
solution that added real value. Some printers developed their printing
and were able to post­up their work on their website and invite their
client to make comments. The next step was also to provide their
customers with a personal computer and some training which enabled
them to make slight amendments, and improve the turnaround time.
This gave their clients increased flexibility and reduced some of the
pressure on deadline times. The cost of implementing such a system
was soon covered by the cost savings on transport, but again added real
value for their customers.

This approach to adding value ties in to the old suggestion of marketers


around thirty years ago, such as Kotler and Doyle, who suggested that
in order to understand customers, companies needed to put themselves
in their shoes in order to look for solutions. While currently new
technologies offer companies opportunities to add value, they are
usually used effectively to support traditional methods of doing
business rather than to replace them.

READING ACTIVITY
Read the article about information management at Caterpillar on page 42 in
Hollensen’s book, and consider how they try to create competitive advantage
by adding value to their customers.

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READING ACTIVITY FEEDBACK
The example of Caterpillar’s use of an information management system shows
that they are approaching this from their customer’s point of view and
ultimately adds some value to their brand. This is similar to the Winterhalter
dishwasher example that we looked at earlier in this unit. Caterpillar has a very
strong reputation in the manufacture of machines used in the construction
industry. Their reputation has developed over a number of years and their
investment in new products means that they continue to lead the market. In
order to defend this position they have looked at the problems that their
customers might face. Many firms in the construction industry use this
equipment on multi-million dollar projects. If you visit building sites around the
world you will see Caterpillar equipment. Many of these companies work to
very strict deadlines and often have fines imposed for missing deadlines. Their
biggest problem arises when a machine stops working and the subsequent time
taken to diagnose and resolve the problem. For every day that a machine is out
of action it costs their customers in terms of lost time. By introducing sensors to
identify failing parts and giving their suppliers and distributors access to the
system, means that they are in a much stronger position to reduce the impact of
machine breakdown.

Understanding the value chain


In order to identify the key value activities, Hollensen (2003) suggests
breaking value activities into two broad categories of primary activities
and support activities.

Primary Activities
1. Inbound logistics
Here we need to consider all of the activities linked to the
handling of distribution of the product or service, to include
transportation, stock control and materials handling.
2. Operations
These include the activities that result in the final product or
service such as packaging, manufacture, assembly and testing.
3. Outbound logistics
This involves the collection, storage and distribution of our
products to customers. For services, this might include taking the
customers to a sports event. Hollensen (2003)

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4. Marketing and sales


This is about making people aware of the product or service and
making it available for them to purchase.
5. Services
Services include any activity which enhances the value of a product
or service, including installation, repair, spare parts and training.

Support Activities
1. Procurement
This is linked to obtaining the resources necessary to service the
primary activities.
2. Technology development
This refers to any value activity that is linked to research and
development, product design, technical know­how or an
improvement in raw materials.
3. Human resource management
This refers to the activities concerned with the training,
development and reward of staff involved in the company.
4. Infrastructure
This covers all of the planning activities of the firm, such as
finance and quality control, as well as any of the structures
within the company that help to maintain its culture.

CASE STUDY ACTIVITY
Read the Amazon and Toys ‘R’ Us case study on pages 53 to 54 of the Hollensen
book and attempt the following questions:

1. Identify the core competences of Amazon.com and Toys ‘R’ Us. How
are these competences in harmony with each other?

2. Does the Amazon-Toys ‘R’ Us relationship make sense from


resource-based view (RBV) and a market orientation view (MOV)?

3. What are the chances that the partnership will turn out to be a financial
success?

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CASE STUDY FEEDBACK
1. The core competences of Amazon are:

a) The handling of customer service on-line.

b) Taking care of all aspects of warehousing.

c) Handling the development of the website and front end


operations like taking orders and customer service, again in large
volume.

The core competences of Toys ‘R’ Us are:

a) Merchandising (being able to display products effectively) and


purchasing expertise, and offering the right product mix to suit
their customer base.

b) Taking care of relationships with toy manufacturers.

c) Toys ‘R’ Us, in collaboration with its bricks-and-mortar parent,


will select, purchase and manage inventory.

In this alliance both partners are able to concentrate on their key


strengths. Amazon is very good at taking care of all online sales,
whereas Toys ‘R’ Us is very good at finding the right product-mix for
the end-consumers and presenting the goods in the most appropriate
way (merchandising) as well as maintaining good relationships with
suppliers (the toy manufacturers).

2. The alliance between the two companies shows consideration for both
the resource based view (RBV) and the market orientation view
(MOV). However, concentrating on each other’s core competences
has its starting point in a resource based view (RBV). Trying to get as
many internet users to see the offers of Toys ‘R’ Us on Amazon’s
website, is based more on MOV.

3. This is always a difficult question to answer. On the face of it the


alliance makes sense and adds value to each of the companies. The
success of the venture will depend principally on their being demand in
excess of their estimated costs, and that both partners can deliver on
their promises. The fact that sales must increase by 300 to 400%
suggests that the targeted new sales are high.

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Developing the firm’s competitive


advantage
Having considered the core competences of the firm, we have an
understanding of some of the factors which make our firm competitive.
We are competing with a number of different firms, all with unique
strengths and some weaknesses. While our own firm is successful and
profitable, we can’t allow ourselves to become complacent. There are far
too many examples of organisations that lose their position in the
marketplace, with a subsequent loss in profits and valuable staff. We
must always be aware of what being competitive means in our
marketplace. Perhaps we are a company which has gained market share
as a result of taking advantage of a competitor’s weakness. It is too easy
for a company to be so focused on itself that it forgets to monitor its
competitors’ business. The main factor which we need to take into
account is that we do not operate in isolation in a marketplace and we
must always research our competitiveness in relation to our main
competitors. Perhaps the biggest threat to our business is now an
overseas competitor, and monitoring an overseas competitor presents
an even bigger challenge to us.

Hollensen (2003) identifies seven factors that contribute towards


competitive advantage and we should be able to measure our firm’s
capabilities with those of our competitors. If we are unable to provide
the data from our existing information sources, then we should look to
fill in the gaps through research activity.

1. Economies of scale
In order to understand the concept of economies of scale we need to
consider the manufacture of a fast moving consumer good. One of the
latest razor blades developed by Wilkinson or Gillette, is made in highly
efficient, up­to­date production plants, which produce this high quality
product twenty fours a day in very large quantities. When developing
this new product, speed and ease of production is a major factor to be
taken into consideration, and will contribute towards a relatively low
cost of production. This cost of production might be so low that firms
will be reluctant to release the actual cost. This low cost will bear no
relation to the final price to the consumer. Firms have to take into
consideration the high research and development costs which have to
be covered in the sale price of the product. It is estimated that the new
Gillette razors absorbed research and development costs of around one
billion dollars.

Firms who enjoy considerable economies of scale are also very efficient
in using up their production capacity. If we refer back to the
Amazon.com case study, we saw that Amazon has excess capacity
which it needs fill. By filling this excess then it will be able to spread
more of its fixed costs. Those firms who have the lowest production

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costs may use this as a way of deterring new entrants into the
marketplace.

2. Economies of Scope
Economies of scope are enjoyed by key players in international markets.
Hollensen (2003) includes the transfer of resources, transfer of
experience and the transfer of ideas and successful concepts across
products and markets. Firms who enjoy economies of scope are able to
gain much quicker entry to new overseas markets, taking advantage of
the skills and know­how developed by the company in other markets.
For major players such as Colgate and Unilever, they are able to transfer
key personnel to developing markets, and regularly share ideas and
good practice with colleagues in other markets. Linked to this is also the
power of the brand, which we will discuss in more detail in Unit 5,
which makes it much easier to penetrate new markets or introduce new
products or services.

The discipline of New Product Development has been revolutionised by


the transfer of knowledge allowing companies to reduce the amount of
time it takes to introduce new concepts to the marketplace.

3. Strategic thinking as a core competence


In order for companies to compete effectively, they should think
strategically. While driven from the managers within the organisation,
the challenge is to develop a culture of strategic thinking at all levels.
The key to achieving this is through the recruitment of strategic
thinkers, people with a proven background and to introduce training in
strategic management within the organisation.

4. Exploitation of local advantages


One of the issues facing companies who operate in global markets is
whether to standardise their product or service offering or whether to
adapt it to meet the local market conditions. While there are obvious
cost advantages in introducing standardised products, it is often
necessary to adapt in order to move closer to the needs of the consumer.
Global companies who are aware of the need to take advantage of local
conditions are likely to enjoy more success.

5. Ability to provide global services


Companies with a global outlook look to take advantage of the
considerable benefits which global players can enjoy. Global companies

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use their developed systems and expertise as a source of competitive


advantage.

6. Company-specific competitive advantages


In order to remain competitive, companies need to understand the
factors that give them a competitive edge. Research suggests that it is
the relationships that they have built up with their customers, and being
able to offer services which their competitors find difficult to match, that
gives them an advantage in the marketplace. This may be as a result of
their manufacturing excellence and the relationships developed with
their distributors or customers.

7. Using human resources in developing


competitive advantage
Strategic marketing must also consider the role of people in the
planning process. There are many excellent books which explore the
issue of human resource management including Leopold et al. (2004).
Those companies who invest in training and rewarding staff usually
benefit from a more motivated workforce and a lower staff turnover
rate. It is too easy for firms to take their workforce for granted or to even
look overseas to outsource some of the functions of the organisation.
However, the investment in developing firm­specific skills and in
attempting to introduce a more people­focused culture may give them a
competitive advantage. Employees who have a strategic awareness will
not only make a more positive contribution to the efforts of the
organisation, but are also more likely to look for ways of improving the
processes within the company.

Levels of International Competitiveness


In order to gain a better understanding of the three levels of
competitiveness see Hollensen (2003), page 69.

Analysis of national competitiveness


Using the Porter Diamond, Hollensen (2003), we need to take into
consideration factor conditions, demand conditions, related and
supporting industries, firm strategy structure and rivalry, chance,
government and competition analysis in the industry.

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Factor conditions
In our analysis we should look at the factors of production which might
give a nation a competitive advantage. This might be natural resources,
skilled workforces or a specialisation in certain industries. We must also
consider service industries and the factors which impact service. We
might consider the southern coasts of Spain which not only favour
tourism but also have developed into regions for sporting and corporate
events. We must also take into consideration the availability of capital,
which is a feature of the most developed economies. Hollensen (2003)
cites the example of Japanese firms who were forced to consider the
automation of their production process as a result of a shortage of
skilled labour and production space.

Demand conditions
We need to understand the demand conditions in the market place and
how this impacts on competitiveness. Consider factors such as dense
populations, a feature of Spanish and Japanese cities or less dense
populations in countries such as Finland or Sweden. Germany has
become a major producer of manufacturing systems as a result of their
heavy emphasis on the technical capabilities of their products. Saab
produced cars in the seventies and eighties for the harsh winter climate
of Sweden, and rapidly developed a reputation for more robust vehicles
which easily stood up to the demands of less harsh winters in other
parts of Europe. Fuji in Japan developed the reputation for producing
high quality products for photographers as a result of the demands of
their own discerning Japanese consumers.

Related and supporting industries


It is normal for the suppliers of components to be based near to their
customers. This makes economic sense from the point of reducing
transportation costs, but also it enables a concentration of skilled labour.
Not only do companies benefit from proximity to suppliers or
customers, but there also advantages in terms of marketing
connections. Hollensen (2003) cites the example of the semiconductor
industry in Japan which is based near the electronics manufacturers,
who are their principal customers.

Firm strategy, structure and rivalry


Hollensen (2003) considers the results of Porter’s studies, which
showed that strong domestic competition in an industry, enabled
companies to compete more effectively in global markets. In order to
face intense competition, the firms had invested in new technologies,

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product development and training in order to improve production and


skills development.

Chance
When we consider the history of particular industries, they may be
based in one particular country simply because the inventor of the
product came from that country and decided to set up business there.

Government
The support of governments can be a key factor in the development of
major industries. They can achieve this through developing the
necessary infrastructure, such as transport or education. In addition, tax
incentives and assistance with the building of production facilities can
also encourage companies to locate in a particular area.

Competition analysis in an industry using


Porter’s 5-forces

Pot ent i al
ent r ant s

Threat of
new entrants

I ndust r y
Bargaining power Bargaining power
compet it or s
of suppliers of buyers

S uppli er s B uyer s

Rivalry among
existing firms

Threat of
substitute products
or services

S ubst it ut es

Source: Reprinted with the permission of the Free Press, a division of Simon & Schuster, from Competitive Strategy:
Techniques for Analysing Industries and Competitors by Michael E Porter. Copyright 1980 by Michael E Porter

Figure 2.3 Porter’s five forces model.

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If we look at Figure 2.3 we see that Porter considers the factors which he
considers to be important when assessing a firm’s competitiveness in
the market. The players within an industry are those that produce the
same products or those that might be considered a substitute product.
As you will see in Figure 2.3, the market is made up of new entrants to
the market, suppliers, buyers, substitutes and market competitors.

Hollensen (2003), page 74­75, uses the Porters’ 5­forces model to analyse
the metal container industry. The suppliers to the industry are potential
future competitors as are their buyers, and there is a considerable threat
of substitute products and the entry barriers to the market are low.
Overall the profit potential of this market is also considered to be low.

Market Competitors
Hollensen (2003) discusses the degree of rivalry between existing
competitors in the market. The level of rivalry will depend on the
following factors:

The concentration of the industry


In markets where there are competitors with a similar market share then
this is likely to lead to intense rivalry. The United Kingdom grocery
sector is characterised by intense competition between Tesco,
Sainsbury’s and Asda.

Rate of market growth


In analysing the market we also need to establish the current growth
rate and to try and estimate the future growth rate. In markets with a
slow growth rate, the fight to retain market share is much fiercer, and
where the growth rate is stagnant then companies will need to be more
competitive in order not to lose share.

Structure of costs
In industries where there are high fixed costs, there is a tendency to cut
prices in order to use up excess capacity.

Degree of differentiation
In analysing our product or service offering we need to establish
whether our offering is differentiated from those of our competitors. If
they are similar then we can expect much greater competitive activity.

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Undifferentiated products in a slow market may be drawn into price


competition which can have a serious impact on profitability.
Companies who are drawn into price competition find that it is very
difficult to break away from this strategic direction. The ultimate result
is a highly undifferentiated market with very strong price competition
and falling profits for all players in the marketplace.

Switching costs
When we enjoy a good relationship with our customers and have
attempted to tie them in to our product or service, it becomes very
difficult for them to switch to one of our competitors. Early distributors
of ice cream gave their customers free refrigerators in return for
distribution rights, effectively putting a barrier in place for competitors.

Exit barriers
When markets become saturated and competition is fierce, the strategic
alternative for some companies will be to look at new markets.
However, if they are tied in to a market due to high cost of exiting, or
where there are a lack of opportunities in other markets, then firms will
find it difficult to leave the market and be forced to continue competing.

Suppliers
In markets where suppliers face little competition, they are in a strong
bargaining position to fix process. Hollensen (2003) cites the example of
Microsoft as suppliers to the computing industry. As their products are
in effect the industry standard they are in a strong position to negotiate
prices with their customers.

Car manufacturers have taken more control of the supply of


components to their business by appointing several suppliers of the
same component. In this way there are much keener discussions on
price. An alternative open to companies is vertical integration, whereby
they take a stake in their suppliers or set up their own supplier.

Buyers
Buyers have more power over their suppliers when they are the major
customer. When your leading customer accounts for more than 60% of
your total business then this gives them considerable purchasing
power. In order to reduce the dependency on a buyer then firms must
look to increase their total number of customers and produce highly
differentiated products.

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Many companies compete fiercely to have their products sold in major


supermarket chains. Supermarkets need only sell those brands which
enjoy a strong position in the marketplace and enjoy a loyal consumer
following. While supermarkets stock many thousands of product lines,
you will notice that there simply isn’t room for all of the fast moving
consumer goods (fmcg) brand names. A new manufacturer will find
that it is very difficult to achieve distribution of new products, and those
that do so usually have to accept the supermarket’s terms and
conditions.

Substitutes
When analysing our market we need to be aware of substitute products
or services which might replace out existing products or their
components. In order to counter this threat we should build up barriers
which, should our customers wish to change supplier, would incur
considerable switching costs.

New entrants
New entrants to a market will have a significant impact on competition.
In order to reduce the possibility of new entrants we need to consider
our brand identity, and the impact of our brand in the market place. A
highly differentiated product with strong brand identity will make it
harder for new products to join the market. Other barriers to entry are
businesses that require a significant investment or where expenditure
on research and development are high. We discussed the men’s razor
market earlier in the unit. Wilkinsons and Gillette both produce highly
differentiated products as a result of their investment in manufacturing
facilities and high expenditure on research and development. They both
also enjoy very strong brand identities, a reputation for quality and
excellent relationships with their distributors. While this is an attractive
market for other companies to enter, Wilkinsons and Gillette have made
it difficult for new companies to join.

The collaborative ‘five sources’ model


Companies are increasing looking to collaborate with competitors as a
strategic alternative to competition. There is a recognition that each has
strengths or weaknesses in particular markets, and by working together
they are able to better serve their customers.

Hollensen (2003), in reviewing the work of Burton (1995), considers the


five sources model alongside Porters’ five forces model.

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Market competitors
Here companies collaborate with competitors who make similar
products, which has become a feature of the international car
components market.

Suppliers
Here companies work with their suppliers, integrating vertically, which
is particularly noticeable in the Japanese market for electronics and cars.

Buyers
Here companies form alliances with specific customers which
guarantee them a certain level of distribution.

Substitutes
Companies choose to work with companies who sell or produce
substitute products. Hollensen cites the example of mobile telephone
companies merging with traditional telephone providers, which has
enable them to increase the size of their network.

New entrants
Here companies diversify into new areas, some with a technological
link. The merging of media companies with internet providers is an
example of this strategy.

Value chain analysis/benchmarking


Hollensen (2003) considers competitive advantage with companies who
are operating at the same competitive level in the market place.

The competitive triangle


There are two factors to be taken into consideration. The perceived
value of a product or service which includes the way that our customers
judge our whole service in terms of delivery, training, after­sales service
and new product developments, and the relative costs of all of these
factors.

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Perceived value advantage


In all of our activities we are judging value from the customer’s point of
view, which not only includes the tangible benefits, but also the
intangible factors such as brand identity and reputation. Hollensen
(2003) suggests that our task is to understand what value the customer
is seeking from our products or services, or in other words the value
chain.

Hollensen suggests that we look at the traditional 4P marketing mix of


product, price, place and promotion, as well as the additional factors of
people, physical aspects and process highlighted by Booms and Bitner.

People
Here we must consider not only our customers but also the people who
work for us. It is important that our staff receive sufficient training to
understand how important their role is in delivering quality of service,
and how this adds value to our business.

Physical aspects
Here we consider the location of our experience and the factors which
we introduce to make our service more tangible. This involves our
premises or, in the case of a hotel, the physical environment.

Process
Firms are investing heavily in new technologies in order to make the
business process more effective for customers. This includes using new
technology to improve booking systems and to reduce the time
involved in purchasing good or services. Low cost airlines have
invested in efficient on­line booking systems which are easy to navigate,
which has given them a competitive advantage over traditional airlines.
Their competitive response has also been to develop similar booking
systems.

Relative cost advantage


Hollensen (2003) suggests that successful businesses are able to provide
the highest possible perceived value to the final customer at the lowest
possible delivered cost. Firms must also have an idea of their
competitor’s costs at all levels of the value chain, which in most cases
will be based on estimates.

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Hollensen considers the factors that affect costs:

Capacity utilisation
This is better expressed in terms of percentage of capacity used. A
restaurant with 100 covers (seats) which uses on average 60 per night,
assuming that they only have one sitting, is working to 60 per cent
capacity. If a firm does not use its capacity to the maximum then it
incurs costs.

Linkages
If we invest in improving the quality of our service, then this might lead
to a reduction in the cost of after­sales service.

Interrelationships
Companies who belong to a group or conglomerate can work together
on research and development or sharing other business activities as a
way of reducing costs.

Integration
Companies are increasingly looking to outsource some of their
operations in order to reduce costs.

Timing
Companies who are to first to reach the market with a new product or
service can achieve significant cost savings particularly as they don’t
face any direct competition.

Policy decisions
Companies who introduce policies on customer service, their choice of
distribution channels or on their product ranges, can achieve significant
costs. A number of companies who have extensive brand portfolios
might sell off less profitable brands or even look to kill off brands which
they don’t believe will be successful in the future.

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Location
In an industry where the transportation or warehousing of goods
accounts for a high percentage of the cost of a product or service,
relocating production might offer significant cost savings. Gillette
introduced centralised production of their shaving products in Europe
in an attempt to increase specialisation or reduce costs.

Institutional factors
Uncontrollable factors such as local taxes or changes in government
regulations will have an impact on costs.

Competitive benchmarking
Benchmarking is essentially about being able to compare your product
or service with those of your competitors. While this might be from a
technical point of view, whereby you obtain samples of your
competitors’ products and break them down (a practice which is often
associated with the automobile industry), we need also to benchmark
customer perception of our company and our competitors. The most
effective way of measuring these competitive differences is through
market research and in­depth interviews with customers. Hollensen
(2003), page 90, suggests a framework for competitive benchmarking.
(See Figure 2.4)

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Examples of value chain functions Customer Own firm Key competitor


(mainly downstream functions) (Firm A) (Firm B)

Importance to How do customers How do customers


customers rate performance rate performance
of our firm? of key competitor?
(key success factors)

High Low Good Bad Good Bad

importance importance

5 4 3 2 1 5 4 3 2 1 5 4 3 2 1

Uses new technology

High technical quality and


competence

Use proven technology

Easy to buy from

Understands what customers want

Low price

Delivery on schedule

Accessible for enquiries

Takes full responsibility

Flexible and quick

Known contact person

Provides customer training

Takes account of future


requirements

Courteous and helpful

Specified invoices

Gives guarantees

ISO 9000 certified

Right first time

Can give references

Environment conscious

Figure 2.4: Framework for competitive benchmarking.

When we carry out our benchmarking exercise we use the value chain
functions and ask customers to rank our company against our
competitors in order to give us a more accurate measure. The results of
the interviews should reveal our key competitive strengths as well as
opportunities for improvement.

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ACTIVITY
Outsourcing

We have made some reference to outsourcing, where a company contracts out


parts of their operations to other organisations. This might be outsourcing
production, parts of the production process, training and staff development,
distribution and logistics, marketing activities and even the personnel or human
resources function.

What are the advantages and disadvantages that outsourcing presents for
organisations?

ACTIVITY FEEDBACK
Outsourcing

There are many examples of how outsourcing has been used in business. In the
past five years this has even involved some service industries being outsourced
to overseas countries. The impact of new technologies has made this more
feasible. Nor are we presenting this as a new idea. Historically companies have
used outsourcing to prevent the need for moving to new premises. Some of
you might work for training organisations, which in the past may well have been
outsourced by a large company.

The advantages and disadvantages of outsourcing:

Advantages Disadvantages
Allows companies to make cost savings in a wide You need to be able to convince companies that it
range of areas is in their interests.

Enables companies to concentrate additional Can put a strain on traditional communication


financial resources in different areas processes

Can make companies more competitive which Can have the same impact as introducing new
ultimately can improve their performance in the staff, but can be even more unsettling for existing
market staff

Allows specialists to take control of important Can create problems with staff and unions
areas such as production or distribution

Allows companies to improve quality standards Can be a problem where it leads to the
and become more efficient outsourcers having direct contact with customers

Short term savings might be made, but lost if this


leads to higher transaction costs overall

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Development of a dynamic benchmarking


model, Hollensen (2003)
Stage 1: Analysis of situation (identification of competence gaps)

We need to provide our own internal assessment of the firm’s current


performance in the market place and those of industry experts who can
give us their assessment of the market and its future potential. We must
focus on critical success factors (Hollensen 2003) and to what extent we
meet the demands of customers in the market. We must determine
whether our competences match the expectations of customers.

Stages 2 and 3: Scenarios and objectives

We need to develop future scenarios for the market, including the


development of competitors in order to identify how near we will be to
match future demands. We should then set our objectives in line with
our own competences and the likely changes in the market.

Stage 4: Strategy and implementation

Our next stage is to set out our future strategy and implementation
plans. We will develop this further in Unit 5.

CASE STUDY ACTIVITY
Read the BBC Worldwide case study in Hollensen, pages 100-101, and answer
the following questions:

1. What are the core competences of BBC Worldwide in relation to the


value chain?

2. Define the differences in the business system of the BBC’s TOTP and
the Pepsi Chart Shows. Which of the two chart shows would have the
biggest chance of being successful in the international market?

CASE STUDY FEEDBACK
1. The principal core competence of the BBC is product development in
the upstream part of the value chain. The series ‘Walking with
Dinosaurs’ was recognised as a highly innovative development in TV

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production, and as a result of their partnership with Discovery, they


have been able to sell the programme in a number of key markets.

While the BBC is a government funded organisation, and as such has


limited funds, it has created relationship competences with other
partners in the industry such as Discovery. This has also enabled them
to buy into Discovery’s existing network of customers. Discovery has
two important channels in Animal Planet and People + Arts, which
already enjoy widespread distribution.

2. This is a difficult question to answer, and your current perception of


Pepsi and the BBC will have shaped your answer.

While TOTP is a strong brand in the domestic market, there is no


strong link with the BBC in International markets. The Pepsi Chart
Show, while a newer programme than TOTP, has the benefit of
association with one of the biggest brands ever, Pepsi, and as such can
benefit from this global association.

The future of both shows in the international market will depend on


the marketing resources of both companies. TOTP should be more
successful in Europe as it has existing links, but the Pepsi Chart Show
should be more successful in other markets due to the sponsorship
money available from Pepsi and the reputation of the Pepsi brand name
globally.

REVIEW ACTIVITY
Procter and Gamble to buy Gillette for $ 60 billion?

When rumours emerged at the end of 2004 that Procter and Gamble were to
buy Gillette for $ 60 billion dollars, several business commentators started to
predict the global impact that this might have on their respective businesses.
Procter and Gamble claimed that this was part of their future plans to remain
competitive and ahead of its major competitors. The following facts were
released to the press:

Procter and Gamble has 16 brands in its portfolio with sales of more than
$1 billion per annum.

Gillette has five brands with sales of more than $ 1 billion per annum.

The combined turnover of both companies would amount to around $ 60


billion per annum.

Gillette has an estimated 74% share of the $ 7 billion global wet shave market.

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More than 2 billion people a day use a Procter and Gamble product, while the
same figure for Gillette is 1 billion people per day.

The combined annual advertising budget of Gillette and Procter and Gamble
(P&G) would be around $ 3 billion, with P&G accounting for around
$2.1 billion.

Questions
1. To what extent do you think companies like P&G can increase the
distribution of the products which it acquires when it takes over a
company such as Gillette, which already has a main presence on
retailers’ shelves?

2. What sort of cost savings do you think will be possible as a result of this
merger?

3. Will P&G be able to dictate to supermarket groups such as Wal-Mart


and Tesco as a result of this multi-billion dollar merger?

4. Read the Teepack case study in Hollensen, page 57, and answer the
following questions:

a) State how you think that Teepack has developed its


competitiveness in the global tea bag packaging market.

b) Describe the ways in which Teepack can develop and maintain


customer relationships

REVIEW ACTIVITY FEEDBACK
1. Historically Procter and Gamble have increased the distribution of the
brands they have acquired, due in no small part to their strong working
relationship with retailers. They managed to increase the shelf facings
of the ‘Iams’ range of pet foods. Having presence on retail shelves is a
difficult task in highly competitive markets, and retailers look to work
with companies who can supply products which generate substantial
turnover in their stores.

2. Considering the current levels of expenditure of P&G and Gillette, the


merger will present P&G with several cost saving opportunities. There
should be considerable cost savings due to increased efficiencies in the
supply chain, as well as savings in the outsourcing of some production.
There are likely to be some savings with the merger of research and
development departments. With a combined advertising budget of

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some $3 billion dollars, there should also be some cost savings.


According to figures announced in the press, there may be as many as
6000 jobs saved out of a combined workforce of around 140,000. P&G
have also increased their growth projections form 4-6 per cent per
annum, to 5-7 per cent.

3. Much is written about P&G trying to dictate terms to multiples,


although they would obviously deny this. They perhaps are simply
gearing up, trimming down to take on markets in the next 10-15 years,
and looking to work more closely with retailers. It is more likely that
the merger will put additional pressures on their rivals. The new lines
that P&G have acquired will complement many of the lines they already
carry. Multiples such as Tesco and Wal-Mart have developed very
profitable relationships with P&G and will welcome the addition of
new lines to their portfolios.

4. a) Teepack was able to take advantage of technological innovation.


It was the first firm on the world market with the
double-chamber tea bag technology. Since then Teepack has
further developed the technology and the tea bag packaging
machines have been developed in close relationship with its
customers.

b) Teepack might consider the following ways for trying to develop


and maintain their customer relationships:

The further development of single production machines to


complete tea bag production lines.

They might consider developing the global Teepack service


system, used for advising on and repairing the tea bag machines,
vital for tackling the problem of down time. Further service visits
can be used to gain feedback from customers, to inform future
developments.

Teepack might consider increasing its own knowledge of tea


production, working towards the end-users need for well made
tea.

References
Hollensen, S, (2003), Marketing Management: a relationship approach.
Pearson Education, Essex, England, ISBN 0273643789

Times online, 29 January 2005, Pressure is on rival, not on supermarkets.


www.timesonline.co.uk

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Unit 3

Assessing the External


Environment

LEARNING OUTCOMES
After studying this unit you should be able to:

· Recognise the decision making process that consumers follow before


they purchase a good or service, and identify the factors which affect
their decision making.

· Demonstrate an understanding of and evaluate decision making in


organisational markets and the factors which influence those
decisions.

· Identify the way in which the decision making unit (DMU) works.

· Recognise the role that competitor analysis and intelligence play in


strategic decision making.

· Analyse the competitive situation in the marketplace and identify the


strengths and weaknesses of competitors.

Introduction
If we consider the definition of marketing that was used in Unit 1, and
the underlying principles of marketing, we must focus our efforts on
customers. The term we will use for business to consumer is B2C. We
need to recognise also that while many of our customers are individuals
and purchase a range or products from the most basic such as bread and
milk, to more involved and expensive purchases such as cars or houses,
some customers may also be businesses. The term business to business
(B2B) is used to cover the role of businesses which sell industrial
products or products which are used in the production process such as
machinery. In some texts you may also see reference to Industrial
Marketing. Hollensen (2003) categorises B2B customers as original
equipment manufacturers (OEMs), intermediaries and governmental
buyers. As marketing managers it is our job to try and understand the
process which our customers go through when deciding to purchase

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products. We refer to this as the decision making process whether we


are talking about individual customers or businesses as customers. In
the next exercise you will read about BASF, and learn about how they
deal with their customers.

CASE STUDY ACTIVITY
Read the BASF case study on page 107 in Hollensen (2003) and answer the
following questions:

1. Which of the potential customers presented in the case study should


BASF approach for its liquid thickener Luvigel® EM? You need to
discuss the criteria which you would use to select a customer from the
list in the case study.

Remember that BASF is introducing a liquid thickener, Luvigel® EM,


which reduces manufacturing time and provides better thickening for
the manufacturers of skincare products.

2. Describe the possible decision-making process of a buyer of Luvigel®


EM.

CASE STUDY FEEDBACK
1. We can identify the following companies as potential customers:
L’Oreal (France), Unilever (UK), Estee Lauder (USA), Procter &
Gamble (USA), Benckiser Group (Germany), Revlon (USA), Body Shop
(UK), Wella (Germany), Boots the Chemist (UK). Indeed, working as a
supplier to any one of these giants can generate high levels of business.

The criteria to use might be:

The customer’s yearly production volume of skincare products.

Is the cosmetic manufacturer willing to mention (on the end-product)


that Luvigel® EM is an important ingredient? The benefit of an
association with a key player in the market would be highly
advantageous to us.

How well does BASF and the customer’s organisation fit together?

What is the physical distance and the psychic distance to the customer?

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Based on these criteria, BASF could possibly start with the German
cosmetic manufacturers Benckiser and Wella.

2. The decision making process would need to take the following into
consideration:

The recognition of a problem or need.

The determination of characteristics and quantity of needed products


or services.

The determination of the product or service desired and quantities


needed.

The search for potential suppliers and preliminary evaluation of their


suitability.

The acquisition and initial analysis of proposals (samples) from


suppliers.

The evaluation of proposals and selection of supplier(s).

The selection of an order routine.

The performance review, feedback and evaluation of the relationship


with the customer.

You will now consider some of the other ways of looking at decision making
processes.

Consumer Behaviour
According to Solomon et al (1999) consumer behaviour is the study of
the processes involved when individuals or groups select, purchase, use
or dispose of products, services, ideas or experiences to satisfy needs
and desires.

We need also to understand that a number of different people might be


involved in the decision to purchase a product. We must consider that
the purchaser and the consumer might not be the same person. Research
shows that many successful men do not purchase their own clothes, but
rely on the choice of their partners. We need also to understand what
part an influencer plays in the purchase of a product. Many children are
heavily influenced by their peers when they purchase items of clothing.
Children can also influence many of the products purchased by parents
or guardians during a shopping trip. The importance of ‘pester power’,

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which refers to the pressure children put on their parents or guardians


when out shopping, should never be underestimated.

In understanding the processes that people go through in making a


decision to purchase, we are able to spot traits or characteristics which
will form the basis of future research, and identify potential market
segments. We will explore market segmentation further in Unit 4.

Consumer Decision Making


We need to bear in mind that we are all consumers of products, and if
we can try to understand the decisions that we have to make, or the
decisions that our friends or families take, then we should have a better
understanding of the decision making process. Ask yourself the
following question? Given that skincare products of one form or
another have been around for a number of years, why has it taken so
long for a product like Nivea for Men to be introduced? One of the
reasons is that men have felt uncomfortable talking about skincare or
their use of it. Market researchers have known for a long time that men
and boys have used skincare products belonging to female members of
the family. Perhaps in your own country this might still be the case?

We need to consider a framework to help us understand the way in


which consumers make decisions and what influences them to consider
certain products or services, particularly in the highly competitive
global markets we are researching.

Culture
S Social influence
S t imulus Reference group
Marketing mix

P Psychological factors
P r ocess Physiological factors
( or ganism)
Perceptions and feelings

R Attitudes and beliefs


R esponse Buying behaviour
Buying practices

Figure 3.1 The SPR (SOR) Model.

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Hollensen (2003) suggests that there are three main areas in which we
need to focus our attention. If we look at Figure 3.1, the SPR model, we
can see these three broad areas. These are the stimuli that make us
consider a product, the process we go through in deciding to purchase
this product and the response that we make having evaluated the
alternatives.

When we consider stimuli, these might be from our own messages, as


an organisation to consumers, or the elements of the marketing mix,
such as the way goods are displayed. We might be influenced by people
around us or reference groups to which we belong. It is important to
consider that we might not be conscious of all of these stimuli.

The next stage we go through is the process. Here we are evaluating our
responses to the stimuli which might be psychological factors,
physiological factors or our feelings towards or perceptions of a
product. If this is a new category of product for us then we might take
longer to choose the product.

We then move to the response stage where we are affected by our


attitudes and beliefs, our buying behaviour and our buying practices.
Let us think back to our male cosmetics example. Companies are wary
about introducing such products, particularly as a result of well
publicised failures.

Through all of these decisions we must take into account the fact that
some products are low involvement purchases and therefore require
less consideration. If we are buying an everyday product such as a
newspaper then while we might be attracted to another newspaper as a
result of a promotional campaign or after comments from our peers in
the workplace, we will probably purchase our usual newspaper. If we
are considering a more involved purchase such as an item of clothing,
then we are likely to be affected by various stimuli and may take longer
in choosing to purchase the item.

Hollensen (2003) suggests that when we consider purchasing products


or services, we take into account our perceived importance of the
product and the perceived risk associated with its use. The perceived
risk is usually higher when we purchase a more expensive product, but
also if this product is linked to our self­image. The risk if buying the
wrong item of clothing and the fear of ridicule by peers are factors that
we might take into consideration. If you are not affected by this problem
as a consumer, then you might well be in a minority.

While we regularly purchase some products, there may be others that


we consider but during our evaluation phase decide to buy the products
with which we are familiar. However, the fact that we are considering a
product suggests that we are aware of stimuli, and there might be a
choice of purchase in the future. Companies often target potential brand
switchers in their marketing communications.

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The decision making process


We can try to understand the consumer decision making process
through the decision making model in Figure 3.2. This model might
explain the rational decisions that consumers make, but may not be
accurate when we consider impulse or irrational purchases.

When trying to understand the decision making process for a product


or service, you should try to work through decision making using this
model. Try to consider purchases that you have made recently, or are
contemplating, and ask yourself where you are in the process.

Problem recognition

Information search

Evaluation of alternatives

Product choice

Outcomes

Figure 3.2 Stages in consumer decision-making.

Problem recognition
We need to understand at what stage our customers or potential
customers consider themselves to have a problem which can be satisfied
by purchasing a product. In the case of a car tyre that needs replacing,
we have little option but to consider a purchase. If we are starting to
worry about our image then we will start to consider the actions
necessary to remedy our problem. We might also be influenced by a
new product which makes us consider a solution to a new need. A
kitchen gadget to make liquidised fruit drinks might not be a product
which we considered before, but could be the solution to our need to

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improve our diet. In many developed countries, where lifestyles are


having an impact on the amount of time people have to spend on
household chores, consumers are actively looking for products to solve
their problems. Consumers will now pay a premium for solutions to
these problems. Perhaps you live in a country where consumption of
air­freshening products is low. You might be surprised by the
obsessions of consumers in more developed countries. The need for
houses to smell fresh has seen the introduction of premium­priced
plug­in air fresheners that release fragrances on a regular basis, and no
doubt in many of these houses bad odours were not actually noticeable.

Remember also that these problems may have existed for a considerable
amount of time. Investment in researching this area, may bring
rewards. Consider the history of the suitcase. We have used this form of
product for more than two hundred years. However, it is only in the last
ten years or so that manufacturers decided to put wheels on cases. This
has now become the standard for the industry.

Information search
If we consider the case of the tyre which needs replacing, then we might
refer to our stored information. We are aware that Kwikfit offer a rapid
tyre change service, and we are aware of their location. The fact that
Kwikfit have invested in communicating information to their customers
has paid off in this instance. We might also go back to memory search
and remember the garage which we used before. If we haven’t
encountered this problem before then we must carry out an external
search; check in the phone book, look on websites or even contact
people who we know might be able to offer some guidance. For some
consumers their search for information is ongoing.

If we consider that one of our most important roles is to provide


information to existing or potential customers, then we might be
helping people through the decision making process. In highly
competitive markets this is essential..

Take the example of purchasing a holiday. In many cases the search for
information for holidays begins immediately after the last holiday. We
need to try and understand the impact that a holiday might have on a
family or group of friends. This is a considerable investment, and may
account for 15% of a person’s annual income. Why would somebody
spend so much on an activity that only accounts for 4% of the whole
year? There are several reasons. The holiday represents relaxation, time
away from the pressures of work and home life, it might be an
opportunity to try out new activities and it is a chance to make
memories. We now see that this is therefore a very important purchase.
At what stage then do we need to send out information to our
customers? In some cases straight after the last holiday, or in other cases
at times when families are likely to be gathered together. The annual
Christmas holiday in the UK is a time when television adverts are

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dominated by holiday companies. Is this because the family are reliving


there previous holidays?

How do we know that this is the information search for purchasing


holidays? The answer is that we invest in market research to try and
understand our customers and their decision making habits.

Evaluation of alternatives
We now pass to an evaluation phase having stored the information that
we need, and in many cases having several brands to choose from. As
marketing managers we are still interested in researching this phase as
this can give us some indication about how our consumers arrive at
their final decision. Solomon et al (1999) looks at ways of identifying
these alternatives.

In Figure 3.3 we see that our alternatives can be broken down into three
sets. The evoked set includes those alternatives that are already in the
memory or our retrieval set, as well as those which are readily available
and on display in a retail setting. Research tells us that in certain
product categories we may have 5 or 6 brands in our evoked set. This
will vary across product categories. If we are aware of products, but
have no intention of buying, then these are in our inept set. If there are
products of which we are not aware and, therefore, unlikely to
purchase, then these are in the inert set.

All alternatives

Evoked set Inert set Inept set

Retrieval set Prominent products


in environment

Figure 3.3 Identifying alternatives.

It is essential that our product is in a consumer’s evoked set as this gives


us more chance of being considered. If our research indicates that we are
not in the evoked set then we can set this as one of our objectives, and
develop our marketing programme to try to achieve this.

We must have research data to help us understand the alternatives open


to our customers. Consider loyal purchasers of our product. If we
believe that our loyal customers will never purchase a competing

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product, then we must invest in maintaining this loyalty. You might be


living in a country where there are many established products. Perhaps
you bank with the same bank that your family has always used, or drink
the same brands as your family and friends. Even if your customers are
loyal, you can’t take this for granted. Traditional businesses, such as
banking,, have now started to suffer from increased competition, and
their customers have moved on to more attractive alternatives, even
though they had been banking with the same company for more than
twenty years.

If you are working with a company that sells to consumers, can you
categorise your consumers in terms of loyalty to your brand? What
percentage of your customers might consider switching brands? If you
can’t answer these questions then you need to address this through
market research.

Product choice
When consumers are making their final choice they are looking for
factors which differentiate products. When products have similar
attributes then consumers may have to look for other reasons to
purchase. Solomon et al (1999) suggest that in order for companies to
address this issue they should look to convey three specific types of
information in their marketing communications. It should point out the
differences between attributes of brands. It should supply the customer
with a decision making rule, and finally that it convey a message that
shows how the customer used the product when he or she last
purchased it.

The Fishbein Model is used to try and establish a consumer’s attitudes


to products. It is a multiattribute model as it tries to measure more than
one attitude. Solomon (2002), suggests that the Fishbein Model can be
used to help understand the decision making process. We can use the
model to measure the attitudes of a number of different product
attributes, which enables us to measure one brand against another.

Hollensen (2003) considers the four attributes we might use to evaluate


products or services.

Cost attributes
Here we need to consider not only the cost of purchase, but also the
costs associated with operating, repairing or with selling on the product
when we want to replace it.

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Performance attributes
These include the quality of the materials used, how reliable the product
is and how generally it performs. This includes such attributes such as
taste, safety or efficiency.

Social attributes
These include some intangible benefits such as its reputation, image and
popularity with friends and peers, style or fashion.

Availability attributes
We need to consider how easy the product is to purchase, such as a
snack bar or soft drink, if there are credit terms for more involved
purchases such as a car, or other factors such as delivery time and
quality of service.

Try to think of the attributes of the products that you buy on a regular
basis. Are these attributes important when you decide to go and eat out
or go out to meet friends? What are the alternatives?

Branding plays a significant role as far as product choice is concerned.


The power of the brand is immense in encouraging loyalty and in
communicating a consistent message to customers. In Unit 5 we will
look at the importance of branding.

Consider the importance of brands in your own decision making. How


important are foreign brands compared to domestic brands? Consider
the situation in China, where a number of new domestic brands are
challenging more established foreign brands. What does foreign mean
to you? Does it represent luxury, better quality, the acceptance of your
peers or is it an inferior product?

Outcomes
Once the consumer has made the final decision to purchase, he or she
will either be satisfied with the purchase or dissatisfied with the
purchase. If the purchase represented a level of risk to the consumer,
then it is still likely that there are doubts. Consumers will very often
question their own purchase, which we refer to as cognitive dissonance.
Car manufacturers target recent buyers with communications to allay
their fears and to convince them that they have indeed made the right
decision. Once the purchase has been completed, the consumer then
returns to the problem identification and is open to information about
this or new products. Car manufacturers have to monitor this period
quite closely. A car buyer who replaces their car every year will be open
to receiving information about new cars on a regular basis.

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Try to think of a purchase that you or your friends have made recently
where you are considering whether or not you have made the right
choice. Have you had to contact the supplier about the product? Many
companies now see after­sales service as important as the purchase in
helping to maintain their client base. The buying of computers is such a
purchase. Consumers in developing countries are starting to invest
heavily in personal computers. What happens when the computer isn’t
working as well as you expected. How easy is it to contact the
manufacturer? Do they resolve the problem quickly or are you made to
feel guilty by the people you deal with on the phone. If you are able to
deal with these issues quickly, then you will almost certainly add value
to the brand in the eyes of your consumer.

ACTIVITY
Ford car dealers

One of the problems that Ford faces in a number of its markets around the
world, is the reputation and service of the dealers who sell Ford cars. In many
cases these are private companies who represent Ford, and usually work
exclusively with Ford. Perhaps understandably one of the problems is the sales
person’s understanding of customers. They are given sales targets, and in many
cases their basic salary is low, with the incentive to make money by taking a
commission on every car that they sell. The average sales price of a new car is
usually around $ 16,000. One of the frequent complaints of the sales people
themselves is that too many people visit their showrooms just to look at the
cars, and seem to have little intention of buying. The sales people refer to these
as ‘tyre kickers’ and refer to people who leave without a buy as a ‘walkout’.
One of the problems with sales people is that they can be seen to be too keen
to get the sale, a factor confirmed by ‘mystery shoppers’, who are people sent
by market research agencies undercover to test customer service in
dealerships. Female customers also complain that male sales people tend to be
patronising, and in a case where they take a male companion to the showroom
with them to help them buy a car, find that the sales people usually always
direct their sales pitch to the male, even thought it is the female who has the
budget to buy the car.

Using the knowledge that you have gained from studying the decision making
process, give some advice to the dealerships to suggest how they might change
their approach to the people who visit their showrooms.

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ACTIVITY FEEDBACK
There are several areas to address and you will have listed some of the
following:

1. The first factor to take into consideration is that a car is an involved


purchase, and requires considerable thought on the part of the buyer.
It is a basic error of a sales person to assume that it is the male who is
making the purchase.

2. Consideration sets – Ford may be part of a consideration set, and so


the potential customer is collecting information, has several questions
to ask, and therefore must leave the showroom satisfied. Even if the
Ford is the best car that they have seen, they might still move on. A
sales person needs to establish if the customer has an information gap
that perhaps they could fill now, or after they have left the showroom.
Ask for this person’s details so that more information can be sent.

3. Showroom – remember that for most customers this might be the only
opportunity to see a car close up, hence the title showroom. Many car
dealers encourage people to visit their showrooms and offer advice
and information in a no pressure environment.

4. Decision time – even when somebody is armed with the information


they need they still might wait before they take a decision. Try to get
the potential customers details and keep sending them information on
a regular basis. It just might jog the memory.

5. Repeat purchase – many car buyers have a purchase cycle for cars. A
‘car interested’ person needs to visit showrooms so that they can make
informed decisions at a later date. The showroom should be an inviting
place with refreshments and information to help this type of potential
customer.

6. ‘Die hards’ – these are your brand evangelists. They help to sell your
cars to their friends. They should always be welcomed and offered
information so that they go out and spread the word.

7. Cognitive dissonance – remember that current customers may still be


anxious about their purchase. A sales person should try to maintain
regular contact to reassure them about their purchase.

You may have made more specific points and these should generally be in the
area of improving customer service and presentation of the showrooms.

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Influences on consumer decision making


We need to explore further the factors which influence consumer
decision making and we must try to understand to what extent these
factors affect our products or services.

Needs
Maslow’s classification is often used as a framework for understanding
the needs of customers. These are considered to be the five basic needs
of humans:

1. Physiological – water, food, shelter, sleep.


2. Safety – security and protection. These needs are taken into
consideration when mobile phones are bought for children or
partners, and may be an important reason why more women
drive cars.
3. Love and belonging – usually family and friendship. In a
developed society where more single people choose to live by
themselves and where the number of single households increases
annually, this has become a very important consideration.
4. Esteem – status, prestige and self respect – these may be taken
into consideration when purchasing luxury cars. Consumers may
well use products in order to improve their self­image.
5. Self actualisation – self fulfilment and personal achievement –
increasingly these needs are being met by products or services
designed to target high achievers and those looking for self
fulfilment.

Perception
According to Solomon (2002), perception is the process by which our
sensations, such as how we respond to light, colour, sound or odours,
are selected, organised and interpreted. Hollensen (2003) suggests that
consumers tend to avoid information that contradicts our current
beliefs and attitudes. The current legislation whereby manufacturers
print stark warnings on their packaging is likely not to be noticed by
smokers.

Memory
Hollensen (2003) discusses the idea of short term and long term
memory. Information is processed in the short term memory and if
stored will pass to the long term memory. As consumers we are

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constantly bombarded by short term messages, many of which we will


never remember. However, when faced with a decision to make about a
new category of product, or one that we haven’t purchased for a while,
memory or recall of an advertising message will have more of an impact
on our decision than we realise.

Solomon (2002) considers the way in which we store information.


Stored information will only be important if we can attach some
meaning to it. Solomon suggests that messages we receive from adverts
may be affected by the type of programme being shown just before the
ad break. Research shows that we recall less when adverts are placed
during stop­go sporting activities. Solomon (2002) states that recall of
the most recent TV advertisement that we saw can be as low as 7%.

Attitudes
Attitude surveys are used to measure our attitudes. We must aim to
understand consumer attitude towards our product or service, and if
necessary we may need to try and change attitudes.

Our attitudes are likely to affect the purchases that we make, and it is
therefore an important part of consumer behaviour. We can form
attitudes towards a product simply because of the way that it is
advertised. The main objective of the advert may simply be to change
consumer attitudes. Solomon (2002) suggests that some adverts are
aimed at our emotions and attempt to evoke positive feelings towards
the product. We must also consider tracking consumer attitudes over a
period of time in order to try and identify changing attitudes.

Socio-demographic variables
Age/social class/demographics

These variables help us to try and categorise our customers and can
form the basis of early attempts to segment the market. Age usually has
some impact on the products we consume. In particular we need to be
aware of products or services which make us feel better about ourselves
and which perhaps are more associated with younger age groups.
Think of the products which we consume in order to make us feel or
look younger. Social class differences are more noticeable in some
countries than in others.

It is evident in developing markets that older consumers are changing


their consumption behaviour. Solomon (2002) refers to this as age
subcultures. Many consumers in the 55­65 age group began their adult
life in the sixties, and grew up experiencing more freedom than
previous generations. This group are now approaching retirement and
are trying to relive their earlier experiences. As a result this group does
not conform to the conventional idea of an old aged pensioner. They

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demand new types of products, and look for specialist holidays and
social activities.

Lifestyles
The way in which we live our lives is reflected in the products or
services that we purchase. There are currently regular television
bulletins about lifestyle and diet. There is a strong association between
fast foods, considered to be healthy and nutritious, with obesity and
lack of fitness. Such is the problem that the UK and USA governments
are putting pressure on the food industry to promote healthier eating.

Culture/subculture
Culture has many definitions. It is shared beliefs, attitudes and
behaviour patterns which are passed on from one generation to the
next. A subculture is a group within a culture who might share similar
ideas.

In trying to understand culture we must focus on the way in which


cultural beliefs or values affect the purchase decisions that we make.
Solomon (2002) considers the introduction of the TV dinner, which
reflected changing family values and traditions.

Reference groups/family
We need to understand to what extent our family of reference groups
have an impact on the goods or services which we produce. These can
also include family and colleagues and their attitudes to products may
influence us more than we realise.

The family
It is difficult to measure the impact of families across different borders.
Consider the Chinese policy of one child per family. This means that
there will be a whole generation of consumers who do not have aunts,
uncles or cousins, and who are increasingly spoiled by parents and
grandparents who invest huge sums in their ‘little king’ or ‘little queen’.
Consumption of personal computers for young people in China has
escalated as a result of this phenomenon.

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Family life cycle


The family life cycle shows how households spend their income over
their lifetime. Once children have left home then parents reach their
peak in spending and very often purchase goods that are rewards, such
as expensive motorbikes, sports cars or cruise ship holidays.

In some cultures, the extended family (whereby two to three


generations live in the same household) is quite common, whereas in
some developed markets this happens very infrequently. Solomon
(2002) talks about the nuclear family, which consists of a mother, father
and one or two children living in a typical household. While the average
number of children per family is around 1.4, there is a common
perception that mother, father and two children is the typical
household. In the United Kingdom and the USA there are increasingly
single households, with more people choosing to live by themselves
than in previous years. These households consume a high percentage of
ready made food.

Organisational decision making (B2B)


Earlier in the unit we considered the B2B market, where the customers
are other businesses, governments and institutions. The output from
this business will eventually end with the final consumer. Hollensen
(2003) suggests that the demand for these products and services arises
because of a derived demand for the finished products and services that
these companies produce.

The main buyers in the B2B sector are manufacturers, intermediate


customers or resellers such as wholesalers and retailers, public sector
markets, such as schools, prisons and hospitals, and public sector
tendering procedures, where companies bid for contracts.

Buying situations
The three different buying situations in B2B markets are new task
buying, modified re­buy and straight rebuy. Each situation suggests
how much work the seller has to undertake in order to gain business.

New task buying


In B2B, buying a new product or service involves a considerable amount
of thought and planning, and the higher the overall value of the project
then the more time is put into the decision making process. There are
also likely to be a number of people involved in the decision making
process, a factor we need to take into consideration in our
communications when targeting new companies.

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Straight rebuy
In a situation where companies are making routine purchases of our
product or service, we need to ensure that our booking systems and
operations are set up to make this process as simple as possible, and we
should invest time in maintaining and developing this relationship. We
should be aware of potential competition and look to set up barriers to
competition.

Modified rebuy
This is relatively straightforward in terms of decision making, however
as a supplier we must be aware that this might open the door slightly for
a competitor. We should try to turn this situation in to a straight rebuy
situation as soon as possible. We might also be the initiator for a new
product or service, particularly if we have a good working relationship
with our customers. Good companies are constantly looking for new
solutions to problems and work closely with suppliers who help them
to develop these new solutions.

Webster-Wind model for organisational buying


behaviour
The Webster­Wind organisational buying behaviour model is another
useful framework we can use when trying to understand the B2B buyer
or, as it is also called, the organisational buyer.

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E nvir onment al I nfluences


PLESTI + C
These influences are exerted through suppliers,
customers, governments, trade unions, etc.

Or ganisat ional I nfluences


The organisational climate – physical,
technological, economic, cultural
Organisational goals
Organisational structure – communication,
authority, status, rewards and workflow
Buying technology – buying tasks

B uyi ng Cent r e I nfluences


Various roles in the buying centre – users,
buyers, influencers, deciders, gatekeepers
Interpersonal interaction – role expectation,
behaviour, relationships
Group processes – leadership, tasks
performed, structure

I ndividual P ar t i cipant ’s I nfluences


Personal and organisational objectives
Personality of buyer
Perceived role set
Motivation
Cognition
Learning

B uying deci sions

Fig 3.4: Webster Wind model.

Source: Webster FE and Wind Y (1972) “A General Model of


Organisational Buying Behviour” Journal of Marketing 36, April

Environmental influences
We have already considered the PEST figures in this unit, and the
PLESTI + C is another way of looking at the influences exerted upon us

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by external factors such as political, legal, economic, social,


technological, industry and customers. We will discuss this in more
detail later in the unit.

Organisational influences
We must try to understand the climate within the organisation as this
will affect their buying decisions. We understand that if we work with
supermarket buyers that they are under pressure to deliver innovative
solutions within stores, and to consider ways of improving distribution.
We must also try to consider their structure, lines of communication and
the reward structure within the organisation. The closer we can be to
their expectations of a supplier then the more we are likely to be chosen
as a supplier.

Buying centre influences


In line with other models we have to establish the roles of key people
within the decision buying centre or decision making unit. An
understanding of their structure and their roles is more likely to open
them up as a potential customer.

Individual participant’s influences


This person is very often our first point of contact. While they are only
part of a decision making unit (DMU), they are our access to the DMU.
We need to build up an understanding of this individual, their
personality, motivation and their role. Good salespeople build up
important dossiers on their customers in order to develop the working
relationship. Within certain business cultures the role of the personal
relationship is critical to a successful working relationship. Japanese
business culture is heavily influenced by the need for a strong working
relationship, and entertainment is critical.

Evaluating suppliers
If we look at Hollensen, page 137, we can see an example of a supplier
evaluation form for the Chrysler Corporation. If we look at this form
then we can see how our potential customers consider their suppliers,
and against which criteria they are being evaluated. This is an important
checklist for potential suppliers and we can feasibly use this form as
self­evaluation, and as the basis for researching our competitors.

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Influences on the buying process


We need to consider the four key areas which have an influence on the
purchasing decisions of companies. In Figure 3.5 we see that these are
environmental, organisational, individual forces and group force.
Hollensen (2003).

E nvi r onment al for ces

1. Recognition of a problem/need

2. Determination of characteristics and quantity


of needed product/service

3. Determination of the product/service desired


and quantities needed

4. Search for potential suppliers and preliminary evaluation


I ndividual for ces of their suitability and qualifications Or gani sat i onal for ces

5. Acquisition and initial analysis of proposals


(samples) from suppliers

6. Evaluation of proposals and selection of supplier(s)

7. Selection of an order routine

8. Performance (review) feedback and evaluation

Gr oup for ces

Figure 3.5: Influences on the buying process.

Environmental forces

Economic influences
While our primary concern as a B2B supplier is our customer, we
mustn’t forget that ultimately their products are likely to be destined for
the end­user market. As a result, a supplier of car components should
take an interest in trends in the car market. We therefore need to
monitor economic changes and consider the likely impact on our
particular market.

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Technological influences
Current developments in technology and the use of web­based
technologies have revolutionised business, in particular the B2B sector.
Manufacturing processes are increasingly computerised and for many
companies the solutions for their needs lie in technological
developments. This will have significant cost implications and our
ability to finance future developments is very important.

Organisational forces

Strategic solutions
Our relationship with key customers is critical to our survival. Our
understanding of the strategic decisions which our customers need to
take may be important to help us develop our future business. The
supermarket business changed dramatically once distributors formed
strategic alliances with their customers. There was a recognition that
distribution was a not a core strength of the supermarket and, by
passing on distribution to strategic partners, they were able to divert
more resources to their core business of retailing and customer service.

Strategic role of purchasing


Companies are increasingly looking at their costs as a strategic
consideration. They are interested in looking at ways to drive down
costs in order to maintain a competitive advantage. This means looking
at the role of their suppliers and looking for ways of improving
purchasing. In some cases, where they run several divisions, they might
be looking to centralise some of their purchasing. As suppliers we
should maintain dialogue with our main customers and work with
them at ways of reducing costs.

Group forces
The people within an organisation who take part in the decision making
process are sometimes referred to as the decision making unit (DMU).
We need to understand exactly how the DMU works within an
organisation. We might need to target each group with a different
communication message. If we are selling industrial grass cutters then
we must consider the operatives as well as the engineers, the finance
directors and the purchasing department.

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The Decision Making Unit (DMU)


We can categorise the different people within the decision making unit
but we should never underestimate the influence of them individually.

Users
These are the people who use our products or services. Not only are
they important in the decision making process, but they are also key
when we are developing new products which they will use. Their
expertise will be important in the new product development process.

Influencers
These are people who can influence a decision to purchase as they may
be involved in the development of a project. They might be people with
technical knowledge who can influence other members of the DMU.

Buyers
These are usually people within the purchasing department who, while
their main role may be to authorise the decision of the DMU, may also
have some input in the final decision.

Deciders
These people might have the final decision when choosing between
suppliers. It is up to our sales and marketing people to identify who the
deciders are and to make sure that we have satisfied their main criteria.

Gatekeepers
These are people who can control the flow of information within the
organisation. If we send details of our new product to a purchase
manager only, then we are reliant upon this person to share the
information with other people within the organisation. We may,
therefore, decide to target more than one person within the company.

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Individual forces
We need to understand the power of individuals within the decision
making process. There are individuals who have a much greater stake
and perhaps have more say in the final decision.

ACTIVITY
Ford Motor Company used its research data in order to make key members of
staff aware of the importance of loyalty and satisfaction. There is often
confusion between loyalty and customer satisfaction and an assumption that
satisfied customers will remain loyal and that loyal customers are satisfied.

Vulnerables True loyalists

or enthustiasts

High

30% 20%

Loyalty Probable lost Switchers or

customers variety seekers

Low

40% 10%

Low High

Satisfaction

Consider the information, where you are faced with the fact that research
indicates that 30% of your current customers are ‘vulnerables’, 20% are ‘true
loyalists’, 10% are ‘switchers’ and 40% are probable ‘lost customers’.

What are the options available to you as Ford’s marketing director? What
specifically would you recommend that they do to address the issues raised by
this research?

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ACTIVITY FEEDBACK
Ford customer loyalty

1. Low loyalty and low satisfaction – one of the problems facing Ford, and
all companies in the car industry, is the fact that the length of time
between purchases in a customer’s life may be several years. This
accounts for about 40% of all customers. We know that the cost of
recruiting new customers will be high, so we will need to divert some
resources to addressing these issues. The problem with the customers
in this section is that at present they seem the most unlikely to buy a
Ford car again. However, there are still some in the group who could,
with some targeting, be moved more towards the high satisfaction
segment.

2. Vulnerables – Ford must recognise that this group of Ford owners


remain loyal to the company, but generally aren’t satisfied with Ford.
This implies that this may have something to do with current levels of
service, and so existing customers need to be targeted, and attempts
made to improve their levels of satisfaction. We can assume that their
loyalty may fall, in which case they could potentially be lost customers
in the future.

3. Branding – Ford’s research revealed that more work needed to be


done to reinforce their brand image. Ford’s brand had history, heritage
and customers who had grown up with exciting cars like the Mustang
and what was needed was more investment in building up brand image.
Research also showed that style and presentation of vehicles was also
more important than they had realised. They launched a major
research and development campaign and put more emphasis into the
design of their vehicles. Not only did they need to win over their
customers, but also their staff. They needed to make people believe in
what was one of the greatest brand names of all times. The next range
of cars to be launched included the Ka, Focus, Puma and Cougar. The
Ford Focus won European car of the year, and people started to talk
about the style and design of Ford cars. The investment in staff training
also started to pay off.

Measuring Customer Satisfaction


If we look at Hollensen’s model in exhibit 4.5, pages 147 to 148, we can
see that our performance as a customer can be measured against the
importance that our customers attach to particular criteria. In this case
Hollensen has looked at product quality, sales, value, design, customer
service, transportation and delivery and invoice and administration.

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S peci fi c S ummar y
at t r i but es char act er i st i cs
Durability
Appearance
P r oduct
Reliability qual i t y

Shipment timeliness
Shipment damage
T r anspor t at i on
Driver courtesy and del iver y

Representative’s accessibility
Representative’s knowledge S ales
Reliability, follow-up Cust omer
loyal t y F i nanci al per for mance
Structural designs Over al l Sales
Sample timeliness D esign cust omer Commit ment Market share
Technical quality sat i sfact i on Lifetime customer value
B ondi ng/ Customer profitability
Complaint resolution r epeat buyi ng Total profit
Telephone response
Cust omer
ser vi ce Cust omer
Information accuracy r et ent ion

Invoice accuracy
Invoice timeliness
I nvoice and
Inquiry responsiveness admi ni st r at i on

Total cost of use


Market price
Supply costs
V al ue
Productivity

Figure 3.6: Customer satisfaction model.

If we look at Hollensen’s model, we can measure our performance


against the seven criteria as a way of measuring overall customer
satisfaction. In B2B we need to take into consideration the various
members of the DMU who will have some say in the way that we handle
their account.

Customer satisfaction loyalty and bonding


In order to increase customer satisfaction we need to consider the bond
which exists between us, as suppliers, and our customers. To what
extent we bond with our customers will be dependent upon the contact
opportunities, the barriers in place to prevent other suppliers or the
activities which we undertake to develop our bond with customers.

If you are working for a small or medium­sized business, or in fact own


such a business, it is likely that you can’t answer these questions in
relation to your customers. The simple test is to focus on your most
important customer, the one that may account for forty per cent of your
business. They are your most important customer, but are you their
most important supplier? If you aren’t then you need to consider
improving this bond, before you start to look for new customers.

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CASE STUDY ACTIVITY
Read the Manchester United case study in Hollensen, page 160, and answer the
following questions. Remember that even if you don’t like football you should
approach this case study as if you were a consultant. Many of the commercial
activities of a sports club have very little to do with one’s knowledge of the
sport itself.

1. How would you describe Manchester United customers on the:

a) B2C market?

b) B2B market?

2. What are the short-term and long-term benefits and pitfalls of the
Manchester United-New York Yankees alliance for both partners?

3. What are the prerequisites for establishing Manchester United as a


global brand?

4. Is the Manchester United-New York Yankees alliance the right way for
realising a global brand strategy?

CASE STUDY FEEDBACK
1. The customers on the B2C market for Manchester United are:

The audience at the game.

Television viewers.

Online visitors on www.manutd.com.

Visitors to retail-shops in Singapore, Dublin, Kuala Lumpur and


Capetown.

The customers on the B2B market are

Vodafone (sponsorship arrangements).

BSkyB (joint television channel).

2. The overall aim is to introduce the Manchester United brand in the


USA and the Yankees brand in the United Kingdom (UK).

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Benefits:

The fact is that the average American doesn’t follow soccer, and much
prefers established American sports such as baseball, basketball,
American football and ice hockey.

The men’s soccer game attracts very little media attention in the USA
and, in fact, the game for women in the USA is more established and
they have also won the World Cup.

The Yankee representatives understand the USA sports market and


feel that the timing is right to introduce the Manchester United brand
to the USA.

Pitfalls:

There are serious concerns about the ‘Americanisation’ of Manchester


United and ‘soccer’.

The sports cultures in the USA and UK are so different.

European football (‘soccer’) will have a difficult time in penetrating the


US sports culture and the same can be said for baseball in Europe.

Baseball is not a similar sport to soccer, and perhaps a partnership with


an American football team like the Dallas Cowboys would have been
better.

3. Manchester is well on the way to becoming a global brand. The United


brand is already known in Africa, China, Japan, India and Latin America.

The management of Manchester United could consider if


football/soccer is enough to carry through a global brand strategy, and
they could perhaps look to make it an entertainment brand.

4. One of the possibilities lies in targeting areas of the world where they
love both soccer and baseball.

An alliance with another club may help to establish a quick presence in


the US market, and also increase their overall global presence.
Assuming that the New York Yankees have a global presence then
Manchester United can piggyback on that success.

Given the US sporting links with other countries, as a result of its high
Hispanic population, might open up some Latin American markets to
Manchester United.

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Competitor analysis and intelligence


In order to make key strategic decisions we need to have a clear
understanding of competitor intelligence. Hollensen (2003) suggests
that there are three stages of competitive development in an
organisation, namely competitor awareness, competitor sensitive and
competitor intelligence. As a company moves through these stages,
they become more responsive to competitors and ultimately will
develop systems to monitor competitor intelligence.

Who are our competitors?


The key to marketing orientation is to focus on the needs of the
customers. The key to understanding competition is to be able to define
your market from the point of view of the customer.

ACTIVITY
Consider the following list of products in the first column. In the second column
write down a list of their likely competitors.

Product Competition

Can of Coca Cola Other cola drinks

Other soft drinks

Any other drinks that may be bought for convenience

A package holiday to a
Greek island

A Parker writing pen

A Harley Davidson
motorbike

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ACTIVITY FEEDBACK 

Product Competition

Can of Coca Cola Other cola drinks

Other soft drinks

Any other drinks that may be bought for convenience

A package holiday to a Other holidays to Greece


Greek island
Holidays to a similar priced destination

A Parker writing pen Other pens

Other products such as chocolate or books that might also be purchased as


a present

Other corporate gifts

A Harley Davidson Other motorcycles


motorbike Sports cars

A swimming pool

You will notice that in certain situations we face direct competition from similar
products. You might ask why a swimming pool is in competition with a motor
bike? The answer is because the Harley for many consumers is a purchase made
once their children have left home and the house loan has been paid. Many
consumers are men in their mid-fifties. The swimming pool is another product
that perhaps their wives or partners would rather purchase with their money.
It might seem obscure but research has shown that this is often the case. The
example of the Parker Pen is much easier to understand. A high percentage are
bought as gifts and they therefore compete with gifts within a specific price
range.

Learning about our competitors


There is much discussion about the ethics of gathering competitor
intelligence. It is generally agreed that companies are paying more
attention to information gathering about competitors and indeed it is
often the focus of some of their marketing research activities. The
different ways of gathering this data are as follows:

· By gathering information from internal employees and


employees of competing companies.

· By gathering information from competitors’ customers.

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· By gathering information by observing competitors or by


analysing physical evidence.

· By gathering information from published materials and


public documents.

Analysing the strengths and weaknesses of


competitors
In order to complete our marketing audit we need to measure the
strengths and weaknesses of our competitors. Hollensen (2003)
suggests a four stage approach.

1. Identify the factors that companies look for when choosing a


supplier and what they expect from the product or service. We
can then rank the most important factors.
2. Assess the company’s and competitors’ performance on different
value functions.
3. Compare how our company rates on different attributes with
each of our competitors. Where we identify weaknesses then we
must take some action to try and remedy these.
4. We must monitor our customer values on a regular basis if we
are to remain competitive. We must avoid complacency at all
costs.

What are the objectives and strategies of our


competitors?
For many companies trying to understand and estimate the objectives
and strategies of competitors may be difficult. However, there are
usually key indicators which will enable us to make an assessment, and
thus allow us to plan our strategic direction.

How to assess our competitors’ current strategies


We need to constantly monitor the activity of our main competitors

Hollensen (2003) suggests that the three main areas that we need to
consider when assessing the current strategies of our competitors are:

1. Identifying their market or markets.


2. Identifying their strategic focus or the way in which they have
chosen work in their markets.

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3. The marketing mix which they have adopted.

Identification of competitors’ chosen


markets

Prices
When considering our competitors’ pricing strategy we need to
consider what their current approach to pricing is. We should have a
good idea of their costs, and certainly be able to estimate them. When
we can estimate their costs we can then see how aggressive their pricing
strategy is. While we accept that price competition can ultimately
destroy our profits, we need to be in a position to respond to changes in
price.

Product features
We should monitor the development of our competitors’ extended
product. By this we mean such things as levels of service or innovation
in developing existing products or services.

Competitors’ strategic focus


We will look at strategic options in more detail in Unit 4. We need to
establish what the future plans of our competitors are. If they are
planning expansion, either at home or abroad, and developing new
products or services, then this gives us some idea about their strategic
intent.

Our competitors’ marketing mix


We can compare the aspects of our marketing mix, namely product,
price, place and promotion, with those of our competitors. In doing so
we may be able to identify areas of weakness which might represent an
opportunity for us. This, of course, will be supported by our market
research activities.

CASE STUDY ACTIVITY
Please read the Virgin Case study in Hollensen page 191 and answer the
following questions:

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1. What have been the main reasons for the disappointing performance of
Virgin Cola (Virgin Drinks division) ?

2. Which segmenting, targeting and positioning strategy would you


recommend to Virgin Drinks for its comeback in the US market? (Use
Tables 5.2 and 5.3)

For a more in depth understanding of segmentation, targeting and positioning,


you can read Hollensen (2003), chapter 8 pp 304-352, or refer to the section on
segmentation in Unit 4 of this handbook.

CASE STUDY FEEDBACK
1. The main reason has been the dominance of the two giants Coca-Cola
and Pepsi Cola, who are well entrenched in the market and enjoy
considerable customer loyalty.

Virgin’s product line of standard cola and a diet cola is too narrow.

The company overestimated the impact of the Virgin brand in the USA.
There is a much stronger association between the brand and Richard
Branson in the United Kingdom and the brand has a very strong
identity. Richard Branson is not as well known in the USA as he is in the
United Kingdom.

2. Virgin Drinks should broaden their product concept by adding new


flavours to the line. They might even want to introduce a new energy
drink to compete in the same market as Red Bull. There is considerable
growth in this new market.

In terms of their geographic segmentation and targeting, Virgin Drinks


should target a much smaller part of the USA. In such a vast country it is
very difficult for a newcomer to achieve nationwide distribution. They
might want to consider the East Coast where UK products have a
much stronger following.

Positioning – it is likely that the groups to target are less conventional,


more outgoing groups.

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Understanding relationships in the


marketplace
A key success factor for a number of companies is the development of
relationships with customers, other companies and suppliers and in
some B2B situations, with the customers of their own customers.

The value net


In considering the value net, Hollensen (2003) discusses the role of a
competitor and a complementor. A complementor is a company which
supplies goods which complement the goods of another company. A
clear example is that of a company which produces computer software
being a complementor to one which produces computer hardware.
Complementors work at the same level in the distribution chain.

Hollensen (2003) cites the ARA network model developed by


Hakansson and Johansson (1987) which looks at the role of actors,
resources and activities in developing networks.

Actors
Actors operate at different levels in the network. Actors are constantly
trying to take more control of the network in the marketplace.

Resource ties
In developing a relationship, companies will combine their resources in
order to improve their effectiveness in the market.

Activities
These refer to any shared activities that are aimed at making companies
more effective. Companies who work together on production schedules
or in improving service to end­users are setting up activity links. These
can present a barrier to other competitors.

Relationships with customers


There is common agreement in marketing texts that it is more cost
effective to develop relationships with existing customers, than it is to
pursue new ones. This lies at the heart of relationship marketing (RM).
We have considered, earlier in the unit, how companies can put up

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barriers to their competitors. Companies which enjoy a very strong


relationship with their customers find that it is difficult for them to
break links with them.

Customer behaviour
Hollensen (2003) uses the marketing relationship continuum developed
by Jackson (1985) to classify the types of relationships that we might
enjoy without customers. The continuum looks at the ‘always­a­share’
customers who focus mainly on transactions which share their business
across a number of different suppliers. At the other end of the
continuum are the lost­for­good customers, who work closely with their
suppliers to create barriers to entry for their competitors.

International strategic alliances


In order to gain rapid entry into overseas markets, many companies are
opting to form strategic alliances with overseas partners. In many cases
this might be of mutual benefit. Chinese firms, in particular, are using
this mode of entry in several markets. However, there are other benefits.
Shanghai Motors in China has offered to invest money in the failing
British company Rover cars. For Shanghai Motors the main incentive
would be to work with a recognised research and development team
who will help to improve the design of cars made in China. For Rover
motors this offers them the opportunity to be a key player in the rapidly
developing Chinese car market.

Perhaps the biggest test for both partners would be the bringing
together of two very different management and work cultures.
However the benefits of achieving a smooth integration are clear for
both parties.

CASE STUDY ACTIVITY
Philips and Jordan

Read the Philips and Jordan case study in Hollensen, page 197 and answer the
following questions

1. What would be the benefits for Philips of the Optiva acquisition? How
would Optiva benefit from the acquisition?

2. If you were a part of Jordan’s senior management group how would


you react to Philips’ acquisition of Optiva?

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CASE STUDY FEEDBACK
1. Philips’ acquisition of Optiva gave them access to a 35-40% market
share in the USA market for electrical toothbrushes. They also gained
access to Optiva’s revolutionary technology which had created such an
impact in the market place.

2. You might consider that Philips’ purchase signals their intent to remain
a major player in the marketplace, which might have an impact on the
relationship with Jordans.

Relationships with suppliers


Suppliers are recognised by marketers as key stakeholders for
companies, and as such the relationship and information flow to them
needs to be managed carefully. Consider the situation where the
financial papers publish a story about the financial difficulties of a major
company. Imagine then that you are one of their main suppliers,
supplying them with $ 100,000 of materials per week. How will you
react to this news? The danger to the customer is that the supplier cuts
supplies which ultimately affect their ability to supply the end­user, and
vital sales could be lost.

Buyer-supplier relationships
In order to understand the relationship between buyer and supplier, we
need to consider the bargaining power of each party. Hollensen (2003)
has developed a matrix (see Figure 3.7) to be able to plot the relationship
between buyers and suppliers.

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SUPPLIER

One Few Many

BUYER

One Co-operative Unequal Unequal


System distribution of distribution of
power power
¬

Few Unequal Balanced power Unequal


distribution of or protection distribution of
power ­ power

Multiple Unequal Unequal Adversarial


distribution of distribution of system
power power
®

Figure 3.7 Buyer–supplier relationships.

1. Cooperative system

In this situation there exists a strong relationship between supplier and


buyer. In such instances, the supplier may well have invested in systems
and technology to improve supplies to the buyer. Such a relationship
will make it very difficult for competitors to become new suppliers.

2. Balanced power or protection

Where there are few buyers or few suppliers in a market then the
balance of power between the supplier and the buyer is similar. In some
cases this might suit a buyer who doesn’t want to rely on just one
supplier. Suppliers who take on more than one buyer will be confident
of their ability to satisfy both current demands and future demands.

3. Adversarial system

In this situation where there are many suppliers and buyers, then the
buyer tends to be in a much stronger position. The emphasis in the
working relationship with suppliers will be based mainly on price, due
to competition, with buyers able to switch suppliers easily.

Relationships with complementors


Hollensen (2003) highlights complementor relationships as a growth
area. Companies join together to develop projects with each bringing
their own expertise to the alliance. There are several examples of major
brands working together to serve customers. Hollensen cites the
example of an alliance between Esso and Tesco to develop mini stores

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on petrol station sites. Tesco benefits from the volume of customers


generated at Esso’s garages, and Esso is able to offer its customers the
retail expertise that has turned Tesco into the leading multiple in the
United Kingdom. Hollensen also cites the example of brands which are
used to add value to products, in what is referred to as ingredient
branding. The best examples of these are Nutrasweet, a sweetening
product use in fast moving consumer goods, and Intel, who provide
‘chips’ for leading computers.

PESTLE, PLESTIE, SLEPT or PEST Factors


A useful acronym to help you to consider the key external factors which
are likely to have an impact on our business is PESTLE or PLESTIE. We
are going to concentrate on the PESTLE, and present a framework for
analysing the key factors.

Each of the letters stands for Political, Economic, Social, Technological,


Legal and Environmental. We need to remember that all of these factors
are external and not internal, and while they might affect our business,
they are also referred to as uncontrollable factors. By this we mean that
our company is not able to change these factors but must be aware of
them, and more importantly, is able to monitor their changes.

Political factors
What are the key political factors which might affect our business?
These are factors such as the government currently in power, the
political climate in a country and the amount of support that a
government gives to business. In some volatile international markets
political factors are likely to be more important than in stable markets.
We will find that some political factors might also appear in legal
factors. This isn’t a problem, as the most important function of the
PESTLE is to identify key factors which are relevant to our business.

Economic factors
We must take into account economic factors which have a direct
influence on our business or on our customers. The key indicators are
inflation, both current and predicted as this will have a bearing on
costing and pricing. Other factors include interest rates, Gross Domestic
Product (GDP), exchange rates and unemployment. While we might
know the GDP per person in the market, we also need to be able to
interpret its impact on our business. While interest rates are low an
economy tends to function more effectively, but this won’t have a direct
impact on all business.

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Social factors
Here we are concerned with the social factors which might impact on
our consumers or on the end­users of products. We can identify some of
these factors in this unit where we look at consumer decision making.
Research will enable us to identify those social factors which have an
impact on our business. We can predict future impact, simply by
studying current growth rates. A fall in the birth rate will have a definite
impact in the future on markets which sell products to parents, and an
increase in divorce rates might also have an impact on housing. It is
those companies which are able to predict future trends which are likely
to have the most impact in the marketplace in the future. Economists are
making many predictions about the impact of the aging population in
developed countries, and the future demand for products.

Technological factors
We need to understand the technological environment in the markets in
which we operate. We mentioned the software market and how this is
linked to the development of the hardware market. Given the rapid
increase in technological development, it has become even more
important to understand the technological environment.

Legal factors
Legal factors are linked closely to political factors. Legislation can have
a direct impact on our business. In the UK market, when the
government changed the tax levels on company cars, in an effort to
encourage companies to purchase more fuel efficient cars, Ford
introduced the new 1.4 litre engine car, as this fell within the new
legislation on company car tax.

Environmental factors
Under environmental factors we can introduce the areas that we
covered in this unit and Unit 2. Here we must consider the competitive
environment in which we operate. This will also include competitor
analysis and how we see our competitive position in the market.

Remember that the PESTLE must only include those factors which are
relevant to our business and our markets, and for that reason it is a
useful tool for marketing planning.

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CASE STUDY ACTIVITY
Dandy Chewing Gum

Read the Dandy case study in Hollensen, page 245, and answer the following
questions:

1. How are Dandy’s competences in the value chain used in the alliances
to create value for the Dandy-Joyco and Dandy-KGFF partnerships?

2. What should Dandy’s future product market strategy be? You can draw
up a SWOT analysis to help you answer the question. Should they
develop their own brands (Stimorol, Dirol and V6) or should they
function more as a sub-supplier to large multinational confectionery or
healthcare/pharmaceutical companies?

The SWOT analysis is covered in more detail in Unit 4 and in Hollensen


(2003), pp 265-271.

CASE STUDY ACTIVITY FEEDBACK
1. In the Russian market, Dandy’s distribution competencies are used in
the Dando-Joyco alliance. In the alliance between Dandy-KGFF,
Dandy’s competence in dragee production technology is used.

2. If we carry out a SWOT analysis we can identify the following:

Strengths – A market leader in the European dragee segment. Their


production technology in dragee chewing gum.

Weaknesses – Compared to Wrigley they lack financial resources

Opportunities – The consumption of chewing gum has generally


changed from mainly sticks to dragees.

Threats – Other American competitors such as Warner Lambert


could be more aggressive in the European market.

As a leader in production technology and with know-how of dragee


products such as Dirol and Stimorol, Dandy should concentrate on
these core competences.

Dandy would be advised to concentrate on its core competences and


develop their existing products, and any new products could be

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marketed under the existing brands of Stimorol, Dirol and V6. Dandy
might also consider acting as a consultant and sell its knowledge about
dragee products to companies who are looking to outsource their
production and/or product development of dragee products. Dandy
has already produced dragee products for other manufacturers or
retail chains under their own private label.

As Dandy’s core competence is considered to be the best then it


should consider the World market and not just the European market
place. In relation to global competitors, Dandy is a small player. They
might consider developing expertise as a sub-supplier of dragee
chewing gum to multinational companies.

REVIEW ACTIVITY
Read the Viagra case study in Hollensen (2003), page 165, and answer the
following questions:

1. How do you see the future market development for drugs against ED?

2. What can Pfizer do to increase the sales for Viagra?

3. What are the key stages when conducting a competitor analysis?

4. To what extent will it be possible to predict a competitor’s response to


our marketing activities?

5. In the case of a car manufacturer, what are their major sources of


competitor intelligence?

REVIEW ACTIVITY FEEDBACK
1. Possible the biggest factor which might impede the market
development of such a drug is the refusal of potential customers to
own up to the problem of ED. In certain cultures such a condition
might impact on virility and a man’s self-esteem. If this is a product
targeted at over 50 year old males, then as the average life of males
increases across the globe, this might reflect on the sales of Viagra.
There will almost certainly be increased competition in the
marketplace. However, Viagra is the name that is strongly identified

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with this category of drugs. There will also need to be continued efforts
to educate potential customers.

2. There will still be growth in sales to males for ED. However, there are
opportunities to introduce a similar drug for women and a version of
Viagra for diabetes sufferers.

3. When conducting an analysis of our competitors, we can follow these


stages:

We need to establish who are our competitors.

We need to understand the relationship between our competitors.

We need to discover how we can learn about our competitors, and


gather the information that we need.

We need to carry out a competitor audit to establish the strengths and


weaknesses of our competitors.

We should establish what we think their objectives are, and what their
likely strategies will be.

We should try to work out exactly how our competitors respond to


competition.

4. Our competitor intelligence will help us to predict the likely response


of our competitors to our activities in the market. We need to establish
how they have responded to competitive pressure historically. If we
are planning to gain share from competitors then we would expect
them to respond. If we know that their objectives are to grow in the
market then we can predict what impact we will have on them.
Companies which are planning to introduce an improved version of
their product will possibly not be bothered by a direct competitor to
the old version.

In carrying out our competitor audit, we should be trying to identify


their weaknesses and use our strengths to take advantage of these. If
our research shows that customers are unhappy with the service and
attitude of our competitors, then this might give us the opportunity to
win this business. It is likely that their response based on price
reduction might not influence a customer who is unhappy with service
levels. We need to remember that our up-to-date competitor and
market information will help us to take out some of the risk of taking
customers away from competitors.

5. Much of the information that we require is likely to be circulated


throughout the company. Our primary source of information will be
gathered from our customers, many of whom will have purchased cars
through dealerships. We should also target the customers of other car
manufacturers to establish current levels of satisfaction. We will
constantly monitor our competitors and collect physical evidence

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about their products. Does this mean obtaining a competitor’s car and
checking it in our research and development workshops? The answer
is almost certainly yes, as well as collecting any published information
about our competitors.

References
Hollensen, S, (2003), Marketing Management: a relationship approach.
Pearson Education, Essex, England, ISBN 0273643789

Solomon, M, Bamossy, G and Askegaard, S. (1999), Consumer Behaviour,


A European Perspective. Prentice Hall Europe

Solomon, M (2002), Consumer Behavior. International Edition, Prentice


Hall

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Developing Marketing Strategies

LEARNING OUTCOMES
After studying this unit you should be able to:

· Identify a company’s current internal and external situation by using a


SWOT analysis.

· Demonstrate an understanding of how and why companies set


corporate and marketing objectives.

· Recognise the strategic options available to companies when


deciding upon their future marketing strategy.

· Analyse a company’s portfolio of products or services.

· Evaluate the range of segmentation variables firms might use when


deciding who to target and how to position their products or
services.

Introduction
In Units 2 and 3 we have considered the internal and external factors
which we need to understand. We now look at exactly how we will use
this information in order to develop our marketing strategies. Without a
clear understanding of exactly how we stand in the market in relation to
our competitors, we will find it difficult to guide our business in the
right direction. We must carry out an honest appraisal of our internal
strengths and weaknesses, while considering the external threats and
opportunities.

Mission statement
We need to offer some direction to our company and in particular our
staff. We should have a mission statement which clearly indicates the
direction of the company. It is easy to suggest that the mission statement
should be as short as possible and communicated effectively, but that is
what we should aim to do. When a well established United States
distribution company introduced its mission statement which was ‘to

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deliver on time’, it seemed far too simplistic. However, what this


statement did was to address a key opportunity which was to achieve
competitive advantage and satisfy customers. Companies in the
business of distributing goods had forgotten that this was the first
priority of its customers. As we discussed in Unit 1, we must consider
whether or not this mission was sustainable over a period of time? To
what extent does it give staff an insight into the way the company is
moving forward? If its purpose was to make staff and customers aware
of its intention, then after a period of time this would need to be revised.
You will no doubt be aware of other mission statements, and you might
even work in a company where there is a clear mission statement. If you
are in a position to look at another mission statement, you might want to
consider how much insight this gives you into the direction the
company wants to move forward.

SWOT analysis
This is a simple technique of analysing the strengths and weaknesses of
our organisation (SW), or internal factors, and the opportunities and
threats in our external environment (OT). It is also down to all
departments within the organisation to contribute to the SWOT
analysis.

Our internal strengths and weaknesses should focus on the people


within the organisation and their levels of training or expertise; our
financial capabilities and resources; our production facilities and
service levels; our internal communication; our market share; the way in
which customers perceive our products, and their perceptions of our
pricing, product development and quality.

We must also produce a SWOT analysis at all levels of the company and
not fall in to the trap of producing just one SWOT analysis for the whole
company. Hollensen (2003) suggests that we conduct SWOT analyses at
corporate level, at a Strategic Business Unit (SBU) level, at product level
and at market level.

Problems with the SWOT analyses


When companies attempt to compile a SWOT analysis for the first time,
it usually highlights an area where the company lacks information. Far
too many companies carry out their analysis without making reference
to their customers or through making assumptions. Far too many
SWOT analyses simply state that there is an opportunity to gain new
customers in a market, and assume that their customers are happy,
when in fact there is a real threat of losing some business to competitors.

These issues should be addressed when we collect information and in


particular when we are carrying out marketing research.

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Carrying out an effective SWOT analysis


The SWOT should not just be a list of strengths, weaknesses,
opportunities and threats, but should be trying to highlight areas which
will make the marketing planning process more effective. Hollensen
(2003) suggests a grid for effective SWOT analyses.

1. The matching of strengths and opportunities

Our marketing research should provide us with a measurement of the


way we are perceived by our customers and potential customers. As we
are concerned by strategic issues then we should ideally be able to
measure customer perceptions of our competitors. We should therefore
be able to identify the key strengths of our company and performance,
and match these to opportunities which exist in the market place.

2. Converting weaknesses and threats

By identifying weaknesses we can develop our plan to address these


issues. Ford’s market research in the 1990s showed that while an
established brand, customers were critical of the style and design of
Ford cars. Ford addresses this issue with considerable investment in the
design of their vehicles, launching cars like the Ford Puma, Focus and
Ka. Hollensen (2003) suggests that one way of addressing weaknesses
and threats is to reposition our products or services. We are aiming to
use our SWOT analyses as a way of setting ourselves specific targets in
our marketing plan.

ACTIVITY
Read the following mini case study and produce an outline SWOT analysis. You
may need to make some assumptions about the company, particularly as you
will see that it is based on a small to medium sized business.

The Man in the Moon

Stewart Wilde had always wanted to own his own bar and brewery, having
worked in the award winning Fat Cat public house in Sheffield, England, while
he studied at Sheffield University. The bar belonged to his economics lecturer,
who had also introduced the concept to the USA. Stewart’s dream was to
become a reality some fifteen years later when he opened the Man in the Moon
bar in Northern Spain, as well as the Vitoria Brewery Company. He had
travelled from Spain to England to research brewing and bar design. In order to
position his bar as an authentic British pub, he needed to recreate the look and
feel of a British bar in a city where the vast majority of bars were much smaller,
and unmistakably Spanish in style. He knew that he would have to recreate
traditional British beers to sell in a market where lighter and much gassier beers
dominated.

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He knew that he would also need to develop his own brands, and was able to
design brands for his new beers, which on the face of it looked as though they
could have been introduced a year ago. He launched Albert’s Ale and Dark
Moon with his business partner, having brewed and tested several recipes. He
was surprisingly good at brewing, and the beer was accepted by a handful of
discerning expatriates, and the many local people who had been drawn to the
bar by its distinctive design.

Stewart was able to take out a loan through the local chamber of commerce
and produced his beer at a small purpose built brewery about 40 kilometres
from the bar. His calculations had been correct. He was able to produce a pint
(approx half a litre) very cheaply, and on the advice of a relative, was able to sell
the beer at a premium price, and therefore position it as a quality product,
while at the same time differentiate his beer from his competitors. While he
was making a healthy profit on the beer, he was still only working to 60%
capacity, and the balance of the sales were made up by traditional Spanish
beers, coffees and spirits.

Stewart set about imposing his mark on the Man in the Moon and it soon
developed into one of the most popular bars in town. He was able to combine
his love of music with being a bar landlord and was soon offering an outlet to
local musicians and bands. He also introduced quizzes which were very popular
with students at the local university who were keen to practice their spoken
English. The bar was unmistakably Stewart’s bar, and on days when he wasn’t
working in the bar, there always seemed to be less people in. Spanish bar
customers were notorious ‘bar hoppers’ and would soon move on to the next
pub if they didn’t like the atmosphere in a bar. His early attempts at advertising
and promotion were hampered by cash flow and the dismissal of advertising as
it didn’t generate the expected level of sales increase. However, running a bar
and a brewery was starting to take its toll on Stewart’s family and social life and
he wasn’t able to develop the business in the way that he had first planned. He
experienced some difficulties with staff and his plans to sell food were not as
successful as he had hoped. At times it seemed a long way from his days in the
Fat Cat in Sheffield.

When you produce your SWOT analysis you will cover areas such as marketing,
production and operations, people, management and resources. For the
external analysis, consider the key political, social, economic and technological
factors, as well as competition and relationships with suppliers. You may need
to make some assumptions.

List the main points in order of importance. Only show the main points

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Strengths Weaknesses

Opportunities Threats

What are the main considerations for the company based on your findings? List
the most important points.

ACTIVITY FEEDBACK 

Strengths Weaknesses
1 Branding – the bar and beers were cleverly 3 Lacked financial resources to develop the
positioned in their respective markets business further

2 On the face of it the bar and brewery have 4 Staff training


achieved some success and are recognised by 5 Marketing – high expectation of advertising
a loyal customer base expenditure

6 Time management – it is not uncommon for


people who are new to business to find it
difficult to delegate

7 Market research – lack of market information


gathering (assumption)

Opportunities Threats
8 To sell spare capacity of unique product to 10 Intense rivalry in bar sector and possible
other bars, using new brands reduction in sales

9 To ‘franchise’ the concept in other towns and 11 Threat of entry of ‘me-too’ products
cities
12 Hands-on approach to running the bar
prevented future planning

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What are the main considerations for the company based on your
findings?

You may not have identified exactly the same points but in a case like this you
should have identified that the threats to the business were considerable and
that there are some weaknesses to overcome.

The most noticeable feature of this analysis is that there are more weaknesses
than strengths, which will need to be addressed in order to move the business
forward.

Facing the likelihood of increased competition and the introduction of ‘me-too’


bars, the option to expand through franchising is very attractive, and enables
rapid expansion with relatively low expenditure.

Unfortunately, this case study is all too familiar. Underlying this, there is a lack
of market information gathered by the owner. In many cases people invest in
new business ventures, confident that they will be successful, when the
available secondary market research data suggests otherwise. The fact is that
the bar market in Spain is saturated with small bars, and the only significant
development is through chains of bars and larger corporations buying into the
market with themed bars. People setting up individual bars do so at their peril.

Corporate objectives
Consider the objectives that a company might wish to set itself. Where do
we start? Companies who are embarking on the planning process for the
first time will find that a shortage of information about the current
position of the company, will make setting objectives very difficult. Of
course, we can assume that one of our principal objectives will be to make
a profit of some kind, and perhaps as a new starter we will set ourselves a
break­even target. We can use past performance as an indicator, however
it isn’t the most accurate way of predicting the future.

When setting our objectives remember that we need to make them


SMART. ( See Unit 1) By that they must be:

1. Specific – an objective that relates specifically to an activity which we


can easily identify, and which those within the company can identify.
2. Measurable – our objective needs to be quantifiable. Multiple
retailers might set their objectives in terms of the number of new
stores they aim to open in the coming year.
3. Aspirational or Actionable – we must be able to carry out the actions
required to achieve our objectives. Imagine a company which lacks
adequately trained marketing personnel. How easy will it be to
address image or awareness problems without the right people in

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place? Aspirational objectives will say something about what the


company is striving to achieve, in a way which guides its
employees. You may see both of these ideas in other marketing
texts.
4. Realistic – we need to ensure that the company is capable of
achieving our objectives. Remember that in a failing company we
will need to deal with problem areas. It will mean that perhaps
expansion will be difficult without tackling the root cause of the
problem. We must liaise with the departments responsible for
helping us to achieve these objectives.
5. Timed – we need to put a timescale on our objectives. These may
be broken down into actionable plans. IKEA are renowned for
their attention to detail when they introduce a new store. They
have in place a system which means that new stores can be
equipped and opened within an agreed time.

Hollensen (2003) lists a number of key corporate objectives. In Figure 4.1


you can see that corporate objectives can be broken down into three
broad categories of profit and financial, growth and marketing
objectives and social responsibility objectives.

Objectives Performance criteria Possible measures

Profit and financial Profitability Profit

objectives Profit as percentage of sales

Contribution margin

Return on investment (ROI)

Contribution to owners Earnings per share

Price/earnings ratio

Utilisation of fixed assets Capacity utilisation

Fixed assets as percentage of sales

Growth objectives/ Per cent yearly growth Sales

Marketing objectives Unit sales

Profit

Competitive strengths Market share

Brand awareness

Brand preference

Contribution to customers Price relative to competitors

Product quality

Customer satisfaction

Customer retention

Customer loyalty

Social responsibility Contribution to employees Wage rates, benefits

objectives Personnel development, promotions

Employment stability, turnover

Contribution to society Contributions to charities or community

institutions

Growth in employment

Figure 4.1: Corporate objectives.

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We will need to monitor our plans to ensure that we do not fall short of
our targets. If we do fall short then we might need to review our
planning.

Growth Strategies
Let us consider the options that are open to us as a company if we want
to grow. Using Ansoff’s well established matrix there are four options
available to us. We can concentrate on our existing products or markets
or consider new markets and new products.

Existing products New products

Existing markets Market Product


penetration development
strategies strategies

New markets Market Diversification


development strategies
strategies

Figure 4.2: Ansoff’s product-market matrix

If we consider each of the four categories in Figure 4.2 then there are
clear examples of how companies have used these strategies to develop.

Market penetration strategies


This is usually the first strategy to consider as it enables us to
concentrate on our core strengths and in markets we should have
developed expertise and contacts. We also know that it is also the easiest
option for our competitors. We will need to call upon our current
knowledge of our competitors before embarking upon these strategic
options. If the market is growing then this perhaps is more
straightforward, but in a maturing market then this poses more
problems. Breakfast cereal manufacturers have frequently tried to
increase sales by communicating new uses of their product to
customers. Showing a cereal as an evening snack for particular
segments may have some impact. Some companies have used their
market research activities to identify new uses of a product.

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Market development strategies


With our existing products we look for new markets. This might include
looking at overseas markets. We can also look to identify new customer
groups. Sports manufacturers realised that sporting clothes had a
limited potential in sports markets, but had huge potential as fashion
items. The international market for training shoes has developed
considerably over the past 15 years, but this is due to them being
positioned as fashion accessories. In some European markets the
training shoe is the preferred shoe for everyday wear among younger
consumers.

Product development strategies


New product development ranges from introducing entirely new
products into markets to modifying and improving existing products.
Improved versions of products may help us to attract new customers in
our existing markets.

Diversification
As a strategic option this should be carefully considered as this involves
moving into entirely new markets with new products. Companies who
have enjoyed success using diversification usually enjoy the reputation
of a very powerful brand and have an existing network of important
customers. We must also consider the option of vertical or horizontal
integration. By integrating vertically we might take over one of our
suppliers or a retail outlet, and by integrating horizontally we might
take over another manufacturer in a different field of expertise.

Managing a portfolio of products


A feature or large companies is that they manage a range of products,
which they handle within a portfolio. A company such as Cadbury’s has
an extensive range of products, and across a wide range of markets.
Within the portfolio, the products will be at different stages of
development, ranging from new products through to well established
products. By managing them as a portfolio they can divert funds from
established products to developing products and may even face a
situation where they need to withdraw or sell off products. Perhaps the
most often used model for managing a portfolio is the Boston
Consulting Group, or BCG Matrix.

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R elat ive mar ket shar e


High Low

High

Quest ion mar k


S t ar or
pr oblem child

Mar k et
gr ow t h

Cash cow D og

Low

Figure 4.3: Boston Consulting Group (BCG) Matrix.

If we look at Figure 4.3 we can see that there are four main categories
within the BCG matrix, measured against the rate of growth within their
market and their market share relative to their largest competitor.
Market growth rate is an important indicator of future market potential.
When the market grows we may be investing in the development of one
of our new products and so extra cash is needed. In terms of our relative
market share, the higher our market share is in relation to our
competitors then the higher should be our profitability.

Question marks or problem children


Operating in a highly attractive market, question marks need investment
if they are to grow and challenge more established competitors.

Stars
As the title suggests, they are the main income generating products in
the portfolio, although they still require investment to maintain their
dominant position in the market. It is when the market slows down and
they maintain their position that they become cash cows.

Cash cows
These well established products enjoy a high relative market share in a
low growth market. As such they tend to require less investment and
can be ‘milked’ to provide investment for question marks in the
portfolio.

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Dogs
These are the least attractive members of the portfolio as they offer very
little profit in a low growth market. These may ultimately be sold or
kept going but with very little investment.

CASE STUDY ACTIVITY
Microsoft’s X-Box

Read the case study in Hollensen, page 263, and answer the following questions:

1. Taking Microsoft’s X-Box and the Windows product into


consideration, show how you might place them in a Boston Consulting
Group (BCG) matrix.

2. Do you think that Microsoft should carry out market testing for online
gaming in Japan?

CASE STUDY FEEDBACK
1. The Windows product is a cash cow product in that it enjoys a high
market share in a market where the growth rate has slowed down.

2. Since online gaming is one of the product advantages which X-Box has
compared to Sony Playstation II, it is one of the ways that X-Box can
gain a competitive advantage over Sony Playstation II. Although
‘broadband’ is not widespread, it is certainly going to be the next
development in the market.

General Electric market attractiveness matrix


Similar to the BCG, the General Electric matrix focuses on our
competitive position in the market and the attractiveness of the market
in terms of growth rate. This matrix can also be used to show a
company’s international portfolio.

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B usiness st r engt h

High Medium Low


High

P r ot ect I nvest B uild


posit ion t o build select ively

Mar k et B uild S elect ivit y/ L imit ed


Medium select ively manage for ex pansion
at t r act iveness
ear ni ngs or har vest

P r ot ect Manage for D ivest


and r efocus ear nings

Low

Figure 4.4: General Electric Matrix – strategic implications. Source: Doole and Lowe (2003)

If we look at Figure 4.4 we can see that there are nine areas where our
business units can be placed, and that each shows us the options available
when deciding our future strategy. Within the grid the shaded segments
are the most attractive to a company. The non­shaded areas imply a
company should consider a change in its strategic direction. Hollensen
(2003) considers the factors that might contribute to the attractiveness of a
market and our competitive position within that market.

Market/country attractiveness Competitive strength

Market size (total and segments) Market share

Market growth (total and segments) Marketing ability and capacity (country
specific know-how)

Buying power of customers Product fit to market demands

Market seasons and fluctuations Price

Average industry margin Contribution margin

Competitive conditions (concentration, intensity, entry Image


barriers)

Market prohibitive conditions(tariff/non tariff barriers, Technology position


import restrictions)

Government regulations (price controls, local content, Product quality


exports)

Infrastructure Market support

Economic and political stability Financial resources

Psychic distance (from home base to foreign market) Access to distribution channels

Figure 4.5: Factors of market/country attractiveness and competitive strength. Source: Hollensen (2003).

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If we look at Figure 4.5 we can see the factors that we need to take into
consideration when estimating the market or country attractiveness
and our competitive strength. Hollensen (2003) suggests also the use of
a questionnaire in order to be able to position our company on the grid.

Analysing supplier relationships


In order to carry out an analysis of the attractiveness of our suppliers we
need to consider the factors which make them attractive to us. These
might be economic factors, performance factors, technological factors
and organisational or cultural factors. Against this we need to evaluate
the things that influence the strength of our relationship with them.
These will include economic factors such as exit costs, the length of the
relationship, the amount of cooperation between the two parties and the
physical or cultural distance.

S t r engt h of r elat ionship

Low Average High


High

R elat ive Medium


supplier
at t r act iveness

Low
1 10

Figure 4.6: Supplier portfolio. Source: Hollensen (2003).

If we consider Figure 4.6 we can plot each of our suppliers on the grid.
We might represent this value in terms of the total amount of business
with a supplier against the total amount of business with all of our
suppliers.

CASE STUDY ACTIVITY
Read the Ford Motor Company case study in Hollensen, page 300, and answer
the following questions:

1. What are the main differences in buying behaviour of golf cars for:

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a) Closed communities for older people

b) Golf courses?

2. Prepare a SWOT analysis for Ford’s entry into the golf car market.

3. Prepare an outline marketing strategy for penetration of Ford’s golf car


into golf courses around the world. You should focus principally on the
four Ps.

CASE STUDY FEEDBACK
1. When targeting the closed community for elder people, a growth
market in developed countries where the population is aging, the
elderly person or elderly couple is the decision maker. (B2C market)

The golf course buyer is an organisational buyer (B2B), as the managers


of golf clubs are the main decision makers.

2. We could include the following for Ford’s SWOT analysis:

Strengths (Internal) – A strong reputation and brand in the passenger


car market.

Ford possesses a strong research and development department (R&D)


for passenger cars. We must not underestimate the Ford brand as a key
strength. As well as being an established brand, with a reputation for
consistency, product quality, and now for design, adding the brand to
new product lines might give it a significant advantage in the market
place. Ford are able to support the new vehicles with their
considerable resources.

Weaknesses (Internal) – Ford has no specialist knowledge of this


market. Ford’s staff are new to this market, which is very different to
their existing markets. Ford’s brand isn’t positioned in this market, and
key buyers in the market are already used to buying established brands.

Opportunities (External) – To gain a share in a growth market with


significant potential. Ford can aim to position itself as the
premium-priced vehicle in the market.

Threats (External) – Other companies such as Yamaha or E-Z-Go who


have already established themselves in the car market. The repeat
purchase cycle of golf buggies is likely to be low.

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3. Ford has already set up a wholly owned company to market their new
line of battery-powered vehicles.

Their 4P strategy could be:

- Product – Ford can position their new line of battery-powered


vehicles as the premium brand in the marketplace, with several
new design features which reach new safety standards.

- Price – There is an opportunity to sell a premium-priced luxury


brand, in order that consumers regard it as more than just a
golf buggy. It is possible that they will produce a range of
buggies in order to target the various price segments in the
market, as they have done with personal cars.

- Place – Ford’s distribution outlets for traditional products offer


them widespread distribution, and a facility in which to situate
the maintenance engineers necessary to service the golf car
market. Online and telephone support will enable them to deal
with after-sales issues more effectively.

- Promotion – In order to target this new market, Ford will need


to mobilise an effective sales force for face-to-face selling.
Direct marketing will enable Ford to target the most important
buyers in the Decision Making Units (DMUs). Ford should use
exhibitions in order to demonstrate their new products in this
new market.

Using market research data to calculate segments


When we are trying to quantify segments, we can use a technique where
we can identify a group of people who we think are most likely to
consume our product, and then using national statistics, start with the
total population for our chosen age group, and then reduce it down to a
more realistic total.

We want to manufacture a new soft drink in China, where our primary


segment is likely to be young adults between the ages of 18 and 24,
currently in further or higher education, they are single and not
married, prefer western style drinks to traditional drinks, and we
estimate that they would consume 2 units of drink per week.

We will first make the calculation based on Beijing, and we are


assuming that the current population is around 25 million people. We
can, of course, extend this exercise to different areas, or calculate the size
of other defined segments for this drink.

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Variable % value Population Source of information

Population of Beijing 100% 25,000,000 Population trends


Secondary
Young people 18-24 10% 2,500,000 National Statistics
sources of
information

Young people 18-24 in 60% 1,500,000 Department of education


higher education

Single (not married) 70% 1,050,000 Local statistics

Prefer western style drinks 55% 577,500 Market research survey

Expressed a preference for 60% 346,500 Consumer testing results


the new drink

Those who will actually 40% 138,600 Company experience of


purchase when given the those that will actually
option purchase Primary
sources of
Those who will continue to 20% 27,720 Forecast based on
information
purchase after an initial experience of
period of one month introducing new
products into the
Chinese market

Number of units consumed 2 units 55,400 units


per week per week per week

We can see that the expected quantity, based on our segmentation


variables, secondary research sources, and our own primary research
data, calculates the size of this group as 27,720 people, with a total
weekly consumption of 55,400 units.

ACTIVITY
Using the segmentation activity data listed, answer the following questions:

1. What are the strengths and weaknesses of this type of forecasting


model?

2. What will be the final outcome if only 30% of this age group are in
higher education?

3. What will be the outcome if we introduce the population of


Copenhagen in Denmark of about 6 million, and leave the other
variables as they are?

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ACTIVITY FEEDBACK
1. We can consider the strengths followed by the weaknesses.

Strengths

This forces a potential entrant to the market to face up to the reality of


new product take-up. When this technique is used as a consultant to
firms, they are very often surprised by the results of this. Imagine if the
starting population is Copenhagen with a population of only 5 million
people, then the final figures may seem insignificant.

The system enables organisations to improve other aspects of their


marketing planning. They are able to see the impact of improving the
take-up of their new products through communications and samples.

If it is used properly then it forces companies to invest more in research


and may reduce the risk of failure. Market research serves to reduce
risk taking in marketing decisions. It is better to invest £ 20,000 in
research to find out a product will fail, than an extra £ 500,000 in
launching in and then see it fail.

Weaknesses

Companies who are determined to make their product succeed tend


not to be pessimistic enough in their forecasts.

The system is only as good as the accuracy of the data. If the figures are
20% out in the beginning then this will have a significant impact on the
outcome.

The segmentation variables, while only acting as guidance, need to be


more accurate and reflect lifestyle data.

2. If only 30% of the age group are in higher education, then this equates
to:

There are 750,000 people of this age group in higher education.

Those that are single and not married = 525,000

Those that prefer western style drinks = 288,750

Those that expressed a preference for the new drink = 173,250

Those who will actually purchase = 69,300

Those who will continue to purchase after a month = 13,860

With an average consumer buying 2 units per week = 27,720

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This is half of the original estimate and a significantly different


proposition.

3. If we introduce the population of Copenhagen then this will equate to:

6,000,000 starting population

600,000 18-24 year olds

360,000 in higher education

252,000 single and not married

138,600 preferring this type of drink

83,160 preferring this actual drink

33,264 who will actually purchase

6,654 who will continue to consume after one month

This equals 6,654 multiplied by 2 units per week = 13,308 units per
week

Market segmentation and positioning


Market segmentation is the marketers way of trying make more
effective use of their resources. The recognition that even major
companies, operating in high value markets, are more effective if they
target specific groups of consumers, has encouraged more companies to
opt for segmentation strategies. The key to successful segmentation is
through market research activities which give insight in to consumer
decision making. Our aim is to identify groups of consumers with
similar wants and needs who will respond to a similar marketing
programme.

In order to segment markets, Hollensen (2003) considers the


requirements for defining market segments

· Adequate size – segments should be large enough to


justify a separate marketing programme.

· Measurability – as in all marketing activities, we need to


be able to quantify the likely size and value of particular
segments.

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· Accessibility – having identified a likely segment, we


must then be able to access them with our product or
service.

· Responsiveness – we must understand how segments


react to various marketing mix elements.

· Compatibility – we must ensure that our strengths as a


company match the needs and wants of or chosen
segments.

Segmenting in B2C markets


There are several criteria that we might use to segment markets.
Hollensen suggests four broad categories of sociodemographic,
behaviouristic, psychographic and benefits sought. We need to be
aware that while some of these segmentation variables are easy to
measure, they might not be representative of the segments we need to
research.

Sociodemographic variables
These tend to be the most often cited and are usually the easiest to
measure. While we can use age, gender, family life cycles, geographical
locations, income, occupation and education, we might also want to
consider race and ethnic origin, social class and events such as holidays,
sports or birthdays

Behaviouristic variables
Here we are attempting to segment based on a consumer’s behaviour
towards a particular product, using past behaviour as a guide to future
behaviour or consumption. We might also segment by a consumer’s
readiness to purchase a product. We might also segment based on a
consumer’s media and buying habits. To what extent has our segment
changed its shopping behaviour with easier access to the Internet? We
might consider our consumers’ experience and ability to use a product.
Consider the computing market, or is it the IT solutions market? We
might also consider consumer loyalty towards our products. Are there
groups of people who are intensely loyal to our brand or do they switch
from brand to brand? We might consider the case of the newspaper
where there has been intense loyalty towards individual brands. We can
also segment by usage frequency. Are our consumers heavy users or
light users? Can we convert our light users to become more frequent
users? We can also look at our consumers’ attitudes to wards innovation
and their choice of products. Some groups of people are avid consumers
of new products, whereas others lag far behind.

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Psychographic variables
Segmenting by psychographic variables perhaps gives us a much better
idea of how people consume, but it can be more difficult to identify and
access them. Here we consider segmenting by lifestyle and personality,
segments that might not be easy to measure using sociodemographic
variables. The explosion of ready meals in developed markets suggests
that consumption is due mainly to busy lifestyles. Is this also the group
that consumes recipe books for quick meals, but still doesn’t find time to
cook? It is likely that we might be able to create sub segments by age and
occupation.

Benefits sought variables


When we use benefits sought from a product or service to segment our
customer base then we are using an area which is perhaps the most
difficult to segment. We need to consider factors such as reliability of the
product, taste or even levels of service. We may find that consumers in
these groups might be spread across a wide range of ages and social
groups.

Segmenting the Ford way


If we look at Figure 4.7 we can see the variables which Ford used in their
dealership training.

You will see that the criteria, in line with those that we have already
considered in this unit, act as a way of categorising actual and potential
customers. Your first reaction might be to look at this numerically and
start to calculate the various combinations. This isn’t necessary, as we
are looking for specific segments that are most likely to buy our cars.
Remember that we have our existing data and we will understand that
there are already natural segments.

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SOCIO DEMOGRAPHIC VARIABLES Age

Sex

Education

Occupation

Family

Family life cycle

Income

Home owning status

Ownership of durables

Socio-economic grouping

GEOGRAPHIC INFORMATION Region

Area type

Area density

Neighbourhood type

House type

BEHAVIOURAL DATA User status

Use frequency

Brand/Dealer loyalty

User value (existing and potential)

PSYCHOGRAPHIC PROFILE Personal values and attitudes

Attitudes to fashion

Life style orientations

System of assessing benefits

Figure 4.7: Segmenting the Ford way.

ACTIVITY
Using the categories in Figure 4.7:

1. Say how the dealers might use segmentation to target potential


customers.

2. Suggest where they can obtain the data necessary to make use of these
segmentation variables.

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ACTIVITY FEEDBACK
1. By encouraging dealers to segment the market for cars in their area,
this will help them to identify and compare different marketing
opportunities. In many cases, income will not be the main variable, but
the personal values and attitudes of some customers. This might be the
case in some developed countries. In the UK, a high percentage of the
population will borrow money in order to purchase a car, which they
will justify as their car is seen as a necessary purchase. In many cases
they will incur unnecessary debts in order to run a car. This decision is
more a result of personal values, rather than for economic reasons.

By recognising these segments, dealers will be able to adjust their


marketing mix, in terms of the message they use in their
communications or the way that they send out messages. They have a
much better chance of reaching their target. Ford had taken note of the
success of the Renault Clio early advertising campaigns. The message
seemed to be addressed at the younger female market, when in fact
they knew that this would appeal to the young at heart, increasingly
more independent over 40 year old female.

The dealers will also be able to value a particular segment and adjust
their marketing expenditure in line with the value of the segment.

2. The dealers were encouraged to look at data sources in terms of


internal, or information which they already had, and external sources,
some of which were available to them through the Ford marketing
department.

Their internal sources were their sales, orders and service records, as
well as any information they held about enquiries or responses to their
marketing activities. External sources included lifestyle data provided
by Ford’s market research agency and general research data such as
Mintel and Euromonitor.

Ford’s own research across European markets, identified the outer


directed groups, who were status conscious, image aware,
materialistic, security conscious and optimistic about the future. This
group of people were attracted to specific brands, and price
considerations were not the most important.

Another important group were inner directed, had a creative outlook,


worried about the look of their purchases (aesthetics), were
independent and pessimistic about things. They worried about fuel
emissions and wanted to know that the car they purchased had
features to deal with this.

Ford’s earlier work on design and image appealed to customers who


were optimistic and confident as a result of their increasing affluence,
and wanted freedom, but at the same time they were concerned about

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increasing levels of pollution. Ford looked to deliver a brand which


balanced this desire for pleasure with the need to feel responsible.
Considerable emphasis was placed on training dealers to recognise
these traits.

Segmenting the B2B market


In Unit 3 we looked at the characteristics of B2B markets. In comparison
to B2C markets, B2B customers tend to be fewer in number, will usually
make high value purchases and rely upon a group of people or the
decision­making unit (DMU) to purchase a product or service.
Traditionally attempts to segment focused mainly on the size and type
of company. However, we can consider the decision making unit
(DMU) in companies, and segments based on the attitude of the
members of the DMU and their attitude towards their suppliers.

Hollensen (2003) proposes the approach of Bonomo and Shapiro (1983)


and their micro/macro segmentation approach.

Macro segmentation
Here we consider variables such as the type of industry, the size of
companies within the market, their relationship with the end­user
market and the way in which the products are used.

Micro segmentation
Here we focus on the internal characteristics of customers and consider
the personal characteristics of the buyers within companies. This can
also focus on the personalities of buyers and the relationship that they
enjoy with sellers.

Hollensen (2003) suggests a relationship approach to segmenting the


B2B market, based on buyer loyalty and the perceived value to the
seller. In Figure 4.8 we can see the variables in the segmentation matrix.

In order to locate within the matrix we must measure the buyer’s degree
of loyalty against the value to the seller. Where there is a high buyer
loyalty and high value to the seller then we have a partnership.

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B uyer loyal t y
Low High

Low

1. S impl e ex change 2. N ot r elevant

V alue t o
seller
( per cept ion)

3. N ot r elevant 4. P ar t ner shi p

High

Figure 4.8: Relationship framework. Source: Hollensen (2003).

Targeting
We need to be able to divide our potential market into those segments
which are most likely to respond to our product or service while
discounting those who are least likely to respond. If we are players in
international markets then we will carry out the same process across
overseas markets.

Positioning
In order to understand positioning we must consider the competitive
nature of the markets in which we operate. If we are competing in the
soft drinks market, then we are likely to face strong competition, and in
many cases we are marketing quite similar products. We can use
positioning, therefore, to differentiate our product from those of our
competitors. In order to position we must first understand the way that
our customers see our product. We are in effect trying to give our
products their own personality that might make them stand out. In
most cases our products have many attributes but we use them to
position the product. In the Polish beer market the leading brands have
used positioning in order to stake a claim in the market and prevent
their competitors from making the same claim. One brand has claimed
the traditional position while another has claimed the sporting position
by associating itself more with sports. Consider the car market in your
country and how companies have positioned their products.

In some markets where we sell high value products, then we must


emphasise image in order to position the product. If we operate in B2B
markets then we must build up brand image and emphasise our leading
edge technological developments.

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When we consider the positioning of our product or service, we are


trying to create in the mind of the consumer an image, or a perception, of
our organisation and its position relative to that of our main competitors.
Once we have claimed our position in the marketplace, then it can be very
difficult for our competitors to make the same claim. We must, therefore,
position our product or service in a way that makes consumers feel as
though it is providing the main benefits for which they are looking. At the
same time this positioning will give us an advantage over our
competitors. This decision to position in the market, will have
implications for all the elements of out strategic marketing programme.

We can use a diagram, or map, to show how customers perceive certain


types of products in relation to competitive products. We can use this
either at a product or brand level.

In the perceptual map each axis represents the two extremes of an


aspect of the product, based on the most important variables, which we
establish through our consumer research. We are going to look at an
exercise in which we use a positional map for breakfast foods, where we
consider the time taken to prepare and consume the product versus the
cost of consuming them. Remember that the variables must also be the
most important to consumers in the market.

CASE STUDY ACTIVITY
Read the Ballygowan case study in Hollensen, page 304, and answer the
following questions:

1. Explain the differences in buying behaviour for

a) bottles of mineral water

b) water coolers.

2. Using the information contained in the case study, where do you think
that Ballygowan should target its marketing resources?

CASE STUDY FEEDBACK
Ballygowan

1. a) Bottles of mineral water would be predominantly sold in the B2C


market, targeted at individual households or family units. This would
appear to be a growing market.

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b) The water cooler is mainly sold to B2B markets, with organisations


the main target group. A rapid deterioration of water quality in some
markets has seen an increase in the number of water coolers sold in the
domestic market.

2. Current market share figures suggest that as the market share of


Ballygowan is so low in the UK, where they only have a share of 1%,
that effort should be made to increase its sales.

ACTIVITY
Using the table below construct a perceptual map for the following breakfast
foods. You will need to plot toast or bread, cold cereal, hot cereal, a cooked
breakfast and new Nutrigrain nutritional breakfast bars.

You can also use the map to show how typical breakfast products in your own
country are positioned.

ex pensive

t ime
quick
consuming

inex pensive

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ACTIVITY FEEDBACK

ex pensive Young
USA professionals
breakfast who are time
poor but
Cooked Nutrigrain concerned
breakfast bars about health

pancakes
and
syrup
t ime
quick
consuming
Hot
cereal Cold Popular
cereal with children

Toast/ Typical French,


Typical Hot coffee
bread Spanish or
breakfast and buns
Italian breakfast
in China
inex pensive

You will see that based on a European perspective that cold cereals, toast or
bread and Nutrigrain bars are all relatively quick, whereas a cooked breakfast
and hot cereal are more time consuming.

How did you get on plotting the typical breakfast from your own country? You
might have a range of breakfast options to choose from, a feature of many
cultures. It is likely that the time you have to prepare and consume your
breakfast will determine your choice. Travelling to different countries, one
usually finds that breakfast can present a huge culture shock. Consumers from
those countries who are used to eating a bread based product with coffee are
horrified by the sight of a cooked British breakfast.

Parents are also interesting consumers in many developed countries. In families


where both parents work, breakfast is essential for growing children, but time
can be a major issues. The option of cold cereals, particularly once the children
are able to serve up their own breakfasts, is the perfect choice for parents.
Cereal packets left on the table with activities and information, are also good
ways to keep children entertained at the table.

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Competitive strategies
In order to consider the strategic options available to us, we use Michael
Porter’s matrix. Porter developed a matrix which considered a
company’s position in the market based on its ability to differentiate its
product or service from those of its competitors, and also its costs,
relative to those of its competitors.

T hr eat of new ent r ant s


Barriers to entry
Economies of scale
Product differentiation
Capital requirements
Switching cost to buyers
Access to distribution channels
Other cost advantages
Government policies
Incumbants’ defence of the market share
Industry growth rate

D et er minant s of supplier power R ivalr y among ex ist i ng fir ms D et er minant s of buyer power
Supplier concentration Number of competitors (concentration) Number of buyers relative to sellers
Availability of substitute inputs Relative size of competitors (balance) Product differentiation
Importance of suppliers’ input to buyer Industry growth rate Switching costs to use other product
Suppliers’ product differentiation Fixed cost vs. variable costs Buyers’ profit margins
Importance of industry to suppliers Product differentiation Buyers’ use of multiple sources
Buyers’ switching cost to other input Capacity augmented in large in increments Buyers’ threat of backward integration
Suppliers’ threat of forward integration Buyers’ switching costs Importance of product to the buyer
Buyers’ threat of backward integration Diversity of competitors Buyers’ volume
Exit barriers
Strategic stakes

T hr eat of subst i t ut e pr oduct s


Relative price of substitute
Relative quality of substitute
Switching costs to buyers

Figure 4.9: Porter’s Five Forces.

It is important for us to assess our position against our competitors in


the market. We must also take into consideration our portfolio of
products, which means that while we are able to focus on a particular
market, or achieve cost leadership in others, it might be acceptable to
have a product in the disaster box.

The most important consideration, in line with comparisons to warfare,


is that we understand the market, that we understand our competitors
(enemies), and that we try to introduce new products or services which
our competitors aren’t expecting.

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CASE STUDY ACTIVITY
BMW’s Mini

Read the case study in Hollensen (2003), page 344, and answer the following
question:

Consider the personal car market and suggest some segmentation categories.
List the main segmentation criteria which you think are the most relevant.

CASE STUDY FEEDBACK
Developed car markets are usually highly segmented, and marketing training
for the dealers who sell cars focuses heavily on how to target specific segments.

If we consider demographic variables then we might segment by gender, the


age of the driver, the size of the household, occupation, income and education.

If we segment by social group then that would be lower, middle and upper
middle.

Segmenting by type of family might include single households, couples, married


with or without children and even breaking this down into the age of the
children in the family.

Vehicle usage such as local journeys only, transporting children, utility vehicle
or family vehicle might also be considered.

Psychographic variables such as lifestyle and personality could also be used to


segment the market. New vehicles with a stylish image might attract an
outgoing person or an achiever.

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REVIEW ACTIVITY
1. Why do companies use product portfolio analysis to help them
construct their marketing plan?

2. What are the advantages and disadvantages of using portfolio models in


marketing planning?

3. Why do we use a SWOT analysis, and which factors do we need to take


into account when using it?

REVIEW ACTIVITY FEEDBACK
1. The product portfolio approach forces companies to assess the
performance of all of its products or services over time. By categorising
these products, it enables them to divert resources into supporting
products with market potential, while also helping them to sell off or
lose products that lose money. The portfolio approach, therefore will
help a company to develop strategic alternatives for its products: a key
consideration in marketing planning, and also identifying new
opportunities.

2. The main advantages of portfolio analysis are that they are easy to use
and give clear strategic direction. The simplicity of the models means
that it is easier to use it as a training tool in companies. Their strategic
value is in the fact that they can show strategic activity in the market,
and also be used to track the developments of leading competitors, and
so give a clearer indication

Their biggest disadvantage is in the fact that it is sometimes difficult to


accurately define a target market or target segment. While it is a simple
tool, many feel that is too simplistic. Many portfolio models are only
based on two variables and so do not always give an accurate picture of
the market.

3. The main purpose of a SWOT analysis is to identify the most


appropriate marketing strategies that our company is able to follow. Its
accurate use will help us to develop the most appropriate marketing
plan. When using the SWOT, we should be looking for information that
will help us to make the best decisions based on an accurate reading of
both our internal strengths and weaknesses, matched to the best
opportunities, while taking into account our biggest threats.

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References
Doole and Lowe (2004). International Marketing Strategy. Fourth Edition,
Thomson, England, ISBN 1844800253

Hollensen, S, (2003), Marketing Management: a relationship approach.


Pearson Education, Essex, England, ISBN 0273643789

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Unit 5

Developing Marketing
Programmes

LEARNING OUTCOMES
After studying this unit you should be able to:

· Demonstrate an understanding of the role of product or service


strategies in developing marketing plans.

· Recognise the importance of new product development (NPD) and


the role of the product life cycle in marketing planning.

· Identify the factors which influence price and pricing strategies.

· Evaluate the range of distribution channels available to companies


when devising their distribution planning.

· Consider the factors which determine a firm’s distribution strategy.

· Recognise the range of marketing communications tools available to


the firm.

· Demonstrate an understanding of how to apply the most


appropriate communications tools when developing a plan within a
set budget.

Introduction
Having considered the internal and external environment in previous
units and looked at the various segmentation options open to us, we
now move into the compilation of our marketing programme. We
should now have a much clearer understanding of the competitive
environment in which we operate, and through an assessment of our
current position and those of our competitors we are now in a position
to set out our marketing activities. This has traditionally been referred
to as developing our marketing mix, in which we make decisions about
the product, place, price and promotion. We will also set objectives for
each of the activities which we undertake.

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Product or service decisions


In Unit 4 we looked at the product and how we might gain competitive
advantage. We will now look at the product mix, levels of service, new
product development, the concept of the product life cycle and the area
of branding and brand equity measurement.

We now have a good understanding of our products and services and


understand that we need to consider them not in terms of their features,
but in terms of the benefits which they offer our customers. If we are
also to communicate this message to our staff then we need to be clear
about this. If we consider the comment of a former L’Oreal Marketing
Director in charge of cosmetics, he said ‘in the factory we make
cosmetics, and in the marketplace we sell hope.’ This illustrates the
importance of understanding the needs of our customers. If we think
back to the exercise in Unit 3 where we looked at competition, we can
see that our competition may even come from a product in another
product category.

Augmented product concept


If we look at Hollensen 2003, page 452, he considers the breakdown of
the product. As a marketer, and faced with constant changes in the
market, we should always be looking to augment, or increase, the value
of our product to our customers. If we look at Figure 11.2 in Hollensen,
he describes the three levels of a product.

Core product benefits


At the first level of the product we consider the performance of our
product, the features of the product, its level of technology and its
image. We must bear in mind that competitive products might also offer
the same core benefits.

Product attributes
At the next level of product we consider factors such as design,
packaging, quality of production and, in the case of cars, colour variants
and design specifications. Where customer service is an important
component of the product, then we can also evaluate staff behaviour.

Support services
At the third level of the product we look to find components which will
help us to differentiate our product. By including delivery, installation
or after­sales service, then we are adding value to our product. At all
levels of the product, our research will concentrate on understanding
these levels of product as well as those of our competitors.

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ACTIVITY
Gym manager

Imagine that you are the marketing manager of a new multi-purpose gym in a
country where a high percentage of the population are overweight or in need of
more frequent exercise. Being a member of a gym is an obvious solution to help
people improve their fitness. Why is it that the biggest problem facing us as the
marketing manager is not just recruiting members, but also trying to stop new
recruits from terminating their membership after only 3-4 months?

ACTIVITY FEEDBACK
Let us think about this from the customer’s point of view. Perhaps what the
customer is buying is the expectation of improving their health, losing weight
and with it an improvement in their appearance, or is it what we might call
experiencing the ‘feel-good’ factor?

You might argue that the cost of the monthly membership of around £40 might
cause people to eventually leave. This may well be the case, but the
membership fees are discussed at the beginning and we can assume that the
customer found them to be affordable.

What about lifestyle? We may have customers who belong to the ‘cash-rich,
time-poor’ segment who, while they enjoy their visits, can’t then fit them in.

Perhaps we need to research customer expectations. Is it not perhaps the case


that what we want is a change in body shape and a reduction in weight? However,
it is unrealistic to achieve any noticeable change in a very short period of time.
Here customer expectations are unrealistic. Some gyms are now sending text
messages to their members to encourage them to turn up more frequently.
Certainly what we need to do is to understand our gym customers and to
segment them through research. This will then provide us with the information
that we need to develop our future marketing programmes.

Service strategies
You may have more experience of services than you do of physical
products and we need to understand the key aspects of service. You

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may also work in a product environment where service is an important


part of the product offering. Academic research into the area of services
marketing is increasing. What are the key attributes of a service that
make them different to products?

Intangibility
A key characteristic of a service is intangibility, meaning that it can’t be
touched as it doesn’t exist in a physical state. If we consider the
experience of watching a film, going to the theatre or attending a major
sporting event, then what is it that we can take away from the
experience? This is an issue which the growing area of sports marketing
deals with. In the case of the marketing manager of a sports team, the
performance of the team or the outcome of the event are often
unpredictable and uncontrollable. However, research by Tomlinson et
al (1995) showed that sports fans attend sporting events not just for the
event itself but also for pre­match refreshments and other factors that
contribute towards the atmosphere.

Perishability
A key characteristic of a service is the fact that it might only have a
limited life. If we consider the case of a visit to the theatre or a one­off
event, then an empty seat represents lost revenue for the theatre owner.
New low­cost airlines have introduced a more flexible approach to
pricing in order to try and ensure that they make the most effective use
of their capacity.

Heterogeneity
In service situations the experiences of customers vary and may depend
upon the levels of customer service. In this case people are very
important in helping to deliver the best experience for customers. In a
restaurant we have chosen to eat a particular style of cuisine but our
enjoyment of this might be affected by the poor service of the staff in the
restaurant.

Inseparability
If we refer back to our experience of the sporting event we can’t separate
the event from the consumption of the event. In order for our service to
be successful then we must be able to reach potential customers in a
specific time frame.

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Types of service
Hollensen (2003) refers to three broad categories of services.

People processing
In this situation customers become part of the production process, in the
case of students at a university or diners in a restaurant.

Possession processing
Here the service is being performed to the possessions of the customer
in the case of repairs to a customer’s products.

Information-based services
These include services such as telecommunications or information
services where the customer isn’t involved in the production of the
service. Recent improvements in technology have meant that this is one
of the fasting growth areas in business.

Service quality gap


We need to be able to measure service levels within our organisation as
part of our focus on customer satisfaction. Service levels can be
communicated to staff and can act as targets within the organisation.
Not only do we measure service levels but we must also understand
what our customers’ expectations are of service. It is important for us to
build up a reputation for good service delivery and to maintain
expected levels of service. Some organisations build this in to their
systems and encourage regular customer feedback. Good hotels strive
to deliver a regular level of service in an attempt to gain regular business
and in order to develop their reputation.

After sales service


This is still a major area of weakness for companies in service industries.
Many can cope with systems and delivering good service, but the real
test is how they deal with after sales service. Hollensen (2003) cites a
number of key writers who suggest that, in many cases, after sales
service offers companies an opportunity not only to build reputation,
but also to increase profitability.

In Unit 2 we discussed the approach of Winterhalter, the manufacturer


of dishwashers, who offered a full service contract, thus tying in more of

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their customers to the business. We must consider the service needs of


our customers and look at ways of setting up service contracts. Not only
does this improve customer satisfaction but it also helps to develop
relationships with customers and create barriers for competitors.

New product development


When we consider new product development (NPD) we know that extra
resources are needed to finance these developments, that the risk of failing
may be high yet to do nothing may offer our competitors an opportunity to
develop new ideas and gain valuable market share. We might also be
competing in the communications market where innovation is essential
just to stay in the market. The developments in the mobile phone market
are an example of how quickly products are changing.

Hollensen (2003) talks about the modular approach to developing new


products as a way of reducing overall investment costs. Here companies
share the cost of developing components, processes, knowledge and
people. The main benefits to the company are that they spend less time
and money developing new products, bring down the variable cost per
unit by sharing production and reduce the overall cost of investment in
production. Black and Decker have used this approach to develop a
wide range of hand held tools for growing domestic markets.

CASE STUDY ACTIVITY
Joyco India

Read the case study in Hollensen, page 481, and answer the following
questions:

1. What are the criteria for successful marketing in the Indian bubblegum
market?

2. What are the main reasons for Joyco’s success over Perfetti in the
bubblegum market?

CASE STUDY FEEDBACK
1. In such a large country it takes time to achieve widespread distribution.
The fact that Joyco have been able to reach 400,000 outlets using 1650
distributors has contributed to the success of Joyco.

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The use of innovative promotional campaigns targeted at young people


has also been important. Joyco’s introduction of a transfer incentive
caught the imagination of its consumers and this sales promotion
campaign delivered an increase in sales.

Joyco not only achieved widespread distribution but also introduced


glass jars to display their products which proved successful in keeping
retail outlets happy.

Joyco resisted the temptation to target several segments, unlike its


competitors, but concentrated on its key segment. The company also
timed its entry into the Indian market with considerable skill and
helped to grow the market through its innovation and understanding of
consumer needs.

2. Apart from the factors already identified, Joyco made an important


assessment of the market and the needs of its consumers, and
developed its product strategy to meet the challenge. As a result they
targeted the most important customer segments, and developed the
most appropriate marketing mix. They appear to have developed good
relationships with its distributors and looked at ways to stay ahead of
their competitors.

Product life cycle

Sales & profit


($) Sales

Profits

Introduction Growth Maturity Decline


Time

Figure 5.1: Product life cycle.

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The product life cycle theory is recognised as a key tool in helping


companies to decide future product strategy. Companies are however
advised to use the model with caution and in the case of managing
portfolios, it should also be used with portfolio analysis such as the
Boston Consulting Group (BCG), as highlighted in Unit 4.

Perhaps it is our better understanding of how to improve the new


product development process which is having an impact on product life
cycles. We must recognise that some products follow a fashion life cycle
which means that some product sales decline very rapidly as the
product reaches the end of its fashion life cycle. Much greater emphasis
has also been placed on the development of new products in
international markets, supported by rapid technological developments.
Greater emphasis on cost control in the production process has also
given companies more flexibility when setting prices, enabling a much
quicker take­up of new products. The ownership levels of mobile
phones and personal computers have increased rapidly and are
projected to grow significantly.

Pricing
Pricing is possibly one of the hardest components of the marketing mix
to get right, and can cause the most discussion within the company and
also with distributors and intermediaries. How many consumers are
concerned with paying low prices yet buy products which have high
value added? Is it in our interests to steer consumers away from price
discussions towards looking at the extra value our products or services
offer? The answer to these questions is that there are many examples of
where we pay relatively high prices for products which have a low cost
of production and it is definitely in the interests of companies to add
value for their customers. The impact of a price war is considerable. It is
not in our interests to take part in a price war unless we know that we
can win!

The sign of a highly developed market is very often the amount of value
which companies have added. Consider the all­inclusive holiday
packages which are increasingly popular where the price includes all
food, drink, entertainment and extra activities with the hotel complex.
What is the main attraction for the buyer? Is it not the fact that they don’t
have to worry about working out how much spending money to take or
that they don’t need to worry about carrying money around?

Pricing from an economist’s and accountant’s point of view

The price of a product will influence the demand for that product in the
market. The economist’s view of pricing is that the demand for a
product is based on the price set. This is referred to as the price elasticity
of demand. In this case higher prices will cause demand to fall and
lower prices will make demand increase.

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The accountant’s viewpoint is based principally on the cost of


producing goods or supplying services. Once the sales of a good reach
the level of the costs of the product, it is said that the break­even point
has been reached. In order to calculate the break­even level, we must
calculate the fixed costs, which are those costs which a company has to
pay in order to be able to produce costs, such as rent or premises. On top
of that the unit costs, or the additional costs of producing each unit, are
called variable costs.

These theories of pricing do not explain the principal of premium


pricing, whereby goods which command a premium price still
command a high level of sales.

ACTIVITY
Consider the all inclusive price of a two week holiday in Cuba, where all food,
drink, evening entertainment, horse-riding, tennis, dance lessons, excursions,
Spanish lessons, flights, child care and transport to and from the airport are
included.

1. What are the benefits for the customer?

2. What, if any, are the benefits for the tour company or hotel selling the
offer? You will need to focus on cost, profit and adding value.

ACTIVITY FEEDBACK
1. The benefits for the customer are:

The piece of mind of knowing that you don’t have to pay for expensive
extras while on holiday such as horse-riding or local excursions.

The customer doesn’t need to worry as much about money transfer or


changing to local currency or having to carry money at all times.

Frequent travellers to overseas destinations have grown tired of hotels


charging excessive prices for food and drinks not included in the cost of
the holiday.

2. The benefits to the hotel are:

Sales volumes increase overall enabling the hotel to negotiate lower


costs.

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The hotel gains a higher overall percentage of the holidaymakers spend


which can increase overall profitability.

Perhaps the emphasis is more on customer experience and less on


maximising sales.

If consumer satisfaction is high then loyalty can improve and increases


repeat business.

While there are benefits to both parties the main aim is to deliver
customer satisfaction and experience.

The economist’s view of pricing

Pricing rules
Let us examine the importance of pricing to the company once again
and why it is important to fix the right price.

1. The price that we charge for our product or service will help to
position the product in the marketplace.
2. The value that we add to our product or service will help us to
hide the true price of the product.
3. The price that we set determines our profit margin and will
ultimately provide us with some of the funds that we need to
develop our new products or services. This will also include an
allocation of funds to cover marketing costs such as advertising.

In many global markets, women’s perfume is positioned as a premium


priced product. However, very few, if any of its consumers are aware of
the cost structure of this type of product. If you suggest to a consumer
that the cost of the bottle may be higher than the cost of the perfume
itself, your comments would be dismissed. It is estimated that if a bottle
of perfume sells for US $ 40, that the cost of the perfume might only be $
3 USD but that the packaging and the bottle might be US $ 6. The cost of
advertising and promotion might easily be US $ 5 per bottle. Of course,
very few perfume manufacturers would ever divulge this information,
but it tells us a lot about price, image and positioning.

Pricing developments
We are currently witnessing significant changes in pricing in certain
B2C global markets. This is due in part to rapid technological
innovation which delivers superior new products at lower costs. We

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might consider the personal computer (PC) market where price levels
have fallen rapidly and in a very short period of time. Each new version
of a PC has more functions, more memory and at a relatively lower
price. A digital camera which cost US $ 500 two years ago can easily be
purchased for US $ 200 now. It is only because firms are competing in
global markets that they are able to spread the development costs of the
product, and sell much larger volumes for very low profit margins, but
who ultimately are producing an adequate rate of return on their
investment. We need to consider, therefore, the factors which we need
to take into consideration when fixing prices.

Factors influencing pricing


Hollensen (2003) considers the following factors we need to take into
consideration when setting our prices.

Firm level factors


These factors will determine the pricing levels which we set for our
products. If our corporate objective is to penetrate a market then it is
likely that our pricing will need to be set at a level that allows rapid
penetration. This could well be setting prices at levels lower that the
existing market price.

If we aim to position our product at the premium end of the market then
we will use premium pricing in order to position. Remember the
example of perfume and how this price will be based on the levels
necessary to position and not necessarily based on the costs of
producing and marketing the product.

Product factors
In Units 2 and 3 we looked at internal and external factors which might
contribute to our success or failure in the marketplace. Our
understanding of our product features, in relation to our competitors’
products or services will help us to set the most appropriate prices.
Hollensen (2003) considers price escalation, where goods are sold to
overseas intermediaries, whose additional costs may cause the price to
the end consumer to rise dramatically. It is essential for us to be aware of
this concept and to encourage intermediaries to maintain cost control.

Environmental factors
We need to be aware of factors in the marketplace which might impact
on prices. In overseas markets we should understand tariffs and
government regulations or taxes which will raise the final price. We are

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also aware that a change in exchange rates can either increase the costs
of goods to overseas customers or might bring down the price.

Market factors
In setting prices we need to understand the dynamics of the market in
which our goods or services are going to compete. Strong competition is
likely to put pressure on pricing and we have already established the
need to understand our competitors. Faced with strong competition we
must consider the positioning of our product and look to add value. We
have discussed ways in which we can erect competitive barriers for our
products, and one of these is to include extra services which tie the
customer in to our business.

Pricing strategies
Consider the pricing strategies that are open to us. Before we can apply
the appropriate pricing strategy we need to understand our competitive
position in the market. There are two broad approaches, namely
penetration pricing and skimming.

If we adopt a penetration pricing strategy then we use price as a way of


gaining rapid market share, in what would be considered to be an
aggressive strategy by our competitors. In order for us to be successful
we would need to know that our competitors were not in a position to
make a rapid response. We might use penetration pricing to win
customers in an attempt to set up competitive barriers.

A price skimming strategy is where we are able to charge a premium


price as a way of recouping some of the money that we have invested in
bringing the product to the market. The possibilities of adopting this
strategy are reduced to rapid technological development in certain
product categories.

Experience curve pricing


It is generally accepted that as a company gains experience in producing
a product, that the cost of production will fall. Some consultants teach
business executives about a concept called dynamic accounting, where
companies are encouraged to look at ways of reducing the cost or
production. This is important in markets where prices start to fall.
During this phase it is the inefficient producers that will be forced out of
the market place.

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Product line pricing


In order to be able to target different segments in price sensitive
markets, we can develop new products that will form part of our overall
product line. In the case of car companies, they offer a range of products,
with some at different price levels. This allows them to position each
product appropriately.

Price bundling
In order to place more emphasis on product value, we should consider
the issue of price bundling. Here we attempt to bundle extra service to
our product offering. While this adds value to the customer, it also
enables us to spread costs across a number of different services.

CASE STUDY ACTIVITY
Harley Davidson

Read the Harley Davidson case study in Hollensen (2003), page 514, and
answer the following questions:

1. What are the main reasons for Harley Davidson’s success in the last 15
years?

2. Describe Harley Davidson’s general pricing strategy.

3. What does the company’s positioning have to do with its pricing


strategy?

4. Should Harley Davidson alter its price, given that there are strong price
pressures from rivals?

CASE STUDY FEEDBACK
1. The company has realised the value of the Harley brand and the
relationship it enjoys with its existing and its potential customers.

The bike has ‘symbolic’ meaning, and according to its followers stands
for freedom, adventure and individualism. Its customers also expect to
pay a premium in order to own this product.

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Harley Davidson have added value to their core product through


selling finance, insurance and merchandise.

2. The Harley pricing strategy is clearly premium price, which Harley will
try to maintain by adding value and protecting the image of its brand.

3. As Harley are able to trade on the reputation of the brand, their


customers do not see price as a deterrent to owning the product. One
could argue that the exclusive prices appeal to their customers and add
to the exclusivity of the bike.

4. This is a question that the marketing team of Harley ask themselves all
of the time. It is unlikely that a competitor will develop a product which
will attract the main Harley customer and so a premium pricing
strategy would be followed. Harley may choose to use a new brand to
compete in other sectors of the market.

Distribution
The basic function of distribution is to link the manufacturer of goods
and services with final consumers. The decision we face is then to
decide how many intermediaries are needed to link us, as the producer,
with the marketplace. The technological revolution in consumer
retailing continues to change the marketplace. Current estimates for
goods purchased via the Internet in the UK during the Christmas
holiday period, suggest that around 5% of all purchases will be made
online. The expertise which we gain in distributing goods or services in
our domestic market may not be transferable to overseas markets,
where distribution systems vary. We must also take into consideration
the fact that the cost of distributing goods may account for about 25% of
the final sales price, which means it is important to find the most
appropriate channels. Perhaps with this in mind we should reconsider
technological innovations and their ability to deliver customer
satisfaction. Reports from consumer groups in the UK suggested that as
many as 1% of all goods ordered online, failed to turn up in time for
Christmas, in spite of delivery guarantees made by suppliers.

Channel length
We must consider the number of intermediaries involved in the
channel. At the first level we start with the manufacturer. In some
markets the manufacturer then sells to the retailer. The retailer then sells
to the consumer. In this case there are two intermediaries, in what is a
traditional distribution channel. A key consideration in channel
structure is that each member of the channel needs to make a profit from
their business, and therefore each adds extra costs in the channel.

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Criteria for choosing distribution channels

Customers
An understanding of our customer groups will determine the choice of
channel. Our research is likely to show us their geographical
concentration, or where they are based, their preferred distribution
outlets, and their usage of the product or services. The key
consideration is to identify trends in distribution and to offer the
channels which best serve the identified customer base.

Product characteristics
It is perhaps obvious to state that the size and frequency of purchase of a
product should determine how it is distributed. Large business to
business products, which are likely to incur large distribution costs,
should be situated as near as possible to the final consumer. Fast
moving consumer goods, which are produced and distributed
frequently, are likely to have widespread distribution.

Competition
In specialist markets we may have little choice but to use the same
distribution outlets as our competitors. Stores which sell products for
the home and garden are usually situated in out­of­town locations and
we would have little choice but to distribute through these outlets.

Legal factors
This is particularly relevant in a number of overseas markets.
Government control over the distribution of alcohol or cigarettes may
be in place in some markets

Market coverage
Hollensen (2003) talks about the three broad categories of distribution
namely intensive (a wide number of channels), selective (which might
favour some geographic areas over others) and exclusive (which might
involve only one distributor).

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Channel length
Here we need to consider the number of parties involved in the
distribution chain. In more traditional distribution channels there may
be a wholesaler and retailer, and in some markets there may even be
more that one wholesaler. The main feature of a multi­layered channel
is the extra cost involved. As each party needs to earn money for their
work, this might impact upon the final price to the consumer.

Control
When choosing the most appropriate distribution channel, companies
face a trade off between the amount of marketing control they can
exercise over the channel and the cost of maintaining the channel.
Generally, the more intermediaries that we use in our distribution, the
less we can control distribution. The most effective control is to have our
own distribution channels, but in many markets the cost of doing this is
prohibitive.

Vertical and horizontal integration


In order to gain more control of distribution, manufacturers might
purchase channel members at the next level of distribution, or vertical
distribution. Many breweries have purchased retails outlets in order to
control the distribution of their products.

Horizontal integration is where suppliers take control of companies at


the same level of distribution, usually by taking over their competitors.

CASE STUDY ACTIVITY
Read the Denka Holding case study in Hollensen (2003), page 518, and answer
the following questions:

1. What are the advantages and disadvantages for Denka of using


franchising to enter markets?

2. What are the disadvantages of using franchising compared to selling


directly to furniture shops?

3. What are the problems and opportunities in BoConcept’s cooperation


with the Inspiration chain?

4. What are the problems of selling through BoConcept’s franchise shops


and large furniture chains?

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CASE STUDY FEEDBACK
1. The main advantages for Denka are:

Finance – the burden of financing a franchise falls to the company which


takes on the franchise of the franchisee.

Capital – the franchise does not use up much of Denka’s capital.

Marketing – the franchiser is able to develop a concept and brand


which is more likely to be recognised and accepted by the market.

The main disadvantages to Denka are:

Control – as the number of franchisees increases then the harder it


becomes to control their performance.

Poor performance – the poor performance of one franchise outlet may


also damage the brand’s reputation in the wider market place.

2. The main advantages to Denka are:

Denka retains more control over marketing effort as this is part of the
franchise package.

Denka will be able to develop its own furniture-chain brand in the


future.

The main disadvantage for Denka is:

Franchising is more resource intensive than selling to furniture stores.


Remember that McDonalds fast-food restaurants found that
controlling franchisees caused them many problems, which ultimately
reflected upon their brand.

3. BoConcept and Inspiration sell complementary products. BoConcept


gain from the access to the know-how of Inspiration, and Inspiration
may gain access to the international market through BoConcept.

4. The biggest challenge in managing multiple outlets is one of pricing.


While it is possible to suggest a recommended price, we can’t insist
upon this. If we think back to the unit where we looked at competition,
it might not be in our interests for the same product to be sold at very
different prices.

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Controlling distribution channels


In order to compare potential distributors we should apply the selection
criteria as suggested by Hollensen (2003), as shown in Figure 5.2.

Distributor 1 Distributor 2 Distributor 3

Criteria Weight Rating Score Rating Score Rating Score

Financial soundness and depth of channel 4 5 20 4 16 3 12


member

Marketing management expertise and 5 4 20 3 15 2 10


sophistication

Satisfactory trade, customer relations and 3 4 12 3 9 3 9


contacts

Capability of providing adequate sales 4 3 12 3 12 3 12


coverage

Overall positive reputation and image as a 3 5 15 4 12 4 12


company

Product compatibility (synergy or conflict?) 3 3 9 4 12 4 12

Pertinent technical know-how at staff level - - - - - - -

Adequate technical facilities and service - - - - - - -


support

Adequate infrastructure in staff and facilities 1 5 5 3 3 3 3

Proven performance record with client 2 4 8 3 6 3 6


companies

Positive attitude towards the company’s 1 3 3 3 3 3 3


products

Mature outlook regarding the company’s 1 3 3 3 3 3 3


inevitable progression in marketing

management

Excellent government relations 1 4 4 3 3 3 3

Score 111 94 85

Scales: 5 – Outstanding, 4 – Above average, 3 – Average, 2 – Below Average, 1 - Unsatisfactory

Weighting: 5 – Critical success factor, 4 – Prerequisite success factor, 3 – Important success factor, 2 – Of
some importance, 1 – Standard

Figure 5.2: Criteria for selecting channel members. Source: Hollensen (2004).

As the table shows, it is not only important to identify the key success
criteria, but also to rank them in terms of their overall importance. We
must concentrate on those factors that are relevant in helping us to

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compete in the market. In using weightings to rank the success criteria,


we may need to change this for particular types of products.

Contracting channel members


It is essential to draw up a contract with our distributors in order to
establish what exactly is expected. This will deal with issues such as
stock levels, levels of after­sales service and sales territories. This is even
more important in international markets to ensure that our distributors
stick to specific geographical areas. Other areas will deal with payment
terms and agreed levels of communication between parties.

Motivating and controlling


In order to motivate channel members we must maintain a regular flow
of information that might help to sell our products. While financial
rewards are important, there is a tendency to sell only the products
which sell well. We must take into consideration the fact that in some
outlets our distributor might also be selling our competitors’ products,
and so it is vital to provide regular communication that might help to
sell our products.

We must set specific and realistic agreed targets for our distributors,
which will enable us to have more control over the relationship. We
must also use these agreements as a way of monitoring performance,
with a view to terminating the contracts of those which perform poorly
in the market.

Retailing
The main feature of the retailing market on a global basis is the
increasing presence of global retailers. Established retailers such as
Wal­Mart from the USA and Carrefour from France continue to
dominate traditional markets, and along with Tesco from the UK are
constantly expanding into new forms of retail outlets. The strength of a
retail brand may enable certain retailers to attack new markets both
within their own country and overseas.

Retail marketing
The criteria used in Figure 5.3 are based on work carried out by Cook, G
(1997) which referred to Lindquist (1974) to identify the key
components which retailers needed to address, in order to be
customer­focused. This research, now more than thirty years old, still
acts as a checklist for retailers to follow, when trying to deliver customer
satisfaction

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IMAGE COMPONENTS ATTRIBUTES

1. Merchandise Quality

Assortment

Fashion

Guarantee

Pricing

2. Service General

Staff service

Telephone handling

Ease of return/problem solving

Delivery

3. Clientele Social class

Self-image

Store personnel

4. Physical Facilities

Layout

Shopping ease

Architecture

5. Convenience Location

Parking

Opening hours

Convenience with regard to competitors

6. Promotion Sales promotion

Displays

Advertising (local)

Advertising (brand)

Events

7. Atmosphere Congeniality

Class

“No pressure” environment

8. Institutional factors Conservative/modern

Reputation

Reliability

9. Post transaction Satisfaction

Loyalty

Figure 5.3: Retail marketing toolbox.

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ACTIVITY
Using the criteria identified in Figure 5.3, give examples of how retail outlets
with which you are familiar use the “toolbox” to deliver customer satisfaction.
Try to identify a store which you feel addresses most of these components in
their retail marketing mix.

ACTIVITY FEEDBACK
There are obviously several stores you could use to attempt this exercise.

A clothes retailer would cover most of these components, particularly the


physical environment, atmosphere, service and levels of merchandise.
Remember that it is because of these attributes that the vast majority of
consumers will not shop online for clothes.

Of course, your country of origin will also impact upon your expectations of
retailers. Shop opening times in China and Hong Kong are geared towards the
satisfaction of consumers, whereas more conservative opening hours in the UK
or France would simply not be acceptable in other countries.

Institutional factors are very often the hardest attributes to change, and usually
areas for improvement for many retailers. Mystery shoppers are used to look at
such areas and to look at levels of service. Very often it is in the area of levels of
service where we, as customers, are not aware of how the retailer deals with
some of these attributes, until we feel that we have reason to complain. As
marketers, remember that we are in the business of building up long term
relationships with customers, which in many instances can be undone by staff,
when dealing with customers who want to return goods or make a complaint.
This is an area for staff training in order to deal with returns or complaints.

Atmosphere and environment are critical success factors for stores such as
Tesco. Like many multiple retailers they are aware of the need to consider
visual aspects, aural (such as background noise), olfactory (such as scent and
freshness), and tactile components (such as softness, smoothness and
temperature). Many supermarkets have introduced in-store bakeries in order
to create a more appealing atmosphere for their shops.

The retail marketing toolkit is a useful checklist for any marketer working in the
retail sector, and can de adapted to a variety of different retail outlets. There
are no set guidelines for particular sectors, only examples of good or poor
practice. Good practice in retail marketing can very often be transferred across
to other sectors, and forces organisations to focus on their customers. IKEA
have carefully researched their business and have provided out of town stores,

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which cater for a wide range of consumers, but which has engendered a high
degree of loyalty.

Spare a thought for WH Smith, a retailer in the UK which would appear to have
a confused positioning. Faced with recently reported falling sales, researchers
have discovered that some of its potential customers use the store to check out
their CDs, books, DVDs and gifts, and often leave the store with nothing more
than a daily newspaper, returning home to buy the other products online.

ACTIVITY
Imagine that you are the marketing director for a major retailer such as Tesco
which traditionally has sold groceries, and any new products have also been
sold in a supermarket environment. You might want to visit the Tesco website
at www.tesco.com, but this is not essential. You can also assume that Tesco are
planning to expand their business. Consider the following questions:

1. How might you express your corporate objectives? These do not have
to be accurate projections but show your understanding of how
companies are managed.

2. Taking into account your corporate objectives how might you express
your distribution or place objectives?

3. How might you express your pricing objectives?

ACTIVITY FEEDBACK
1. You are likely to have expressed you objectives in terms of turnover
taking into consideration your current situation and the actual and
projected market trends in your key sectors.

The first objective may be to grow turnover, for example, by 7% per


annum, which might be the current rate of growth. If we apply this to
the actual turnover then multiply this by 7% to generate a turnover
figure.

We might also take into consideration our current relationships with


suppliers and the economies of scale that expansion offers us. We
might, therefore, express our objectives in terms of further developing

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our relationships with suppliers and any reduction in costs that might
come with this.

2. Taking into consideration our corporate objectives, our increase in


turnover may also be expressed in terms of numbers of new stores
opened or the number of stores that are to be expanded. Remember
that at corporate level we might express a new store in terms of the
average level of turnover a new store brings. If the average turnover of
a new store is £ 100,000 per week then this equates to £ 5 million
pounds per annum.

We can further break this down into the types of retailer. We might be
looking to open more of the Tesco convenience stores or in terms of
the new clothes outlets they are currently investigating. Remember
that this can also be expressed in terms of weekly or monthly targets. A
supermarket that is looking to finance the development of 24 new
stores may easily express this in terms of 2 new stores per month.

3. Remember that when we looked at pricing, companies may have


already established their position in the market place. Tesco might
easily express their pricing in terms of customers receiving value for
money, which will be researched as part of the market research plan.

Cox, D.A. et al (2003) researched female store shoppers and


discovered that ‘bargain hunting’ was an important consideration for
shoppers across a number of different socio-economic groups. Tesco
understand that a positive retail experience is key for their shoppers
and that their pricing will be competitive in the market place as a result
of the economies of scale gained through the sheer volume of their
business. Creating areas in their stores for heavily discounted goods
might satisfy the bargain hunting needs of their customers.

You will no doubt have realised that there are a range of possible
objectives in the areas we have discussed, which can be confusing. You
must note, however, that these options are reduced if the corporate
objectives are to simply maintain their current status in their markets
or if indeed they need to downsize their business.

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CASE STUDY ACTIVITY
Red Bull

Read the Red Bull case study in Hollensen, page 552, and answer the following
questions:

1. Give the reasons for the international success of Red Bull.

2. What are the threats and opportunities which Red Bull face by planning
to increase its market share in the USA?

CASE STUDY FEEDBACK
1. Red Bull GMBH had clearly identified segments across a number of
international markets and were able to deliver a consistent message to
consumers.

The company’s strategy of reinvesting funds into marketing enables the


brand to remain prominent.

The company’s use of extreme-sports sponsoring has helped to


position the Red Bull brand in line with the ‘young adult lifestyle of
working hard and playing hard.’

The company used packaging and promotion to draw attention to what


is an entirely new product for certain markets.

2. The US market, while extremely diverse, represents a considerable


opportunity for Red Bull.

The identified segment will almost certainly be a considerable size in


the USA, particularly on the East and West coasts.

The biggest threat to Red Bull is the fact that it might be a fashionable
brand and as such the growth might not continue to grow.

Other drinks manufacturers will have been attracted to this new sector
and will certainly be researching new drinks to compete with Red Bull.

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Marketing Communications
The range of tools available to the marketing communications manager
comprise the following:

· Advertising.
· Sales promotion.
· Publicity (Public relations).
· Personal selling.
· Sponsorship.

In order to communicate effectively with consumers or potential


consumers, we must understand that we will need to use a range of
communication tools for specific market situations. The use of more
than one tool is referred to as Integrated Marketing Communications
(IMC).

Push or pull strategies?


In communicating with our customers we have the option of using push
or pull strategies. If we use pull strategy then we are trying to stimulate
our consumers so that they request the product from retailers and ‘pull’
the product through the distribution channel. If we target channel
members and offer them incentives to persuade more customers to buy
our products then this is called ‘push’ strategy.

Above the line or below the line?


Above the line activities have traditionally been mainstream
advertising which were the main function of an advertising agency.
Other activities that are aimed at stimulating sales, but were not carried
out by the advertising agency, such as sales promotion, are referred to
as below the line activities.

Theories of communication
There are several theories of communication, including Schramm’s
theory, and it is important to understand the broad principles of these
theories. Essentially, research tells us that if we use a television advert,
which reaches a potential audience of 12 million viewers, a percentage
of this audience will switch over as the advert is shown, and some
people will be distracted and not notice the advert. Of those that do
watch the advert some will not form part of the target audience, while

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some will watch the advert and will possibly have forgotten it after a
short while. Some may take an interest in the advert, and possibly the
smallest percentage of all will be stimulated by the advert to take any
further action. This is often referred to wastage, and something we need
to take into account when communicating with potential customers.
However, even though our final audience may be much smaller than
the total potential audience, advertising can have a very high impact
and can lead to increased sales or move people closer to the decision to
purchase.

We also looked earlier in Unit 3 at consumer behaviour and the way in


which consumers make decisions to purchase products or services.
Using communication theory, as well as the likely impact of our
marketing communications, means that we are able to calculate the cost
of our communications and the value of the outcomes of research.

We need to understand some key terms in communications:

Reach – This is commonly referred to as an opportunity to see (OTS),


where we calculate the number of people in our target group who are
likely to have seen the advertisement placed at least once.

Frequency – Here we need to calculate the number of times a person is


likely to be exposed to our communication. If we consider that most
campaigns are shown several times during a specified period, then we
can set our communications objectives in terms of the frequency with
which our communications are likely to be seen.

Gross rating points (GRPs) – This is the way in which the media sell
their advertising space. Here we multiply the reach of the advert by the
frequency it appears in the media. Here, for example an advert which
has a reach of 50 per cent, which has a frequency of 3, has a GRP of 150.

Customer response index (CRI)


A useful tool for measuring the impact of advertising is the customer
response index (CRI). The CRI, in line with consumer decision making
decisions, tracks consumer reaction to adverts from being exposed to
the advert, through awareness levels, their understanding of the advert,
any intention to buy, to their purchase of the product or service. This
takes into account the wastage that we discussed earlier in the unit

If we look at the calculation of those who are exposed to the advert, the
people then are aware of the product, those who understand what the
product is and could do for them, those who have expressed an interest
in purchasing and then those who actually do purchase the product, we
can see that this equates to 9.8% of the original group who could
potentially have seen the advert when it was shown.

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The CRI is also a useful tool for forecasting the impact of future adverts,
and for looking for areas of improvement in the effectiveness of the
advert.

Purchase CR I
Intend to (85%)
purchase 9.8%
(62%)
Understand
(72%) No action (15%)
Awareness 2%
Exposure (48%)
to adverts
(54%) No intention (38%)
7.1%

Do not understand (28%)


7.1%

Unaware (52%)
28%

No exposure (46%)
46%

100%
Calcul at ion
Those who will purchase the product:
CRI = % exposed X % aware X % understand X % intending X % purchase
= 0.54 X 0.48 X 0.72 X 0.62 X 0.85
= 0.098 or 9.8%

Figure 5.4: Customer response index.

ACTIVITY
Using the figures in Figure 5.4, calculate the following:

If the reach of our advert is 10 million people then calculate:

a) The total number of people who were not exposed to the advert.

b) The total number of people who are likely to purchase the product.

c) The total number of people who are likely to purchase the product if
we are able to increase the percentage of people exposed to the advert
from 54% to 68%

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ACTIVITY FEEDBACK
a) If the total reach of the advert is 10 million then the total number who
are not exposed is:

0.46 x 10,000,000 people

= 4.6 million.

b) The total number of people who are likely to purchase the product is:

0.54 x 0.48 x 0.72 x 0.62 x 0.85 x 10,000,000

= 983,507 purchases.

c) If we increase the percentage of people exposed to the advert from


54% to 68% then the total number likely to purchase would be:

0.68 x 0.48 x 0.72 x 0.62 x 0.85 x 10,000,000

= 1,238,491 purchases.

This represents an increase of 254,984.

Of course, the CRI is a useful tool for forecasting and can only be used
accurately when we collect accurate data about the response of customers to
our adverts. We will be able to use these figures as a benchmark for future
campaigns, and it also helps us to set targets for those responsible for
communicating with customers.

How to improve levels of response in


marketing communications
If we look at the key stages of the communication process in Figure 5.4,
each stage suggests area where we might improve our overall
communications. Remember that an improvement in any or all of the
stages will lead to a better outcome. Every improvement between stages
moves more people towards the decision to purchase.

If we first of all consider our advertising strategy, we must identify


ways in which we can improve exposure to the adverts, awareness of
the adverts, increase overall understanding of the adverts, make
consumers consider our product or service as one of their possible
purchases, and then move them to the final stage of purchase. We must

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not underestimate the importance of the post­purchase decision, and


make the purchase as smooth as possible in order to encourage repeat
purchases in the future.

We will now consider ways in which we might improve our advertising


strategy.

ACTIVITY
Look at the table and against each poor response factor and communications
problem, suggest ways in which we might look to improve consumer response.

You might want to give some examples of advertising campaigns with which
you are familiar.

Stages of communication Marketing Suggest improvements to advertising and


communications marcomms strategy
issues or problems

1 Low levels of Low levels of media


consumer exposure to exposure, possibly
advertising output. due to poor selection
of media

2 Low levels of Possibly due to the


awareness of poor content of the
advertising campaign adverts and lack of
frequency necessary to
create awareness

3 Low levels of Possibly due to the


understanding of the poor content of the
adverts adverts and lack of
frequency necessary to
create awareness

4 Low levels of Possibly due to the


consumers showing lack of frequency of
any intention to buy the advert and
the product or service advert’s proposition
failing to encourage
consumers sufficiently

5 Low levels of the Possibly due to the


desired final outcome, lack of frequency of
or the main objective the adverts and the
of the advertising desired outcome not
expressed sufficiently

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ACTIVITY FEEDBACK 

Stages of communication Marketing Suggest improvements to advertising and


communications marcomms strategy
issues or problems

1 Low levels of Low levels of media · Improve understanding of target group by


consumer exposure to exposure, possibly reassessing market research data.
advertising output. due to poor selection
of media

2 Low levels of Possibly due to the · Do we need to review our target group’s
awareness of poor content of the media habits?
advertising campaign adverts and lack of
· What is the cost of achieving higher
frequency necessary to
awareness levels? We might consider
create awareness
increasing advertising expenditure, but
would this achieve further awareness?

3 Low levels of Possibly due to the · Consider an increase in frequency of


understanding of the poor content of the adverts, but must forecast the likely
adverts adverts and lack of response.
frequency necessary to
· Review the content of the adverts, with a
create awareness
view to making some amendments for
future campaigns.

4 Low levels of Possibly due to the · Possible look at reinforcing the message
consumers showing lack of frequency of by changing the exposure periods of the
any intention to buy the advert and advert. A ‘long short’ burst could be
the product or service advert’s proposition replaced by intermittent bursts over a
failing to encourage slightly longer period.
consumers sufficiently

5 Low levels of the Possibly due to the · Are there other ways of encouraging
desired final outcome, lack of frequency of purchase, perhaps through a campaign of
or the main objective the adverts and the sampling? This proves to be popular for
of the advertising desired outcome not new products.
expressed sufficiently

Additional feedback

1. In order to run more effective communication campaigns, it is essential


to be in possession of good market information, which gives you an
insight into the way in which your potential consumers purchase
products and how they live their lives. Remember that in Unit 4 we
looked at segmentation variables and it is important to be able to break
down a market into these identifiable segments.

2. A good example of how a product fits into the life of a consumer is the
example of Jello, a jelly dessert sold in the USA. Sales were high, but
repeat sales were low. Research identified a group of consumers who
had ‘stock’ of products in their cupboards, and Jello was one of these
products. However, in order to be able to consume Jello it had to be
made at least 3-4 hours before it was consumed. After dinner, when

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the choice of dessert was made by this particular segment, Jello was
never an option as it would take so long to make. The solution to
getting more sales therefore was to encourage their consumers to
make Jello in the morning while they boiled water for their morning
drink, so that it would be ready to be consumed in the evening. Jello
changed the message in their adverts and there was an instant increase
in sales of Jello.

Improving response rates (continued)


If we consider the consumer adoption process, we can look at the ways
in which the consumer adoption process is improved. We looked at the
situation in our example earlier in this unit, but let us consider some
other options.

In research carried out by Percy (2001) and Dibb et al (1997), the role of
key people who might influence the buying process was considered

Decision making stage Promotional activities

Awareness Mass appeal media such as television, press, and magazines

Interest Mass appeal media such as television, press, and magazines

Evaluation Personal sources – relatives, friends, colleagues, peers

Trial Personal sources – self, influencers, sales personnel or trades people

Adoption Personal sources – self, influencers, relatives, family, friends

Figure 5.5: Promotional techniques and consumer buying decisions. Source: Adapted from Percy, L (2001) and Dibb et al
(1997).

If we consider the various stages we notice that while in the beginning


the use of mass media options are very important in generating
awareness and interest. We mentioned earlier that it is essential to raise
awareness and interest in order to stand any chance of moving
consumers nearer to the decision to consider the product. As we move
into our evaluation, trial and purchase phases, we can see the
importance of influencers such as our family, friends or other people
who we consider to be key in recommending the use of the product. We
must also take into consideration the role of self in the decision making
process.

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Branding
It is important at this stage to distinguish between a product and a
brand. Throughout this course, the term ‘product’ could be replaced
with ‘brand’ without fundamentally changing the meaning or effect of
much of what you learn.

Philip Kotler, according to Keller (2003), defined a product as anything


that can be offered to a market, from an automobile to an idea. A brand,
said Keller, is “…a product, but one that adds other dimensions that
differentiate it in some way from other products designed to satisfy the
same need.” It should not be confused with a brand name or mark
which is designed merely to distinguish a product or to denote
ownership of a product by a particular company.

ACTIVITY
Read exhibit 11.5 in Hollensen, p 468.

What do you think prompted Mars, Nestlé and Cadbury – manufacturers of


confectionery (mainly chocolate) products (sometimes called ‘countlines’) – to
try and extend their brands into the biscuit market? What would convince them
that the investment in manufacturing capacity was worth the risk of launching a
new product?

Having entered the biscuit market, where else could they take their brands?

ACTIVITY FEEDBACK
Confectionery brand owners have been capitalising on the value of their brands
by extending them into other, closely related, markets. In fact, Mars had
experienced mixed fortunes with the Twix Top perhaps because it was
changing both the category and the product at the same time. It is likely that this
test was studied closely for the future.

Multipacks of chocolate snacks such as Twix proved successful because they


represented good value to the consumer who recognised the brand and had a
perception of price based on single products sold through independent
confectioners, tobacconists and newsagents (CTNs).

The risk of launching new variants and brand extensions was reduced by the
strong brand awareness and image of the countlines.

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Further extensions included branded ice cream bars and miniature wrapped
chocolate bars in gift packs such as Cadbury’s ‘Miniature Heroes’. In both these
markets these well-liked and trusted brands could have a great impact against
relatively under-promoted brands and enabled Mars, Nestlé and Cadbury to
command premium prices.

The key to branding is in the concept of adding value to the product and
thereby building competitive advantage. This may be done through
associating the brand with product performance but many add
non­functional, emotional differences.

The benefits to a consumer of a brand include those of the brand mark –


assigning responsibility for the product to a specific manufacturer. But
more importantly brands acquire meanings and values for customers
because of the social context in which brands exist. Brands are talked
about, they are trusted, they let customers down, they are the ‘stars’ of
TV commercials and, increasingly, of Hollywood movies and sporting
events. To an extent, the best known global brands have (and, indeed,
are) personalities.

The trust and loyalty consumers put in some brands can be very deep
rooted and may be dependent on personal experience but need not be at
all rational. Indeed, in the UK, Saatchi and Saatchi refer to these emotive
and involving brands as ‘Love Marks’ (www.saatchi.co.uk).

One of the most famous branding mistakes took place when Coke in the
US responded to their arch­rival’s ‘Pepsi Challenge’. Relaunching their
product with a sweeter formulation, as their research told them, Coke
nevertheless found they had misunderstood the relationship between
the brand and the consumer. Legend has it that even people who did not
drink Coke contacted the company to protest against the change. Coke’s
rapid change back to ‘The Real Thing’ proved that the brand was as
much the property of its customers as the Coca­Cola Company.
According to Ira Herbert, former chief marketing officer of the
company, “We’d have been massacred had we not brought it back.”
(Ohmann 1996)

Even functional differences can, occasionally, be attributed to the brand


rather than the product. Devoted Nike customers may, understandably,
assert that their shoes look better than the competition, but they often
simply believe that they are better. A more compelling example
appeared in the UK medical journal, The Lancet, some years ago when
researchers published the results of a blind trial of painkillers.
Specifically they tested the reported effectiveness of generic aspirin
tablets. One group of subjects was given an unbranded packet, the other
a pack with the market­leader’s brand name on.

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The functional effectiveness of the tablets in the trial was undoubtedly


affected by years of advertising and promotion and perhaps millions of
pounds of marketing expenditure. The subjects, almost universally,
reported the brand leader as being more effective as a pain killer despite
the two tablets being chemically identical.

Increasingly, as production processes become more sophisticated and


lead­times for the introduction of new products shortens,
manufacturers find it hard to maintain an advantage on product
performance alone. For some organisations, therefore, the brand is a
significant source of sustainable competitive advantage. Brand
advantage is sustainable because it is almost impossible for competing
brands to occupy the same social or mental space as each other.

Brand equity
There is no industry or product sector in which branding is impossible.
However, the significance of branding varies from industry to industry.

According to the UK consultancy Brand Finance, much of the value of


media companies and pharmaceuticals is found in their ‘intellectual
property’ in contrast to companies such as retail food stores and utility
suppliers with large real estate assets. See Figure 5.6.

Amongst these companies, for example, food manufacturers have


strong assets in the brands they produce and not in the factories that
produce them.

Figure 5.6: Assets of the FTSE 350

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The same research, from Brand Finance, also showed that, all things
being equal, strongly branded companies performed better than market
averages, a finding supported by long term research on the profit
impact of marketing strategy (PIMS).

In order to measure and, therefore, manage these intangible assets, the


concept of brand equity was developed. Although it has directed
attention to an important outcome of marketing activity, brand equity
has also been the source of some confusion since it has been defined and
used in many differing ways.

According to Keller (2003), however, the key points are –

· Differences in outcomes arise from the ‘added value’


endowed to a product as a result of past marketing
activity for the brand.

· This value can be created in a number of different ways


· Brand equity provides a common denominator for
interpreting marketing strategies and assessing the value
of a brand.

· There are many different ways in which the value of a


brand can be manifested or exploited to benefit the firm
(i.e. in terms of greater proceeds or lower costs, or both).

(Keller, op cit, p42)

Hollensen (op cit, p470) describes brand equity as “…additional cash


flow achieved by associating a brand with the underlying values of the
product or service.” However, it is sometimes dangerous to equate
brand with cash measures since investment in brand building cannot
often pay immediate dividends.

In categories as diverse as chewing gum, soft drinks and men’s razors,


the market leaders (at least in the US) in the 1990s were the same brands
as in the 1920s (Keller 2003). At the same time many leading brands such
as The Body Shop and Amazon.com have been built without any of the
obvious supports of massive advertising expenditure or mass
distribution.

So, building up brand equity is not an easy, rapid or risk­free enterprise.


Developing a strategy for a brand is similar to that for a product or
company.

Many of the analytical tools looked at in Units 2 and 3 can be used to


assess the relative strengths of brands in a company’s portfolio or in the
marketplace. The only difference is the unit of analysis.

Brands do best when they are strong and well supported; that is to say,
when they have a good market share. But Bain & Co’s detailed research

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of the profitability of premium brands in 40 categories of consumer


goods (Vishwanath and Mark 1997) found another significant factor.

A brand’s relative market share (RMS) had a different impact on


profitability depending on whether the overall category was dominated
by premium brands or by value brands to begin with. Therefore, brand
strategies, they argued, should also take into account the brand strength
of the competition.

R elat ive mar ket shar e

High

T he T he H i gh-R oad
H it chhik er B r and
ROS 15-20% ROS > 20%
P r emium
degr ee
of
cat egor y
T he D ead-E nd T he L ow -R oad
B r and B r and
ROS < 5% ROS 5-10%

Low
Low High

Figure 5.7: Bain & Co’s strategies for brands.

The key to strong brands in competitive market was innovation and this
was a feature of the so­called high­road brand (more than 20% return on
sales or ROS).

Brands with ROS between 15% and 20% should, the research
recommended, focus on innovation and niche marketing. However,
‘dead­end’ brands demanded tough decisions from their owners –
invest heavily or cease their support. Unilever, during the last five
years, delisted several hundred brands that were both in overcrowded
categories and had weak brands.

Hitchhiker brands, prosper as market fragments. The authors cite the


example of the automobile market where new niches, such as ‘people
carriers’ and sports utility vehicles (SUVs) have developed. However,
the research also showed that these brands, which enjoyed current
profits due to their premium price but had low market share, were
vulnerable to price moves by the market­leader which can leave them
struggling to justify their higher price policy.

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ACTIVITY
Gillette is a strong brand that has been leading its sector for over 80 years.
When Bic and others introduced disposable razors their first reaction was to
launch their own in the knowledge that, given the same price and performance,
consumers would choose the trusted brand.

Was this the right decision? How would you characterise the Gillette brand in
the Bain & Co matrix?

ACTIVITY FEEDBACK
In fact, the first reaction of the Gillette management was misguided. A
dominant share of the low-end market, where customer bought on
value-for-money, would only give them a ROS of 5-10%. Gillette was, in fact, a
high-road brand and the company subsequently poured $200 million into
developing an even more sophisticated product, the Sensor, that became the
highest price ‘shaving system’ on the market by 25%. Some 15% of the
customers in fact traded up from disposables and Gillette has continued to
trade up customers by introducing new innovations.

Vishwanath and Mark (1997) point out that markets can drift towards
low price, so called ‘low road’ competition. But this then opens up the
opportunity for a premium brand to take the high road.

Perhaps the most troublesome aspect of branding is knowing how far its
value can be exploited. Brand extensions attempt to use the values of an
established brand and transfer them to products and services in new
(but related) market sectors.

An elaboration on Igor Ansoff’s growth vector matrix by Baker and


Hart (1999) demonstrated that product development and
diversification where strategies which were supported by appropriate
brand extension.

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S upply - T echnology - P r oduct - B r and


Present New

Mar k et P r oduct
Present penet r at ion development
(lowest risk) (lower risk)
D emand
|
Mar k et
|
Cust omer s Mar k et D iver sifi cat i on
New development (highest risk)
(higher risk)

Figure 5.8: Extended growth vector matrix

The principle source of risk is moving away from known customers and
their needs. So taking this strategic move with a brand that already has
high recognition and levels of trust may ameliorate this.

ACTIVITY
Kingfisher lager is a premium beer from India that has gained significant
penetration in the UK market by securing distribution through many of the
country’s independent Indian restaurants and then expanding to the take-home
sector through supermarkets. Now, from May 2005, the Kingfisher name will
be on new Airbus A320s, flying between the UK and various destinations in
India as a new low-cost airline takes off.

Dr Vijay Mallya who is Chairman of UB (United Breweries) Group, one of


India’s largest companies and the parent company of Kingfisher Airlines says,
“we plan to have a ‘fly the good times’ approach to offering our passengers a
unique on-board experience as well as value for money.” The in-flight meals
will, of course, consist of Indian cuisine.

“Kingfisher is a well recognised brand, both in India and internationally, standing


for exuberance and lifestyle, combined with a long-standing credibility built
over many decades. These qualities will be integral to the Kingfisher Airlines
platform of ‘fly the good times’” says Dr Mallya. (Sources: the Times
Newspaper, 29.1.05. www.kingfisherworld.com and www.airlinequality.com)

Do you think this is an appropriate brand extension? How would you evaluate
the contribution of the brand to the new venture?

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ACTIVITY FEEDBACK
Low-cost airlines seem to be frequent targets for entrepreneurs with strong
brands – EasyJet is one such, whilst Virgin has taken a ‘higher road’ approach
concentrating on longer haul routes.

The question is really whether the brand is strong enough to make its presence
felt and the market for low-cost air travel is likely to be profitable. Bain and Co’s
research referred to above might suggest that a low cost position is unlikely to
yield great profits. But air travel is increasingly seen as a commodity business
and the industry is highly regulated allowing customers to make easy
comparisons between the few competitors for specific destinations.

At first glance, Dr Mallya seems to be extending the brand into new products
and technologies as well as into new markets and customers. Crucially,
however, the UB Group already has experience of the charter flight business
and is expanding principally in India where there is little competition and
growing demand. Kingfisher could be another Virgin and expand into a range of
services such as banking, mobile phones and other markets where a reliable
brand may be at an advantage.

Brands remain possibly the most valuable, yet misunderstood,


marketing asset a company has. The key to successful exploitation of
brand equity is to monitor the perception of the brand amongst
customers and others involved in purchase decisions, including other
parts of the value­chain. This must be done constantly since it is only in
the minds of consumers that the brand has its effect.

Sponsorship
Sponsorship, as an academic research area, continues to attract
increasing attention. While sports sponsorship is estimated to account
for around 70 per cent of all sponsorship (about one 2 billion dollars per
annum in the UK alone (Duffy, 2004)) there are signs of increased
activity in broadcast, arts and cause­related marketing. There is no
doubt that sponsorship is high profile and therefore attracts a lot of
attention and, as Duffy (2004) states, it enables marketers to connect
with consumers in a passionate environment.

What are the benefits of sponsorship to sponsors and why are so many
sponsorship deals considered to be poor value for money? The main
reasons cited by Chadwick (2004) and Duffy (2004) are:

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1. Planning – the sponsoring companies enter into a sponsorship


deal without a clear sponsorship plan. Sponsors need to be clear
about what it can achieve for them and set objectives for the
sponsorship.
2. Sponsor matching – the match between the sponsor and the
sponsored isn’t appropriate. Sponsors can use sponsorship to
improve their positioning. In the case of the soft drink Sprite, the
sponsorship of the exciting and youthful sport of snowboarding
enabled the company to reposition Sprite in the market place.
Many cases of unsuccessful partnerships may simply be because
the chairman of the company has chosen to sponsor her favourite
football team, but where there is little benefit to the company.
3. Poor targeting – many sponsorships are linked to events, and
recall research shows that on many occasions there is poor recall
of sponsors’ names. Research from Sports Marketing Surveys
showed that 52% of viewers recalled that Wendy’s Burgers
sponsored an event where, in fact, McDonalds were the principal
sponsor.
4. Not integrated with the marcomms plan – too many companies
treat their sponsorship as a separate activity. Successful
sponsorship campaigns, like the Barclaycard sponsorship of the
English Premier League, are integrated with sales promotion
activities, promotions for staff and part of the overall PR plan.

ACTIVITY
Foster’s ten year deal for the British Formula 1 Grand Prix

Foster’s beer has a ten year deal to sponsor the high profile British Grand Prix.
Briefly list and describe the benefits to Foster’s of such a sponsorship.

Source: Chartered Institute of Marketing Magazine

ACTIVITY FEEDBACK
Benefits to Foster’s:

1. Global media coverage – the fact that the British Grand Prix is shown in
140 countries and with an estimated 600 million audience will enable
Foster’s to increase exposure to its brand.

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2. Brand Association – Formula One racing is extremely high profile and is


considered to be an exciting pastime. Brands which are associated with
the race benefit from the reputation and glamour of Formula One.

3. Internal Communications – Foster’s are able to use the sponsorship of


Formula One to motivate and reward its staff. In line with other high
profile sponsorship deals, staff are a major stakeholder and this allows
them to visit the event or to receive merchandise associated with the
event.

4. Hospitality – when companies sponsor high profile events it enables


them to offer hospitality to key stakeholder groups. According to Pippa
Collett, Shell’s sponsorship director, paddock tickets at a Formula One
race can cost as much as five thousand dollars per person, and are
extremely popular with clients. These can be included as part of a
sponsorship deal.

5. Venue sales – the deal enables Foster’s to sole distribution rights at the
event, not only generating revenue but also exposing the brand to new
consumers.

You may have included an increase in sales of Foster’s as a result of exposure on


television. While this may in fact happen, research suggests that it is very
difficult to measure the success of a sponsorship in terms of increased sales of a
product.

REVIEW ACTIVITY
1. How does the product life cycle theory impact on product
development strategy?

2. What are the differences between value-based pricing and cost-based


pricing?

3. What are the current distribution trends in world markets?

4. Why do companies find it difficult to standardise their advertising


messages on a global basis?

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REVIEW ACTIVITY FEEDBACK
1. The Product Life Cycle theory tells us that in many cases, existing
products will start to decline in the market. In order to stay in touch
with the consumer, we need to keep introducing new products or
services. Once a product has reached its saturation stage then we
should consider developing it, or introducing a new product to
eventually replace it.

2. Cost-based pricing is the traditional approach to pricing. Here the


company calculates it costs, adds on a profit margin and sets a price.
This takes very little of the current market level, the perceived value of
the product or the expectations of consumers. A value-based pricing
approach requires an understanding of how consumers perceive prices
and brands in the market.

3. There are some significant trends in global distribution, with much of it


centred round the increasing internationalisation of retail outlets.
Frequent travellers comment on the similarities in shopping complexes
around the world and the standardisation of retailing. There is also a
considerable change in traditional retailing with vertical integration
leading to a lower number of intermediaries. The rise of multinational
retailers, such as Wal-Mart and Tesco, has seen an increase in the
power of retailers and their ability to dictate terms to their suppliers.

4. Cultural differences mean that it is very difficult to standardise


messages across markets. Many words or expressions do not travel
across borders, and in some cases may have a totally different meaning.
Our beliefs, religion and education will also affect the way that we
receive messages, and so it is very difficult to standardise the message.
Occasionally firms are successful. Gillette’s main message about
comfortable shaving does not lose very much in translation and so ‘the
best a man can get’ has been used in several diverse markets.

References
Baker, M. and S. Hart (1999). Product Strategy and Management. Hemel
Hempstead, Prentice Hall.

Beech, J and Chadwick, S (2004), The business of sport management.


Pearson Education,Essex, England, ISBN 0273682687

Cook, G, (1997) Retail Marketing for Ford. Part of the marketing series
publications.

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Cox, D.A., et al, (2003), Reassessing the pleasures of store shopping,


Journal of Business Research, No. 58, pp 250­259

Duffy, N. (2004), A game of two halves, CIM Magazine, Issue 6, October


2004.

Hollensen, S, (2003), Marketing Management: a relationship approach.


Pearson Education, Essex, England, ISBN 0273643789

Keller, K. L. (2003). Strategic Brand Management. Building, Measuring and


Managing Brand Equity. Prentice Hall.

Ohmann, R. (1996). Making & Selling Culture. Hanover NH, Weslyan


University Press.

Tomlinson, M, Buttle, F and Moores, B, (1995) The Fan as Customer:


Customer Services in Sports Marketing, Journal of Hospitality and Leisure
Marketing, Vol. 3, No. 1, pp 19­36

Vishwanath, V. and J. Mark (1997). “Your Brand’s Best Strategy.”


Harvard Business Review 75(3).

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Unit 6

Organising, Implementing and


Controlling the Marketing Effort

LEARNING OUTCOMES
After studying this unit you should be able to:

· Identify the range of marketing objectives that companies set


themselves as part of the marketing planning process.

· Identify some of the techniques used to set achievable targets in the


marketing planning process.

· Define the key elements of the marketing control system.

· Demonstrate an understanding of the need for the evaluation and


control of marketing plans and identify appropriate control
mechanisms.

Organisational structures
Much has been written about organisational structures and their
importance in achieving customer focus within the organisation. It is
important to understand that there are very often changes in
organisational structures as a firm grows or takes on new products and
markets. We will look at the five broad categories of organisational
structure as suggested by Fifield and Gilligan (1999) and McDonald (1999).

1. Small business or owner manager

This type of business is characterised by the founder of the company


who takes on most of the roles within the organisation. The staff
employed have specialist roles and may often be working by
themselves and, therefore, have no management responsibilities. The
organisational structure is, therefore, informal, with the
owner/manager at the centre, with informal links to the other staff
within the organisation. This structure allows the owner to have
maximum flexibility and frequent communication with employees. As

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the business grows, and they take on more customers, there will be a
need to adopt a more formal structure.

2. Formal structure

As a company moves towards a formal structure then management


roles are created. In the first instance, managers will be appointed in
sales/marketing, production and finance, which will be expanded as
the company grows. Each department will employ specialists to take on
new roles. There is a much greater need for more formal communication
and departments will be given budgets. All departments will report to
the managing director.

Managing Director

Sales/marketing Finance Production

Figure 6.1: Formal structure.

3. Matrix structure

A more developed organisational structure is the matrix structure. Here


organisations can split responsibilities by product category and by
market, or on an international basis by product category and
geographical region. In Figure 6.2 the product categories are split by
laundry services and cleaning products, while the market sectors are
split by schools, restaurants and hospitals. While each department has a
defined role, there may be some confusion over the development of new
products. The structure does allow for more frequent communication.

Schools

Market
structure Hospitals

Restaurants

Laundry services Cleaning products

Product/service structure

Figure 6.2: Matrix structure.

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4. Centralised structure

Marketing function
at centre

Figure 6.3: Centralised structure.

Under a centralised organisational structure, the marketing function is


operated from the centre and marketing programmes are developed for
the other companies within the organisation. Each branch or strategic
business unit (SBU) has its own specialist departments. The biggest
problem facing the organisation is that a centralised marketing
department can be slow to respond to the needs of the other companies
within the group.

5. Decentralised structure

Marketing
decentralised

Figure 6.4: Decentralised structure.

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Under a decentralised structure each operating unit has its own


marketing department. While they take responsibility for their own
operating unit, they should liaise with the other marketing
departments. There tends to be a duplication of marketing effort and
some waste. Excessive waste and duplication is likely to lead to
restructuring towards a more centralised structure.

CASE STUDY ACTIVITY
Adidas-Salomon

Read the case study in Hollensen (2003), pages 647 to 649, and answer the
following questions:

1. What are the main motives for the new Adidas-Salomon organisation?

2. Should a separate marketing plan be made for each of the three


divisions?

CASE STUDY FEEDBACK
1. The main motive for Adidas-Salomon’s organisation is to set up their
divisions based on their positioning in the market. The organisation
should, therefore, reflect the differences in consumer needs. The three
divisions operate along the same lines as strategic business units (SBU).
In setting up their three divisions the organisation are demonstrating
that they are customer focused. The development of these three
divisions also reflects the changes that have taken place in the
leisure/sports markets globally over the past few years.

2. As the divisions are based on three different market sectors, then each
should produce its own marketing plan. Each of these plans will link in
to the overall corporate plan, and there may be some marketing
activities which are shared across divisions. However, it is important to
emphasise that as their customer bases are likely to be very different,
then this should be reflected in their plan. There might be some
difficulty in separating the customers of the three footwear divisions.

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Marketing audit
In Units 2 and 3 we looked at both the internal environment and the
external environment of the firm. A marketing audit is carried out to
identify the main external and internal factors which are most likely to
have an impact on the marketing plan. We will use a SWOT analysis to
bring both internal and external factors together and help us to identify
our key strengths or weaknesses and the main opportunities and threats
which face us in the market. For most companies the data required to
carry out this audit will have been collected during the course of the
year, and many of the research activities undertaken will provide us
with the necessary information upon which we can base our marketing
plan.

Why develop a marketing plan?


The main reason for the marketing plan is to establish the company’s
current situation in the market, help it to consider the future direction
possible, based on its current situation and then set out what it needs to
do to achieve its objectives. While it is the function of the marketing plan
to analyse the current situation, it is generally accepted that its
objectives are stated for each segment in which it operates.

The structure of a marketing plan


There are several ways to present a marketing plan, including
McDonald (1999), Dibb et al (1997) and Hollensen (2003) who suggests
the following structure:

· Title page.
· Table of contents.
· Executive summary.
· Introduction.
· Situational analysis.
· Marketing objectives and goals.
· Marketing strategies and programmes.
· Budgets.
· Implementation and control.
· Conclusion.

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Title page
This quite simply specifies the name of the business units covered,
authors and the time scale of the plan.

Table of contents
This indicates the key sections in the plan and is important in guiding
individuals to their key areas of responsibility.

Executive summary
As with all summaries, the executive summary gives a brief overview of
all of the sections in the plan, and will state which products or services
are included, the amounts to be invested and a summary of the expected
outcomes of the plan. It will also identify the key objectives of the plan.

Introduction
The introduction will deal with the product or service to be included in
the plan and its current situation in the market. The introduction will
also state what the main purpose of the plan is.

Situational analysis
The situational analysis covers the current external and internal
situation that the product or service now faces. The SWOT analysis is
used to present this data, with strengths and weaknesses (SW), the
internal factors, and opportunities and threats (OT), the external factors.
They will cover some of the following points:

Internal assessment
These are also sometimes referred to as controllable variables, as the
firm can have direct control over its staff, resources, products and the
manufacturing process.

Here we will identify the main personnel who are going to drive this
plan forward. We will need to concentrate on their experience, training
and skills from which the plan will benefit. It might also look at the
future personnel needs of the organisation, when dealing with the later
stages of the plan. This section will also deal with the main lines of
communication between key personnel, as well as saying something
about the culture within the organisation.

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External assessment
This part of the plan should consider the main opportunities and threats
facing the organisation. This will include details about the key
segments, the main target markets and their patterns of consumption,
and the share of this market in both value and volume terms. There will
be a separate section detailing current market trends, future forecasts,
and a section to deal with competitive activity and the main players in
the market. This was covered in Unit 3.

The external assessment will also consider the PEST factors, or the main
political, economic, social and technological factors, which will affect
the future performance of our organisation and products or services.
We will need to look at any legal considerations which are likely to
affect our product or service. Consider the current movement towards
reducing the impact of cars. This is an issue that might have a
considerable impact on car sales in the future, but an issue which car
companies are monitoring, and including in some of their
communications with key stakeholders. Established companies in the
market will be monitoring competitive activity and will be paying
attention to new entrants in the market.

Marketing objectives and goals


The main marketing objectives will be expressed in terms of market
share, sales, profit and return on investment (ROI). All of these should
be expressed in quantified terms such as percentages or numbers, with
the time taken to achieve those goals. Their accuracy will depend
heavily on the information available to the company. They should be
accurate and realistic as opposed to an unrealistic wish list. As
McDonald (1999) states, marketing objectives are about products and
markets only. We might express our objectives in terms of our image
and reputation in the market with customers and potential customers,
and use research to measure these variables. More and more firms are
considering their social responsibility which we will cover in more
detail in Unit 8.

ACTIVITY
Setting marketing objectives

Wood (2004) breaks marketing objectives down into external and internal
objectives. Again when you consider the process of setting objectives, you will
see the importance of having accurate market data. We will concentrate on the
external objectives only.

Using the grid for marketing objectives, fill in the gaps with some of your own
suggestions. The first column looks at the marketing objectives which a

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company might set, the second column considers how to measure them, and
the third column is for examples of these objectives. This is meant to serve as a
checklist for key objectives, which does not mean that all companies should set
the same type of objectives.

Objective How to measure objectives Examples

1. To increase Market research survey on


customer satisfaction customer satisfaction

2. To retain existing By setting up and monitoring


customers sales plan for existing
customers

3. To encourage Sales promotion and


product trial sampling with the use of
coupons, telephone numbers
and point-of-sale samples

4. To acquire new Sales plan with key customers


customers targeted

Marcomms plan with a


message for new uses of
product

5. To acquire/defend Monitoring sales targets and


market share responses to communications

6. To expand/defend Number of outlets opened


distribution and new distribution
partnerships set up

7. To build brand Market research survey,


awareness before, during and after
marketing activities

8. To enhance brand Market research survey to test


image customer perception of the
company against key
variables

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ACTIVITY FEEDBACK 

Objective How to measure objectives Examples

1. To increase Market research survey on To increase customer satisfaction levels of


customer satisfaction customer satisfaction 65% to 70% in year 1, 75% in year 2 and 85% in
year 3 through an improved staff training
programme.

2. To retain existing By setting up and monitoring To retain the 20% ‘most loyal’ customers (from
customers sales plan for existing Ford example) and to maintain current sales
customers levels

3. To encourage Sales promotion and To reach 20 test drives per showroom per
product trial sampling with the use of month (Ford example) over the next six
coupons, telephone numbers months, and to achieve a conversion rate of
and point-of-sale samples 20%

4. To acquire new Sales plan with key customers To target the ‘luxury’ segments of the
customers targeted European package tour holiday market, and

Marcomms plan with a acquire twenty new customers per month, for

message for new uses of the next 12 months

product

5. To acquire/defend Monitoring sales targets and To maintain current market value share of
market share responses to communications 25% through a programme of staff training

6. To expand/defend Number of outlets opened To establish 10 new franchise partners


distribution and new distribution (Thorntons) in the next 12 months, with a
partnerships set up projected turnover of £ 500,000 per annum,
per store

7. To build brand Market research survey, To increase current awareness levels of brand
awareness before, during and after from 5% to 15% in 12 months, through an
marketing activities integrated campaign of advertising,
sponsorship and sales promotion

8. To enhance brand Market research survey to test To establish the position of being seen as the
image customer perception of the most innovative and reputable company in the
company against key industry, through public relations activities
variables.

There are, of course, several examples you could have listed, and there are, as
we have established before, no right answers. If we aren’t able to set specific
targets then we do not have sufficient understanding of the market, nor how
consumers behave within the market.

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You will probably want to know how you can set, for example, a target for
improving awareness of the brand in the market place. The simple answer is
that we need to understand what is possible and use current examples as
benchmarks. It is well documented that high profile sponsorship might only
improve awareness levels in the first year by about 10-15%, so we can bear this
in mind when setting our own objectives. We also know that short term
sponsorship might deliver an increase in awareness, sometimes as high as 20%,
but that this then falls once the sponsorship ends.

Setting objectives and developing your training programmes around this,


means that all key people within the organisation are aware of what we are
trying to achieve, and can work towards these goals.

Setting sales targets


Marketing consultants will usually find that when they visit a new
client the main objective of the client is to increase sales significantly.
They often have very ambitious targets and want to know how this will
be achieved. Of course, the first thing that we need to establish is how
existing customers feel about the business, and are they happy with our
service at present. Existing customers are very often neglected, when
they can represent the easiest new sales to make. A company which
manufactures sophisticated computing software, was able to make
additional sales of £ 60,000 (or 8.6% of their current turnover) in two
weeks simply by contacting their existing customers.

In order to set sales targets for our client we can follow this sequence:

1. Establish the current conversion rate for sales. If they need to


visit four clients in order to get one sale then they have a
conversion rate of 25%.
2. Establish also how many prospects their sales force are capable of
visiting in a week.
3. Calculate how many calls need to be made, or how many pieces
of information need to be sent out, in order to get a response for
the sales team to follow up.
4. Ask the client to state how many new sales they need in the next
year.
5. Now calculate how many people they will need to see in order to
get their desired sales target.

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ACTIVITY
Sales targets

You are acting as a consultant for a company which sells a software


management system to golf course managers that handles accounts, bar and
restaurant takings as well as membership information. You are given the
following information.

The sales people have a conversion rate of 20%, that is to say they that if they
are given five leads then they will usually convert one of them.

They want to find 50 new customers in the coming year and they currently have
two sales people. They split the country up between them by north and south.

Each sales person can only visit a maximum of two potential clients per week as
a result of the travelling time involved, and the time needed to demonstrate the
product. Once a prospect is converted then this involves extra administration
time to finalise the sale.

If they send out 1000 mail shots then they usually get a return of about 20 new
prospects.

1. Calculate the number of people they will need to visit in order to reach
their sales targets, establish how they will identify their sales prospects,
and work out how long it will take the sales team to visit the prospects
you have identified.

2. Suggest ways in which they can improve their conversion rates.

ACTIVITY FEEDBACK
We can work out the following.

1. To find 50 new customers with a conversion rate of 20% means that


they will need 250 prospects to visit, or 125 each.

They each have a capacity of about 8 per month, or 192 per annum
between them.

This means that in the first year they will be able to visit 192 prospects,
and the remaining 58 will take 3-4 months more.

In order to get 250 prospects, we start by dividing 250 by 20, which is


the number of prospects that they get from a 1000 mail shots, which
gives us a factor of 12.5. Therefore, if we multiply 12.5 by 1000 mail

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shots, then we get a figure of 12,500. This means that they would need
to send out a mailshot of 12,500 to get a figure of 250 prospects.

2. In order to improve their conversion rates they could do the following:

Sales conversion rates – consider improved training for sales team. An


improvement of only 10% means that they will need to visit less
people, and spend less time looking for new prospects.

Improve communications – with potential customers this will not only


improve response rate, but also improves a potential customer’s
perception of the organisation. This can be achieved by reviewing the
current practice of preparing communications literature and also
consider investment in additional training.

Marketing strategies and programmes


We can break down our marketing programmes into pricing, product,
distribution and communication, or we may wish to express them as the
4 Ps of product, place, price and promotion. In each section, we will
state what we are going to do, and at what time, and the sum of all of
these activities are aimed at achieving our objectives.

Budgets
We will look at budgeting in more detail, later on in this unit. Our
budgets will take into account the cost of undertaking our product,
communications and distribution activities. This will include our
expenditure on advertising, our product development costs and the
costs of increased distribution. This will be presented to include targets
and will identify some of the key areas and those responsible for
monitoring them.

Implementation and control


We will cover these in more detail later in this unit. Under
implementation and control, we will measure the progress of our
actions and carry out a financial analysis. This will also involve
monitoring our budgets.

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Conclusion
Here we will include details of how our marketing strategy worked,
highlighting the advantages that our product or service has over our
main competitors.

Budgeting
In order to control our marketing plan we should aim to stick closely to
our budget. This means that we have an amount of money to spend on
our marketing activities and, as effective planners, we should also have
expectations of what our actions will achieve. We should express our
intended outcomes as objectives, which we should then express in
measurable terms. By expressing our objectives in measurable terms
means that we can monitor them to see if they have been achieved. At
the lowest level we should be able to set sales objectives and profit
expectations, and also look to express the outcomes of our other
marketing activities. We need to consider how we monitor customer
awareness, brand perceptions or even our overall image. What about
developing new products? We know that they involve high levels of
research and development funding, but how can we reduce the risk of
them failing, and within a specified budget? It is at this level that we
look to differentiate ourselves from competitors and concentrate on
building up value in our business.

CASE STUDY ACTIVITY
Teekanne

Read the case study in Hollensen (2003), page 669, and answer the following
questions:

1. To what extent is it an advantage for Teekanne that it manufactures tea


bag machines and branded tea bags?

2. Teekanne wants to expand its tea sales outside Germany. Are there
any countries that you would recommend?

3. Teekanne suggests that Sean Connery could be used to help change


the image of tea. Is this a viable option?

4. What other European promotional strategy might Teekanne use, as an


alternative to Sean Connery, to increase sales of its brand in the
European tea market?

5. Through the sales of tea bag machines, Teekanne already has


knowledge of and contacts with the main tea brand manufacturers in

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the US market. How might Teekanne use these contacts to plan the
market penetration?

CASE STUDY FEEDBACK
1. The main advantage is vertical-integration, as they are both a supplier
and a manufacturer. This allows the company to have a much closer
feel for the market, and also for the end-user. Through Teepack they
can test machines and through Teekanne they are able to supply the
market with newly developed tea bags, with a more efficient
production time.

2. There are several opportunities. It would appear that the United


Kingdom and Ireland might be attractive markets, due in part to their
very high sales of tea and the ‘low psychic distance’ of the two
countries.

3. One of the biggest mistakes that companies make in targeting


celebrities is that they undervalue the actual cost of hiring a celebrity. A
company might expect to have pay a round $ 50,000, when the price
demanded might be $ 500,000+. The other consideration is to be
certain that the celebrity’s ‘positioning’ will appeal to your target
groups.

4. The company might use a mix of TV commercials, newspapers,


magazines, internet-promotion, sponsorship or sales promotion. The
most important consideration is to be clear what your promotional
objectives are and use the most appropriate activities.

5. Teekanne can use its contacts to:

- gain up-to-date market information

- get access to a distribution network through one of the


tea brand manufacturers

- consider co-operation, or an alliance with one of the tea


manufacturers, with a view to supplementing each other’s
product lines

- consider purchasing a tea manufacturer with potential


and which has already penetrated the market.

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Customer lifetime value


Customer lifetime value will be covered in greater detail in Unit 7.

Barriers to implementation of market strategy


The barriers that stand in the way of successful implementation of
marketing strategy fall broadly into three categories.

1. Pressures external to the organisation

External pressures on the organisation will act as barriers to the


implementation of marketing strategies. In carrying out our external
analysis we should identify those factors which might affect our
marketing plans. We should be aware of any pressure groups who
might work against us, and consider which other political, social,
economic or technological might pose a risk to us. This emphasises the
importance of categorising these PEST factors and carrying out an
effective risk analysis.

2. Pressures on the marketing function from within the organisation.

When we look at the Thornton’s example later in the unit, we will see
that in order to carry out effective marketing plans, marketing training
will be necessary for all of those involved in implementing the plan. Far
too many plans do not take into account the prevailing organisational
culture. UK banks, in particular, found it very difficult to implement
some of their marketing activities due to the attitude of some of its staff.
They are very often neglected during implementation, even though
they are in the front line dealing with customers. It is unrealistic to
design a customer­focused marketing strategy without considering the
organisation’s ability to deliver on its promise. Some organisations will
have an existing structure which is simply not designed to be able to
deliver the proposed marketing strategy as is intended.

3. Pressures within the marketing function

It is often assumed that the marketing function is able to implement the


marketing activities as set out in the plan. This can be a problem when
companies are planning to expand their business, but haven’t
considered how the marketing function will carry this out. Their
execution of the plan is critical and they are very often the first group to
be evaluating and controlling the plan.

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Marketing Control
In order to establish if we have achieved our objectives, or that we are on
our way to achieving them, we need to establish control mechanisms as
part of our plan. It is well documented that this is the most neglected
area of planning, (McDonald (1999) and Hollensen (2003)) and,
therefore, merits more attention. The problems encountered in control
are usually as a result of an inadequate monitoring system, or the
reluctance of some of the designers of the plan to face up to early
problems, choosing to continue in the hope that the plan will be
successful.

Setting up a control system


Hollensen (2004) suggests splitting a control system into two broad
areas. The first is output control, which is mainly based on financial
measurements, and the second is behavioural controls, which focuses
on non­financial measurement.

Output control requires the constant monitoring of expenditure against


set targets in order to track changes. This enables us to take any
necessary corrective action. Behavioural controls are more about how
we train and motivate the staff who we use in order to deliver the plan.
We can address these issues through a programme of training within
the organisation, with the people who will help us to achieve our overall
objectives.

Marketing control system


If we look at the marketing control system in Figure 6.5, we will see that
at the first stage of the control system we need to decide what exactly
our overall outcomes are likely to be at the end of the plan, which we do
by setting objectives. Following from the objectives, we decide our
marketing strategy, which shows how we are going to achieve our
objectives in broader terms. Our strategy will then break down into
detailed plans (see Unit 5) where we state specifically how we will
manage pricing, promotion, distribution and product issues.

Having laid out our plans for implementation, we must then set our
specific performance standards in the areas of product, distribution,
communications and pricing, in which we specify exactly what is
expected at each level. This may be in terms of numbers of sales visits
and conversion rates.

We must then locate the people who are responsible for delivering the
expected results of our plan. This may be down to our brand manager or
possibly shared with the manager responsible for sales. The control
mechanism should be set up in such a way that the managers

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responsible can evaluate actual performance against the standards we


set. It is important that they are able to take corrective or supportive
action if we are deviating from the plan.

At this stage there are three tasks that those responsible for monitoring
the plan will need to execute. The first stage is to deal with individuals
and their contribution to the plan. It may be necessary to praise, offer
advice or even reward them through salary increases, bonuses or even
promotion. If the deviation is as a result of inappropriately set objectives
or unrealistic marketing performance standards, then corrective action
will need to be taken.

Alter D ecide on:


objectives
objectives
strategies
plans for implementation

Alter E st ablish mar ket i ng


standards per for mance st andar ds
product
distribution
communications
pricing

L ocat e
r esponsibilit y

Reward,
E valuat e per for mance promote,
against st andar ds advise,
punish

T ak e cor r ect i ve/


suppor t i ve act ion

Figure 6.5: Marketing control system.

Early performance indicators


There are several key performance indicators that will help us to
monitor the progress of our marketing plans. Hollensen (2003) in
reviewing the work of Samli et al (1993) , suggests that there are six key
indicators. These include a drop in the quantity of goods demanded,

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sudden movements in sales patterns, complaints from customers, a


noticeable impact on the sales of competitors’ products, significant
returns of our goods and an increase in the request for parts or repairs.
All of these indicators require further investigation and may require
some corrective action on the part of those responsible for the plan.

ACTIVITY
Thorntons Confectionery

Thorntons are a UK based confectioner, who have developed a reputation for a


range of confectionery, including Belgian style chocolates and toffees.
Consumption of chocolate per head of population in the UK is high, and the
total market is worth around £ 3.6 billion per annum, with a household
penetration of around 41%.

£ millions 2002/2003 2001/2002 +/- change

Turnover 167.1 163.8 2.0%

Profit before tax 6.4 7.1 (9.9%)

Operating cash 21.3 23.9 (10.9%)


flow

Figure 6.6: Sales trends. Source: Thorntons Confectionery.

1. Look at the sales figures, profit before tax and operating cash flows in
Figure 6.6 and briefly comment upon them.

2. What might your sales objectives be for the following year?

ACTIVITY FEEDBACK
1. We need to be careful when commenting upon incomplete figures as
the true pattern may be hidden. We can see that Thorntons have
increased their sales by 2 %. If we look at their interim sales for the
following year we see that they have increased by 4.4%. There would
appear to be a year-on-year increase.

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Both profits and operating cash flows show a decrease. Upon further
investigation we will see that this is due mainly to a significant
investment in plant and technology. What we can see is that where a
company makes investments then it will reflect in key indicators such as
profit or cash flow.

2. We might make the assumption that the confectionery market is


growing and our sales objectives should reflect this. If the market was
growing by 2.5% then we should look to grow by at least that amount.
If we have ambitions to grow market share then this would be reflected
in a higher percentage target than the current growth rate in the
market. Remember that our objectives must be realistic and
achievable, given the current company situation.

ACTIVITY
More from Thornton’s confectionery

£ millions 2002/2003 2001/2002 +/- change

( % )

Own shops 133.8 134.5 (0.5)

Franchise 12.3 11.3 8.8

Private label commercial 12.6 12.2 3.3

Thornton’s branded 3.1 1.6 93.8


commercial

Gift delivery service 5.3 4.2 26.2

Total 167.1 163.8 2.0

Figure 6.7: Breakdown of sales 2002/2003 by outlet.

If we now look at the breakdown of sales we can also consider a breakdown of


our preliminary ideas on our sales objectives.

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What might your sales objectives be, in light of the additional information?

ACTIVITY FEEDBACK
The breakdown of figures suggests that our core business, that is turnover
generated through our own shops, has fallen slightly but against a background
of a rising market. This may also be due in part to the fact that we have
increased our franchise business, but it should not have had such an impact.

Let us make some assumptions:

· Own shop revenues should grow by a target rate of 2% or


£ 2.68 million.

· Franchise revenues to grow by 8% or £ 980,000.

· Private label commercial to grow by 3% or £ 380,000.

· Thornton’s branded commercial to grow by 20% or £ 620,000.

· Gift delivery service to grow by 20% or £ 1.06 million.

This makes a total revenue increase of about £ 5.75 million or 4.3% increase
overall.

We have made a conservative estimate of 20% increase on the Thornton’s


branded commercial sector, which actually showed a growth of 93.8%. At this
stage we don’t know the underlying reasons for this. This does, however,
represent a move away from their traditional business, but nevertheless an
exciting opportunity. This probably increases access to the market by opening
up distribution outlets. It suggests also a different emphasis in our overall
marketing plan. As Thornton’s has traditionally been very successful at key
selling times such as Christmas, Easter and Valentines Day, a move towards
branded commercials reduces the dependency on these times, even though
they are always likely to be key selling times.

These targets can be broken down into regional targets and ultimately can be
measured at shop level. These will be some of the ‘early performance
indicators’ which we considered earlier in this unit. The increase in sales
through franchise outlets will depend also on Thornton’s plans to increase the
number of franchises.

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ACTIVITY
Thornton’s international plans: opportunity or threat

According to Thornton’s annual report, their plans to expand overseas appear


to be on hold yet again. In a presentation to shareholders they revealed that the
possibility of international franchises had been ‘rejected for the foreseeable
future.’ The possibility of exporting products to the USA or to any
Commonwealth countries is under review, but they do not see this as a ‘short
payback opportunity.’ The company’s main priority is to continue focusing on
the UK market where they consider the most potential to be.

What do you think of Thornton’s international plans? Do you think that they are
right to put off their franchise plans for overseas markets?

ACTIVITY FEEDBACK
At first hand it would appear that Thornton’s appear reluctant to step outside
their domestic market. While they do not see that there are opportunities to be
gained by operating overseas, they have perhaps underestimated potential
threats, and given the developments in China, they have also underestimated
the opportunities. They seem to have an old-fashioned view of marketing
goods overseas. They have a well established product, a wide range of product
lines and considerable expertise in marketing their products. China is a rapidly
developing market, and simply by operating in one major city might give them a
bigger target market than half of the total UK population of 56 million. While
the market potential is huge, the opportunity to work within China would also
open up the Far Eastern markets, as well as present them with a chance to
reduce some manufacturing costs considerably. China has a rapidly expanding
middle class with a passion for western style goods. Past experience of
international marketing also tells us that companies who become entrenched in
their own market run the risk of new overseas competition in their domestic
market.

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REVIEW ACTIVITY
1. Read the SCA case study in Hollensen (2003), page 701, and answer
the following questions:

a) What are the differences in buying behaviour between the


consumer/retail and non-domestic B2B tissue markets?

b) SCA wants to increase market shares, both in Europe and the


USA. How could SCA set up a budget system that would enable
the company to control the budget if marketing objectives are
met?

2. What are the main factors which we need to take into consideration
when setting marketing objectives?

3. Why do companies need to have marketing controls in place?

4. What are the problems involved in setting up and implementing a


marketing control system.

5. What are the benefits of the matrix organisational structure?

REVIEW ACTIVITY FEEDBACK
1. a) In the consumer/retail market the consumer buys tissues in order
to improve the quality of life, to make daily life easier and in some
instances a useful standby product.

For the business-to-business market, tissues are bought to help in


the production process as a way of improving quality, safety and
productivity.

b) The budget system should contain elements such as market


share, sales and profitability. In order to set this up to reflect
overseas involvement, customer groups could be replaced by
countries formed into regions, such as Europe and the USA.

2. The marketing objectives are used as a means of guiding the company


in the right direction, or a target for future activities. In order for the
company to achieve these objectives, or targets, they will be expressed
in terms of sales objectives, market share, by volume and value, and can
also include the expected return on investment as a result of
undertaking these activities. We will also use our objectives to establish

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the time needed to achieve them, and at all times make them
achievable and understood in key areas of the business.

We can also use our marketing objectives to set targets in our


marketing mix areas such as pricing, promotion, place (distribution)
and product, again setting ourselves measurable and achievable
targets.

We can also set societal objectives (covered in Unit 8 in more detail) in


terms of how we can best serve the interests of society, taking into
consideration our social responsibilities in terms of the way that we
reward and treat staff.

3. Companies need to have marketing controls in order to measure how


they have performed, when executing their plans. Companies need to
measure their performance in order to move to the next phase of their
plan. The options available to them are to moderate their plans if they
are not achieving their targets, or to continue with the plan if they are.
Marketing controls are, therefore, important in that they are used to
try and influence the performance of those responsible for executing
the plan.

4. One of the most difficult problems with setting up a control system is


to know exactly how to establish what constitutes the right amount of
control. Control mechanisms should be tight enough to identify
deviations from the plan, but not so tight that they get in the way of the
planning process.

The term control may also be viewed negatively by people within the
organisation, and may impact on the performance of individuals. A
control system should not be perceived to be a way of punishing
performance in the company, but as an early detection option to help
put the plan back on course.

We have already established that one of the key problems with control
systems is that they can become too rigid, and fail to identify the
deviations from the plan, for which they were set up.

5. The matrix structure is most advantageous for companies who have a


wide range of products and services and which are spread over a wide
geographical area. When companies move to a matrix structure it is
usually achieved by two of their existing structures intersecting each
other. A matrix structure typically creates a dual focus to ensure that
conflicts between a product area and a geographical area are identified
and analysed.

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References
Dibb, S, Simkin, L, and Bradley J, (1997), The Marketing Planning
Workbook. Thomson Business Press, London, England. ISBN 1861523491

Hollensen, S, (2003), Marketing Management: a relationship approach.


Pearson Education, Essex, England, ISBN 0273643789

McDonald, M, (1999), Marketing Plans: How to Prepare Them, How to Use


Them. Butterworth­Heinemann, Oxford, England. ISBN 0750641169

Wood, M, (2004), Marketing Planning: Principles into Practice. Pearson


Education, Essex, England. ISBN 0273686798

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Unit 7

Focus on Direct Marketing and


Customer Relationship
Management

LEARNING OUTCOMES
After studying this unit you should be able to:

· Demonstrate an understanding of the key strengths of direct


marketing approaches.

· Demonstrate an understanding of the need to develop distinct


acquisition and retention strategies.

· Demonstrate an understanding of the nature of customer loyalty and


how it may be delivered.

· Demonstrate an understanding of how to develop budgets and


strategies based on lifetime value and allowable marketing cost.

· Be able to calculate the impact of different strategies on customer


value and profitability.

Introduction
In this unit, we will be focusing almost exclusively on direct marketing.
Direct marketing is often represented as a subset of marketing
communications but, we argue, many of the techniques of direct
marketing are essential to the proper strategic applications of the
currently ‘fashionable’ concepts of relationship marketing and
e­commerce.

Direct marketing stakes a unique claim with regards to its measurability


and accountability. But these are not lofty, theoretical strengths of a
broad approach. In direct marketing the ‘devil is in the detail’. It is
simply not possible to implement a successful direct relationship or
online (potentially ‘one­to­one’) strategy without understanding and
tracking the value of individual customers.

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Defining direct marketing


According to Graeme McCorkell, the veteran direct marketing
consultant and writer, direct marketing –

“…produces or uses data from interactions with customers


or prospects in order to target marketing activity, generate
continuing business and maintain control over marketing
expenditure.”
McCorkell (1998)

McCorkell (1997) also describes the cornerstones of direct marketing as

· Targeting – who will be interested?


· Interaction – how did they respond before?
· Control – what was the return on our investment?
· Continuity – how can we further the relationship?

These elements all interlink with one another and it is impossible to say
that one is more important than the other. Nevertheless the key,
according to Tapp (1998), is that a direct marketing company captures
individual customer details as soon as there is contact between them –

“so that the marketer can begin a relationship with that


customer, subsequently treating them differently over time in
order to generate repeat business”

In other words, in response to knowing more about a customer any


aspect of the marketing mix may be changed.

Drayton Bird, another long serving and influential direct marketer in


the UK defines direct marketing as –

“Any activity which creates and exploits a direct


relationship between you and your customer as an
individual” (Bird 1989)

The Institute of Direct Marketing in the UK describes it as –

“The planned recording, analysis and tracking of consumer


and business direct response behaviour to develop
marketing strategies for current and future customers”
(www.theidm.co.uk)

This latter definition points to the potential strategic importance of a


direct marketing approach.

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ACTIVITY
Look again at the definitions of direct marketing (and review the definitions of
marketing in earlier units). What do you think are the key strengths of each with
regard to developing competitive advantage?

ACTIVITY FEEDBACK
Here we have taken just the main direct marketing definitions –

Definition Strengths

“ Marketing is the management process The conventional, transactional definition from Unit 1. It
which defines, anticipates and satisfies speaks of customers and their needs. Arguably it does
customer requirements efficiently and not refer to the strategic importance of keeping
profitably” (CIM) customers in the longer term.

“Any activity which creates and exploits a This pithy definition focuses on the value of the
direct relationship between you and your individual customer relationship. It suggests that this
customer as an individual” (Bird 1989) relationship is, itself, an asset. However, the
‘exploitation’ of the relationship may raise ethical issues
for some, and there is no suggestion that the relationship
should be maintained for longer term gains.

“The planned recording, analysis and At first difficult to understand, this definition emphasises
tracking of consumer and business direct the ‘technocratic’ nature of direct marketing. It is about
response behaviour to develop marketing planning and about detailed recording of customer
strategies for current and future behaviour. Crucially that behaviour is in response to
customers” (www.theidm.co.uk) direct activity. The purpose is made clear; to continually
inform strategy.

Table 7.1: Strengths of various definitions of direct marketing.

In neither of the ‘direct’ definitions are the interests of the customers


represented. Perhaps this is taken as understood as part of marketing, but given
what we know about the level of marketing knowledge in some companies (see
Unit 1), this may not be wise. Tapp’s definition above does, at least, talk about
the need to generate repeat business – as does the quote from Graeme
McCorkill – presumably by satisfying customers. Hence, direct marketing
encourages looking to future revenues which can only be secured by satisfying
customers now and in the future.

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Relationship marketing
Since the early 1980s, a new strand of (direct) marketing has emerged.
Relationship marketing (RM), discussed briefly in Unit 1, builds on the
strengths of direct marketing and translates them into strategies for the
whole business.

The notion of relationship marketing has been championed by, amongst


others, the Cranfield School of Management. The key text for this course
by Svend Hollensen, refers throughout to a ‘relationship approach’ in
contrast to a ‘transactional’ one. Having completed six modules you
should, by now, be familiar with this distinction.

Payne (1995) identified the key features of relationship marketing:

· A focus on maximising lifetime value of selected


customer segments.

· Concern with customer service as central to retaining


customers.

· Emphasis on quality throughout an organisation – the


measurement of customer perceptions of quality rather
than objective standards of production quality.

· A shift in focus from transactions to relationships


between suppliers and customers.

· An emphasis on the importance of a wide network of


relationships in delivering value to customers.

The first three points resonate closely with a direct marketing approach
and, like direct marketing, can be supported by the intelligent use of
technology, particularly in sharing information between customers and
the company – and within a company. We will look at this in Unit 8.

The last two points above move beyond direct marketing in staking a
claim for marketers, and marketing expertise, to have influence
throughout the network of relationships that sustain a company. This
latter point is a concept very close to the value chain or value network
explained in Hollensen (2003).

Whilst direct marketing is almost universally accepted as one approach


to marketing at a tactical level and an increasing number of companies
are recognising the strategic importance of developing long term
relationships with customers, few are yet adopting the relationship
approach with other stakeholders as well.

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Relationship marketing is contrasted with transactional marketing in


Hollensen (op cit) chapter 1, pages 9­13.

As you learn some of the essential techniques of how direct marketing


deals with customers, you might like to reflect on how direct marketing
principles might help manage other stakeholder relationships.

The significant change of emphasis from short term transactions


already described in with respect to direct marketing is even more
significant for the relationship marketing perspective. A whole industry
has grown up around the implementation of customer relationship
management (CRM) which is based on the principles of relationship
marketing.

Beyond the key features above, Payne (2000) also summarises the key
strategic contributions of Cranfield’s RM as being –

· Understanding the economics of customer retention and


thus ensuring the right amount of money and other
resources are appropriately allocated between two tasks
(retaining and attracting customers).

· Highlighting the critical role of internal marketing in


achieving external marketing success.

· Showing how the principles of RM can be applied to a


range of diverse domains, not just customer markets.

· Recognising that quality, customer service and marketing


need to be integrated in a much closer manner than has
previously been the case in many organisations.

· Illustrating how the traditional marketing mix concept of


the four Ps (product, Price, Place and Promotion) does
not adequately capture all the key elements which must
be addressed in building and sustaining relationships
with markets.

· Ensuring that marketing is considered in a


cross­functional context.

Payne and others have developed a ‘Multiple markets model’


(reproduced diagrammatically in Hollensen, p10 and below) with
which they demonstrate the importance of non­customer relationships
in addition to those with existing and potential customers.

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I nt er nal mar k et s
Internal marketing:
every employee is an
internal customer or an
internal supplier

R efer r al mar k et s
S upplier mar k et s Creation of advocates
Collaboration (besides customers):
with key suppliers intermediaries,
Cust omer mar k et s agencies, etc.
(Customer retention,
customer lifetime value)

I nfluence mar ket s


R ecr uit ment
mar k et s Industry related
influencers, associations,
Human resources/ government departments
skilled people (universities, etc.)

Figure 7.2: Relationship marketing’s ‘Six markets model’. Source: Hollensen (2003:10).

The point of considering these as potentially marketing relationships is


that they can be managed in an integrated and coordinated way to
achieve corporate objectives.

ACTIVITY
Think of a small business with which you are familiar, it may be a local retail
store or a supplier of services such as cleaning or catering services.

Try and list the different companies and organisations with which the company
has a relationship. Are these equally important? Which could be managed using
marketing techniques?

Now, for a charity or voluntary organisation, repeat the exercise. Are the
relationships different?

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ACTIVITY FEEDBACK
You may have listed suppliers, staff, others in the value-chain such as agents or
distributors as well as customers. For a charity or voluntary organisation, the
relationships are inevitably different. For example, you might separate out
donors and clients (the recipients of the charity’s help), governmental
departments, volunteers and others.

Payne (2000) refers to five generic ‘markets’ in addition to the customer


markets.

· Internal Markets

Every employee or department is a customer to another.

· Supplier and Alliance Markets

Increasingly suppliers are identified as crucial in most companies’


operations.

Sometimes suppliers become allies or partners.

· Recruitment Markets

Appropriately skilled workers are in demand in almost every industry.

Some companies owe their success to recruiting better people than


their rivals.

· Referral markets

Direct marketing identifies the most committed customers as


‘advocates’. These people recommend highly favoured brands to their
friends. In other product sectors, intermediaries are important
referrers of business.

· Influencer Markets

For large publicly listed companies these include financial analysts,


stock brokers and others who may assess their performance.

Relationship marketing reminds us of the complex web of interactions that


must be managed by a company to deliver something of value to the end
consumer. Viewed as a sequence of ‘events’, this is Porter’s concept of the
Value Chain, but you will recall that Hollensen depicts this in more dimensions
as a ‘Value Network’.

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ACTIVITY
Read Hollensen sections 1.3 to 1.7, pages 9-20. Develop your answers to the
discussion questions on page 22.

ACTIVITY FEEDBACK
What are the similarities between relationship marketing (RM) and
transactional marketing (TM)?

The two approaches have the same starting point: focus on customer
satisfaction.

Furthermore both approaches need the same powerful instruments in the


implementation of the marketing plan: personal selling, budgeting revenues and
costs, etc. The instrumental dimension has been largely neglected in the early
academic discussion of the RM concept. However, proven tools are available in
the discipline of direct marketing.

How does a relationship marketing strategy differ from a transactional


marketing strategy?

In the ‘pure’ versions of TM and RM, Table 1.3 (pp12-13in the Hollensen
textbook) gives an overview of the differences between the two approaches.

The exchange-based TM approach is based on a notion of mass markets where


individual customers are anonymous. The goal is to make customers choose
one particular brand over competing brands. This easily creates a situation of
competition between the marketer and the customer. In transaction marketing
situations, customers, as unidentified members of a segment, are exposed to a
number of competing products, and they are supposed to make independent
choices from among the available options.

The two parties have conflicting interests. The starting point is that the
customer does not want to buy; he or she has to be persuaded to do so.
Although Peter Drucker said that the aim of marketing is to make selling
superfluous.

RM emphasises cooperation rather than competition and consequent conflict


among the parties and among the marketing actors. In relationship marketing,
where interactions and cooperation exist at some level, the customer and the
supplier or service provider are not totally isolated from each other. The
relationship is based on value creation in interactions between the supplier or
service provider and the customer, cooperation is required to create the value

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that the customer is looking for. Of course, this does not mean that conflicts
could not exist; however, cooperation is the driving force, not conflict.

Which kind of industries could benefit from the use of RM versus TM


and vice versa?

You could refer back to the discussion on direct marketing and loyalty and to
the earlier discussion of the use of technology.

Industries favouring RM could include complex computer-systems, building


projects and similar situations where because cooperation and partnership
between the partners is needed to get a satisfactory solution for the customer.

Industries favouring TM may include those where mass production of standard


products is taking place, like foodstuffs, components or raw materials (like
cement). It may also be appropriate where each customer buys small amounts
of a product of low value and they do so infrequently.

In which situations would customers not be expected to be interested in RM?

Market situations characterised by low customer interactivity/arm’s length, and


impersonal contact with manufacturer. In this case, there may be more of a role
for intermediaries and they may employ RM techniques.

The strategic role of direct marketing


It is important to understand that there is a difference between applying
direct marketing techniques and implementing a direct, or relationship,
marketing strategy.

As discussed in Unit 1, strategy concerns long term, important decisions


that lead towards stated objectives in uncertain conditions. Decisions
such as this have an impact throughout an organisation.

Tapp (1998) suggests that there are three levels of direct marketing in
which –

A. Direct marketing drives the business; the entire company is run


according to the direct marketing approach from the design of
the product to communications. Pricing is dynamic and adapted
to different customers at different times and the product is only
sold direct.
B. Direct marketing drives part or all of the marketing strategy; it
improves the return on investment in other forms of marketing.
Often a particular segment of the market is managed directly
whilst traditional channels are still used if appropriate.

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C. Direct marketing is used as part of the communications mix;


there is no direct marketing strategy but, perhaps, direct
response communications are used amongst other more
conventional techniques.

ACTIVITY
Try and find examples from your own experience or from your reading of
companies that fit into each of these categories. Can you think of reasons why
they might have chosen to follow one or other of these approaches?

ACTIVITY FEEDBACK
It is highly likely that you found it easy to identify companies who use direct
marketing techniques amongst many others (the third category above). Most
global brands such as McDonalds and major brand owners such as Unilever and
Proctor and Gamble have experimented with direct techniques. They continue
to spend heavily on mass advertising primarily to maintain brand awareness in
markets where there are many substitutes and competition is intense. In the
UK, Heinz experimented with a direct marketing strategy but soon found that
the costs outweighed the benefits of selling additional cans of soup and beans.
In the end, companies supplying fast-moving goods have to deliver the product
efficiently and cheaply to the customer. For many this inevitably means using
the major supermarkets, and opportunities to ‘go direct’ are few.

Companies such as BA and other major airlines use direct marketing intensively
in certain markets where there are high value customers they would like to
keep. These (identified as the second level of direct marketing) use direct mail,
e-mail and specially tailored offers to build barriers around their best
customers. Often these are called loyalty, privilege or ‘gold’ schemes.

You may also have found it easy to think of companies that are entirely ‘direct’.
In the UK and Europe, financial services have been revolutionised by the
emergence of telephone and internet based providers of insurance and
banking. Many of the success stories of e-commerce, such as Amazon, are
retailers that have no ‘offline’ presence and deal with customers entirely
directly, but at a distance.

Those companies that have embedded direct marketing into their


company are likely to be those that value longer­term customer

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relationships. This is an important point. Direct marketing companies


are those that look at the value of their customers over the longer term.

Companies need new customers, indeed they must recruit new


customers before they can go on to become long­term, loyal customers.
But in almost every business, new customers then become more
expensive to recruit. It is, therefore, tempting for companies to chase
only those customers who will be profitable in the short term, say as a
result of the first transaction. But it is precisely these customers that will
also be targeted by the competition. Knowing the ‘lifetime value’ of
customers (LTV) can enable a company to make better decisions
regarding which customers to target, with what product or service and
how much to spend in doing so.

ACTIVITY
As Daewoo UK re-brands as Chevrolet, it is looking to attract younger
customers to its small car range. They know, however, that they will have to
use big incentives to get young adults to shift allegiance from Ford, Vauxhall and
others. The question is how big? The profit margins on new cars are slim – at
most 10% on a new car of £4,500 (€6,500), but much of that can disappear in
conventional marketing costs.

They know that once they have a customer the chances of a repeat purchase
within three years is high (as much as 50%) so how might the idea of lifetime
value help them make their decision?

ACTIVITY FEEDBACK
It is clear that re-branding for Daewoo/Chevrolet is going to be expensive.
Apart from the cars themselves, the dealership network has to change and they
will be advertising heavily to educate the public. If they consider only the
current financial year then it is difficult to justify reducing profitability now by
adding marketing costs.

However, if they look over the next three years and predict that half of their
customers will return, then they can also predict future revenue and profits. If
half of those re-purchasing a Chevrolet in three years time return yet again,
then those customers are even more valuable.

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Loyalty
The main protagonist of the concept of loyalty in marketing is Frederik
Reicheld (1996) who researched the impact of loyal customers noting
that many companies lost 10 to 30% of their customers each year. The
result was complete renewal of their customer base within 5 years. He
also pointed out the oft quoted statistic that it cost between 3 and 30
times more to recruit a new customer than to keep an existing one.

Reicheld reported Bain & Company’s research into the effect of


customers leaving and staying. They discovered that, in some cases, a
5% increase in retention (through increased loyalty) could result in a
50% increase in cumulative profitability. In the case of a credit card
company the same increase in loyalty was responsible for an
improvement in profit of 125%!

Traditionally loyalty has been assumed to be closely linked to


satisfaction. However, further Bain & Co research has pointed out that it
is dangerous to assume that any customers are, in fact loyal. (Jones and
W. Earl Sasser Jr. 1995)

ACTIVITY
In the 1970s Telecom was a subsidiary of the UK’s Post Office. It had a
monopoly on the provision of domestic telephones in the UK. Nevertheless,
managers were keen to adopt up-to-date techniques and regularly surveyed
their millions of customers. This was particularly important when, in the 1980s
the business transferred into the private sector and telecommunications was
opened up to competition.

The main findings of a (fictionalised) customer satisfaction survey are


summarised in Figure 7.3.

Totally dissatisfied Dissatisfied Neither satisfied Satisfied Totally satisfied


nor dissatisfied

15% 20% 25% 35% 5%

Figure 7.3: Summary Telecom customer satisfaction ratings.

If you had been advising Telecom as it prepared to fight its competitors for the
first time, how would you have interpreted the figures? On which customers
would you have advised they spent their ‘retention’ budget?

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ACTIVITY FEEDBACK
Probably your initial reaction was to point out that the company was in danger
of losing 35% of its customers; the ‘totally dissatisfied’ and the ‘dissatisfied’.
Indeed a SWOT analysis such we discussed in Units 4 and 6, might raise this as a
weakness.

In fact, Jones and Sasser (1995) reported that this was the concern of many
companies as they examined their customer satisfaction survey. However,
their investigations came up with some surprising results, replicated across a
number of different sectors.

Firstly, they discovered that even ‘satisfied’ customers in many industries were
prone to defect. In some cases the only thing preventing them was a near
monopoly situation. Utility companies (such as Telecom) were an example of
this.

Secondly, they discovered that the ‘totally satisfied’ customers were up to five
times more valuable that the merely ‘satisfied’ because they would stay longer
and buy more.

Their conclusion was that resources should be focused on increasing and


maintaining the satisfaction of customers in the top two satisfaction categories.

Tapp (1998) cites research by the agency Rapp & Collins that illustrates
why companies lose their customers –

Reasons Percentage

Moved away/dies 4

Relationships with other companies 5

Competitive activity 10

Product dissatisfaction 14

Figure 7.4: Reasons why customers were lost. Source Tapp, 1998

Hollensen (2003, p618) points to research that analyses customers’


loyalty on two axes; attitudinal and behavioural.

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ACTIVITY
Read section 15.5 in Hollensen, pp617-620. Given the figures above in Figure
7.4, do you think the four categories of loyalty developed by Dick and Basu help
address the problem of customer defection?

ACTIVITY FEEDBACK
Figure 7.4 shows that nearly 80% of customer leave because they are
dissatisfied with the product and or the service they have received. Research
such as this must be treated with caution since so-called ‘exit interviews’ tend
to focus on the ‘completely dissatisfied’ category of customer who would be
difficult to retain in any circumstances. A further 4% of customers move away
or die.

However, just 15% of customers move because of competitive activity and


these must fall into the category of ‘spurious loyalty’.

Whilst the classifications from Dick and Basu are useful for conceptualising
loyalty they are weak as a management tool. It would be necessary to factor in
satisfaction and the sources of that satisfaction in order to develop appropriate
strategies.

By now you should also have considered the possibility of reflecting on the LTV
of such customers. This would assist in allocating budgets to customers
segmented by loyalty.

What Creates Loyalty?


Different customers in different markets experience many different
kinds of loyalty. We have already referred to the idea of physical
barriers that prevent a customer leaving. In financial services it is often
stated that a customer with four accounts with a particular back is 100
times less likely to defect than a customer with only one account. Banks
have huge incentives to retain customers since, often, current accounts
simply cannot be run profitably.

Above all, satisfaction and service help to create loyalty. In some cases
this may be rational when the customer knows that the product

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represents the best value in the marketplace. In the UK this is often the
case with mortgages when lenders compete on interest rates and offer
‘fee­free’ switching.

But commitment can be emotional too. In this respect, brands are ideally
placed to build bonds of loyalty but continually meeting the
psychological needs of their customers.

Whilst retention and loyalty are intertwined, loyalty is not an inevitable


consequence of a customer’s longevity. In order to maximise the
chances of a customer staying and increasing their commitment a
company must develop a ‘contact strategy’ that aims to build loyalty.
The process begins when a customer is first recruited.

· Welcome. It has been said that, rather than ‘new’ or ‘free’,


the most powerful words in direct marketing are ‘thank
you’. Customers are increasingly aware of their own
value to a company and appreciate this being recognised.
This is not the moment to sell more, but it is a useful time
to collect data and capture any problems before they
become insurmountable.

· Up Selling. When a customer has only recently joined


they can still recall many of their reasons. Assuming their
first experience was positive there is usually an
immediate opportunity to increase their purchasing.

· Cross Selling. A new product often sensitises customers


to other, related needs. Complementary products and
services are ideal. A customer investing in a new DVD
player may want insurance or DVDs themselves.

· Renewal/Preventing Inactivity. Timing is crucial,


renewal should be prompted before customers lose
interest. Often subscription marketing offers incentives
for payment by standing order or direct debit, or for
paying in advance for a longer membership period. A
customer may appear to be inactive for many reasons.
Historical data may give you clues as to customers
buying patterns.

· Reactivating Lapsed Or Inactive Customers. As we have


already discussed action to ‘revive’ a customer can go on
as long as the results outweigh the costs.

The development of a customer from first contact through to a highly


loyal customer is often visualised as the ‘ladder of loyalty’.

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D eveloping r el at i onshi ps

P ar t ner

A dvocat e

S uppor t er

Cl ient

P ur chaser

P r opect

Figure 7.5: The ladder of loyalty.

Whilst conventional marketing concentrates on the transformation of


potential customers into purchasers and established clients, direct and
relationship marketing which prizes loyalty seeks to create supporters
and, ultimately, ambassadors.

Ambassadors are not only fiercely loyal to the company, they also
recommend the company to others, hence their name.

ACTIVITY
Now might be a good time to take a break from studying! Go shopping for a
new experience.

Perhaps you could have a haircut or go out for a meal or visit a car showroom or
an expensive clothes store just to look (you don’t have to buy anything). The
important thing is, it should be a store or restaurant you have not visited before.

As you go in search of a new service ‘encounter’ note down all the places you
consider. Note how you learn about alternatives, perhaps from friends or
family or from advertising, directories or just by browsing. Try to keep a record
of how you made a decision to become a customer of the chosen company. As
you spend time in the store or restaurant, note how many times you were
approached by service personnel (the manager, waiters, sales people, etc).
How many times were you unsure about what to do or say; how many times

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did you have to ask for help, or were you ‘pounced’ upon by eager members of
staff?

At the end of your time in the store, how likely is it that you would go back? Did
you end up enjoying the experience?

ACTIVITY FEEDBACK
Whatever your experience you will have concluded that it was broadly
speaking, enjoyable or not enjoyable. You will have formed an impression of the
store, showroom or restaurant.

Along the way you will have experienced ‘moments of truth’ when the service
personnel had to judge what you, the customer, wanted. At these moments,
your experience could have been positively or negatively affected.

For example, if you had booked a meal, but then arrived at a restaurant to find
your table not available, the service has already failed. If you are then expected
to wait a long time and no apology is given, it may be that the quality of the meal
itself is irrelevant.

Every moment you come into contact with an organisation is called a ‘touch
point’. Companies can improve service and customer loyalty greatly by
identifying these and managing them.

Loyalty schemes
Loyalty schemes aim to reward loyal behaviour by linking increased
value, for the customer, to repeat purchases.

Often these involve some kind of card, which must be presented at the
point of purchase and notional points which can be redeemed against
other products or services.

Some loyalty schemes, such as AirMiles™ or Nectar™ (in the UK) are
stand alone schemes that several brands can buy into. This may make
the scheme more attractive to consumers since they are more able to
collect substantial rewards. However, the rewards are not unique to a
brand and the scheme must be managed carefully so that there is no
competition between brands in the scheme. For example, it is likely that

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only one supermarket and only one bank would be in the Nectar
scheme.

Companies also develop their own schemes. Airlines, for example, have
developed ‘frequent flyer’ programmes for their most valuable
customers.

Sub­brands such as ‘Club Class’ and ‘Business First’ are ways of


rewarding continued high usage. In fact, if a British Airways Gold
cardholder does not travel enough, they have their membership
downgraded.

Loyalty schemes should not be confused with sales promotions.

A sales promotion may be targeted at particular type of customer and


may encourage repeat purchase but often sales promotions are
short­lived and aim for short term effects. Crucially many sales
promotions miss the opportunity to collect important information
about customers and are not underpinned by the use of a database.

B r and L oyalt y Mat r i x :


t he diamond of l oyal t y

L oyals

H abit uals Var iet y


seek er s

S wit cher s

Figure 7.6 A brand loyalty matrix. Source: Knox, S. (1996)

In some cases, sales promotions can be destructive. Simon Knox (1996)


writing about the apparent decline of brand loyalty in the 1980s and 90s
pointed out that there were at least two dimensions of loyalty –
psychological commitment and active support (through purchase
behaviour).

When mapped, these two dimensions generated four kinds of


customers.

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These were described as –

· Loyals
- Active (involved) decision making based on product
features, quality, referral

- High perceived risk in changing brands


- Small portfolios
· Habituals
- Passive decision making based on simplification
- Latent risk of brand changing
- Susceptible to changing brand when first choice out
of stock

- Smaller portfolios
· Variety Seekers
- Multi­brand buying, active search based on quality
- Large portfolios
- Unlikely to defect permanently when choice out of
stock

- Seek variety for own sake or alternative usage


occasions

· Switchers
- Large, varied portfolios
- Sensitive to price and promotions
- Low perceived risk in changing

In contrast to the Dick and Basu classifications of loyalty referred to


earlier, Knox’s model focuses solely on existing customers.

ACTIVITY
How do you think understanding of a company’s customer base in these terms
might influence customer retention activity?

Which customers do you think comprise the largest group; which the smallest?

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Would this form of analysis have any effect on the acquisition of new
customers?

ACTIVITY FEEDBACK
Knox’s ‘Diamond of Loyalty’ suggests that the Loyals are likely to be the most
valuable customers. Whilst Habituals have less commitment, they still buy a lot
and Variety Seekers, though they are committed actually support many brands.
Switchers are likely to be least valuable since they select from many brand
alternatives and do not feel committed to any.

It is impossible to say which group is the largest. Knox suggests that the
categories are relative and determined by cluster analysis. That is, when all
customers are plotted according to the strength of their commitment and
support, a line can be drawn separating the above four segments. Different
companies in different markets may each discover a distinctive distribution on
the diamond grid.

Interestingly this notion of loyalty has significance for the acquisition of


customers too. All brands would hope to gain loyal customers but, by
definition, these should be the most difficult to recruit from rivals. By the same
token Switchers will be the most susceptible to incentives, but may equally be
tempted away.

It seems the main battle is likely to be for Habituals and Variety Seekers. Having
recruited them, however, the challenge would be to transform them into truly
loyal, totally satisfied customers.

Promotional activities intended to increase the loyalty of customers must be


properly targeted and, likewise, sales promotion activities aiming to acquire
new customers must be carefully designed and monitored to ensure that the
customers are likely to remain.

Research that enabled you to compare the loyalty profile of the customers of
competing companies or brands would enable you to assess the vulnerability or
strength of the customer bases. This is illustrated simply in Figure 7.7.

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B r and L oyal t y Mat r ix :


t he diamond of l oyal t y

Loyals

A
B
Size of circle
denotes volume

Switchers

Figure 7.7: Mapping customer loyalty profiles of brand A and brand B. Source Knox, S.
(1996)

It is clear that loyalty is a complex idea and that companies often expect
loyalty when they do little to earn it.

Furthermore some customers, even regular customers, may develop a


distinct ‘anti­commitment’ to a brand. Jones and Sasser (1995) cited
above even went as far as suggesting that some dissatisfied customer
could become ‘terrorists’ (the opposite to ambassadors), undermining
the brand or company and spreading ill will.

Loyalty offers us a basis for segmentation of our customer base that can
have enormous benefits. Tapp (1998) reports that the credit card
company MBNA found strong correlations between loyalty amongst its
users and their profession. Teachers, accountants, nurses and engineers
were identified and the company was able to develop successful new
products – ‘affinity’ credit cards targeted at clubs and societies with the
added incentive of a donation to the group. In the US as many as one in
four credit cards is now an affinity card.

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ACTIVITY
Case Study: Ocean Spray
Adapted from Smith (2003)

Ocean Spray is the world’s largest grower of cranberries and producer of


cranberry products. World overproduction led to the marketers using sales
promotions and advertising to drive demand.

In the UK, the juice market had been static and supermarket labels, priced at up
to 20% lower, were dominating. However, Ocean Spray had no branded
competition in the cranberry juice sector and had 80% awareness. The
marketers’ challenge was to encourage consumer trial in the hope that new,
frequent, users would be created.

The campaign eventually run was principally television advertising supported by


price promotions in major supermarkets. Research showed that 58% of new
users were attracted by advertising whilst the remainder came from
promotions. At the same time, fewer customers who repeated their purchase
were generated by promotions (42%) than by advertising (58%).

Over 80% of Ocean Spray cranberry juice is consumed by upmarket (ABC1)


women who believe it has healthy properties. It is sold in 1litre cartons at
around £1. The campaign of around £2 million generated around 2 million
trialists.

How would you apply the principles of loyalty to this example? What form
might a loyalty scheme take?

ACTIVITY FEEDBACK
For every 100 customers recruited by Ocean Spray’s campaign, 58 would have
been attracted by advertising and 42 by price promotions. Furthermore, of the
58 ‘advertising customers’ some 34 would repeat their purchase whilst just 18
‘promotion customers’ would.

Using Knox’s (1996) model (see above) new customers could not be classified
as ‘Loyals’ yet. It seems as though the campaign could be attracting customers
who are Habituals and Variety Seekers, who are likely to repeat their
purchases. Those that do not repeat the purchase may be Switchers.

However, you would need to exercise some caution. Careful research might
tell you that Variety Seekers have a ‘repertoire’ of, say, ten juice products. In

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this case they may purchase Ocean Spray only every two or three months and
you might wrongly have categorised them as Switchers.

Ocean Spray should begin a loyalty scheme which encouraged new purchasers
to tell about their purchase patterns. They may note the range of brands they
buy, how many different flavours they buy over the year and the basis upon
which their purchase decisions were made. The reward for providing this
information may be tailored to appeal to Habitual Purchasers (for example, by
rewarding frequent purchase over a long time) or Variety Seekers (by
emphasising quality and the range of uses to which cranberry juice can be put).

The aim would be to establish Ocean Spray as an habitual but essential


purchase for those with small repertoires or portfolios and to increase the
frequency or amount of purchase amongst those with larger portfolios.

At the same time, the loyalty scheme could develop a collectible theme (such as
on-pack coupons) to track the heaviest purchasers and to reward them with,
for example, a tie-up with a major health and fitness brand or program to build
towards high value rewards.

Understanding lifetime value


Lifetime value (LTV) of a customer can be expressed as the value of all
future contributions expected from that customer.

To be even more precise, we could say that LTV should be the ‘net
present value’ of all future contributions. This calculation gives us the
ability to allow for the cost of spending on these customers now for an
anticipated return at some date in the future. After all, at the very least,
the additional marketing expenditure we are proposing could be
banked and be gaining interest!

The customer ‘lifetime’


The number of years a customer may stay with a company varies. It will
depend upon the type of product, the characteristics of the customers
themselves, the market and the company’s objectives.

Some products, such as insurance policies, often have built­in renewal


dates. These are opportunities for customers to go elsewhere and also
opportunities for the insurance company to retain them. Given the
difficulty of recruiting new customers, customer retention is one of the
main strategic options for direct marketing.

Customers vary in their ‘loyalty’ to a product, company or brand. To


some extent this may be in the power of the company to influence, but

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there is some evidence that, at least in some markets, customers are


intrinsically more or less loyal.

In addition some markets tend to experience rapid changes because of


technological innovation or because of frequent regulatory changes.
Highly competitive markets where there is an element of fashion tend to
see customers following the next ‘wave’ or fad and loyalty is low.

A company that is struggling to survive will find it difficult to take a


long view and often pursues short term sales to maintain cash­flow. A
stronger company with greater resources can view a direct marketing
approach as a (longer term) investment decision.

Looking ahead five years gives a reasonable projection for the business,
but figures must be based on reality as far as possible. Frequently
companies overestimate the loyalty of their customers believing that
there is no substitute for their brand or product. It is all too easy to take
profit from a customer initially and to fail to invest in the future
relationship. Later on we discuss retention activity.

Other advantages of direct marketing


The main strength of direct marketing has already been alluded to. It is
the emphasis on longer term goals. Whereas traditional marketing is
constrained by the financial year in which a plan is actioned, direct
marketing must argue for an appropriate time­frame in which to plan.

A direct marketing approach has a number of other advantages.

· Targeting.
· Motivating action.
· Interactivity.
· Transactional information.
· Relationships.
· Databases.
· Measurement.
· Testing.

In order to illustrate the principles and the key strengths of a direct


marketing approach it is useful to consider a concept known as the
spiral of prosperity.

This describes the progression of a direct marketing plan.

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ID prospects

Target media Analyse

Sell products Increase customer value

Information Cross sell, up sell, renewal

Database and analysis Interact with clients

Figure 7.8: The spiral of prosperity.

The process is reasonably self explanatory but starts (for a new


company or new campaign) at the top of the cycle with the
identification of potential customers.

Identify prospects

As with conventional marketing, research is often used to make


educated guesses about the consumers most likely to become
customers.

Target media

Media such as newspapers, TV, radio, cinema, outdoor advertising and,


of course, direct mail can all be used. The key factor is the efficiency with
which they put our product or message in front of the right people.

Sell products

Assuming some products are sold as a result of our activity, each


element (such as a mail pack or a press advertisement) MUST also carry
enough information for us to track where the sale came from.

Gather information

The information from the sale, and from all responses, must be
captured. Horror stories circulate about ‘successful’ campaigns that
generated thousands of coupons which then languished in a filing
cabinet until both the company and its prospective customers forgot.

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Database and analysis

The information captured forms a database which can then be


interrogated to look for even more useful information. This way we can
discover which customers are most valuable, where they came from (via
which medium) and, crucially, how much each customer cost to
acquire.

Interact with key clients

Crucially, having acquired customers we need to keep in control of the


relationship. The most important clients may have given us thousands
of pounds worth of business and these are likely to be vital to our future.
Further interaction simply gives us the opportunity to get to know them
better and, of course…

Cross sell, up sell, renew

Having bought one product, customers have already overcome many of


the barriers to buying in the first place. This is one of the reasons why so
much emphasis is placed in direct marketing on existing customers.

Increase customer value

By selling more to existing customers, we can increase their value. All


things being equal, customers who buy more from us early on are likely
to continue buying from us in the future.

Analyse

We can now analyse our customer base even more. Not only do we now
know which media produced the best initial response, we also know
which customers then went on to buy two or more products from us in
the future.

Back to identifying prospects

Armed with this in­depth knowledge we can select future recruitment


activity on the basis of initial response rates x value of orders, or even
projected lifetime value. Crucially, we no longer need to spend money
on media that does not work.

The direct marketing principles are elegantly simple. Based upon


eliciting a response from all who we reach with our communications,
direct marketing provides us with information to continually improve
the efficiency of our marketing spend.

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Direct marketing strategy


Having discussed marketing strategy throughout this course, you may
have noticed an emphasis on gaining customers as if for the first time.
That is, the importance placed on transactions rather than customer
relationships that we have noted before. The key point of distinction in
direct marketing strategy is that, in fact, there are likely to be two
strategies.

A company considering the role of direct marketing might follow a


model like this suggested by Tapp (1998).

Overall marketing objectives

S t r at egic decision 1
Initial consideration of the role of direct marketing

S t r at egic decision 2
Allocate resources between existing and new customers

Understand the importance of loyalty on profit for


your business

S t r at egic decision 3 S t r at egic decision 4


Keep existing customers Attract new customers

Figure 7.9: Strategic decisions in direct marketing. Adapted from Tapp, 1998.

The two halves of the direct marketing strategy relate closely to the two
sides of the ‘spiral of prosperity’ diagram explained above.

ACTIVITY
On what basis do you think the strategic decisions listed above are made?

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ACTIVITY FEEDBACK
Decision 1 considers whether direct marketing is, in fact, appropriate for the
company.

It may be, if profit is largely dependent on existing customers or if a small


number of customers are responsible for a large proportion of profits. It may
also be appropriate when the product or service could be adapted to small
segments or even individual customers and where the data collected from
customers will tell us about their needs.

Strategic decision 2 allocates the budget for marketing activity on the basis of
efficiency in achieving the objectives. The intention is to maximise sales within a
given budget by converting the least expensive sales first. Most likely these will
be existing customers whom we wish to retain.

Decision 3 then is about how we should keep customers – a retention strategy


– for example, which customers we want to hold onto most of all? It is likely
that we will find it useful to segment our existing customers on the basis of
profitability and, again, lifetime value.

Having developed a retention plan and predicting its results we may then find
that we still have not achieved our overall marketing objectives. Often the
strategy to gain new customers – an acquisition strategy, decision 4 – will
appear to be very similar to a conventional marketing plan. However,
experience and data built up on existing customers will help us target new
customers more effectively.

The emphasis on assigning value to customers and building towards


objectives with the lowest­cost sales first is another striking difference
between direct marketing and traditional, mass marketing.

Required volume of sales

Repeat Former Previous New


sales customers enquiries business

Fig 7.10: How direct marketing builds towards an objective.

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So, strategically, a direct marketing plan has to be based on a complete


understanding of the value of existing customers and a projection of the
value of new customers.

In an small B2B situation it is comparatively simple to identify the most


important customers, but for many organisations, especially those
marketing B2C, the mass of data needed to track and analyse customer
relationships demands a technological solution. We will examine this at
greater length in Unit 8.

Acquisition
We have looked at direct marketing strategy and seen that it divides
into two major ‘sub­strategies’; acquisition and retention. In this section
we look at direct marketing’s approach to acquiring new customers.

Objectives for the acquisition of customers are likely to be concerned


with maximising sales within a set budget or maximising sales at a
given cost per sale.

With that in mind, we have seen that direct marketing campaigns aim to
acquire the lowest­cost sales first. These are usually existing customers
but if these are insufficient to meet our targets then we will need to
approach a hierarchy of targets as below.

ACTIVITY
If direct marketing emphasises the importance of existing customers, why do
you think acquisition is important? It might help you to think about this example.

FirstClass manufactures babies’ nappies (or diapers) and has concentrated on


recruiting mothers during their initial stay in hospital. Every year they gain
20,000 new customers but, the sales manager complains, the company still
doesn’t grow. Why?

ACTIVITY FEEDBACK
Acquisition is important because all companies lose customers. Some
customers simply lose touch (it is estimated that annually around 15% of all
households change address in the UK) and some, unfortunately die.

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FirstClass, however, have discovered that customers change because of their


lifestage. As quickly as babies are born, they are also being potty trained! If the
company wants to grow it will have to acquire more customers at the
outset…unless it can persuade parents to use their products for longer!

Recently
lapsed
customers

Former customers

Enquirers

Referrals

Profiled prospects

Handraisers

Suspects

Fig 7.11: The hierarchy of acquisition targets. Source: Tapp, 1998 p150.

Broadly speaking, those at the top of the pyramid are few in number but
relatively easy to acquire. Book and music clubs spend considerable
time and effort persuading recently lapsed members to re­join.

ACTIVITY
Why do you think someone who has just stopped their membership of, say, a
health club and gymnasium might be a better prospect than the reader of a local
newspaper?

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ACTIVITY FEEDBACK
A recently lapsed member already knows the club, he or she has already shown
that the club is convenient and, unless we know to the contrary (i.e. from
complaints), they have received some benefit from membership. If you think
back to what you know of consumer behaviour (Unit 3), you will remember the
influences on consumer decision making. A recently lapsed member is already
in the correct segment for the health club.

Readers of the local paper, who might be targeted could, of course, be


interested in joining but many will be too young, perhaps too old or simply not
interested; at best only a proportion of the readers will be suspects. Almost any
advertising medium includes an element of waste.

Of course, we would hope not to have lost customers in the first place. It
has been said ‘we acquire with product and retain with service’. If the
product and service fail to meet expectations no amount of clever direct
marketing can make it into a success.

We need to know how much our marketing budget can achieve.

ACTIVITY

Customer Segment Number on list Historical cost of a


sale

Existing customers 2500 €1.50

Customers who have not bought from us for 12 4000 €4.50


months

Entrants to a competition in the national press 4000 €18.00

Customers who have not bought from us for 36 6500 €7.00


months

Table 7.12: Glenmore’s customer lists.

Glenmore sell collectible plates to a small number of very dedicated customers.


They have a number of lists of potential acquisition targets that are laid out in
the following table along with the known costs of making a sale.

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Glenmore’s objective is to maximise sales with a budget of €60,000. Which


customers should they contact? What will their targeted sales be?

ACTIVITY FEEDBACK
Glenmore should target the cheapest sales first. Although there are only 2,500
existing customers, they cost 1/3rd of the cost of recruiting customers who
bought a year ago. The other lists, though larger, do not present as good value
per customer or per sale. The budget is used up selling to the smaller, cheaper
lists and Glenmore have no need to use less qualified lists such as the
competition entrants.

Customer Segment Number Historical cost Cumulative


on list of a sale
sales costs

Existing customers 2500 €1.50 2500 €3,750

Customers who have not 4000 €4.50 6500 €21,750


bought from us for 12 months

Customers who have not 6500 €7.00 11964 €60,000


bought from us for 36 months (only 5,464 can
be recruited
from this list)

Entrants to a competition in 4000 €18.00 - -


the national press

Figure 7.13: Glenmore’s mailing strategy.

ACTIVITY
Now consider what Glenmore should do if they have €150,000 in their budget.

Calculate the figures as above. How would you allocate this budget?

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ACTIVITY FEEDBACK
You will see that with this significantly larger budget, Glenmore is able to use all
the lists they have.

Customer Segment Number Historical cost Cumulative


on list of a sale
sales costs

Existing customers 2500 €1.50 2500 €3,750

Customers who have not 4000 €4.50 6500 €21,750


bought from us for 12 months

Customers who have not 6500 €7.00 13000 €67,250


bought from us for 36 months

Entrants to a competition in 4000 €18.00 17000 €139,250


the national press

Figure 7.14: Glenmore’s mailing strategy with increased budget.

Leaving €10,750 of the budget unspent.

You may have considered spending more on one or other of the lists but this
would not have given you any greater return.

Of course, these figures are simplified but the crucial aid to your decision
making was knowing the cost of acquiring each kind of customer. Looking at
the hierarchy of prospects pyramid above, you might consider the competition
entrants to be ‘handraisers’; that is, they have simply expressed an interest in
the Glenmore product, but they are not committed. You might advise
Glenmore to look for other, better qualified customer lists – do they, for
example, keep track of all the people they send brochures or catalogues and
who have never bought? These may prove to be more efficient lists.

Allowable marketing cost


In order to be able to establish realistic acquisition objectives we need to
have some idea of what our budget can achieve. Often in marketing the
budget is allocated as part of overall budgeting at a corporate level.
Sometimes this is simply on the basis of historical figures (i.e. “we spent
€100,000 last year so we must spend less/the same/more this year”) but

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direct marketing demands that we account for marketing spend more


precisely.

Apart from giving us control and being able to establish targets,


familiarity with concepts such as ‘return on investment’ (ROI) enable
marketers to argue their case with the finance department more
effectively.

Allowable marketing cost (AMC) is a figure which allocates marketing


costs to each customer. So in the above Glenmore example where the
budget is €60,000 and a total of 11,964 customers are acquired, the
average AMC is just over €5.

We should know also what the value of such a sale is and how much
profit is expected from each sale and so we can also calculate AMC in a
slightly different way.

ACTIVITY
Belloud is a security company that installs a simple ‘one-box’ burglar alarm in
homes and small offices. The price is €500, whilst the product costs €250 and
the cost of the engineer visiting to install is estimated at €40. The ‘required
profit’ figure is a 60% mark up on the cost of the product

Selling Price €500.00

minus Costs

Costs of Goods €250.00

Installation costs € 40.00

€290.00

= Contribution or gross profit €210.00

minus Required Profit €150

= Allowable Marketing Cost per order €60

Figure 7.15: Allowable marketing cost for Belloud.

In the right hand column, you can fill in your own figures adjusting the required
margin or the selling price. You might also judge that the costs for the engineer
are rather low. What happens to the AMC when you change other figures?

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ACTIVITY FEEDBACK
Obviously, changes in the other figures have an effect on the AMC at the end of
the calculation. For example, doubling the installation costs to €80 means that
AMC is only €20. If this is not a realistic figure for the sales operation (one might
imagine that customers will require some reassurance that the burglar alarm is
appropriate for their premises) then an additional €40 added to the price
restores the AMC to €60.

We might also be able to negotiate the level of profit required, but having an
analysis such as the one above can only strengthen out argument.

In the future, if our €60 budget is borne out by experience, we may also
use this figure to establish an overall marketing budget. If the marketing
objective is to gain 5000 new customers then –

Marketing budget = AMC x required number of customers

= €60 x 5000

= €300,000

A word about response rates


Given that direct marketing is about generating a response there is an
awful lot of mystery surrounding levels of response (especially to direct
mail) and we have already referred to the wide range of responses
received by very different kinds of activity. Let us state clearly –

There is no magic number.

Response rates used to estimate the effectiveness of future campaigns


are without exception based on past experience. The fact is then, that if
you have no track record of direct marketing, you cannot know what the
response is likely to be.

However, given what we now know about AMC, we can set a target
response rate.

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ACTIVITY
Look back at the Belloud figures. Our objective is to gain 5000 customers with a
budget of €300,000. Two possible campaigns have been suggested. In both
cases respondents will be sent a brochure and then called by phone to place an
order. It is estimated that only 1 in 10 of these will result in an order.

Campaign A is to run a series of direct response adverts on a satellite TV


channel along with a series of full page adverts in a TV listings magazine. The
adverts will cost around €75,000 to make and our €225,000 spend will enable
us to reach approximately 1.5 million adults.

Campaign B is a mailing campaign to a list of consumers who have previously


bought home-improvement products. Total production and mailing costs add
up to €1.20 per item allowing us to mail 250,000 names.

In each case what would the target response rate be and how would this help
you evaluate each option?

ACTIVITY FEEDBACK
First of all this case accurately reflects reality in that a high value (and, therefore,
high risk purchase) is rarely bought by the consumer in one stage. The
campaigns are intended to generate ‘enquirers’. Hence, for every customer to
be acquired we need 10 such enquirers. The target of each campaign is then to
attract 50,000 responses!

Campaign A would require 3.3% of the audience to respond.

Campaign B would require 20% of the list to respond.

In fact, the only way to judge the suitability of each campaign would be based on
past experience which may be your own or that of a specialist direct marketing
agency. It is likely that both figures are rather optimistic and this could be an
argument to trim the costs of the campaign to enable a larger audience to be
reached.

For example, if in campaign B the costs of mailing came down to €0.90 per item
then we could mail over 333,000 names. Our target response rate would then
fall to 15%.

Crucially however, the simple calculations have enabled us to set a target rather
than simply executing a plan and ‘hoping for the best’.

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Calculating lifetime value (LTV)


So far we have mentioned LTV and stressed its importance. In this
section we will examine it in more detail and learn how it is calculated
and think about the implications for strategy.

We have also defined LTV as the total of all future revenues from a
customer. In practice, again, this is easier if we have some historical data
upon which to base our figures. Even if a company does not have the
figures now, it is a strong argument for establishing a database now in
order to make decision making easier in the future.

In some product categories it is fairly easy to construct the data we need.


Financial institutions, for example, must keep detailed records of
clients, the products they have and, for example, investments made.
The difficulty is often correctly allocating all the costs of sales – not just
advertising expenditure, but also the service costs; for example, a call
centre for handling policyholders’ queries and the costs of issuing
documentation.

For companies that are wholly ‘direct’, such as mail order catalogue
companies where every transaction is recorded against each customer,
the process is more straightforward.

Figure 7.16: An example of lifetime value calculations.

It is easier to understand this if we look at a worked example. The table


below could illustrate the figures from two campaign run to recruit

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members to a book club, but you can adapt it to reflect almost any kind
of business. It looks at customer lifetime value over 6 years.

In this example each line of the table is explained below.

Line 1 shows the year under consideration. Note this table shows
customers recruited in year ‘0’. This is customary in such calculations
because (as we shall see later) applying a discount factor requires us to
use these numbers in a certain way. For now it is best to think of these as
marking the ‘anniversary’ of the customers’ recruitment.

Line 2 shows how many customers were recruited in campaign A and


then how many remained with us in the following five years. This
decline in numbers is called the ‘rate of attrition’.

Line 3 gives net profit from each customer. Hence, their initial order in
the first year realises £30 profit whilst in the second year the remaining
customers generate only £22.50 each. In subsequent years this declines
as customers buy fewer books.

Line 4 simply shows the cumulative profit, per customer, from the
beginning of the campaign.

Line 5 shows the total profit from all customers (acquired from this
campaign) each year. Clearly as the number of customers and the
amount they spend declines each year, this amount reduces
significantly from £30,000 to £2,600.

Line 6 is simply the cumulative profit figure for all these customers.

These lines are then repeated for campaign B.

Note that, in fact, this table is somewhat simplified. It does not break
down costs in order to show how the profit figure is arrived at. The
allowable marketing cost calculation discussed earlier could be
introduced to allow us to track changing costs of order and marketing
costs. In this case we are assuming that all the marketing (acquisition)
costs come into year 0.

ACTIVITY
Familiarise yourself with the figures above and check to see how the figures are
calculated.

Cover up years 1 – 6 and imagine you are the marketing manager making a
decision about which campaign to try and emulate. Which is the most
successful?

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Now uncover year 1. Remember this table is showing the ongoing value of
customers recruited in year 0 and NOT new customers each year. However,
now that you have two years’ information does your assessment of the success
of the campaigns change?

Now uncover the remaining columns. How would you assess the campaign
now?

ACTIVITY FEEDBACK
You have just made judgements based on lifetime value.

You should have, rightly, concluded that Campaign B was the most effective
initially. In fact, it was until we look at years 2 and 3. The problem is that the
customers recruited by campaign B simply did not stay and so their LTV over
the longer term was lower.

This kind of behaviour can be seen in customers who are offered a significant
incentive to join or to make an initial purchase. Arguably, Hoover, some years
ago offering free flights to the US for UK purchasers of a vacuum cleaner fell
into this trap. They certainly did not create loyal Hoover customers – especially
when they could not keep up with demand for air tickets!

The next table shows the same calculations but with the added
complexity of a ‘discount factor’ This is simply a way of allowing for the
fact that £100 today has more value than £100 earned in the future. As
we stated before, money earned today could be invested and earn
interest. Very often, therefore, calculations of net present value (NPV)
use the prevailing bank interest rates.

The table below has some additional information.

Line 7 shows the selected interest rate for the NPV calculation.

Line 8 shows this interest rate translated into a discount factor. Clearly,
year upon year, the discount factor is cumulative. Incidentally, that is
why the first year is ‘0’. If we apply the discount rate (7%) multiplied by
the year (0) we get 0, i.e. no discount. In year 1 we discount by 7% x 1 =
7%.

For the sake of completeness, the actual figure shown in line 8 and used
to is derived from –

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year
(1 + Interest rate as a decimal) 
So after the first year (i.e. in year 1) this calculation is –

1  1
1
= =  09345794 
.
(1 + 0. 7 )  107 

­ which we round down to two decimal places for the sake of clarity!

Figure 7.17: Lifetime value and net present value.

ACTIVITY
Now repeat the same procedure as with the previous table. Cover up years 1-6
and evaluate the campaign. As you work through the columns of figures check
the calculations to ensure you understand them. For each year of data, which
campaign appears to be the most successful?

Now uncover year 1 and repeat the procedure.

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Uncover the remaining columns one by one and review your decision. What
has changed?

ACTIVITY FEEDBACK
As you worked through year 0 again you should have concluded that campaign
B is the more successful. In contrast to the previous example, however, where
we were not applying the concept of net present value, campaign B continues
to be the most profitable over the longer term until we reach year 4. This is
because the discounting of future revenues from campaign A customers
ensures that they never generate as much profit as campaign B customers do in
years 0 and 1. However, across years 5 and 6 i.e. The extended longer term,
campaign A appears to perform better as the dwindling number of customers
continue to spend.

Now that you are familiar with the LTV calculation, you should try and
set up a spreadsheet in an application like Lotus or Excel to be able to
replicate the figures above and to experiment with your own. Such
calculations have real business value for a company.

If you do not have access to the software to handle spreadsheets then it


is possible to do the same calculations manually. An accounting ledger
with sufficient columns will help and it is advisable to leave spaces
between the columns for some workings. Using pencil enables you to
change figures frequently.

ACTIVITY
Use the table above with some of your own figures to see the effects of the
following scenarios. Start with the original figures and make only the first
change suggested. Note the differences and think how this might change your
evaluation of the two campaigns. Then add the second change and reflect on its
effect. Finally, add the final amendment.

A. What happens when the bank interest rate is very low, say 1.5%?

B. What happens when we lower our costs of acquisition in campaign A


such that the net profit for those customers rises by 10% to £33,
£24.75, £21.23 etc ?

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C. What happens if our incentive in campaign B is less effective and those


customers number only 800 in year 0 and 140 in year 1?

N.B. work through your calculations fully before comparing your answers with
the feedback.

ACTIVITY FEEDBACK
The tables below show the effects fully worked through with some comment.

Figure 7.18: Lifetime value in a period of low interest rates.

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Figure 7.19: Lifetime value with improved profitability in campaign A.

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Figure 7.20: Lifetime value with lower response rates in campaign B.

You might also like to try reverting back to a more realistic discount rate at this
point to see the impact.

Overall, you should have demonstrated to yourself that the initial value and
number of customers is important, but that this is moderated by a
consideration of the lifetime value of such customers.

To summarise, acquisition is just one half of a balanced strategy. It


recognises the need for customers at the outset or to replace those lost.
We have focused on the need to calculate the lifetime value of customers
to ensure we budget adequately. As with traditional marketing,
however, we need to ensure that every element of the marketing mix is
adapted sufficiently to meet the needs of the targeted consumers.

Being able to forecast the future value of customers supports strategic


decision making.

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Retention
The other side of the direct marketing strategy is retention. You will
recall that, for an existing company, this is in fact the first ‘strategic
decision’ to be made. To what degree can its objectives be achieved by
existing customers?

Here again the database underpins our decision making by informing


us of the value of different customers. We would probably want to
segment our customer base by profitability.

Again LTV can inform us. We would want to look at both current and
future profits from customers.

If, however, our projected revenues from existing customers do not


meet our objectives, what can be done? The answer is to keep customers
longer and encourage them to buy more – the right hand side of the
‘spiral of prosperity’ diagram.

Before we look at what activities might encourage customer loyalty, let


us look at how we might budget for retention activity and its effect on
LTV.

Figure 7.21: The effect of retention activity on LTV.

The table above repeats some of the data we looked at in the section on
acquisition. In effect, we have decided to examine the higher value

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customers recruited from campaign B to see if we can improve their


longevity.

The table shows retention as being low. A 20% retention rate is also an
‘attrition rate’ of 80%. It is clear that keeping customers active for longer
would benefit our overall profit.

Our expenditure is currently £2 per customer, perhaps sending them a


‘members only’ catalogue or voucher. However, we can see that from
year 6 we begin to lose money on customers.

ACTIVITY
What should the reaction of the marketing team be to the news that these
customers cease to be profitable in year 6? How would you suggest they
address this?

ACTIVITY FEEDBACK
Once customers become unprofitable a decision may be made to ‘demarket’
them. This may mean ceasing to contact them. In a B2B market, minimum
order values may be imposed to deter customers where the cost of transaction
outweighs the revenue.

However, avoiding this situation is preferable. The aim should be to keep the
customers more profitable for longer. Increasing the order value would help.
Some mail order companies do this by offering free postage and packing on
orders over a certain value. Of course, the cost of the incentive must be
accounted for in the allowable marketing cost calculation.

We can go on to test different incentives on a sub­segment of customers


to see if this improves their rate of purchase or increases the average
value of order.

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ACTIVITY
Using the data above, suppose we increase our expenditure to £5 per
customer and this has the effect of increasing the retention rate to 25%. What
is the effect on profit?

Repeat this exercise but, in addition, increase the net profit per customer by
20%.

ACTIVITY FEEDBACK
The initial results are disappointing. This is because our retention rates are so
low to begin with.

Figure 7.22: The effect of an increased retention budget.

The table shows that these customers are simply too costly to maintain. It could
be that they are intrinsically disloyal and they search for offers from our
competitors.

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Figure 7.23: The effects of increased profitability on customer lifetime value.

Even here, the effect of the retention activity is still minimal and these
customers become unprofitable in year 5.

Finally, let us look at a similar scenario to the one above. In this case
customers recruited from campaign C are higher value and more loyal.
Our retention rate is 70% per annum.

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Figure 7.24: Retention activity with more valuable, more loyal customers.

The value of orders (and profitability) is shown to be of great


significance but still there comes a point at which customers can become
unprofitable – especially as their value falls.

ACTIVITY
What actions would you recommend in year 4 to avoid the loss in annual profit?

One very successful mail order book club in the UK mails its lapsed customers
(i.e. those who have cancelled their membership and so are generating no
income whatsoever) up to 15 times before treating them as ‘lost’. How can this
be justified?

ACTIVITY FEEDBACK
You may have suggested, as in the previous exercise, trying to rid the company
of unprofitable customers. However, it may be worth testing lower-cost
retention activities.

The book club in question has tested its attempts to revive customers on
previous lapsed customers. Again they are projecting LTV, but this time for a

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particular segment of their customer base – rejoining members. They know


that the value of orders from these customers covers the investment they make
in retention activity up to the 15th mailing. Beyond that they will make little or
no profit.

In addition, whilst the early mailings and the most successful (and, therefore,
can be more expensive), the final mailings may be as simple as a greetings card
in a plain envelope bearing the caption –

“What can we do to tempt you back? Five books for 50p each.”

The mailing itself is very low cost and the selection of books in the offer is likely
to be costed very carefully. The book club may well be making some profit even
on this order.

The important point is that understanding profit on a per customer basis lets us
calculate both a target response rate and the allowable marketing cost.

We recommend you familiarise yourselves with the examples we have


worked through. Of course you can adjust the figures to develop you
own scenarios and to reflect different businesses and markets and
different segments of your own customer base.

The techniques of making marketing expenditure fully accountable are


applicable to all direct and relationship marketing approaches and are
very powerful indeed.

REVIEW ACTIVITY
1. What is the difference between direct marketing and direct mail?

2. How would you define ‘junk mail’?

3. How might direct marketing be implemented to different degrees in


different organisations?

4. Define customer lifetime value.

5. Describe the key points of the ‘spiral of prosperity’.

6. What are the two halves of the typical direct marketing strategy?

7. What are the key features of relationship marketing?

8. What do you consider to be the main differences between relationship


marketing (RM) and transactional marketing (TM) ?

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9. In an acquisition strategy, which kinds of customers should we target


first?

10. What is RVA or FRAC analysis?

11. We are selling a product via direct marketing for €125 that costs €75
to produce. We wish to take a 30% profit margin on the price. What is
our allowable marketing cost per order?

12. When using the concept of net present value to help calculate lifetime
values, does a period of higher interest rates make the long term value
of retained customers appear higher or lower?

ACTIVITY FEEDBACK
1. What is the difference between direct marketing and direct mail?

You may have referred to a number of definitions including –

“Any activity which creates and exploits a direct relationship between


you and your customer as an individual” (Bird 1989)

The key to direct marketing is the strategic recording and analysis of


customer behaviour so that you may treat them differently as a result.

2. How would you define ‘junk mail’?

So called junk mail does not have a precise definition. A customer may
call any mail ‘junk’ when it is unwanted. Hence, direct communication
runs the risk of being dismissed when it is poorly planned.

3. How might direct marketing be implemented to different degrees in


different organisations?

Tapp (1998) identifies three level –

- Direct marketing drives the business.

- Direct marketing drives part or all of the marketing strategy.

- Direct marketing is used as part of the communications mix.

4. Define customer lifetime value.

The lifetime value (LTV) of a customer can be expressed as the value of


all future contributions expected from that customer.

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5. Describe the key points of the ‘spiral of prosperity’.

The spiral of prosperity is the concept of continuously improving our


knowledge of customers. Having tracked them from recruitment we
can identify which are the most valuable and attempt to recruit more of
the same. The stages are –

- Identify prospects.

- Target media.

- Sell products.

- Gather information.

- Database and analysis.

- Interact with key clients.

- Cross sell, up sell, renew.

- Increase customer value.

- Analyse.

- Back to identifying prospects.

6. What are the two halves of the typical direct marketing strategy?

Acquisition and retention.

7. What are the key features of relationship marketing?

Two lists were given in this unit, they are condensed below –

- RM focuses on retaining customers and maximising


lifetime value.

- Customer perceptions of quality and service seen as


central to retention.

- Focus shifts from transactions to relationships between a


wide network of relationships in delivering value to
customers.

- Retention and acquisition are funded according to the


known value of customers.

Recognising the importance of multiple ‘markets’ including –

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- Internal Markets, Supplier and Alliance Markets, Recruitment


Markets, Referral Markets and Influencer Markets.

8. What do you consider to be the main differences between relationship


marketing (RM) and transactional marketing (TM)?

This is summarised by Hollensen (Hollensen) in table 1.3, pp12-13

9. In an acquisition strategy, which kinds of customers should we target


first?

Acquisition targets are built from the cheapest to acquire up to the


most expensive. However, you might also have considered projected
lifetime value. Hence, the most cost-effective should be targeted first.

10. What is RVA or FRAC analysis?

Recency, Value, Activity or Frequency, Recency, Amount, Category.


They are ways of ‘scoring’ customers on a database.

11. We are selling a product via direct marketing for €125 that costs €75
to produce. We wish to take a 30% profit margin on the price. What is
our allowable marketing cost per order?

AMC = (€125 – 30%) – €75

= (€125 – €37.50) – €75

= €87.50 – €75

= €12.50 per order

12. When using the concept of net present value to help calculate lifetime
values, does a period of higher interest rates make the long term value
of retained customers appear higher or lower?

In periods of high interest rates, future earnings will appear lower than
they would if interest rates were low. This is because the interest rate
is used in NPV calculations (of lifetime value) to allow for the cost of
deferring income until later.

References
Bird, D. (1989). Commonsense Direct Marketing. London, Kogan Page.

Logan, R. (1998). Getting to know your database B. Halsey, Ed. The


Direct Marketing Guide. Teddington, Institute of Direct Marketing.

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McCorkell, G. (1997). Direct and Database Marketing. London, Kogan


Page/Institute of Direct Marketing.

McCorkell, G. (1998). How marketing went direct B. Halsey, Ed. The


Direct Marketing Guide. Teddington, Institute of Direct Marketing.

Stone, M. and R. Shaw (1988). Database Marketing. London, Gower.

Tapp, A. (1998). Principles of Direct & Database Marketing. London,


Financial Times / Pitman Publishing.

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Unit 8

Marketing, Technology and


E-commerce

LEARNING OUTCOMES
After studying this unit you should be able to:

· Demonstrate an appreciation of the technological changes that are


having an impact on markets and marketing.

· Demonstrate an understanding of the implications of e-commerce


on marketing strategy.

· Demonstrate an understaning of how to develop strategies for


‘learning relationships’ with customers.

Introduction
Marketing has undergone an almost revolutionary change in the last 30
years. Much of this has been driven by changes in technology such as
the massive increase in processing power available in personal
computers. The developments in communication networks – such as
the World Wide Web, satellite television and mobile telephony – have
also brought significant changes both to markets and to marketing.

Conventional marketing texts tend to focus on how (mass) marketing


has been done by large multinational corporations since the 1950s.
Whilst much of the theory has proved to be useful and many of the
models you have examined in Units 2, 3 and 4 enable you to think
creatively about strategy, you should have a recurring tension between
this conventional approach, and the direct and relationship approaches
referred to in your key text and in Units 1 and 7. We believe this
accurately reflects the tension in many companies and organisations
today as they seek to reinvent themselves for a new age.

In this module, we will look at some of the major changes that have
taken place globally and examine the impact they have had – and may
have in the future – on marketing strategy. In particular we will
examine important marketing concepts, such as customer loyalty which
have developed partly in response to emerging technologies, increased

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competition and related customer needs, and at new strategies


emerging in the most current e­commerce markets.

In a rapidly changing world how do companies learn, as Tom Peters


puts it, to dance on a moving carpet?

Innovation and change


The world is changing. Writing in 1997 about his concept of ‘connexity’,
Geoff Mulgan said –

“The economy is based as never before on the formal


processing of information, the action of knowledge on
knowledge itself, in everything from steel foundries to
genetic engineering. But beyond these purposive linkages it
is the capacity to share, to spread, to disseminate and
connect that makes sense of them, and gives them value…
…Looking forward, the great milestones may include the
full integration of television into the Internet, so that it
ceases to be a one­way medium, and, further ahead, the
implant of a serial port for plugging a computer or network
into the human brain itself.”
(pp20­21)

The latter point may seem far­fetched, but no doubt when Vint Cerf and
Robert Kahn developed the TCP/IP protocol that made the Internet
possible over 30 years ago, they would have been amazed at the kind of
global network we see today. Even in the early 1990s few people had
even heard of the Internet, yet in the space of 15 years as many as 800
million people are using it.

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WORLD INTERNET USAGE AND POPULATION STATISTICS

World Regions Population Population Internet Usage Penetration World


( 2004 Est.) % of World Usage, Growth (% Users %
Latest Data 2000-2004 Population )

Africa 893,197,200 14.0 % 12,937,100 186.6 % 1.4 % 1.6 %

Asia 3,607,499,800 56.5 % 257,898,31 125.6 % 7.1 % 31.7 %


4

Europe 730,894,078 11.4 % 230,886,42 124.0 % 31.6 % 28.4 %


4

Middle East 258,993,600 4.1 % 17,325,900 227.8 % 6.7 % 2.1 %

North 325,246,100 5.1 % 222,165,65 105.5 % 68.3 % 27.3 %


America 9

Latin 541,775,800 8.5 % 55,930,974 209.5 % 10.3 % 6.9 %


America/
Caribbean

Oceania / 32,540,909 0.5 % 15,787,221 107.2 % 48.5 % 1.9 %


Australia

WORLD TOTAL 6,390,147,487 100.0 % 812,931,59 125.2 % 12.7 % 100.0 %


2

NOTES: (1) Internet Usage and Population Statistics were updated on December 3, 2004. (2)
Demographic (population) numbers are based on data contained in the web site gazetteer.de. (3)
Internet usage information comes from data published by Nielsen//NetRatings, by International
Telecommunications Union, by NICs and other reliable sources. (4) Data from this site may be cited,
giving the due credit and establishing an active link back to InternetWorldStats.com.

Figure 8.1: Internet usage statistics. Source: www.internetworldstats.com.

ACTIVITY
If you were launching a strategic marketing course on the Internet, and given
that it is written in English, where would you anticipate your customers coming
from?

ACTIVITY FEEDBACK
One aspect of the web as a communication technology is that it exposes
companies to larger audiences than ever before. Many small and medium-sized

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enterprises (SMEs) have been surprised that the moment they set up websites
they receive enquiries from the other side of the world.

Of course, you might also take into account the penetration of English as a
second language. Students in countries such as Hong Kong or Greece might
accept that their education should be in English. You might expect more
resistance in France or in Spanish-speaking South America. You might also
consider the benefits of translating your material into other languages such as
Chinese and Spanish.

For universities in the US and the UK, much of the interest comes from Asia.
The country producing the largest number of engineering graduates, for
example, is China and China is also the provider of the most overseas students
in the US university system.

In some countries censorship restricts access to the World Wide Web.

However, the growth of the Internet should not blind us to the fact that
half the world’s population have never even made or received a
telephone call, let alone used the World Wide Web.

The range of technologies which affect markets (that is, both customers
and producers of goods and services) is almost infinite. Communication
technology like the Internet, satellite and digital television and third
generation (3G) mobile phones are the most visible to us as consumers.

But change in communication is just one manifestation of the deeper


impact of technological change. In 1965, Gordon Moore, the founder of
Intel, suggested that the number of components fitted onto a chip had
doubled each year since 1959 and he predicted that this would continue
until at least 1975. Now referred to as “Moore’s Law”, it has been a
particularly striking feature of computing development until very
recently.

The development of the microchip has seen processing power increase


such that almost any product from cars to kettles can have a chip
implanted in it.

Ten years ago Pine, Peppers and Rogers noted the need for technology
to be at the service of the customer relationship (Pine II et al. 1995). For
example, Bandag, a company supplying truck tyres, planned to embed
a chip into a tyre to be able to monitor wear. In this way the company
hoped to be able to add value not so much to the tyre but to the
relationship with its customers, avoiding emergency tyre changes,
keeping trucks on the road longer and, by the way, marginally
increasing the number of tyres consumed since they would be changed
before they wore out.

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Pine et al also predicted the use of technology to support online grocer


retailing such as Opodo and Tesco. They held the opinion that it was
insufficient simply to ‘allow’ customers to order online, the retailer had
also to learn from the process more about the customers’ needs and
wants.

ACTIVITY
As a consumer, think about your regular trip to a store to buy basic household
items or groceries. How has technology changed this experience in your
lifetime? Visit a local store and note down how technology has had a positive (or
negative) impact on the customer experience. How might this change in the
future?

ACTIVITY FEEDBACK
Depending on your local store, you may have noted obvious changes such as
increasingly sophisticated tills. Increasingly, tills are part of EPOS (electronic
point of sale) systems and facilitate EFTPOS (electronic funds transfer at the
point of sale).

For many companies such as major supermarkets, tills automatically link to


stock control systems and, hence, into logistics. For Wal-mart in the US, for
example, their “Retail Link” system is a source of competitive advantage,
enabling the store to drive down costs. So important was this to Wal-mart that,
in 1998, they threatened legal action over Amazon.com’s employment of two
ex-Wal-mart executives, fearing that their system could be copied. By 2001
rumours abounded about the two companies planning to merge their web
operations.

Other, less obvious trends you may have noticed include the range of products
and brands available to you and, as importantly, now familiar to you thanks to
TV and other forms of advertising. Or you may have noticed the number of
products that invite your comments, or entry into competitions, by telephone,
e-mail or on the Internet.

In the future, stores will communicate with shoppers in more sophisticated


ways using plasma and LCD screens linked to networks. Tesco in the UK is
already doing so with considerable success. Potentially, such networks could be
global.

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How innovation happens


Innovation and the development of new products and brands is central
to much marketing success. Often it is supposed that innovation centres
around products but it should be clear to you now that innovation can
affect any part of the value­chain. Whilst products are often the most
visible aspects of value delivered to customers they are often not the
most important (see also discussion of branding in Unit 4).

How innovation happens is a matter of some debate. Linear models


suggest that either technology or the market pushes change. A more
likely model is the interactive model explained by Trott (1998).

Latest sciences and technology TECHNOLOGY


Advances in society PUSH

Commercial
Idea R&D Manufacturing Marketing product

Needs in society and


MARKET
PULL the marketplace

Figure 8.2: Interactive model of innovation. Adapted from Rothwell and Zegveld, 1985, by Trott (1998) p19

The central row running from left to right represents the conventional
new product development process depicted in many textbooks. But all
such development takes place in a dynamic environment and,
ironically, new technology (most notably the web) enables the faster
communication of other changes in technology as well as developments
in society across the globe.

ACTIVITY
Consider a product such as Apple’s iPod or its spiritual ancestor, Sony’s
Walkman. Both designed to make music mobile. But do you think these are
inventions driven by consumer demands and changes in lifestyle or is it a case of
technology leading the way?

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ACTIVITY FEEDBACK
You have probably realised that the answer is somewhere between the two.
There is no doubt that digitisation and data compression technology has
enabled the iPod and a host of competitors to exist. But it’s also true that
without the massive popularity of home computers and the rise in internet
access, demand would be much less. There is also a sense in which society has
changed. It is now quite normal to see young people with headphones as they
walk the streets or ride trains; perhaps this was made possible by the Walkman.

More difficult to appreciate, for many, is the rise in ‘audio-piracy’ with the
sharing of MP3 files without payment to the copyright holder. Again this has
only been made possible by the affordability of data storage and by rapid online
access. Of course, without portable players these ‘pirates’ could still download
to their PCs and burn CDs (illegally). A small box of electronics that weighs a
few grams and holds thousands of tracks makes the whole business a lot easier.

The Chartered Institute of Marketing (CIM, 2004) identified three


‘zones’ of innovation. These are essentially strategies that companies
and markets can follow.

Zone 1: Basic Innovation, where minor product or service


enhancements occur.

Zone 2: Relative Innovation, that builds on existing offerings or takes


them to new markets.

Zone 3: Concept Innovation, which creates breakthrough products or


services. Examples of the latter include EasyHotel which offers cheaper
hotel rooms if the customer cleans their room or La Caixa offering
kiosk­based bank services.

You may recall in Unit 5 Baker and Hart’s extended growth vector
matrix. It suggested that the greatest change (i.e. to both product and
market) involved the greatest risk. However, some recent research also
suggests that Zone 3 innovators have the opportunity to generate
disproportionate profits by creating new ‘market spaces’. There is little
doubt that Apple has done just that with the iPod.

You can read more about the CIM’s assessment of the risks and benefits
of innovation at www.shapetheagenda.com.

Change and innovation is not to be seen as simply driven by technology


since firms must develop technology into something useful and desired
by consumers. If such developments take too long, competitors may
meet those consumer needs. On the other hand, if development is too

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hasty, considerable investment may be made into a product that


consumers see no real need for.

Marketers need to be aware of change that is being forced upon them


and their customers as well as keep up to date with advances in
technology that might enable them to deliver superior value.

ACTIVITY
Read the following article from the “Wireless Economy” special report from
Times Online December 2004

Case: We’ve got your number
The latest example of Big Brother, and more a useful tool for vehicle
recognition, the e-numberplate has arrived, as Andrew Heavens reports

It is not every day that you get to push the boundaries of car number plate
design.

Michael Cordell and his management team managed it in a few minutes when
they sat down for a brainstorming session in the offices of Hills Numberplates,
their Birmingham-based company.

“We were sitting there with this plate, looking at it, saying ‘What else can we do
with it?’” said the managing director of the UK’s leading plate supplier. “Then
someone said ‘Look, there’s a great big lump of plastic in the back – we must be
able to shove something inside it’.”

“We said, ‘Well, you could shove some electronics in it.’”

It may not have been the most exhaustive of research and development
procedures, but it did the trick. A few months later, Hills was drawing up plans
for the world’s first e-plate, a cutting edge, wireless-enabled powerhouse of a
number plate that started rolling off the production line this summer.

The electronics that they shoved into the back of their plate was a Radio
Frequency Identification (RFID) transmitter, a stamp-sized piece of circuitry
designed to send out a wireless signal to anyone listening in with a wireless
receiver.

With the addition of that simple piece of wireless technology, Mr Cordell and
his team gave their company a brand new line – a rare thing in the mature
industry of number plate manufacture.

They also came up with a product that, if it catches on, could have just as
profound an impact on the businesses of their customers.

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The key selling point of Hills’ new e-plate is its ability to send out a unique,
encrypted radio signal from both ends of a car, lorry or any other kind of
marked vehicle. That signal can be picked up be a receiver up to 1,000 metres
away, even if the vehicle is driving through thick fog, parked up behind a
warehouse or stuck six lanes deep in traffic.

That ability, Hills hopes, will make their e-plate a must-have accessory for the
burgeoning fleet management and car hire sectors in the UK, Europe and
beyond.

Up to now, one of the key challenges of the car hire sector has been to keep
track of the hundreds of cars moving in and out of their garages.

Companies like Avis and Hertz have had to spend millions employing armies of
garage hands to check cars in and out of their yards, then bill their customers
for every hour on the road.

With an e-plate, a lot of that could be done automatically. “You can let your
customers return a vehicle any time of the day or night,” said Mr Cordell. “The
receiver would clock the car in, let you in to the garage then shut the gates to
prevent you driving out.” In a worse case scenario, fleet management
companies could also drive around with a mobile wireless receiver to track
down lost or stolen vehicles.

Mr Cordell’s ambitions do not stop at the commercial vehicle sector. If fleet


management companies could use the plates to track down missing vehicles, he
reasons, then so could the police.

Hills’ development of the new e-plate is an example of the possibilities of


technology leading product development. At first glance, Hills seem to have
stumbled upon a market opportunity.

Before reading on, answer the following questions;

1. From a marketing perspective, what might be the opportunities and


threats from this application for Hills and to other businesses?

2. What challenges do you envisage for Hills attempting to take advantage


of this new opportunity?

Having written your answers to the above questions, read the continuation of
the article below.

Case: We’ve got your number (continued)
Once every car in the country was fitted with an e-plate, police would be able
to set up a receiver at the side of the road and scan for suspect and stolen cars.
That vision of the future may not be as far-fetched as it first appears.

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The Department for Transport is conducting a consultation on a wide range of


electronic vehicle identification (EVI) technologies that could one day be fitted
into every car in the country.

Most of the technologies involve some sort of tagging, with various kinds of
identification chips lodged in the dashboard, chassis or indeed, in Hill’s case, the
number plate. Each chip could, conceivably, automatically report a car for
anything from speeding and dangerous driving to road tax evasion.

Plans like these have predictably raised the hackles of civil rights and drivers’
interest groups. But fears of a Big Brother future miss the point, according to
Mr Cordell.

According to him, the wireless technology in his new e-plates could have a
much more immediate and subtly subversive impact on the way we live and
drive.

Hills currently supplies plates to car retailers and manufacturers for about
£4.50 a go trade price. Those retailers and manufacturers then sell the plates on
to the consumer for as much as £20-£25.

But new plates will call for a new distribution chain. To ensure the integrity of
the radio equipment in each plate, Mr Cordell thinks he will have to cut out the
middle man and supply direct to consumers, for about the same £20 price tag.
The retailers and manufacturers could miss out on the deal altogether.

“That,” he said, “could wind up a few people.”

ACTIVITY FEEDBACK
1. It is clear that the value chain for each different application will be
distinct. As it stands Hills appears not to have considered a value-based
analysis. (See Unit 2). Hills is straying into the area of new product
development (NPD) into which some major manufacturers are already
investing. For example, suppliers of electronic components to motor
manufacturers may already be meeting the need for tracking by
embedding similar technology in other parts of the car. As a
consequence, Hills is likely to be seen as a competitor.

2. The article suggests that Hills have not yet considered who the
customers are for this new technology. Possible end-users include car
hire companies who might use it to track their vehicles, but the
unintended effects of the technology – which may be benefits to the
police, government or even to criminals – may create resistance from
some consumers.

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Moreover, their existing partners in the value chain (such as car dealers
and parts suppliers in the after-care market) may feel aggrieved that
Hills is to sell direct to the end user. At the launch of a new product this
could be very damaging to Hill’s core business.

However, it should be borne in mind that this case is UK based. The


constraints and opportunities in another country may be different.

Direct marketing and technology


Many of the technological and social changes already mentioned above
are leading to the adoption of radically changed marketing strategies.
Amongst them, direct marketing is, perhaps, the most significant (see
Unit 7).

ACTIVITY
Review your understanding of direct marketing and the various techniques or
activities that may be included in a direct marketing strategy. How have these
been affected by developments in technology? Why is the direct marketing
paradigm appropriate in a technologically advanced world?

ACTIVITY FEEDBACK
You should have noted the strategic decisions referred to in Unit 7.

A company’s decision to apply direct marketing will partly be influenced by the


ease with which such a strategy can be implemented. The increasing power of
desktop computing has put database applications within the reach of even the
smallest firm.

In addition, customers’ increasing use of technology either within products and


services themselves or in the form of new communication media, opens up
new opportunities for companies to differentiate themselves and to meet the
needs of ever more tightly defined segments, in some cases a segment of one
customer.

You should certainly have recalled the parallel emphasis on acquisition and
retention and the impact of considering lifetime value.

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A reasonably sophisticated database can track individual customers and, in real


time, calculate their value and profit contribution to a company. This kind of
modelling can lead to new segments and new insights that may be the basis of
retaining customers’ loyalty. A focus on customer satisfaction and their value
may defend our market share and profitability – true sustainable competitive
advantage. But this must be based on ever improving knowledge of our target
consumers.

However, technology is not the only driver behind marketing’s progression


towards more precise segmentation and accountability.

Reasons for the growth of direct and


relationship marketing approaches
Writers such as Tapp (1998) and Yeshin (1998) identify a number of
reasons why direct marketing should be the greatest area of growth in
marketing. Figure 8.3 summarises these –

Fragmentation and Satellite, cable and digital media along with an increasing number of
proliferation of media specialist and lifestyle magazines and web sites make large scale brand
building more of a challenge. At the same time, such targeted channels are
opportunities for direct approaches.

Consumer sophistication Arguably, consumers are more demanding than they have ever been,
expecting continuously improved levels of service and, above all,
convenience. So called ‘time-poor’ consumers expect to be able to access
services 24 hours a day, 7 days a week.

Consumers can also more easily purchase products at a distance, not


simply because they can evaluate the product online or on TV, but because
of credit and credit cards.

Increasing concern for Companies are increasingly questioning marketing expenditure and
cost-effectiveness seeking to make departments accountable for their spending. Direct
marketing offers improved levels of control.

The continued fall in More and more companies are now able to manage sophisticated
computing costs databases, often without specialist people or equipment.

Figure 8.3: Summary of reasons for growth of direct approaches.

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The importance of the database


You may already be thinking that direct marketing is demanding since
it requires us to have information about our customers which, in a
transactional situation, is often difficult to obtain.

For example, a retail store may have hundreds, perhaps thousands of


customers visiting each day. How is it possible to track this purchasing
behaviour? How can this possibly be analysed?

The answer is, of course, that with computer based systems, huge
quantities of data can be recorded and analysed. For many retailers the
challenge is to capture the data in the first place.

ACTIVITY
Consider that you wish to instigate a direct marketing strategy in a retail
decorating store selling paint, wallpaper and related items. Itemise the
information you would record from customers. Against each one note how you
might acquire it; for example, is it routinely recorded when a transaction is
made? If not, how might it be gathered?

ACTIVITY FEEDBACK
According to Logan (1998) a typical database for B2C marketing consists of –

Consumer records – name, age, marital status, number of children, income


bracket, lifestyle indicator, job codes, credit indicators

Consumer address records – full address, address type, ACORN, MOSAIC


or other geodemographic codes, region code, sales area, media area code (e.g.
TV region).

Accounts data – reference number(s), account type, start date, last used date,
average balance, account worth indicator, other accounting codes.

Activity data which records actual customer behaviour in response to our


contact with them.

Activity codes for media or source (in examples of LTV in Unit 7, this might be
‘campaign A’), activity dates, type of response, recency of response, frequency
of response and value of response.

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In addition, the decorating store may also have customers that are themselves
businesses. In this case, subtly different additional data may be collected –

Business person records – name, job code, job title (as they wish to be
addressed), telephone number, fax number, e-mail address, department, other
decision-makers, type of business (using standard industrial classifications or
SIC codes).

Business address data – group indicator (holding company, subsidiary, sole),


full company name, short company name, full address, telephone number, fax,
telex, e-mail, web address, region code or sales area, SIC, product types,
importer/exporter, number of employees indicator, turnover indicator.

Some data such as the products bought and their value is, of course, collected in
a retail setting. But it is often difficult to ‘tie’ this data to a particular customers.
Businesses (and students) often make the mistake of assuming that such
information can only be collected by research. In fact, most market research is
prohibitively expensive for this kind of data collection and customers may well
resent being asked for all this information.

In fact many organisations, including retail stores, have solved this problem by
offering loyalty cards, credit accounts or similar schemes. Loyalty cards offer
incentives (usually discounts) for customers to identify themselves when they
pay. In this way companies can ensure records are maintained.

You will see that the amount of data held on each customer can be
daunting and it is for this reason that computers have been so influential
in the growth of direct marketing. In order to make data more
manageable, often disparate elements of data are linked under
indicators. This is a form of segmentation that makes the data easier to
read. However extreme caution must be exercised when clustering
customers on the basis of these ‘artificial’ indicators and it is the job of
the strategic marketer to question and test these.

The most common, and essential, categories of analysis are usually


denoted by the acronyms RVA or FRAC to which numerical values may
be given in the database.

Recency, Value, Activity

or

Frequency, Recency, Amount, Category

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ACTIVITY
Why do you think RVA or FRAC analyses are useful? Would you give a high
score to someone who has purchased a large amount from you on the basis that
they are more valuable or a lower score on the basis that they are unlikely to
buy again for some time?

ACTIVITY FEEDBACK
RVA and FRAC analysis can simplify decision making by allocating a numerical
value to each customer. A high score is usually based on experience of
particular types of customer. Stone and Shaw (1988) argue that the best
indicators of future transactions are past transactions.

For example, motor manufacturers know that cars are changed, on average,
every five years whilst banks know that customers with two or three of their
products (say, a current account, a savings account and a mortgage) are much
more likely to buy further products (such as a credit card).

“The more your customers have spent with you, the more they are likely to
spend with you in the future” (Tapp 1998)

The logic may seem difficult to accept but it is borne out by direct marketing
practice. In fact, the statement can be understood by metaphor. Complete
strangers are the least likely to believe what you say (or indeed even listen),
whilst your closest friends are likely to trust and like you, will already have
talked with you and believed many things you have told them. By definition,
your closest friends will trust you and what you say most of all.

Allocating points on the basis of RVA or FRAC enables us, again, to


segment customers on the basis of their value to the company.

The analysis of the database yields much more important information,


and the more accessible the database is, the more it will be used.
However, too often simple enquiries of a database have to be made
through an (overworked) IT department and this can restrict the utility
of the information. For this reason it is increasingly important that
marketers understand and are comfortable with computers and their
capabilities and remain involved with the design and implementation
of marketing databases.

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The use of the database


The database supports all the key direct marketing decisions. As such it
needs to be flexible and easily updated. Even expensive tailor­made
databases can run into unforeseen problems when marketers begin to
use the data.

For example, each time a new campaign runs, new customers will be
added. In addition, each time existing customers are contacted or
themselves contact the company, that ‘event’ will need to be recorded.

Some years ago a company that sold insurance products to the elderly
failed to include on its database a method of recording the deaths of its
policyholders or their partners. As a result it continued to send offers for
life assurance, often addressed to a recently deceased person.

Profiling
One of the most intriguing uses of the database is in profiling for
acquisition.

Profiling is usually carried out by specialist external agencies which


have the expertise (and their own, appropriate database) in order to
identify and target new customers based on the attributes of the existing
customers.

The ‘external’ database may contain socio­demographic or lifestyle


information (see Unit 3) on many millions of consumers. It will contain
many of the same key pieces of information as a company’s own
database and it uses these to establish a number of ‘matching’ records.
For example, the postcode narrows down the record to one of only a few
in a postcode area; a full name and title added could produce a perfect
match.

When the two databases are matched to some extent – at least 1000
customer records but ideally over 10% – then a range of further useful
things can be achieved using this sample.

Firstly, the external database can be interrogated to produce a report on


the whole database (often itself a representative sample of the whole
population) in comparison to the sample of the company database.

This analysis will show the under­ or over­representation of certain


features. For example, the customer database may be predominantly
older people, they may have a higher average income than the
population or they may choose particular types of holiday. All this
information can be useful when selecting targets for acquisition or,
indeed, for understanding existing customers. Sometimes this data may
suggest new segmentations or clusters to the marketer.

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Names and addresses from the external database are also usually
available to purchase. Hence, a company may test the usefulness of the
profiling by, perhaps, mailing a sample of the most closely matched
consumers on the external database. The cost of these names and
addresses depends on their value and the intended use.

Data may also be added into the company database from the external
database. However, the customer database must be structured to accept
and make use of this data. If it is not then it is often better to repeat the
profiling process periodically.

E-commerce and loyalty


The boom and bust of the Internet in the 1990s showed that e­commerce
was far from easy. Hollensen (op cit, p636) refers to other research (by
Fred Reicheld again) that argued that although customers are hard to
acquire online they tend to be committed to meeting their needs online.
So, once consumers found the website that met their needs they tended
to stay with it. This ‘stickiness’ is a new concept in marketing and
reflects the speed with which customers can ‘click off’ a website if it fails
to deliver the expected benefits.

There are two ways of looking at e­commerce and its development. One
is to hail it as a new and revolutionary ‘shake­up’ to marketing, the
other is to see it in the context of much of what we have discussed so far
in this unit.

E­commerce is essentially concerned with transactions on the Internet.


As such it is entirely suited to the principles of direct and relationship
marketing. This is because it is concerned with the exchange of
information between parties involved in the marketplace. Information
carried on the web is transferred almost instantly and, usually, on a
one­to­one basis. Of course, the web cannot distribute physical products
but in every other aspect of marketing it can play a significant role.

ACTIVITY
Case: Club Nokia’s website creates customer loyalty

Read the case study (Hollensen pp391-393) and answer the three questions.

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ACTIVITY FEEDBACK
Case: Nokia

Explain the purpose of Club Nokia. Do you agree that it is better to


have Club Nokia online (as a website) and not offline?

Club Nokia is an attempt to increase customer loyalty. Creating Club Nokia


offline (in a ‘bricks-and-mortar version’) would be much too expensive. With
3G phones giving seamless access to the web, it makes sense to utilise the
technology known to be in the hands of their target audience.

Visit Club Nokia’s website (click from www.nokia.com). Do you agree


that Club Nokia is able to create customer loyalty?

Going there may not be the most exciting experience that you can get on the
web. Considering that Nokia is selling so many mobile phones to young people,
it should be possible to approach them in a more appealing way. The target
market is technologically aware and already heavy web users.

In autumn 2001 Nokia launched a new mobile phone accessory, the


digital Nokia Music Player HDR-1. With the Nokia Music Player, users
will be able to listen to an integrated FM stereo radio and
downloadable audio/music files, as well as use it as a handsfree kit for
their phone. Using the Nokia Music Player, it is possible to download
AAC and MP3 music files via the Nokia Audio Manager PC software
installed on your PC. With the 32 MB memory card, the Nokia Music
Player can hold up to nine hours of audio content, depending on the
encoding format and quality. As the Nokia Music Player requires only
one AAA battery, it can easily be used as a stand-alone, independent
device.

a) Should the Nokia Music Player be marketed online, offline or


both?

Both possibilities should be considered, as it is a kind of standardised product


not requiring a lot of service back-up. As Nokia is the market leader in mobile
phones it should try to implement a kind of intensive distribution with this
product.

b) Would the choice of Club Nokia as the distribution channel for


the Nokia Music Player be a good decision, or should Nokia
choose another e-commerce strategy?

Nokia is an excellent producer of mobile phones but maybe they are not the
right firm to run a website with an e-commerce strategy. One option would be
to outsource this kind of e-commerce to a specialist who knows how to attract
a web-audience, or to set up an alliance with a strong online brand which
already has the target audience and the traffic such as eMusic and MusicMatch.

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The Internet and the marketing concept


The Internet can be integrated into the marketing concept for the
following reasons

A. It can be used to support the full range of organisational


functions and processes that deliver products and services to
customers and other key stakeholders.
B. It is a powerful communications medium that can act as a
‘corporate glue’ that integrates the different functional parts of
the organisation.
C. It facilitates information management, which is now increasingly
recognised as a critical marketing support tool to strategy
formulation and implementation.
D. The future role of the Internet should form part of the vision of a
company since its future impact will be significant to most
businesses.

(Chaffey et al. 2000)

In the early days of the web, opponents argued either that the
technology would affect all markets or that there were some that it
would be impossible to ‘digitise’. It is important for a firm to consider to
what extent its whole value offering to the end consumer may be
affected by electronic technologies.

ACTIVITY
Read Sections 10.2 and 10.3 in Hollensen, pp396-398.

For newspaper publishers over the past twenty years, new technology
drove down the cost of production. Initially, digital typesetting and
imaging enabled journalists to compose their columns directly onto a
page and, thus, to work to ever tighter deadlines. More recently the
availability of digital cameras and satellite communication has enabled
reporters to file reports, with high quality colour photography, instantly
from around the world. Even just in the last year or two, digital cameras
integrated into mobile phones have enabled readers themselves to send
images – typically of disasters or of celebrities – for publication in the
newspaper.

However, technology is also leading consumers of newspapers to look


online for information that before they would have expected their

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newspaper to provide. Furthermore advertisers, a major source of


revenue for newspapers, are increasingly considering online
advertising. Local newspapers have traditionally generated much of
their income from small ‘classified’ advertisements from private
individuals selling anything from cars to second hand goods.
Increasingly these sales are going through eBay.

Pine, Peppers and Rogers (op cit) pointed out that whilst many firms
were rich in information on their customers and should, therefore, be
able to customise their offering, they often continued to behave like
mass marketers.

Pine et al identified 6 kinds of product or service that lent themselves to


mass customisation:

· Complex products or services.


· Big ticket (i.e. expensive) items.
· Digitisable products and services.
· Online services.
· Luxury and speciality products.
· Retailing services.

ACTIVITY
In each case note down a few reasons why you think that an offering falling into
one of the above categories could or should be customised for the individual
customer. Think of an example of a company that falls into each category. Does
it customise its offering?

ACTIVITY FEEDBACK
Complex products or services

Most people do not want to spend a lot of time comparing complex costs and
specifications. Hence, despite the technological basis of mobile phone
companies there are a large number of intermediaries online selling phones and
airtime packages and, crucially, allowing the consumer to compare competing
networks.

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Big ticket (i.e. expensive) items

Pine et al use the logic of lifetime value discussed in Unit 7 to argue for this
category. It is also clear that for a company such as Boeing, manufacturing
passenger jets, one customer’s order is very significant to their turnover.

Digitisable products and services

The most obvious category in many ways. Information, entertainment such as


music and video can all be ‘packaged’ and delivered in an infinite number of
ways to meet the needs of a consumer. Amazon has taken a standard product
and allied it to information about its customers’ preferences to build value for
them – as an online service.

Online services

Obviously, online services (which may deal with digitisable products) should be
able to be customised. However, Pine et al point out that some online services
fail to do so. (See below; The world wide web and web ‘presence’)

Luxury and speciality products

Pine et al suggest that in some categories, consumers have complex


requirements and tastes which enable the producer to command a premium
for modifying their offering.

Retailing services

Almost by definition, retail services adapt their offering to the individual client.
However, the difficulty is ‘standardising’ such adaptation. Pine et al cite the
Ritz-Carlton hotel chain in which many different customer-facing staff may
meet a given customer and behave in different ways. The key, they say, is to
capture and remember important information, such as room preference
(smoking or non-smoking) or favoured newspaper so that the customer need
not be asked repeatedly.

Learning relationships
Clearly the key to learning and acting upon knowledge of individual
customer preferences is a database which supports organisational
learning. When an organisation, as opposed to individuals within the
organisation are focused, then the whole organisation is able to meet
and sometimes exceed the expectations of customers. Where these are
personal, detailed and complex, then a barrier is built up around the
customer. It becomes increasingly difficult for the customer to leave
knowing that it will take time for any new supplier to learn the same
features of the required service.

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It is not sufficient simply to builds the walls, as Jones and Sasser have
warned above. Banks traditionally depend on customers’ inertia and
the potential problems of transferring sensitive data from one set of
accounts to another. However, in these circumstances customers may
still not be satisfied and may look for opportunities to spread their risk,
perhaps by taking up products from rivals and so making any future
defection easier.

Pine et al suggest that there are four distinct strategies that need to be
developed in order to maintain true learning relationships.

An information strategy It is important also to establish a relationship in which information is


given by the customer without pressure. Customers increasingly know
the value of their personal data and may protect it. Learning
relationships are undoubtedly of value to the company, but they
should also be of value to the customer. Loyalty cards schemes such
as those of the major supermarkets, go some way towards this.

A production/delivery This item emphasised the importance of integrating the marketing


strategy approach with other functional areas. It is not sufficient to meet all
customers’ many varied needs without also examining the possibilities
for reducing the cost of doing so. Pine et al suggest a modular
approach to production may be the answer- establishing common
processes and components in much the way that VW has done in
launching its luxury marque, the Phaeton, that shares components
with Audi and Bentley models.

An organisational strategy Rather than following traditional management structures focusing on


products and brands, Pine et al suggest ‘customer managers’
responsible for the relationship with customers who have similar
needs and tasked with gaining share of the total customers spend,
almost irrespective of category. There are early signs of this approach
from UK supermarkets such as Tesco which meets the financial
service, clothing and other needs (in addition to conventional
groceries) of many of its customers.

An assessment strategy Finally Pine et al advocate the assessment of lifetime value and share
of customer as vital. Drawing the connection once more between
customer satisfaction and loyalty, they also suggest measuring the
gap between customers ideal and what is actually supplied. Again,
given a sufficiently sophisticated database, this is to be done for each
customer.

Figure 8.1: Strategies needed to develop learning relationships. Adapted from Pine et al (1995).

Approaches such as those advocated by Pine et al, have been seen as


futuristic. Indeed even ten years ago the ‘deep impact’ of
communications technologies was still to be appreciated. By 1999,
however, Andersen Consulting was identifying the real effect of
e­commerce trends on corporate and marketing strategy (Chaston
2001).

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1. Vertical disintegration
A reversal of the integration of the value chain seen in previous
decades. Companies could now move quicker by collaborating
with outsourced service.
2. The Vale of the intangibles
Far from being the main location of value, physical assets can
increasingly be seen as barriers to rapid restructuring.
Knowledge, skills, brands, reputation and customers are all less
tangible and, potentially, more valuable. (see Unit 4)
3. Increasing returns
The intangibility of many products on the web lead to the
expectation of better returns on investment. Each additional
customer on eBay or Amazon.com costs virtually nothing.
4. Perfect information
A principle feature of the classical economist’s model of a market
is (almost) a reality. In some markets buyers and sellers have
total knowledge of the price of competing offerings and can
negotiate on that basis. Power shifts towards buyers and the
market is likely to reach an equilibrium price level.
5. Instant supply chains
The electronic integration of the complete supply chain where
each order triggers instant orders of materials and production
means that customers will increasingly expect instantaneous
responses. Companies that have any element of the value chain
‘off­line’ will suffer.

The World Wide Web and web ‘presence’


The major tool for e­commerce is the World Wide Web. It is now as
unnecessary to describe the web as it is to describe the telephone or
television.

However, there is still considerable ignorance about the range of


technologies, programs and applications which can operate in the web
environment and which support e­commerce.

There is wide variation in the extent to which companies have


incorporated the web into their marketing strategy. Chaffey at al (2000)
describe five levels of development of a web presence. The majority of
companies worldwide are believed to be at level 2 or below.

Level 0. No web site


Level 1. Company has an entry in a directory such as yell.co.uk

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Level 2. ‘Brochureware’ a simple, static website with basic company


information
Level 3. Simple interactivity with users able to search and access
prices or product details and, perhaps, raise queries by
e­mail
Level 4. Interactive site supporting transactions. Functions such as
online purchasing or support
Level 5. Fully interactive site supporting relationship marketing

Buyer behaviour online


In order to understand what an organisation’s web presence may
achieve, it is important to consider how the web is being used by
consumers and other businesses. Hollensen uses the notion of market
space to distinguish the environment in which online buyers make their
decisions from that of real world market places.

ACTIVITY
Read Section 10.6, Hollensen, pp410-422.

What are the main features of buyer behaviour in B2C and B2B market spaces?

ACTIVITY FEEDBACK
The main difference between B2B and B2C buyers online is that consumers are
characterised as individuals either making predominantly affective decisions,
enjoying the experience of the web environment (hedonistic) or rational,
instrumental decisions. Business users, however, may also be consumers but
may also be sellers and intermediaries.

In fact, as the eBay example illustrates, individual consumers and interest


groups can act either as sellers, intermediaries or as members of a group
decision-making process.

Newsgroups, chatrooms and peer-to-peer file sharing forums are all market
spaces where consumers can share experiences, act together to purchase in
bulk or promote tools to strengthen the customer in an online transaction.

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For example, programs like Bidnapper (www.bidnapper.com) enable buyers


to automate their eBay bidding, whilst online organisations such as Source
Services Ltd seek to automate purchasing for businesses in a way that will share
the benefits of bulk buying (www.source-services.co.uk).

It is clear that, online, the status of any individual or corporate is difficult to


assess and so whilst businesses must strive for better information on the
consumer, consumers are often striving for better information on potential
suppliers.

However, companies should not assume that all customers are about to
make all their purchases online. Particular sectors and particular brands
are known for their web presence.

For example, consumer electronics are high price products where the
potential for saving is of great interest to consumers. Given that the
main brands are well­known and have reputations for good quality it is
likely that many customers carry out extensive product searches (see
Unit 3) and compare price and performance. Similarly, brand loyal
customers of Lands’ End or Fat Face wearers may visit the web sites in
order to check on the latest offers or to browse through a wider range of
products than are in the paper­based catalogue. (www.landsend.com
and www.fatface.com). These websites also offer a further taste of the
brand values that loyal customers of these companies so admire; for
example, Fat Face’s website links to a ‘Fat Planet’ subsite on extreme
sports.

Even for many of the most dedicated customers, however, online


ordering is ignored in favour of a telephone call.

One of the concerns consumers have is security. By and large it is


impossible to demonstrate that a website is secure no matter how good
its technology. As a result, it is in the best interests of the consumer to
offer as wide a range of response channels as possible. Apart from
placing address, telephone and e­mail details on a website sites can now
incorporate internet call­back (where a customer books a call from the
company) or ‘chat’ in writing on the site with a company representative.
Despite the restriction on speed from some customers’ internet
connection, some companies also offer voice and or video over the web.
(Chaston 2001)

Ease of contact, of meeting the immediate need of the consumer (which


may be for information or reassurance rather than a product) is likely to
increase the ‘stickiness’ of a web site.

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Convergence; ‘clicks and mortar’


Recent research seems to suggest that the web, as a marketplace, is
maturing with substantial competition in almost every sector. The
acquisition of new customers, therefore, continues to be expensive –
perhaps 20­40% more for pure internet companies than for stores with
both an on­ and offline presence.

E-commerce marketing strategy


There is every reason to suppose that the fundamental arguments about
strategy that run throughout these eight units hold for e­commerce as
much for entirely offline businesses. The issue is rather that there are
now almost no totally offline markets.

When web­based businesses can reach millions of customers


worldwide and drive down the costs of transactions they have the
ability to ‘swoop’ on profit pools and undercut traditional suppliers.

ACTIVITY
Read the following case and answer the questions that follow.

Case: Glasses Direct


(adapted from The Sunday Times Business. January 2005)

Glasses Direct, founded by a 21-year-old entrepreneur James Murray Wells


launched a website last summer to sell spectacles at prices typically around
15% below those of high-street chains.

Murray Wells set up the company after facing a bill for £150 for a pair of
spectacles as a student. As he investigated the cost he found only one
laboratory willing to give him the ‘inside’ information he needed. To test his
idea he simply sent his own prescription to the lab and ended up paying a
fraction of the cost.

With some IT help James set up the website and launched the company from
his parents’ spare bedroom. At first, the job fitted around study time, but then
after distributing some leaflets and advertising in a local directory in the nearest
city Murray Wells was faced with employing eight and using three more rooms
at home.

Glasses Direct is now selling more than 300 pairs of glasses a day to more than
8,000 customers – sales could be around £150,000. The workforce is 11 and
they have just moved to business premises.

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There has been resistance. Some high street chains suggest that Glasses Direct
doesn’t fit spectacles properly. One supplier suddenly refused to work with the
new company. A large US company has sounded Murray Well out about a
possible takeover.

The future may be their own manufacturing and the website may soon enable
customers to view themselves online wearing the various styles of glasses.

Not bad for an idea that was just going to provide pocket money for a hard-up
student.

www.glassesdirect.com

1. How has technology enabled Glasses Direct to prosper?

2. Evaluate the business, given what you know about direct and
relationship approaches to marketing.

3. What does the future hold for Glasses Direct. Do you see future
technological developments as an opportunity or a threat?

ACTIVITY FEEDBACK
1. How has technology enabled Glasses Direct to prosper?

The original market insight had little to do with technology. Murray


Wells simply wanted to investigate the possibility of competing of
price. You may have referred to the discussion on pricing strategies in
Unit 5.

Moreover custom has been generated by traditional publicity, plus


some judicious PR in local and national press.

However, the web presence has given Glasses Direct access to a world
audience.

2. Evaluate the business, given what you know about direct and
relationship approaches to marketing.

Glasses Direct is another example of a web-based business that has not


had to invest heavily in premises or stock. Glasses are made to order
and despatching is done from the supplier whilst product requests and
specifications can all be handled electronically.

However, Glasses Direct will need to work to retain customers.


Separating the supply of spectacles from the process of eye testing

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means that customers have no need to revisit the company as they


might an optician. Opticians currently tend to remind customers when
an appointment is necessary and, therefore, have the potential to
maintain a longer term relationship. For an optician, the lifetime value
of a customer paying £150 for a pair of glasses every two years, for
example, is higher than a Glasses Direct customer who pays £15 – even
if they return for twenty years.

3. What does the future hold for Glasses Direct. Do you see future
technological developments as an opportunity or a threat?

It is highly likely that ‘copy cat’ glasses suppliers will continue to appear
on the Internet. Customers shopping in this was are concentrating on
value and making price-based decisions – Glasses Direct will be under
pressure to contain costs. With the transparency of comparison
possible on the web, customers may make decisions based on the
difference of pennies.

Technological changes in eyesight treatment may well threaten the


whole of the prescription spectacles market. If Murray Wells wanted
Glasses Direct to be a preferred provider of a wider range of products
then he would have to invest in making the brand well-known and
trusted, customer service would have to be consistently excellent and
he would have to consider how customers can be protected from
competition, perhaps by developing learning relationships with them.

Successful e­commerce strategies match an organisation’s


competencies to identified market opportunities. However, these
competencies are sometimes ‘geared’ by the use of internet
technologies. The value chain or value net model referred to throughout
Hollensen (2003) and this module applies just as much when the links
between elements are virtual. In fact, value nets now more easily spread
around the globe to enable companies to drive down operating costs.

The danger is that, in the ‘gold rush’ mentality that prevailed in the
dotcom boom, companies may see opportunities for new customers,
new markets or new processes without also seeing the significant
problems that may exist. This is arguably the case with the Glasses
Direct example above.

In every respect then, a business that seeks to take advantage of new


technology – especially web and e­commerce opportunities, must
approach marketing in the same, rigorous way as any other. Direct and
relationship approaches lend themselves particularly well to such
opportunities because they depend upon rapid and accurate interaction
and information. To reiterate the principles of direct marketing
(McCorkell 1997) referred to in Unit 7 –

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Targeting – who will be interested? This may be facilitated by low cost


research online or access to a very much wider audience.

Interaction – how did they respond before? With web technology this
can be tracked and interaction built around individual requirements.

Control – what was the return on our investment? Again tracking is


made easier since all contacts with a customer can be registered
automatically.

Continuity – how can we further the relationship? This last area


depends on a strategic decision to focus on longer term customer
relationships.

REVIEW ACTIVITY
1. Do you consider innovation to be a driving force in marketing or a
source of threats?

2. Why might a direct or relationship marketing strategy be suited to a


rapidly changing and technologically sophisticated market?

3. Why might a company focus its attention on satisfied customers rather


than those that are dissatisfied?

4. What is the difference between ‘true’ loyalty and spurious loyalty?

5. What are the advantages of considering loyalty as both attitudinal and


behavioural?

6. Why does the marketing concept fit well with the Internet?

7. List three kinds of organisation that may be able to adopt mass


customisation.

8. Describe a ‘learning relationship’.

ACTIVITY FEEDBACK
1. Do you consider innovation to be a driving force in marketing or a
source of threats?

Innovation is simply a fact of a competitive environment. Whilst


innovation can represent a threat to almost any organisation in any

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market, monitoring such change can lead to insights that, in turn, may
lead to competitive advantage.

2. Why might a direct or relationship marketing strategy be suited to a


rapidly changing and technologically sophisticated market?

Direct and relationship approaches are those which stay close to


profitable customers and respond to their needs. In a rapidly changing
marketplace customers are more valuable than products.

3. Why might a company focus its attention on satisfied customers rather


than those that are dissatisfied?

Totally satisfied customers (ambassadors) are considerably more value


than the merely satisfied. The latter may still prove to be disloyal and
efforts to totally satisfied should be rewarded. Totally dissatisfied
customers may be impossible to satisfy and if kept artificially loyal, may
turn out to be ‘terrorists’ who undermine the company.

4. What is the difference between ‘true’ loyalty and spurious loyalty?

True loyalty, according to Dick and Basu, is exhibited by a customer


who buys regularly and has a favourable attitude towards the brand he
buys. Spurious loyalty is defined as repeat behaviour without a
supporting positive attitude towards the brand or product.

5. What are the advantages of considering loyalty as both attitudinal and


behavioural?

Repeat purchases, as Dick and Basu point out, do not necessarily define
a loyal customer. However, Simon Knox’s examination of loyalty seeks
to provide a tool with which to measure and manage customers
segmented by loyalty. Combining these two perspectives ensures that
repeat patronage is not taken for granted and that strategies to build
loyalty are based on a more accurate picture of customers’ attitudes
and behaviour.

6. Why does the marketing concept fit well with the Internet?

Chaffey (2000) summarises the ‘fit’ as follows –

- It can be used to support the full range of organisational


functions and processes that deliver products and
services to customers and other key stakeholders.

- It is a powerful communications medium that can act as a


‘corporate glue’ that integrates the different functional
parts of the organisation.

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- It facilitates information management, which is now


increasingly recognised as a critical marketing support tool to
strategy formulation and implementation.

- The future role of the Internet should form part of the vision of
a company since its future impact will be significant to most
businesses.

7. List three kinds of organisation that may be able to adopt mass


customisation.

Any of the following may be listed and explained –

- Complex products or services.

- Big ticket (i.e. expensive) items.

- Digitisable products and services.

- Online services.

- Luxury and speciality products.

- Retailing services.

8. Describe a ‘learning relationship’

A learning relationship exists between a company and its customers if


the company is able to capture and remember information and
respond to it in a way that gives the customer improved value. The end
result must be a satisfied customer who is unwilling to move away.

References
Chaffey, D., R. Mayer, K. Johnston and F. Ellis­Chadwick (2000). Internet
Marketing. Strategy, Implementation and Practice. Harlow, Pearson
Education Limited.

Chaston, I. (2001). E­marketing Strategy. Maidenhead, McGraw­Hill.

CIM (2004) “The Creative Dilemma” The Marketer Issue 1, April

Hollensen, S. (2003). Marketing Management: a relationship approach.


Harlow, Person Education.

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Jones, T. O. and W. Earl Sasser Jr. (1995). “Why Satisfied Customers


Defect.” Harvard Business Review (Nov/Dec).

Knox, S. (1996). “The death of brand deference.” Market Intelligence &


Planning.

Logan, R. (1998). Getting to know your database B. Halsey, Ed. The


Direct Marketing Guide. Teddington, Institute of Direct Marketing. 1.

McCorkell, G. (1997). Direct and Database Marketing. London, Kogan


Page/Institute of Direct Marketing.

Payne, A. (1995). Advances in Relationship Marketing. Oxford,


Butterworth­Heinemann.

Payne, A. (2000). Relationship Marketing: Managing Multiple Markets


Cranfield School of Management, Ed. Marketing Management. A
Relationship Marketing Perspective. Basingstoke, Macmillan Press Ltd:
16­30.

Pine II, B. J., D. Peppers and M. Rogers (1995). “Do you want to keep
your customers for ever?” Harvard Business Review (March/April):
103­114.

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