Malliga Marimuthu - Marketing and Management - Defined, Explained and Applied-Pearson (2022)

MARKETING AND MANAGEMENT
Pearson is the world’s leading learning company. Our education business combines 150 years of experience in
publishing with the latest learning technology and online support. We help people learn whatever, wherever and
however they choose.
Pearson Custom works for educators. We partner with you to build course-specific materials, designed to
MARKETING AND
facilitate student success. We open the door to a wealth of content and technology and walk you through the
process of selecting or creating the custom resources to meet your goals.
To get in touch, email custom@pearson.com.au.
MANAGEMENT:
Defined, Explained and Applied
Compiled by Malliga Marimuthu
Copyright © 2020 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9780655702412 – Marketing and Management: Defined, Explained and Applied
9780655702412_C.indd 1 3/4/20 8:30 AM

MARKETING AND
MANAGEMENT: DEFINED,
EXPLAINED AND APPLIED
Compiled by
Malliga Marimuthu
9780655702412_FM.indd 1 3/3/20 5:31 PM

Pearson Australia
707 Collins Street
Melbourne VIC 3008
www.pearson.com.au
Copyright © 2020 This Custom Book Edition, Pearson Australia (a division of Pearson
Australia Group Pty Ltd).
Copyright © 2018 by Pearson Education Inc. for Principles of Marketing, 7th ed.
by Armstrong, Kotler, Adam & Denize.
Copyright © 2019 by Pearson Education Inc. for Management: the essentials, 4th ed.
by Robbins, DeCenzo, Coulter & Woods.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system,
or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without the written permission of the publisher.
Project Management Team Leader: Jill Gillies

Courseware Associate: Jessica Darnell
Production Controller: Yoke Lian Yong
Copyeditor: Sandra Goodall
ISBN: 978 0 6557 0241 2

ISBN: 978 0 6557 0242 9 (uPDF)
9780655702412_FM.indd 2 3/3/20 5:31 PM

Brief contents
Session 1 Introduction to marketing and sustainable marketing 1

1 Marketing: Creating and capturing customer value 2
2 Sustainable marketing: Social responsibility, ethics and legal compliance 36
Session 2 Understanding the marketplace and buyer behaviour 67

3 The marketplace and customers: Analysing the environment 68
4 Buyer behaviour: Understanding consumer and business buyers 102
Session 3 Marketing analytics 139

5 Marketing analytics: Gaining customer insights 140
Session 4 Products and services 175

6 Customer-driven marketing strategy: Creating value for target customers 176
7 Products, services and brands: Offering customer value 204
8 New products: Developing and managing innovation 228
Session 5 Price and placement 251

9 Pricing: Capturing customer value 252
10 Placement: Customer value fulfilment 276
Session 6 Integrated marketing communication 319

11 Communicating customer value: Advertising and public relations 320
12 Salespeople and sales promotion: Creating value in relationships 344
13 Direct and digital marketing: Interactivity and fulfilment 370
Session 7 Managers, management and managerial sustainable

responsibilities393
14 Managers and management 394
History Module: A brief history of management’s roots 416
15 The managerial environment 424
Ethics and Social Responsibility Module: Managing socially responsible
and ethical behaviour 442
Session 8 Managing the business 453

16 Foundations of planning 454
17 Foundations of decision making 470
9780655702412_FM.indd 3 3/3/20 5:31 PM

iv Brief contents
Session 9 Managing the organisation and individual 489

18 Organisational structure and design 490
19 Foundations of individual behaviour 520
Session 10 Managing people 553

20 Managing human resources 554
21 Motivating and rewarding employees 582
Session 11 Leading and managing groups 603

22 Leadership and trust 604
23 Understanding groups and managing work teams 630
Session 12 Control and change management 655

24 Foundations of control 656
25 Managing change and innovation 680
Entrepreneurship Module: Managing entrepreneurial ventures 706
Appendix 1 Case studies 719

Appendix 2 The marketing plan: An introduction 732
Appendix 3 Marketing analytics spotlights 740
Appendix 4 Careers in marketing 764
Glossary 770
Index 790
9780655702412_FM.indd 4 3/3/20 5:31 PM

Contents
Session 1
Introduction to marketing Capturing value from customers 18
and sustainable Creating customer loyalty and retention 18
marketing 1 Growing share of customer 19
Chapter 1 Building customer equity 20
Marketing: Creating and capturing Building the right relationship with the
customer value 2 right customers 20
Learning Objectives 2 The changing marketing landscape 21
Concept map 3 The digital age: Online, mobile and
What is marketing? 4 social media marketing 21
Marketing defined 4 The challenging world economy 23
The marketing process 4 Measuring marketing’s contribution to
Understanding the marketplace and organisational performance 24
customer needs 5 Marketing in Action 1.1
Customer needs, wants and demands 5 Are marketers really that ‘lousy at selling
Market offerings: Goods, services and marketing’? 25
experiences6 The growth of not-for-profit marketing 26
Customer value and satisfaction 7 Rapid globalisation 26
Exchanges, transactions and relationships 8 Sustainable marketing: The call for more
Markets8 environmental and social responsibility 28
Designing a customer-driven marketing So, what is marketing? Pulling it all
strategy 9 together 28
Selecting customers to serve 9 Student Learning Centre
Choosing a value proposition 10 • Reviewing the learning objectives 31
Marketing management orientations 11 • Discussion questions 32
Preparing an integrated marketing plan • Critical thinking exercises 32
and program 13 • Mini cases 33
Engaging customers and managing 1.1 Digital technologies in marketing 33
customer relationships 15 1.2 Customer-driven marketing
Customer relationship management 15 strategy33
1.3 Marketing analytics at work 34
Engaging customers 16
1.4 Ethical reflection 34
Consumer-generated marketing 17
• References 34
Partner relationship management 18
9780655702412_FM.indd 5 3/3/20 5:31 PM

vi Contents
Chapter 2 Session 2
Understanding the
Sustainable marketing: Social marketplace and buyer
responsibility, ethics and legal behaviour 67
compliance 36 Chapter 3
Learning Objectives 36 The marketplace and customers:
Concept map 37 Analysing the environment 68
Sustainable marketing 38 Learning Objectives 68
Social criticisms of marketing 39 Concept map 69
Marketing’s impact on individual The marketing environment 70
customers39 The company’s microenvironment 70
Marketing’s impact on society as a whole 42 The company 70
Marketing’s impact on other Suppliers71
businesses44 Marketing intermediaries 71
Consumer actions to promote Competitors72
sustainable marketing 45 Publics72
Consumerism45
Customers73
Environmentalism46
The company’s macroenvironment 74
Public actions to regulate marketing 49
Demographic environment 74
Business actions towards sustainable Economic environment 81
marketing 49
Natural environment 82
Sustainable marketing principles 49
Technological environment 84
Marketing in Action 2.1
Peoples Coffee: Making a difference,
The quite real virtual experience 85
one cup at a time 52
Political and social environment 86
The role of ethics in marketing 53
Cultural environment 88
Marketing ethics 53
Responding to the marketing environment 91
The sustainable company 56
Managing the marketing effort 92
Legal compliance in marketing 56
Marketing analysis 92
Putting a compliance program in place 56
Marketing planning 93
Legal education 57
Marketing implementation 93
Coverage of a legal compliance program 58
Marketing department organisation 95
Student Learning Centre
Marketing control 96
• Reviewing the learning objectives 63
• Discussion questions 63 Student Learning Centre
• Critical thinking exercises 64 • Reviewing the learning objectives 97
• Mini cases 64 • Discussion questions 97
2.1 Consumerism 64 • Critical thinking exercises 98
2.2 Role of ethics in marketing 64 • Mini cases 98
2.3 Marketing analytics at work 65 3.1 Microeconomic environment 98
2.4 Ethical reflection 65 3.2 Technological environment 99
• References 66 3.3 Marketing analytics at work 99
• References 100
9780655702412_FM.indd 6 3/3/20 5:31 PM

Contents vii
Chapter 4 Session 3
Marketing analytics 139
Buyer behaviour: Understanding Chapter 5
consumer and business buyers 102 Marketing analytics: Gaining
Learning Objectives 102 customer insights 140
Concept map 103 Learning Objectives 140
Consumer markets and consumer buyer Concept map 141
behaviour 104 Marketing information and customer
Model of consumer behaviour 104 insights 142
Characteristics affecting consumer Marketing information and today’s ‘big data’142
behaviour 105 Marketing analytics 143
Marketing in Action 4.1 Managing marketing information 143
Consumer behaviour: A whole life story 111
The buyer decision process 117 Netflix streams success with big data
Stages in the buyer decision process 117 and marketing analytics 144
The buyer decision process for Assessing marketing information needs 146
new products 120 Developing marketing information 147
Stages in the adoption process 120 Internal data 147
Individual differences in Competitive marketing intelligence 148
innovativeness121
Marketing research 149
Influence of product characteristics
Defining the problem and research
on rate of adoption 121
objectives150
Business markets and business Developing the research plan 150
buyer behaviour 122
Primary data collection 153
Business markets 123
Implementing the research plan 162
Business buyer behaviour 125
Interpreting and reporting the findings 162
The business buying process 128
Customer database use in direct and
E-procurement: Buying on the internet 131
digital marketing 163
Business-to-business digital and social Customer database defined 163
media marketing 132
Database use in direct and digital
Student Learning Centre marketing164
Analysing and using marketing information 167
• Discussion questions 133
Customer relationship management 167
• Critical thinking exercises 134
Distributing and using marketing
• Mini cases 135
information168
4.1 Consumer behaviour 135
4.2 Business buyer behaviour 135 Student Learning Centre
4.3 Marketing analytics at work 135 • Reviewing the learning objectives 170
4.4 Ethical reflection 136 • Discussion questions 171
• References 136 • Critical thinking exercises 171
• Mini cases 171
5.1 Gathering data 171
5.2 Customer insights 172
9780655702412_FM.indd 7 3/3/20 5:31 PM

viii Contents
5.3 Marketing analytics at work 172 What is a product? 206

5.4 Ethical reflection 173 Products, services and experiences 206
• References 173 Levels of products and services 207
Product and service classifications 208
Product and service decisions 211
Session 4
Products and services 175
Individual product and service decisions 211
Chapter 6
Customer-driven marketing
Headspace and the unsought product 212
strategy: Creating value for
Product line decisions 217
target customers 176
Product mix decisions 218
Learning Objectives 176
Concept map 177 Services marketing 219
Customer-driven marketing strategy 178 Nature and characteristics of a service 219
Market segmentation 179 Marketing strategies for service firms 220
Segmenting consumer markets 179 The service–profit chain 221
Marketing in Action 6.1 Managing service differentiation 222
ALDI: Offering a ‘same-for-less’ value Student Learning Centre
proposition 182 • Reviewing the learning objectives 224
Market targeting 186 • Discussion questions 224
Evaluating market segments 186 • Critical thinking exercises 225
Selecting target market segments 187 • Mini cases 225
Socially responsible target marketing 190 7.1 Industrial products 225
7.2 Packaging 225
Differentiation and positioning 192
Positioning maps 192

• References 226
Choosing a differentiation and
positioning strategy 192
Chapter 8
Communicating and delivering the New products: Developing
chosen position 198 and managing innovation 228
Student Learning Centre Learning Objectives 228
• Reviewing the learning objectives 199 Concept map 229
• Discussion questions 199 New-product development strategy 230
• Critical thinking exercises 200 The new-product development process 230
• Mini cases 200 Idea generation 230
6.1 Target marketing 200 Idea screening 232
6.2 Differentiation 201
Concept development and testing 233
Marketing strategy development 234
Business analysis 235
• References 203
Product development 235
Test marketing 236
Chapter 7
Products, services and brands: Commercialisation236
Offering customer value 204 Managing new-product development 237
Learning Objectives 204 Customer-centred new-product
Concept map 205 development237
9780655702412_FM.indd 8 3/3/20 5:31 PM

Contents ix
Team-based new-product development 238 Psychological pricing 264

Systematic new-product development 238 Promotional pricing 265
Product life-cycle strategies 239 Marketing in Action 9.1
Marketing in Action 8.1 Pricing cues are customer clues 266
Mattel: Managing the fun and games 240 Geographical pricing 268
Introduction stage 242 Dynamic and online pricing 269
Growth stage 243 International pricing 270
Maturity stage 243 Student Learning Centre
Decline stage 244 • Reviewing the learning objectives 272
Student Learning Centre • Discussion questions 272
• Reviewing the learning objectives 246 • Critical thinking exercises 273
• Discussion questions 246 • Mini cases 273
• Critical thinking exercises 247 9.1 Online price tracking 273
• Mini cases 247 9.2 Rebates under the microscope 273
8.1 Innovation 247 9.3 Marketing analytics at work 274
8.2 New-product development 247 9.4 Ethical reflection 274
8.3 Marketing analytics at work 248 • References 275
• References 248 Chapter 10
Placement: Customer value
fulfilment 276
Session 5
Price and placement 251 Learning Objectives 276
Concept map 277
Chapter 9
Pricing: Capturing customer value 252 Supply chains and the value delivery
Learning Objectives 252 network 278
Concept map 253 Supply chain goals 281
What is a price? 254 Major supply chain functions 283
Major pricing strategies 254 The nature of marketing channels
Customer value-based pricing 255 and value creation 286
Cost-based pricing 257 How marketing channels add value 287
Competition-based pricing 259 Number of channel levels 288
Channels in the service sector 290
New-product pricing strategies 260
Market-skimming pricing 260 Channel behaviour and organisation 290
Market-penetration pricing 260 Channel behaviour 290
Channel organisation 291
Product-mix pricing strategies 261
Product-line pricing 261 Marketing in Action 10.1
Optional-product pricing 262 Multichannel services marketing 296
Captive-product pricing 262 Channel design and management decisions 297
Analysing consumer needs 298
By-product pricing 263
Setting channel objectives 298
Product-bundle pricing 263
Identifying major channel alternatives 298
Price-adjustment strategies 263
Evaluating the major alternatives 299
Discount and allowance pricing 263
Channel management decisions 299
Segmented pricing 264
9780655702412_FM.indd 9 3/3/20 5:31 PM

x Contents
Retailing 300 Student Learning Centre

Retailing: Connecting brands with • Reviewing the learning objectives 339
consumers300 • Discussion questions 339
Types of retailers 300 • Critical thinking exercises 340
Wholesaling 307 • Mini cases 341
Types of wholesalers 307 11.1 Integrated marketing
communication341
Wholesaler marketing decisions 309
11.2 Public relations 341
Wholesaling trends and developments 311
Student Learning Centre 11.4 Ethical reflection 342
• Reviewing the learning objectives 312 • References 342
• Critical thinking exercises 313 Chapter 12
• Mini cases 314 Salespeople and sales promotion:
10.1 Corporate VMN 314 Creating value in relationships 344
10.2 Multichannel distribution networks 315 Learning Objectives 344
10.3 Marketing analytics at work 315 Concept map 345
Personal selling 346
• References 317
The nature of personal selling 346
The role of the salesforce 347
Session 6
Integrated marketing Managing the salesforce 348
communication 319 Designing salesforce strategy
and structure 348
Chapter 11
Communicating customer value: Recruiting and selecting salespeople 352
Advertising and public relations 320 Training salespeople 353
Learning Objectives 320 Compensating salespeople 354
Concept map 321 Supervising and motivating
The promotion mix 322 salespeople354
Integrated marketing communications 322 Marketing in Action 12.1
The new marketing communications Social selling: Who needs salespeople? 357
model322 Evaluating salespeople and salesforce
The need for integrated marketing performance358
communications324 Sales promotion 359
Marketing in Action 11.1 Rapid growth of sales promotion 359
It’s content marketing, not advertising 325 Sales promotion objectives 360
Shaping the overall promotion mix 326 Major sales promotion tools 360
The nature of each promotion tool 327 Developing the sales promotion
Promotion mix strategies 328 program363
Advertising 329 Student Learning Centre
Setting advertising objectives 330 • Reviewing the learning objectives 365
Setting the advertising budget 332 • Discussion questions 365
Other advertising considerations 333 • Critical thinking exercises 366
Public relations 335 • Mini cases 366
The role and impact of public relations 336 12.1 Supervising salespeople 366
12.2 Sales promotion 367
The main public relations tools 337
9780655702412_FM.indd 10 3/3/20 5:31 PM

Contents xi
12.3 Marketing analytics at work 367 Session 7

Managers, management
12.4 Ethical reflection 368 and managerial
• References 369 sustainable
Chapter 13 responsibilities393
Direct and digital marketing: Chapter 14
Interactivity and fulfilment 370 Managers and management 394
Learning Objectives 370 Learning objectives 394
Concept map 371 Concept map 395
The direct and digital marketing model 372 Who are managers, and where do
Direct and digital marketing 372 they work? 396
Benefits of direct and digital marketing What four characteristics do all
to buyers and sellers 374 organisations share? 396
Direct marketing 375 How are managers different from

Direct print and reproduction 375 non-managerial employees? 397
Direct-response television and radio 375 What titles do managers have? 397
Telemarketing375 What is management? 399
Kiosks and electronic dispensing 376 What do managers do? 400

What are the four management functions? 400
Digital marketing 377
What are management roles? 401
Interacting in digital marketing 377
What characteristics do managers need? 402
Search-engine optimised websites 377
Is the manager’s job universal? 403
Search engine marketing: Three reasons Why study management? 406
why search engines exist 379 What factors are reshaping and redefining
Search engine marketing 381 management?406
Online advertising 382 Why are customers important to the
manager’s job? 407
Email383
Why is innovation important to the
Social media marketing 384
manager’s job? 407
Other forms of online interaction 385
Why are ethics and social responsibility
Interactivity 386 important to the manager’s job? 408
Customer-to-customer interaction 386
Why are social media tools important to
Customer-to-company interaction 387 the manager’s job? 408
Student Learning Centre Why is sustainability important to the
• Reviewing the learning objectives 388 manager’s job? 408
• Critical thinking exercises 388
• Mini cases 389
13.1 Location-based marketing 389
• Management Skill Builder | Becoming
13.2 Direct and digital marketing 389
politically adept 411
• Mini cases 413
14.1 Google: Building a better boss 413
• References 391
14.2 Managing to create a better world 414
• References 414
9780655702412_FM.indd 11 3/3/20 5:31 PM

xii Contents
History Module Should organisations be socially

A brief history of management’s responsible?443
roots416 How can managers identify the ethical
Learning objectives 416 thing to do? 444
Early management (3000 BCE–1776) 417 Ethical perspectives 445
Behavioural approach (late 1700s–1950s) 418 What factors influence ethical
Classical approaches (1911–1947) 419 and unethical behaviour? 446
Quantitative approach (1940s–1950s) 420 How can managers encourage
Contemporary approaches (1960s–present) 421 ethical behaviour? 447
Choosing between management Codes of ethics 447
approaches422 Ethical leadership 448
• References 423 Ethics training 448
Formal protective mechanisms 449
Chapter 15
References451
The managerial environment 424
Learning objectives 424
Concept map 425 Session 8
Managing the
What is the external environment of an business453
organisation?426
Chapter 16
What is the general environment of an
Foundations of planning 454
organisation?426
What is the specific environment of an
Concept map 455
organisation?429
What is planning, and why do managers
How does the external environment affect need to plan? 456
managers?432 Why should managers formally plan? 456
What is organisational culture, and why is it What are some criticisms of formal
important?434 planning, and how should managers
How does organisational culture affect respond?457
managers?435 Does formal planning improve
Student Learning Centre organisational performance? 458
• Reviewing the learning objectives 437 What do managers need to know about
• Discussion questions 437 strategic management? 459
• Management Skill Builder | Understanding What is strategic management? 459
Culture438
Why is strategic management important? 459
• Mini cases 439
What are the steps in the strategic
15.1 Tragedy in fashion 439
management process? 459
15.2 Getting a boost 439
• References 440 What contemporary planning issues do
managers face? 463
Ethics and Social How can managers plan effectively in
Responsibility Module dynamic environments? 463
Managing socially responsible and How can managers use environmental
ethical behaviour 442 scanning?463
Learning objectives 442 How can managers use benchmarking? 464
How do organisations define their social
responsibilities?443
9780655702412_FM.indd 12 3/3/20 5:31 PM

Contents xiii
• Discussion questions 465 Session 9

Managing the organisation
• Management Skill Builder | Being and individual489
a good goal setter 466
Chapter 18
• Mini cases 467
Organisational structure and design 490
16.1 Less is more 467
16.2 Spy games 467
Concept map 491
• References 468
What are the six key elements in
Chapter 17 organisational design? 492
Foundations of decision making 470 What is work specialisation? 492
Learning objectives 470 What is departmentalisation? 493
Concept map 471 What are authority and responsibility? 495
How do managers make decisions? 472 What is span of control? 499
What defines a decision problem? 472
A question of ethics 500
What is relevant in the decision-making How do centralisation and decentralisation
process?472 differ?500
How does the decision maker weight What is formalisation? 501
the criteria and analyse alternatives? 473
How is a mechanistic organisation different
What determines the best choice? 475
from an organic organisation? 501
What happens in decision implementation? 475
What are some common organisational
What is the last step in the decision designs?503
process?475 What traditional organisational designs
What common errors are committed in the can managers use? 503
decision-making process? 475 What contemporary organisational designs
How do groups make decisions? 477 can managers use? 505
What are the advantages and disadvantages What are today’s organisational design
of group decision making? 477 challenges?508
When are groups most effective? 479 How do you keep employees connected? 508
How can you improve group How do you delegate effectively? 508
decision making? 479 How do global differences affect
What contemporary decision-making organisational structure? 510
issues do managers face? 480 How do you build a learning organisation? 511
How does national culture affect managers’ How can managers design efficient and
decision making? 480 effective flexible work arrangements? 512
Why are creativity and design thinking
important in decision making? 481
Student Learning Centre • Discussion questions 514
• Reviewing the learning objectives 484 • Management Skill Builder | Increasing
• Discussion questions 484 your power 515
• Management Skill Builder | Being a creative • Mini cases 516
decision maker 485 18.1 Structural renewal at the Australian
• Mini cases 486 Red Cross 516
17.1 Going greener 486 18.2 Shortening the corporate ladder 517
17.2 Dramatic decisions 486 • References 518
• References 487
9780655702412_FM.indd 13 3/3/20 5:31 PM

xiv Contents
Chapter 19 What contemporary OB issues do

Foundations of individual behaviour 520 managers face? 540
Learning objectives 520 How do generational differences affect the
Concept map 521 workplace?540
What are the focus and goals of How do ability, disability and mental health
organisational behaviour? 522 affect the workplace? 541
What is the focus of OB? 522 How do managers deal with bullying in the
What are the goals of organisational workplace?543
behaviour?522 Student Learning Centre
What role do attitudes play in job • Reviewing the learning objectives 545
performance?523 • Discussion questions 546
What are the three components of an • Management Skill Builder | Understanding
attitude?523 employee emotions 546
What attitudes might employees hold? 524 • Mini cases 547
Do individuals’ attitudes and behaviours 19.1 Troubling texts 547
need to be consistent? 525 19.2 A fighting chance at a fair go 548
• References 548
What is cognitive dissonance theory? 525
How can an understanding of attitudes
help managers be more effective? 526 Session 10 Managing people553
What do managers need to know about
Chapter 20
personality?527
Managing human resources 554
How can we best describe personality? 527
Can personality traits predict practical Concept map 555
work-related behaviours? 530
What is the human resource management
How do we match personalities and process, and what influences it? 556
jobs?531 What is the legal environment of HRM? 557
Do personality attributes differ across
How do managers identify and select
cultures?532
competent employees? 559
How can an understanding of personality What is employment planning? 559
help managers be more effective? 533
How do managers reduce their workforce? 561
What is perception, and what factors How do organisations recruit employees? 561
influence it? 533
How do managers select job applicants? 562
What influences perception? 534
How are employees provided with needed
How do managers judge employees? 534
skills and knowledge? 566
How can an understanding of perception help
How are new employees introduced to the
managers be more effective? 537
organisation?567
How do learning theories explain What is employee training? 567
behaviour?538
How do organisations provide a safe
What is operant conditioning? 538
working environment? 570
What is social learning theory? 539
What contemporary HRM issues do
How can managers shape behaviour? 539
managers face? 571
How can an understanding of learning help How can managers manage downsizing? 571
managers be more effective? 540
How can workforce diversity be managed? 572
What is sexual harassment? 573
9780655702412_FM.indd 14 3/3/20 5:31 PM

Contents xv
What is career development? 574 Session 11 Leading and managing

Student Learning Centre groups603
• Reviewing the learning objectives 576 Chapter 22
• Discussion questions 576 Leadership and trust 604
• Management Skill Builder | Providing Learning objectives 604
good feedback 577 Concept map 605
• Mini cases 578 Who are leaders, and what is leadership? 606
20.1 Managing diversity at PwC 578
What do early leadership theories tell us
20.2 Producing CHAMPS at KFC 578
about leadership? 606
• References 579
What traits do leaders have? 606
Chapter 21 What behaviours do leaders exhibit? 606
Motivating and rewarding What do the contingency theories of
employees582 leadership tell us? 610
Learning objectives 582 What was the first comprehensive contingency
Concept map 583 model?610
What is motivation? 584 How do followers’ willingness and ability
What do the early theories of influence leaders? 612
motivation say? 584 How participative should a leader be? 613
What is Maslow’s hierarchy of needs theory? 584 How do leaders help followers? 614
What is McClelland’s three-needs theory? 585 What is leadership like today? 616
What are McGregor’s Theory X and What do the four contemporary views of
Theory Y? 586 leadership tell us? 616
What is Herzberg’s two-factor theory? 586 What issues do today’s leaders face? 620
How do the contemporary theories explain Student Learning Centre
motivation?588 • Reviewing the learning objectives 623
What is goal-setting theory? 588 • Discussion questions 623
How does job design influence motivation? 590 • Management Skill Builder | Being a
What is equity theory? 592 good leader 624
How does expectancy theory explain • Mini cases 625
motivation?593 22.1 Gearing up and reaching out 625
How can we integrate contemporary 22.2 Top-down leadership 625
motivation theories? 594 • References 626
Student Learning Centre Chapter 23
• Reviewing the learning objectives 596 Understanding groups and managing
• Discussion questions 596 work teams 630
• Management Skill Builder | Being a Learning objectives 630
good motivator 596 Concept map 631
• Mini cases 598 What is a group, and what stages of
21.1 Battling bugs and vanquishing development do groups go through? 632
viruses598 What is a group? 632
21.2 One for the money . . . 598
What are the stages of group development? 632
• References 599
What are the main concepts of group
behaviour?634
What are roles? 634
9780655702412_FM.indd 15 3/3/20 5:31 PM

xvi Contents
How do norms and conformity affect group What should managers control? 664
behaviour?634 When does control take place? 664
What is status, and why is it important? 635 In what areas might managers need
Does group size affect group behaviour? 636 controls?666
Are cohesive groups more effective? 636 What contemporary control issues do
How are groups turned into effective managers confront? 668
teams?637 Using feedback to control employee
Are work groups and work teams the performance669
same thing? 638 Do controls need to be adjusted for cultural
What are the different types of work teams? 639 differences?669
What makes a team effective? 639 What challenges do managers face in
How can a manager shape team controlling the workplace? 670
behaviour?644 Controlling workplace conflict 671
What current issues do managers face in Student Learning Centre
managing teams? 645 • Reviewing the learning objectives 675
What’s involved with managing global • Discussion questions 675
teams?645 • Management Skill Builder | Discipleining
When are teams not the answer? 647 difficult employees 676
• Mini cases 677
24.1 In the can 677
24.2 Driving better decisions 678
• References 678
• Management Skill Builder | Understanding
how teams work 649 Chapter 25
• Mini cases 650 Managing change and innovation 680
23.1 Working together anywhere, Learning objectives 680
anytime650 Concept map 681
23.2 Intel inside . . . and far away 650 How can managers encourage innovation
• References 651 in an organisation? 682
How are creativity and innovation related? 682
How can organisations stimulate creativity? 682
Session 12 Control and change
What’s involved in turning creativity into
management655
innovation?683
Chapter 24 How can a manager foster innovation? 683
Foundations of control 656
How does design thinking influence
innovation?686
Concept map 657
What is change, and how do managers
What is control, and why is it important? 658
deal with it? 687
What is control? 658
Why do organisations need to change? 688
Why is control important? 658
Who initiates organisational change? 689
What takes place as managers control? 659
How does organisational change happen? 689
What is ‘measuring’? 659
Reasons why change fails 693
How do managers compare actual
What are some techniques for overcoming
performance to planned goals? 662
barriers to organisational change? 694
What managerial action can be taken? 664
9780655702412_FM.indd 16 3/3/20 5:31 PM

Contents xvii
What reaction do employees have to What human resource management (HRM)

organisational change? 695 issues do entrepreneurs face? 712
What is stress? 695 What issues do entrepreneurs face in
What are the symptoms of stress? 695 leading an entrepreneurial venture? 712
What causes stress? 696 How can entrepreneurs motivate
How can stress be reduced? 697 employees?712
Student Learning Centre How can entrepreneurs be leaders? 713
• Reviewing the learning objectives 699 What controlling issues do entrepreneurs
• Discussion questions 699 face?714
• Management Skill Builder | Stress How is growth managed? 714
management700 How are downturns managed? 714
• Mini cases 701 What’s involved with exiting the venture? 714
25.1 Turning Coles around 701 Why is it important to think about
25.2 Saving mates 702 managing personal challenges as an
• References 702 entrepreneur?715
Entrepreneurship Module • References 717
Managing entrepreneurial ventures 706 Appendix 1
Learning objectives 706 Case studies 719
Who engages in entrepreneurship? 707
Who’s starting entrepreneurial ventures? 707 Appendix 2
What do entrepreneurs do? 708 The marketing plan: An introduction 732
What planning do entrepreneurs Appendix 3
need to do? 708 Marketing analytics spotlights 740
What’s in a full business plan? 709
Appendix 4
What issues are involved in organising an
Careers in marketing 764
entrepreneurial venture? 710
What are the legal forms of organisation for Glossary770
entrepreneurial ventures? 710 Index790
What type of organisational structure should
entrepreneurial ventures use? 711
9780655702412_FM.indd 17 3/3/20 5:31 PM

9780655702412_FM.indd 18 3/3/20 5:31 PM

SESSION Introduction
1
to marketing
and sustainable
marketing
• Marketing: Creating and capturing customer
value
• Sustainable marketing: Social responsibility,
ethics and legal compliance
9780655702412_CH01.indd 1 3/3/20 10:41 AM

Chapter
1 Marketing: Creating and capturing

customer value
You are beginning a journey into the science and practice of marketing – a journey that is both exciting
and vital in the preparation for the career that awaits you. In this chapter, we start with the question,
‘What is marketing?’. Simply put, marketing is managing profitable customer relationships. The aim
of marketing is to create value for customers and to capture value from customers in return. We start
with a definition of marketing before proceeding to discuss the five steps in the marketing process –
from understanding customer needs, to designing customer-driven marketing strategies and integrated
marketing programs, to building customer relationships and capturing value for the firm, as shown in
Figure 1.1. Finally, we discuss the major trends and forces affecting marketing in this age of customer
relationships. Understanding these basic concepts, and forming your own ideas about what they really
mean to you, will give you a solid foundation for all that follows.
As you start this chapter, we suggest you pay close attention to the visual representation on the next
page, which is designed to give you a ‘helicopter’ view of the main concepts covered. You will find such a
visual representation, or concept map, at the start of each chapter.
Learning Objective 1 Define marketing, and outline the steps in the marketing process.
What is marketing? pp. 4–5
Learning Learning Objective 2 Explain the importance of understanding the marketplace and
Objectives customers, and identify the five core marketplace concepts.
Understanding the marketplace and customer needs pp. 5–9
Learning Objective 3 Identify the key elements of a customer-driven marketing strategy, and
discuss the marketing management orientations that guide marketing
strategy.
Designing a customer-driven marketing strategy pp. 9–13
Preparing an integrated marketing plan and program pp. 13–15
Learning Objective 4 Discuss customer relationship management, and identify strategies for
creating value for customers and capturing value from customers in
return.
Engaging customers and managing customer relationships pp. 15–18
Capturing value from customers pp. 18–21
Learning Objective 5 Describe the major trends and forces that are changing the marketing
landscape in this age of relationships.
The changing marketing landscape pp. 21–28
So, what is marketing? Pulling it all together pp. 28–30
9780655702412_CH01.indd 2 3/3/20 10:41 AM

Chapter 1 Marketing: Creating and capturing customer value 3
CREATE VALUE FOR CREATE VALUE

CUSTOMERS AND BUILD FROM CUSTOMERS
CUSTOMER RELATIONSHIPS IN RETURN
Understand Design a Construct an Build Capture value

the customer- integrated profitable from customers
LO 1 marketplace driven marketing relationships to create profits
Define marketing, and outline the
and customer marketing program and create and customer
steps in the marketing process.
needs and strategy that delivers customer equity
wants superior value delight
Societal
Production Product Selling Marketing
LO 2 marketing
concept concept concept concept
Explain the importance of concept
understanding the marketplace
and customers, and identify the
five core marketplace concepts. MARKETING MANAGEMENT ORIENTATIONS
(a lens through which managers understand the marketplace and customers)
Process
Phy
LO 3 opl
e evid sical
Pe enc
Identify the key elements of a e
customer-driven marketing strategy, Marketing
and discuss the marketing processes for cre Pl ogis
s and at
management orientations that tion exchanging offering ing, c ac tic
l
u
ce
t
ti and s th om em s
s
in s, partners and s at ha mu
Pri
guide marketing strategy. g

of erin , client n
ent
o c v
v s iety e v
eli omer
an set
ica for
at
st
alu rge
tin
dd
A
unication
g
e
Comm
la
cu
Promot
Products
Product
LO 4
Discuss customer relationship
ion
management, and identify Industry Market

strategies for creating value for (a collection of sellers) (a collection of buyers)
customers and capturing value from
customers in return.
ma inable
M oney
Unce my
ing
econ
In f o r m a ti o n
rket
r t ai
ta
o
Sus
n
LO 5
Describe the major trends and forces Ra M ar
al p id ke t i n g l a n d s c a p e
glo
that are changing the marketing

ge
is a la
it a
b
landscape in this age of

relationships. tio
n Con of Dig
trib Growth fit
perf ution to ro
or m a n
ce not-for-p g
in
market
9780655702412_CH01.indd 3 3/3/20 10:41 AM

4 Session 1 Introduction to marketing and sustainable marketing
What is marketing?
Marketing, more than any other business function, deals with customers. Although we will soon explore
more-detailed definitions of marketing, perhaps the simplest definition is this one: Marketing is engaging
customers and managing profitable customer relationships. The twofold goal of marketing is to attract new
customers by promising superior value, and to keep and grow current customers by delivering satisfaction.
Marketing comes to you in traditional forms, such as the products you see on supermarket shelves and
in the windows of shopping-centre boutiques, as well as in the advertising you see and hear in newspapers
and magazines, and on television and radio. However, in recent years, marketers have adopted a host of
new marketing approaches, using everything from imaginative websites and social networks to smartphone
apps. These new approaches do more than just blast out messages to the masses. They reach you directly
and personally. Today’s marketers want to become a part of your life and enrich your experiences with their
brands – to help you engage with their brands.
When we examine successful marketing organisations, we see that many factors contribute to making a
business or other organisational type successful. These factors include great strategy, dedicated employees,
good information systems and excellent implementation, among others. However, today’s successful
organisations have one thing in common – they have a strong market orientation, which means they
are focused on their customers, their competitors and their profits (or surpluses in the case of those not
operating for profit), and they have a commitment to sharing this marketing information with all parts of
the organisation.1 These organisations share an absolute dedication to understanding and satisfying the
needs of customers in well-defined target markets. They motivate everyone in the organisation to produce
superior value for their customers, leading to high levels of customer satisfaction.
At home, at school, where you work and where you play, you see marketing in almost everything you
do. Yet, there is much more to marketing than meets the consumer’s casual eye. Behind it all is a massive
network of people, technologies and activities competing for your attention and purchases.
This book will give you a complete introduction to the basic concepts and practices of today’s marketing.
In this chapter, we begin by defining marketing and the marketing process.
Marketing defined
What is marketing? Many people think of marketing as only selling and advertising. We are bombarded
every day with television commercials, catalogues, spiels from salespeople and online pitches. However,
selling and advertising are but the tip of the marketing iceberg.
Today, marketing must be understood not in the old sense of making a sale – ‘telling and selling’ – but
in the new sense of satisfying customer needs. If the marketer engages consumers effectively, understands
their needs, develops products that provide superior customer value, and prices, distributes and promotes
them well, these products will sell easily. In fact, according to management guru Peter Drucker, ‘The aim
of marketing is to make selling unnecessary.’2
Selling and advertising are only a part of a larger marketing mix – a set of marketing tools that work
together to engage customers, satisfy customer needs and build customer relationships.
Broadly defined, marketing is a social and managerial process by which individuals and organisations
obtain what they need and want through creating and exchanging value with others. In a narrower business
marketing context, marketing involves building profitable, value-laden exchange relationships with customers. Hence,
The process by which
marketing organisations we define marketing as the process by which marketing organisations engage customers, build strong
engage customers, customer relationships and create customer value in order to capture value from customers in return.3
build strong customer
relationships and create The marketing process
customer value in order
Figure 1.1 presents a simple five-step model of the marketing process. In the first four steps, marketing
to capture value from
customers in return. organisations uncover knowledge about consumers, create customer value and build strong customer
9780655702412_CH01.indd 4 3/3/20 10:41 AM

CREATE VALUE FOR CAPTURE VALUE

Understand Design a Construct an Build Capture value

the customer- integrated profitable from customers
marketplace driven marketing relationships to create profits
and customer marketing program and create and customer
needs, wants strategy that delivers customer equity
and demands superior value delight
Figure 1.1 A simple model of the marketing process
relationships. In the final step, companies reap the rewards of creating superior customer value. By creating
value for consumers, companies, in turn, capture value from consumers in the form of sales, profits and
long-term customer equity.
In this chapter, we begin to examine the steps in this model of the marketing process. We review
each step but focus more on the customer relationship management steps – understanding customers,
building customer relationships and capturing value from customers.
Understanding the marketplace and

customer needs
As a first step, marketers need to understand customer needs, wants and demands, and the marketplace
within which they operate. We now examine five core customer and marketplace concepts: (1) customer
needs, wants and demands; (2) market offerings – goods, services and experiences; (3) customer value and satisfaction;
(4) exchanges and relationships; and (5) markets.
Figure 1.2 shows how these core marketing concepts are linked, with each concept building on the
one before. Market offerings are the various product forms we examine in detail in Chapters 7 and 8.
We discuss value, satisfaction and quality throughout the book. We begin our discussion of customer needs,
wants and demands in this chapter, and examine them further in Chapters 4 and 5. The nature of exchange,
transactions, relationships and markets is examined in this chapter and throughout the book.
Customer needs, wants and demands

The most basic concept underlying marketing is that of human needs. Human needs are states of felt needs
deprivation. Humans have many complex needs. These include basic physical needs for food, clothing, States of felt
deprivation.
warmth and safety; social needs for belonging and affection; and individual needs for knowledge and
self-expression. While marketers may stimulate these needs, they do not create them for they are a basic
part of human makeup.
Wants are the form taken by human needs as they are shaped by culture and individual personality. wants
A hungry person in Australia, Singapore or Hong Kong might want a rice or noodle dish for a quick lunch, The form human needs
take, as shaped by
accompanied by green tea. A hungry person in the South Pacific might want mangoes, suckling pig and
culture and individual
beans. Wants are described in terms of objects that will satisfy needs. As a society evolves, the wants of its personality.
members expand. As people are exposed to more objects that arouse their interest and desire, producers try
to provide more want-satisfying goods and services.
9780655702412_CH01.indd 5 3/3/20 10:41 AM

Needs, wants
Market offerings
and demands
CORE MARKETING CONCEPTS
Value,
Markets
satisfaction
and quality
Exchange,
transactions and
relationships
Figure 1.2 Five core customer and marketplace concepts
People have almost unlimited wants but limited resources. Thus, they want to choose products that
provide the most value and satisfaction for their money. When backed by buying power, wants become
demands demands. A simple way to look at needs, wants and demands is that a person needs water to survive (thirst).
Human wants that are The person may want a carbonated beverage to satisfy his or her thirst. If the person has the resources, he or
backed by buying power.
she may demand a particular brand of carbonated beverage, such as Coca-Cola, Pepsi or another local brand.
Outstanding marketers, whether profit-oriented companies, citizen-focused government or not-for-
profit organisations, go to great lengths to learn about and understand their customers’ needs, wants and
demands. They conduct qualitative research, such as small focus groups and customer clinics, to ascertain if
there are unmet needs, wants and demands. They conduct quantitative research on a larger scale to ascertain
the magnitude of the unmet needs, wants and demands. They seek customer insights when they examine
their databases for patterns hidden in purchase data, customer complaints, inquiries, warranty claims
and service performance data. They train salespeople and other frontline personnel to be on the lookout
for unfulfilled customer needs. They observe customers using their own and competing products, and
interview them in depth about their likes and dislikes. They conduct consumer research, analyse mountains
of customer data and observe customers as they shop and interact, offline and online. Understanding
customer needs, wants and demands in detail provides important input for designing marketing strategies.
market offering People at all levels of the company – including top management – stay close to customers.4
Some combination
of goods, services, Market offerings: Goods, services and experiences
information or
Consumers’ needs and wants are fulfilled through market offerings – some combination of goods,
experiences offered to a
market to satisfy a need services, information or experiences offered to a market to satisfy a need or a want. Usually, the word product
or want. suggests a physical object such as a car, an iPad or a bar of soap. However, the concept of product is not
9780655702412_CH01.indd 6 3/3/20 10:41 AM

limited to physical objects; anything capable of satisfying a need

can be called a product. The importance of products that are
physical objects lies not so much in owning them as in the
benefits they provide. We buy food not to look at, but because it
satisfies our hunger. We buy a microwave not to admire its utility,
but because it defrosts or cooks our food.
Marketers often use the expressions goods and services/
experiences to distinguish between products that have physical
form and those that do not – that is, those that are intangible.
However, in Chapter 9 we show that there is a continuum
involved and not a clear-cut dichotomy. Consumers also obtain
benefits through experiences, people, places, organisations,
activities and ideas, and so we call these products, too.
Consumers decide which entertainers to watch at the movies
and on television, which places to visit on holiday, which
organisations to support through contributions and which
ideas to adopt. Thus, the term product covers physical goods,
services, experiences and a variety of other offerings that satisfy
consumers’ needs and wants. If at times the term seems not to
fit, we could substitute words such as satisfier, resource or offer.
In the broadest sense, market offerings also include other
entities, such as persons, places, organisations, information and ideas.
Many sellers make the mistake of paying more attention to
the attributes of the products they offer than to the benefits
produced by these products. They see themselves as selling a Product offerings: Social causes are products . . . Often
product, rather than providing a solution to a need. demarketing is involved.
A manufacturer of drill bits may think that the customer wants a Department of Health
6 mm drill bit, but what the customer really wants is a 6 mm hole.

These sellers suffer from marketing myopia.5 They are so
taken with their products that they focus only on existing wants and lose sight of underlying customer marketing myopia
needs. They forget that a product is only a tool to solve a consumer’s problem and they will have trouble if The mistake of paying
more attention to the
a new product comes along that serves the need better or less expensively. The customer with the same need
specific products a
will, all things being equal, want the new product. company offers than
Smart marketers look beyond the attributes of the products and services they sell. By orchestrating to the benefits and
several services and products, they create brand experiences for consumers. For example, you do not just experiences produced
by these products.
watch a V8 Supercar or MotoGP motorcycle race; you immerse yourself in the exhilarating, high-octane
experience that the many on-board mini-cameras now provide.
Customer value and satisfaction

Consumers usually face a broad array of products and services that might satisfy a given need. How do they
choose among these many market offerings? Customers form expectations about the value and satisfaction
that various market offerings will deliver, and buy accordingly. Satisfied customers buy again and tell others
about their good experiences. Dissatisfied customers often switch to competitors and disparage the original
product to others.
Marketers must be careful to set the right level of expectations. If they set expectations too low, they
may satisfy those who buy but may fail to attract enough buyers. If they set expectations too high, buyers
will be disappointed. Customer value and customer satisfaction are key building blocks for developing and
managing customer relationships. We revisit these core concepts later in the chapter.
9780655702412_CH01.indd 7 3/3/20 10:41 AM

Exchanges, transactions and relationships

exchange Marketing occurs when people decide to satisfy needs and wants through exchange relationships. Exchange
The act of obtaining is the act of obtaining a desired object from someone by offering something in return. In the broadest sense,
a desired object from
the marketer tries to bring about a response to some market offering. The response may be more than
someone by offering
something in return. simply buying or trading products and services. A political candidate, for instance, wants votes; a golf club
wants members; an orchestra wants an audience; an online community of practice, such as BimmerPost
(BMW owners), wants subscribers who help each other; and a social action group, such as Amnesty Australia,
wants idea acceptance.
transaction Whereas exchange is the core concept of marketing, a transaction is marketing’s unit of
A trade between two measurement. A transaction consists of a trade of values between two parties. In a transaction, we must be
parties that involves at
able to say that one party gives X to another party and gets Y in return. For example, if you pay $1650 for
least two things of value,
agreed-upon conditions, a television set to Harvey Norman in Sydney or Singapore, you are engaged in a classic monetary
and a time and place of transaction.
agreement. Marketing consists of actions taken to build and maintain desirable exchange relationships with target
audiences involving a product, service, idea or other object. Beyond simply attracting new customers and
creating transactions, the company wants to retain customers and grow their business. Marketers want to
build strong relationships by consistently delivering superior customer value. We expand on the important
concept of managing customer relationships later in this chapter.
Markets
market The concepts of exchange and relationships lead to the concept of a market. A market is the set of actual
The set of all actual and and potential buyers of a product. These buyers share a particular need or want that can be satisfied through
potential buyers of a
exchange relationships.
product or service.
Marketing means managing markets to bring about profitable customer relationships. However,
creating these relationships takes work. Sellers must search for buyers, identify their needs, design good
market offerings, set prices for those offerings, promote them, and store and deliver them. Activities such
as consumer research, product development, communication, distribution, pricing and service are core
marketing activities.
Although we normally think of marketing as being carried out by sellers, buyers also carry out
marketing. Consumers market when they search for products, interact with companies, obtain
information and make their purchases. In fact, today’s digital technologies, from websites and online
social networks to tablets and smartphones, have empowered consumers and made marketing a truly
interactive affair. Thus, in addition to customer relationship management, today’s marketers must also
deal effectively with customer-managed relationships. Marketers are no longer asking only, ‘How can we
reach our customers?’ but also, ‘How can our customers reach us?’ and even, ‘How can our customers
reach each other?’.
Figure 1.3 shows the main elements in a marketing system. Marketing involves serving a market of final
consumers in the face of competitors. The company and competitors research the market and interact with
consumers to understand their needs. They then create and send their market offerings and messages to
consumers, either directly or through marketing intermediaries. All of the parties in the system are affected
by major environmental forces (demographic, economic, physical, technological, political/legal and
social/cultural).
Each party in the system adds value for the next level. In the figure, the arrows represent relationships
that must be developed and managed. Thus, a company’s success at building profitable relationships
depends not only on its own actions but also on how well the entire system serves the needs of final
consumers. Coles Supermarkets cannot fulfil its promise of everyday low prices unless its suppliers provide
9780655702412_CH01.indd 8 3/3/20 10:41 AM

Company
(marketer)
Marketing
Suppliers Consumers
intermediaries
Competitors
Major environmental forces
Figure 1.3 Elements of a modern marketing system
merchandise at low costs. And Toyota cannot deliver a high-quality car-ownership experience unless its
dealers provide outstanding sales and service.
Designing a customer-driven
marketing strategy
Once marketing management fully understands consumers and the marketplace, it can design a customer-
driven marketing strategy. We define marketing management as the art and science of choosing marketing
target markets and building profitable relationships with them. The marketing manager’s aim is to attract, management
The art and science of
engage, keep and grow target customers by creating, delivering and communicating superior customer
choosing target markets
value. and building profitable
To design a winning marketing strategy, the marketing manager must answer two important questions: relationships with them.
(1) What customers will we serve? (Who is our target market?) and (2) How can we serve these customers best? (What
is our value proposition?). We introduce these aspects of marketing strategy here, and discuss them further in
later chapters.
Selecting customers to serve

Marketing management first decides who the organisation will serve. This is done by examining the various
segments into which the market naturally falls, based on the appropriate factors that can be used to analyse
a market. We discuss this aspect in depth in Chapter 6. Marketers know they cannot serve all customers in
every way with a single market offering. They know it is necessary to select customers they can serve well
and profitably. This may not involve continuously seeking increasing market demand; at times, it may be
necessary to seek fewer customers and reduce demand.
Most people think of marketing management as finding enough customers for the company’s current
output, but this is too limited a view. The organisation has a desired level of demand for its products.
At any point in time there may be no demand, adequate demand, irregular demand or too much demand,
and marketing management must find ways to deal with these different demand states. (See Table 1.1 for
a demand management ready-reckoner.) Marketing management is concerned not only with finding and
increasing demand but also with changing or even reducing it. For example, Uluru (Ayers Rock) might
have too many tourists wanting to climb it, and Daintree National Park in North Queensland can become
9780655702412_CH01.indd 9 3/3/20 10:41 AM

Table 1.1 Demand management ready-reckoner

1 Negative demand
A market is in a state of negative demand if a major part of the market dislikes the product and may even pay a price to avoid it.
Examples include vaccinations, dental work and gall-bladder operations.
2 No demand
Target consumers may be unaware of or uninterested in the product. The marketing task is to find ways to connect the benefits of
the product with the person’s natural needs and interests.
3 Latent demand
Many consumers may share a strong need that cannot be satisfied by any existing product. Examples include safer communities and
more fuel-efficient cars. The marketing task is to measure the size of the potential market and develop effective products and services
that would satisfy the demand.
4 Declining demand
Every organisation, sooner or later, faces declining demand for one or more of its products. The marketing task is to reverse the
declining demand through creative remarketing of the product.
5 Irregular demand
Many organisations face demand that varies on a seasonal, daily or even hourly basis, causing problems of idle or overworked
capacity. Examples include public transport, museums and hospital operating theatres. Supermarkets may be less frequented early
in the week and understocked after heavy weekend trading. The marketing task is to find ways to alter the same pattern of demand
through flexible pricing (e.g. early-bird specials), promotion and other incentives.
6 Full demand
Organisations face full demand when they are satisfied with their volume of business. The marketing task is to maintain the current
level of demand in the face of changing consumer preferences and increasing competition.
7 Overfull demand
Some organisations face a demand level that is higher than they can, or want to, handle. Examples include a national park that is
carrying more tourists than the facilities can handle. The marketing task, called demarketing, requires finding ways to reduce the
demand temporarily or permanently. Demarketing aims not to destroy demand but only to reduce its level, temporarily or permanently.
8 Unwholesome demand
Unwholesome products will attract organised efforts to discourage their consumption. The marketing task is to get people who like
something to give it up, using such tools as fear messages, price hikes and reduced availability.
Sources: For a fuller discussion, see Philip Kotler, ‘The major tasks of marketing management’, Journal of Marketing, October 1973, pp. 42–9; and
Phyllis Berman & Katherine Bruce, ‘Make-up gets a make-over’, BRW, 7 May 1999, pp. 56–7.
overcrowded in the tourist season. Power companies sometimes have trouble meeting demand during peak
usage periods.
demarketing In these and other cases of excess demand, the needed marketing task, called demarketing, is to reduce
Marketing in which the demand temporarily or permanently. The aim of demarketing is not to completely destroy demand, but only
task is to temporarily
to reduce or shift it to another time or even to another product. Thus, marketing management seeks to affect
or permanently reduce
demand. the level, timing and nature of demand in a way that helps the organisation achieve its objectives.
A marketing organisation’s demand comes from two groups: new customers and repeat customers.
Beyond designing strategies to attract new customers and create transactions with them, marketing
organisations go all out to retain current customers and build lasting relationships. Simply put, marketing
management is customer management and demand management.
Choosing a value proposition

The marketing organisation must also decide how it will serve targeted customers – how it will differentiate
and position itself in the marketplace. A marketing organisation’s value proposition is the set of benefits or
values it promises to deliver to consumers to satisfy their needs.
9780655702412_CH01.indd 10 3/3/20 10:41 AM

Such value propositions differentiate one brand from another. They answer the customer’s question,
‘Why should I buy your brand rather than a competitor’s?’. Marketing organisations must design strong
value propositions that give them the greatest advantage in their target markets. For example, Telstra’s value
positioning in 2016 was ‘It’s how we connect’. The company’s value propositioning is more easily identified
in its WiFi advertising, which used tennis and humour to make it stand out and finished with the statement
‘Telstra Air is how’ – how to stay in touch using thousands of WiFi hotspots.
Marketing management orientations

We have seen that marketing managers carry out tasks to achieve desired behaviour in defined target
markets and to build profitable relationships with target customers. Questions arise in this regard.
For example, what philosophy should guide these marketing efforts? What weight should be given to
the interests of the organisation, the customers and the society? Very often, these interests conflict with
each other.
There are five alternative concepts under which organisations may conduct their marketing
activities: (1) production, (2) product, (3) selling, (4) marketing and (5) societal marketing. We discuss each of
these below.
The production concept

The production concept holds that consumers will favour products that are available and highly production
affordable. Therefore, management should focus on improving production and distribution efficiency. This concept
The idea that consumers
concept is one of the oldest philosophies that guide sellers.
will favour products
The production concept is still a useful philosophy in some situations. For example, both personal- that are available and
computer maker Lenovo and home-appliance maker Haier dominate the highly competitive, price-sensitive highly affordable, and
Chinese market through low labour costs, high production efficiency and mass distribution. However, that the organisation
should therefore focus
although useful in some situations, the production concept can lead to marketing myopia. Companies
on improving production
adopting this orientation run a major risk of focusing too narrowly on their own operations and losing sight and distribution
of the real objective – satisfying customer needs and building customer relationships. efficiency.
The product concept

Another major concept guiding sellers, the product concept, holds that consumers will favour product concept
products that offer the most quality, performance and innovative features. Thus, an organisation should The idea that
consumers will favour
devote energy to making continuous product improvements. Some manufacturers believe that if they
products that offer
can build a better mousetrap the world will beat a path to their door.6 But they are often rudely the most quality,
shocked. Buyers may well be looking for a better solution to a mouse problem, but not necessarily for performance and
a better mousetrap. The solution might be an electronic deterrent, an exterminating service or even a features, and that the
organisation should
house cat, or something that works better than a mousetrap. Furthermore, a better mousetrap will not therefore devote its
sell unless the manufacturer designs, packages and prices it attractively, places it in convenient energy to making
distribution channels, brings it to the attention of people who need it and convinces buyers that it is a continuous product
improvements.
better product.
The product concept can also lead to marketing myopia. For instance, railways management once
thought that users wanted trains, rather than transportation, and overlooked the growing challenge from
airlines, buses, trucks and cars. FTA-TV (free-to-air television) station management who target narrow
segments overlook the fact that, in general, younger people watch less television in favour of interaction selling concept
with each other via mobile devices, instant messaging and email, interactive games and social networking The idea that consumers
on the web, and even watch sporting events on YouTube after the fact. will not buy enough
of the firm’s products
unless the firm
The selling concept undertakes a large-scale
Many companies follow the selling concept, which holds that consumers will not buy enough of the selling and promotion
firm’s products unless the firm undertakes a large-scale selling and promotion effort. The selling concept is effort.
9780655702412_CH01.indd 11 3/3/20 10:41 AM

typically practised with unsought goods – those that buyers do

not normally think of buying, such as insurance. These industries
must be effective at tracking down prospects and selling them on
product benefits.
Such aggressive selling, however, carries high risks. It focuses
on creating sales transactions rather than on building long-
term, profitable customer relationships. The aim often is to sell
what the company makes, rather than making what the market
wants. It assumes that customers who are coaxed into buying the
product will like it. Or, if they do not like it, they will possibly
forget their disappointment and buy it again later. These are
usually poor assumptions.
The marketing concept

The marketing concept: KFC colourfully proclaims how it delivers The marketing concept holds that achieving organisational
satisfaction – ‘It’s finger lickin’ good’. goals depends on determining the needs and wants of target
Bloomberg via Getty Images
markets and delivering the desired satisfaction more effectively
and efficiently than competitors do. The marketing concept
marketing has often been stated in colourful ways: ‘Finger lickin’ good’ (KFC), ‘Beanzmeanz Heinz’ (Heinz), ‘You
concept are 24 hours of sun!’ (Fronius solar energy) and ‘Where do you want to go today?’ (Microsoft).
The marketing
The selling concept and the marketing concept are sometimes confused. Figure 1.4 compares the
management philosophy
which holds that two concepts. The selling concept takes an inside-out perspective. It starts with the factory, focuses on
achieving organisational the company’s existing products, and calls for heavy selling and promotion to obtain profitable sales.
goals depends on It focuses primarily on customer conquest – getting short-term sales with little concern about who
knowing the needs and
buys or why.
wants of target markets
and delivering the desired In contrast, the marketing concept takes an outside-in perspective. As Herb Kelleher, Southwest Airlines’
satisfactions better than colourful co-founder, puts it, ‘We don’t have a marketing department; we have a customer department.’
competitors do. The marketing concept starts with a well-defined market, focuses on customer needs and integrates all the
Starting point Focus Means Ends
THE SELLING Existing Selling and Profits through

Factory
CONCEPT products promoting sales volume
THE MARKETING Customer Integrated Profits through

Market customer
CONCEPT needs marketing
satisfaction
Figure 1.4 The selling and marketing concepts contrasted
9780655702412_CH01.indd 12 3/3/20 10:41 AM

marketing activities that affect customers. In turn, it yields profits by creating lasting relationships with the
right customers based on customer value and satisfaction.
Implementing the marketing concept often means more than simply responding to customers’
stated desires and obvious needs. Customer-driven companies research current customers deeply to learn
about their desires, gather new product and service ideas, and test proposed product improvements.
Such customer-driven marketing usually works well when a clear need exists and when customers know
what they want.
In many cases, however, customers do not know what they want or even what is possible. As Henry Ford
once remarked, ‘If I’d asked people what they wanted, they would have said faster horses.’7 For example,
even 20 years ago, how many consumers would have thought to ask for now-commonplace products such
as tablet computers, smartphones, digital cameras, 24-hour online buying and satellite navigation systems
(GPS) in their cars? Such situations call for customer-driven marketing – understanding customer needs even
better than customers themselves do and creating products and services that meet existing and latent needs,
now and in the future. As an executive at 3M puts it, ‘Our goal is to lead customers where they want to go
before they know where they want to go.’
The societal marketing concept

The societal marketing concept questions whether the pure marketing concept overlooks possible societal
conflicts between consumer short-run wants and consumer long-run welfare. Is a firm that satisfies the marketing
immediate needs and wants of target markets always doing what is best for consumers in the long run? concept
The idea that a
The societal marketing concept holds that marketing strategy should deliver value to customers in a company’s marketing
way that maintains or improves both the consumer’s and society’s wellbeing. It calls for sustainable decisions should consider
marketing – socially and environmentally responsible marketing that meets the present needs of consumers’ wants, the
company’s requirements,
consumers and businesses while also preserving or enhancing the ability of future generations to meet
consumers’ long-run
their needs. interests and society’s
Even more broadly, many leading business and marketing thinkers are now preaching the concept of long-run interests.
shared value, which recognises that societal needs, not just economic needs, define markets.8
The concept of shared value focuses on creating economic value in a way that also creates value for
society. A growing number of companies known for their hard-nosed approaches to business – such as
GE, Dow, Google, IBM, Intel, Johnson & Johnson, Nestlé, Unilever and Walmart – are rethinking the
interactions between society and corporate performance. They are concerned not just with short-term
economic gains but with the wellbeing of their customers, the depletion of natural resources vital to their
businesses, the viability of key suppliers and the economic wellbeing of the communities in which they
operate.
One prominent marketer calls this Marketing 3.0. ‘Marketing 3.0 organisations are values-driven,’ he
says. ‘I’m not talking about being value-driven. I’m talking about “values” plural, where values amount to
caring about the state of the world.’ Another marketer calls it purpose-driven marketing. ‘The future of profit
is purpose,’ he says.9
Preparing an integrated marketing

plan and program
The company’s marketing strategy outlines which customers the company will serve and how the company
will create value for these customers. Next, the marketer develops an integrated marketing program that
will actually deliver the intended value to target customers. The marketing program builds customer
relationships by transforming the marketing strategy into action. It consists of the firm’s marketing mix –
that is, the set of marketing tools the firm uses to implement its marketing strategy.
9780655702412_CH01.indd 13 3/3/20 10:41 AM

While the ultimate aim may be to modify people’s behaviour – to drive more carefully, drink less alcohol,
use less energy or water, think favourably of a political party, give more to a charitable organisation or buy
a particular brand – marketing managers have a defined set of tools they can use. The set of tools most
marketers employ, in varying combinations, has developed most recently from the knowledge gained in
business-to-business marketing (formerly industrial marketing) and in marketing services. We refer to these
tools (see Figure 1.5) as the extended marketing mix. Each of the main marketing mix tools (product, price,
placement logistics and promotion) is discussed in more detail in the chapters forming Sessions 2 and 3. It
should be noted at the outset that the three remaining marketing mix tools (people, process and physical
evidence) are discussed throughout the book for reasons which should become clear as the story unfolds.
To deliver on its value proposition, the marketing organisation must first create a need-satisfying
market offering (product). It must decide how much it will charge for the offer (price) and where it will
make the offer available to target customers (placement). It must communicate with target customers
about the offer and persuade them of its merits (promotion). It must decide how relationships will be
developed and maintained and who will do this (people). It must decide on how customer satisfaction
will be delivered and recorded (technologies) – whether a service/experiential product or after-sales
service (process). And, lastly, it must manage customer expectations and relative service quality,
thereby ensuring that customers have realistic expectations which the marketing organisation can
meet (physical evidence). The marketing organisation must blend all these marketing mix tools into
a comprehensive, integrated marketing program that communicates and delivers the intended value
to chosen customers. We explore marketing programs and the marketing mix in much more detail in
later chapters.
PRODUCT: GOODS, SERVICES PRICE PEOPLE

and EXPERIENCES List price ‘People interacting with
Variety Packaging Discounts people’ is how many service
Quality Sizes Allowances experiences might be
Design Add-ons Settlement and described. Relationships
Features Warranties credit terms are important in marketing.
Brand name Returns
TARGET CUSTOMERS
INTENDED POSITIONING
PLACEMENT LOGISTICS PROMOTION PROCESS PHYSICAL EVIDENCE

Demand chain Advertising In the case of Services are mostly
management Personal selling ‘high-contact’ services, intangible. The
Logistics management Direct marketing customers are often meaning of other tools
Channel management Online marketing involved in the process and techniques used
of creating and enjoying in measures of
experiences. Increasingly, satisfaction is
so is technology. important.
Figure 1.5 The extended marketing mix
9780655702412_CH01.indd 14 3/3/20 10:41 AM

LINKING THE CONCEPTS

Stop here for a moment and stretch your mind. What have you ● What does marketing mean to you? How does it affect your
learned so far about marketing? Set aside the more formal daily life?
definitions we have examined and try to develop your own ● What brand of athletic shoes did you last purchase? Describe
understanding of marketing. your relationship with Nike, adidas, New Balance, Asics,
● In your own words, what is marketing? Write down your Reebok, Puma, Converse or whatever brand of shoes you
definition. Does your definition include such key concepts as purchased.
customer value, engagement and relationships?
Engaging customers and managing

customer relationships
The first three steps in the marketing process – understanding the marketplace and customer needs,
designing a customer-driven marketing strategy and constructing marketing programs – all lead to the
fourth and most important step: building profitable customer relationships. We first discuss the basics of
customer relationship management. Then we examine how companies go about engaging customers on a
deeper level in this age of digital and social marketing.
Customer relationship management

Customer relationship management is perhaps the most important concept of modern marketing. In its
broadest sense, customer relationship management is the overall process of building and maintaining profitable
customer relationships by delivering superior customer value and satisfaction. It deals with all aspects of
acquiring, keeping and growing customers. Hence, more specifically, customer relationship customer
management (CRM) is the process of managing detailed information about individual customers and relationship
carefully managing customer touch points in order to maximise customer loyalty. management
(CRM)
Managing detailed
Relationship building blocks: Customer value and satisfaction information about
The key to building lasting customer relationships is to create superior customer value and satisfaction. individual customers
Satisfied customers are more likely to be loyal customers and to give the marketing organisation a larger and carefully managing
share of their business. customer touch points
in order to maximise
customer loyalty.
Customer value
Attracting and retaining customers can be a difficult task. Customers often face a bewildering array of
products and services from which to choose. A customer buys from the firm that offers the highest customer- customer-
perceived value – the customer’s evaluation of the difference between all the benefits and all the costs of perceived value
The customer’s
a market offering relative to those of competing offers. Importantly, customers often do not judge product
evaluation of the
values and costs accurately or objectively. They act on perceived value. For example, is a Tesla Model 3 really difference between all
the most economical choice when buying a motor vehicle? In reality, it might take years to save enough in the benefits and all the
reduced fuel costs to offset the car’s higher purchase price. However, Tesla Model 3 buyers perceive that they costs of a marketing
offer relative to those of
are getting real value. It is all a matter of personal value perceptions. For many consumers, the answer to our competing offers.
question is ‘no’, but – for the target segment of style-conscious, affluent buyers – the answer is ‘yes’.
customer
Customer satisfaction satisfaction
Customer satisfaction depends on the product’s perceived performance relative to a buyer’s The extent to which
a product’s perceived
expectations. If the product’s performance falls short of expectations, the customer is dissatisfied.
performance matches
If performance matches expectations, the customer is satisfied. If performance exceeds expectations, the or exceeds a buyer’s
customer is highly satisfied or delighted. Outstanding marketing companies go out of their way to keep expectations.
9780655702412_CH01.indd 15 3/3/20 10:41 AM

important customers satisfied. Most studies show that higher levels of customer satisfaction lead to greater
customer loyalty, which in turn results in better company performance. Smart companies aim to delight
customers by promising only what they can deliver, then delivering more than they promise. Delighted
customers not only make repeat purchases; they also become willing marketing partners and ‘customer
evangelists’ who spread the word about their good experiences to others.10
For companies interested in delighting customers, exceptional value and service become part of the
overall company culture. For example, year after year, Ritz-Carlton ranks at or near the top of the hospitality
industry in terms of customer satisfaction. The company’s passion for satisfying customers is summed up
in its credo, which promises that its luxury hotels will deliver a truly memorable experience – one that
‘enlivens the senses, instils well-being, and fulfils even the unexpressed wishes and needs of our guests’.11
Although a customer-centred firm seeks to deliver high customer satisfaction relative to competitors,
it does not attempt to maximise customer satisfaction. A company can always increase customer satisfaction
by lowering its price or increasing its services. But this may result in lower profits. Thus, the purpose of
marketing is to generate customer value profitably. This requires a very delicate balance: the marketer must
continue to generate more customer value and satisfaction but not ‘give away the house’.
Customer relationship levels and tools

Marketing organisations can build customer relationships at many levels, depending on the nature of the target
market. At one extreme, a company with many low-margin customers may seek to develop basic relationships with
them. For example, Lever-Rexona does not phone or call on all of its Sunsilk consumers to get to know them
personally. Instead, the company creates relationships through brand-building advertising, websites and social
media presence. At the other extreme, in markets with few customers and high margins, sellers want to create
full partnerships with key customers. For example, Lever-Rexona teams work closely with Coles, Woolworths
and other large retailers. In between these two extremes, other levels of customer relationships are appropriate.
Beyond offering consistently high value and satisfaction, marketers can use specific marketing tools to
develop stronger bonds with consumers. For example, many companies offer frequency marketing programs
that reward customers who buy frequently or in large amounts. Airlines offer frequent-flyer programs,
hotels give room upgrades to their frequent guests, and supermarkets – for example, Woolworths – give
patronage discounts to their customers via such tools as their Woolworths Rewards card which enables
customers to get money off their weekly shopping bills.
Other companies sponsor club marketing programs that offer members special benefits and create
member communities. For example, Harley-Davidson sponsors the Harley Owners Group (HOG), which
gives Harley riders a way to share their common passion of ‘making the Harley-Davidson dream a way
of life’. HOG membership benefits include a quarterly HOG magazine, the H.O.G. Touring Handbook, a
roadside assistance program, a specially designed insurance program, theft reward service, a travel centre
and a ‘Fly & Ride’ program enabling members to rent Harleys while on holiday. The worldwide club now
numbers more than 1500 local chapters and more than a million members.12
Engaging customers
Profound changes continue to occur in the ways in which companies are relating to their customers.
Yesterday’s marketing organisations focused on mass marketing to all customers at arm’s length. Today’s
companies build deeper, more direct and lasting relationships with more carefully selected customers.
We now examine some of the important trends in the way companies are relating to their customers.
Customer engagement and today’s digital and social media

The digital age has spawned a dazzling set of new customer relationship-building tools, from websites,
online ads and videos, mobile ads and apps, and blogs to online communities and the major social media,
such as Twitter, Facebook, YouTube, Instagram and Pinterest.
9780655702412_CH01.indd 16 3/3/20 10:41 AM

Yesterday’s companies focused mostly on mass marketing to broad segments of customers at arm’s
length. By contrast, today’s companies are using online, mobile and social media to refine their targeting
and to engage customers more deeply and interactively. The old marketing involved marketing brands to
consumers. The new marketing is customer-engagement marketing – fostering direct and continuous customer
involvement in shaping brand conversations, brand experiences and brand community. Customer-
engagement marketing goes beyond just selling a brand to consumers. Its goal is to make the brand a
meaningful part of consumers’ conversations and lives.
The burgeoning internet and social media have given a huge boost to customer-engagement
marketing. Today’s consumers are better informed, more connected and more empowered than ever before.
Newly empowered consumers have more information about brands and they have a wealth of digital
platforms for airing and sharing their brand views with others. Thus, marketers are now embracing not only
customer relationship management but also customer-managed relationships, in which customers connect
with companies and with each other to help forge their own brand experiences.
Greater consumer empowerment means that companies can no longer rely on marketing by intrusion.
Instead, they must practise marketing by attraction – creating market offerings and messages that engage
consumers rather than interrupt them. Hence, most marketers now combine their mass-media marketing
efforts with a rich mix of online, mobile and social media marketing that promotes brand–consumer
engagement and conversation.
Many companies post their latest ads and videos on social media sites, hoping they will go viral. They
maintain an extensive presence on Twitter, YouTube, Facebook, Google+, Pinterest, Instagram, Vine and other
social media to create brand buzz. They launch their own blogs, mobile apps, online microsites and consumer-
generated review systems, all with the aim of engaging customers on a more personal, interactive level.
Take Twitter, for example. Organisations ranging from computer giant, Dell, and news media to
politicians and government departments have created Twitter pages and promotions. They use ‘tweets’
to start conversations with and between Twitter’s more than 317 million monthly active users, to address
customer service issues, to research customer reactions and to drive traffic to relevant articles, web and
mobile marketing sites, contests, videos and other brand activities.13
Similarly, almost every marketing organisation has something going on Facebook these days. Starbucks
has more than 38 million Facebook ‘fans’; Coca-Cola has more than 94 million.14 And every major marketer
has a YouTube channel where the brand and its fans post current ads and other entertaining or informative
videos. Instagram, LinkedIn, Pinterest, Snapchat, Vine – all have exploded onto the marketing scene, giving
brands more ways to engage and interact with customers. Skilled use of social media can get consumers
involved with and talking about a brand.
The key to engagement marketing is to find ways to enter consumers’ conversations with engaging
and relevant brand messages. Simply posting a humorous video, creating a social media page or hosting a
blog is not enough. Successful engagement marketing means making relevant and genuine contributions
to consumers’ lives and interactions.
consumer-
Consumer-generated marketing generated
Whether invited by marketers or not, consumer-generated marketing has become a significant marketing
marketing force. Through a profusion of consumer-generated videos, blogs and websites, consumers are Brand exchanges
playing an increasing role in shaping their own brand experiences and those of other consumers. Beyond created by consumers
themselves – both
creating brand conversations, on their own or by invitation, customers are having an increasing say in invited and uninvited
everything from product design, usage and packaging, to pricing and distribution and reviewing product – by which consumers
quality and satisfaction.15 Some companies ask consumers for new product and service ideas, while others are playing an increasing
role in shaping their
invite customers to play an active role in shaping ads.
own brand experiences
Despite the many successes, however, harnessing consumer-generated content can be a time-consuming and those of other
and costly process, and companies may find it difficult to glean even a little gold from all the garbage. consumers.
9780655702412_CH01.indd 17 3/3/20 10:41 AM

Moreover, because consumers have so much control over social media content, inviting their input can
sometimes backfire. For example, McDonald’s famously launched a Twitter campaign using the hashtag
#McDStories, hoping it would inspire heart-warming stories about Happy Meals. Instead, the effort was
hijacked by Twitter users, who turned the hashtag into a ‘bashtag’ by posting less-than-appetising messages
about their bad experiences with the fast-food chain. McDonald’s pulled the campaign within only two
hours, but the hashtag was still churning weeks, even months, later.16
As consumers become more connected and empowered, and as the boom in digital and social media
technologies continues, consumer brand engagement – whether invited by marketers or not – will be
an increasingly important marketing force. Through a profusion of consumer-generated videos, shared
reviews, blogs, mobile apps and websites, consumers are playing a growing role in shaping their own and other
consumers’ brand experiences. Engaged consumers are now having a say in everything from product design,
usage and packaging to brand messaging, pricing and distribution. Brands must embrace this new consumer
empowerment and master the new digital and social media relationship tools – or risk being left behind.
Partner relationship management

When it comes to creating customer value and building strong customer relationships, today’s marketers know
partner they cannot go it alone. They must work closely with a variety of marketing partners. In addition to being good
relationship at customer relationship management, marketers must also be good at partner relationship management
management – working closely with others inside and outside the company to jointly bring more value to customers.
Working closely with
partners in other
company departments
Partners inside the organisation
and outside the Traditionally, marketers have been charged with understanding customers and representing customer
company to jointly needs to different company departments. The old thinking was that marketing is done only by marketing,
bring greater value to sales and customer-support people. However, in today’s more connected world, every functional area can
customers.
interact with customers, especially electronically. The new thinking is that – no matter what your job is in a
company – you must understand marketing and be customer-focused. Rather than letting each department
go its own way, firms must link all departments in the cause of creating customer value.
Partners outside the organisation

Marketers must also partner with suppliers, channel partners and others outside the company. Marketing
channels consist of distributors, retailers and others who connect the company to its buyers. The supply
chain describes a longer channel, stretching from raw materials to components to final products that
are carried to final buyers. Through supply chain management, companies today are strengthening their
connections with partners all along the supply chain. They know that their fortunes rest on more than just
how well they perform. Success at delivering customer value rests on how well their entire supply chain
performs against competitors’ supply chains.
Capturing value from customers

The first four steps in the marketing process outlined in Figure 1.1 involve building customer relationships
by creating and delivering superior customer value. The final step involves capturing value in return, in the
form of current and future sales, market share and profits. By building superior customer value, the firm
creates highly satisfied customers who remain loyal and buy more. This, in turn, means greater long-run
returns for the marketing organisation. Here, we discuss the outcomes of creating customer value: customer
loyalty and retention, share of market, share of customer and customer equity.
Creating customer loyalty and retention

Good customer relationship management creates customer satisfaction. In turn, satisfied customers remain
loyal and talk favourably to others about the company and its products. Studies show big differences in the
9780655702412_CH01.indd 18 3/3/20 10:41 AM

loyalty of customers who are less satisfied, somewhat satisfied

and completely satisfied. Even a slight drop from complete
satisfaction can create an enormous drop in loyalty. Thus, the
aim of customer relationship management is to create not
only customer satisfaction but also customer delight.
Keeping customers loyal makes good economic sense.
Loyal customers spend more and stay around longer. Research
also shows that it is five times cheaper to keep an old customer
than to acquire a new one. Conversely, customer defections
can be costly. Losing a customer means losing more than a
single sale. It means losing the entire stream of purchases that
the customer would make over a lifetime of patronage. Here
is a classic illustration of customer lifetime value:
Stew Leonard, who operates a highly profitable four-store

supermarket in Connecticut and New York, once said that
Customer lifetime value: To keep customers coming back, the US
he sees $50,000 flying out of his store every time he sees supermarket chain Stew Leonard’s has created the ‘Disneyland of
a sulking customer. Why? Because his average customer dairy stores’. Rule #1 – The customer is always right. Rule #2 – If the
spends about $100 a week, shops 50 weeks a year, and customer is ever wrong, reread Rule #1.
Courtesy of Stew Leonard’s
remains in the area for about 10 years. If this customer
has an unhappy experience and switches to another
supermarket, Stew Leonard’s has lost $50,000 in lifetime revenue. The loss can be much greater if customer lifetime
the disappointed customer shares the bad experience with other customers and causes them to defect. value
The amount by which
revenues from a
To keep customers coming back, Stew Leonard’s has created what has been called the ‘Disneyland customer over time
of Dairy Stores’, complete with costumed characters, scheduled entertainment, a petting zoo, and exceed the company’s
animatronics throughout the store. From its humble beginnings as a small dairy store in 1969, Stew costs of attracting,
Leonard’s has grown at an amazing pace. It’s built 30 additions onto the original store, which now selling and servicing that
customer. The value
serves more than 300,000 customers each week. This legion of loyal shoppers is largely a result of the of the entire stream
store’s passionate approach to customer service. ‘Rule #1: The customer is always right. Rule #2: If the of purchases that the
customer is ever wrong, reread rule #1.’17 customer would make
over a lifetime of
Stew Leonard is not alone in assessing customer lifetime value. Lexus, for example, estimates that a patronage.
single satisfied and loyal customer is worth more than $600 000 in lifetime sales, and the estimated lifetime
value of a Starbucks customer is more than $14 000.18 In fact, a company can lose money on a specific
transaction but still benefit greatly from a long-term relationship. This means that companies must aim
high in building customer relationships. Customer delight creates an emotional relationship with a brand,
not just a rational preference. And that relationship keeps customers coming back.
Growing share of customer

Beyond simply retaining good customers to capture customer lifetime value, good customer relationship
management can help marketers increase their share of customer – the share they get of the customer’s share of customer
purchasing in their product categories. Thus, banks want to increase ‘share of wallet’. Supermarkets and The portion of the
customer’s purchasing
restaurants want to get more ‘share of stomach’. Car companies want to increase ‘share of garage’, and
that a company gets in
airlines want greater ‘share of travel’. its product categories.
To increase share of customer, firms can offer greater variety to current customers. Or they can train
employees to cross-sell and up-sell in order to market more products and services to existing customers.
For example, Amazon.com is highly skilled at leveraging relationships with its 244 million customers to
increase its share of each customer’s purchases. Originally an online bookseller, Amazon.com now also
9780655702412_CH01.indd 19 3/3/20 10:41 AM

offers customers music, videos, gifts, toys, consumer electronics, office products, home improvement
items, lawn and garden products, apparel and accessories, jewellery and an online auction. Based on its
system, which relies on each customer’s purchase history, the company recommends related products that
might be of interest. In this way, Amazon.com captures a greater share of each customer’s spending budget.
In the United States, Amazon has what it terms its Prime two-day shipping program, which has also helped
boost its share of customers’ wallets. For an annual fee of $99, Prime members receive delivery of all their
purchases within two days, whether it is a single paperback book or a 60-inch high-definition television.
According to one analyst, the ingenious Amazon Prime program ‘converts casual shoppers, who gorge on
the gratification of having purchases reliably appear two days after the order, into Amazon addicts’. As a
result, Amazon’s 40 million Prime customers now account for more than half of its US sales. On average,
a Prime customer spends 2.4 times more than a non-Prime customer does.19
Building customer equity

We can now see the importance of not just acquiring customers, but also keeping and growing them.
One marketing consultant puts it this way: ‘The only value your company will ever create is the value that
comes from customers – the ones you have now and the ones you will have in the future. Without customers,
you do not have a business.’20 Customer relationship management takes a long-term view. Companies want
not only to create profitable customers, but to ‘own’ them for life, earn a greater share of their purchases
and capture their customer lifetime value.
What is customer equity?

customer equity The ultimate aim of customer relationship management is to produce high customer equity.21 Customer
The total combined equity is the total combined customer lifetime values of all of the company’s current and potential customers.
customer lifetime values
As such, it is a measure of the future value of the company’s customer base. Clearly, the more loyal the company’s
of all of the company’s
customers. profitable customers, the higher the company’s customer equity. Customer equity may be a better measure of
a company’s performance than current sales or market share. Customer equity is one reason why upmarket car
brands, such as BMW, have focused on younger customers (average age about 40), and why communities of
practice, such as Bimmerpost.com and BabyBMW.net, are so important to the company’s long-term sales and
profitability. There, those younger users communicate with one another across the full range of BMWs and
also with companies across the world that supply original equipment accessories and more.
Building the right relationship with the right

customers
Companies should manage customer equity carefully. They should view customers as assets that need to
be managed and maximised. But not all customers, not even all loyal customers, are good investments.
Surprisingly, some loyal customers can be unprofitable, and some disloyal customers can be profitable.
Which customers should the company acquire and retain?
The company can classify customers according to their potential profitability and manage its relationships
with them accordingly. Customers can be classified into one of four relationship groups, according to their
profitability and projected loyalty.22 Each group requires a different relationship management strategy.
Strangers show low potential profitability and little projected loyalty. There is little fit between their needs
and the company’s offerings. The relationship management strategy for these customers is simple: do not
invest anything in them; make money on every transaction.
Butterflies are potentially profitable but not loyal. There is a good fit between their needs and the
company’s offerings. However, like real butterflies, we can enjoy them for only a short while and then they
are gone. An example is stock market investors who trade shares often and in large amounts but who enjoy
hunting out the best deals without building a regular relationship with any single brokerage company.
Efforts to convert butterflies into loyal customers are rarely successful. Instead, the company should enjoy
9780655702412_CH01.indd 20 3/3/20 10:41 AM

the butterflies for the moment. It should create satisfying and profitable transactions with them, capturing
as much of their business as possible in the short time during which they buy from the company. Then the
company should move on and cease investing in them until the next time around.
True friends are both profitable and loyal. There is a strong fit between their needs and the company’s
offerings. The company wants to make continuous relationship investments to delight these customers and
nurture, retain and grow them. It wants to turn true friends into true believers, who come back regularly and
tell others about their good experiences with the company.
Barnacles are highly loyal but not very profitable. There is a limited fit between their needs and the
company’s offerings. An example is smaller bank customers who bank regularly but do not generate enough
returns to cover the costs of maintaining their accounts. Like barnacles on the hull of a ship, they create
drag. Barnacles are perhaps the most problematic customers. The company might be able to improve their
profitability by selling them more, raising their fees or reducing service to them. However, if they cannot
be made profitable, they should be ‘fired’.
The point here is an important one: different types of customers require different engagement and
relationship management strategies. The goal is to build the right relationships with the right customers.

We have covered a lot of ground. Again, pause for a moment and customer relationship management strategy does it use? Do
develop your own thoughts about marketing. you think this relationship management strategy differs from
● In your own words, what is marketing and what does it seek other companies you buy from?
to accomplish? ● Are you a ‘true friend’ of any company? What strategy does
● Select a company that you last purchased from. How well does this company use to manage its relationship with you?
that company manage its relationships with customers? What
The changing marketing landscape

Marketing operates within a dynamic global environment. Every decade calls on marketing managers
to think in a fresh way about their marketing objectives and practices. Rapid changes can quickly make
yesterday’s winning strategies out of date. As management thought leader Peter Drucker once observed, a
marketing organisation’s winning formula for the last decade will probably be its undoing in the next decade.
Marketing does not take place in a vacuum. Now that we have discussed the five steps in the marketing
process, let us examine how the ever-changing marketplace affects both consumers and the marketers who
serve them. We look more deeply into these and other marketing environment factors in Chapter 3.
In this section, we examine the major trends and forces that are changing the marketing landscape and
challenging marketing strategy. We look at six major developments: (1) the digital age; (2) the challenging
economic environment; (3) measuring marketing’s contribution to organisational performance; (4) the growth of not-
for-profit marketing; (5) rapid globalisation; and (6) the call for more corporate social responsibility.
The digital age: Online, mobile and social media

marketing
The information revolution has reached a critical point where a new information-based infrastructure is
internet
unfolding as we witness the convergence of telecommunications, media and technology (TMT) in the form A vast public web of
of computer systems, information services and consumer/professional electronics. The new digital computer networks
infrastructure is creating major shifts in markets and competition. As a result, traditional company and that connects users of
all types all around the
industry structures are being transformed into alliance networks. This IT explosion is accelerating the rate
world to each other and
of change and the emergence of new global competitors as various markets become attractive due to the to an amazingly large
lower costs offered to many industries by technology such as the internet. information repository.
9780655702412_CH01.indd 21 3/3/20 10:41 AM

The explosive growth in digital technology has fundamentally changed the way we live – how we
communicate, share information, access entertainment and shop. More than 3 billion people – 42 per cent
of the world’s population – are now online; over 80 per cent of Australians own smartphones. These numbers
will only grow as digital technology rockets into the future.23
Most consumers are totally smitten with all things digital. For example, many smartphone users keep
their mobile phone next to them when they sleep – they say it is the first thing they touch when they get
up in the morning and the last thing they touch at night. In just the past few years, people averaged more
time per day with digital media than they did viewing traditional television, with many using their mobile
device while they watch television.24
The consumer love affair with digital and mobile technology makes it fertile ground for marketers
trying to engage customers. So it is no surprise that the internet and rapid advances in digital and social
digital and social media have taken the marketing world by storm. Digital and social media marketing involves using
media marketing digital marketing tools, such as websites, social media, mobile ads and apps, online video, email, blogs and
The use of digital
other digital platforms, to engage consumers anywhere, anytime via their computers, smartphones, tablets,
marketing tools, such
as websites, social internet-ready TVs and other digital devices. These days, it seems that every company is reaching out to
media, mobile ads and customers with multiple websites, newsy tweets and Facebook pages, viral ads and videos posted on
apps, online video, YouTube, rich-media emails and mobile apps that solve consumer problems and help them shop.
email, blogs and other
At the most basic level, marketers set up company and brand websites that provide information and
digital platforms, to
engage consumers promote the company’s products. Many companies also set up branded community sites, where customers
anywhere, anytime can congregate and exchange brand-related interests and information. For example, the Pettalk site, <www.
via their computers, pettalk.com.au>, is a place where pet lovers can communicate via discussion boards dedicated to various
smartphones, tablets,
internet-ready TVs and types of pets. Patient, <patient.info/forums/>, offers moderated forums where people from all over the world
other digital devices. can register and share their medical experiences, and the research they have found for various ailments and
remedies. And Sony’s GreatnessAwaits.com site serves as a social hub for PlayStation PS4 game enthusiasts.
It is a place where fans can follow social media posts about PS4, watch the latest PS4 videos, discover which
PS4 games are trending on social networks, share content and interact with other fans – all in real-time.
To date, GreatnessAwaits.com has earned more than 4.5 million page views, curated more than 3.3 million
pieces of social content and featured 75 000 fans.25
Beyond brand websites, most companies are also integrating social and mobile media into their
marketing mixes.
Social media marketing

It is difficult to find a brand website, or even a traditional media ad, that does not feature links to the brand’s
Facebook, Twitter, Google+, LinkedIn, YouTube, Instagram, Pinterest or other social media sites. Social
media provide exciting opportunities to extend customer engagement and get people talking about a brand.
More than 90 per cent of all US companies now use social media as part of their marketing mixes, and
71 per cent believe that social marketing is core to their business.26
Some social media are huge – Facebook has more than 1.2 billion active monthly members. Twitter
has more than 317 million monthly active users; Pinterest draws in 53 million users; and Instagram racks
up an estimated 300 million active monthly visitors. Reddit, the online social news community, has nearly
174 million unique visitors each month from 185 countries. But more-focused social media sites are also
thriving, such as XDA-Developers, an online global community of many millions of smartphone users
who exchange advice, discuss entertainment and share software development via phone at the community’s
online, Facebook, Swappa, Twitter, YouTube, Google+ and mobile sites such as Tapatalk.
Online social media provide a digital home where people can connect and share important information
and moments in their lives. As a result, they offer an ideal platform for real-time marketing, by which
marketers can engage consumers in the moment by linking brands to important trending topics, real-world
events, causes, personal occasions or other important happenings in consumers’ lives.
9780655702412_CH01.indd 22 3/3/20 10:41 AM

Using social media might involve something as simple as a contest or promotion to garner Facebook
likes, tweets or YouTube postings. But more often these days, large organisations of all kinds use a wide
range of carefully integrated social media. For example, space agency NASA uses a broad mix of social
media to educate the next generation of space explorers on its mission to ‘boldly go where no man has
gone before’. In all, NASA has more than 480 social media accounts, spanning various topics and digital
platforms. The agency has more than 10 million Facebook fans, 9 million Twitter followers, 2.5 million
Instagram followers and 30 000 YouTube subscribers. One of NASA’s largest-ever social media campaigns
supported the recent test launch of the Orion spacecraft, which will eventually carry humans to deep-space
destinations, such as Mars or an asteroid.27
Mobile marketing
Mobile marketing is perhaps the fastest-growing digital marketing platform. Four out of five smartphone
users use their phones to access their bank account for online transfers and payments, browse product
information through apps or the mobile web, make in-store price comparisons, read online product reviews,
find and redeem coupons, and a lot more.28 Smartphones are ever-present, always on, finely targeted and
highly personal, and for one-third of Australians, their only means of telephone communication.29
This makes smartphones ideal for engaging customers anytime, anywhere as they move through the buying
process. For example, Starbucks customers can use their mobile devices for everything from finding the
nearest Starbucks and learning about new products to placing and paying for orders.
We investigate the exciting use of digital technologies in marketing in the chapters ahead, particularly
in Chapter 13.
The challenging world economy

From 2008 to 2009, the United States experienced a stunning economic meltdown, mainly due to questionable
bank-lending practices. This Global Financial Crisis (GFC) was unlike anything experienced since the Great
Depression of the 1930s. As a result, most world economies experienced major economic upheavals, requiring
implementation of government stimulus packages. Stock markets plunged and trillions of dollars of market value
simply evaporated. The financial crisis left shell-shocked US consumers short of both money and confidence
as they faced losses in income, a severe credit crunch, declining home values and rising unemployment.
The stimulus packages introduced by the leading economies had a beneficial effect, particularly in
Australia and New Zealand. These countries were less affected by the GFC due, in part, to mineral exports
and to tighter regulation of the financial services sector. However, a subsequent downturn in trade with
China in 2015–16 caused concerns in both countries.
The faltering and uncertain economy caused many consumers to rethink their spending priorities and
to cut back on their buying. More than just a temporary change, the economic downturn has affected
consumer attitudes and spending behaviour and will continue to do so for many years to come – and in many
countries. In Australia and New Zealand, consumer confidence fell due to the collective impact on their
economies of a number of challenges occurring internationally: first, the US crisis, then the sovereign debt
issues of a number of southern European countries, followed by mass migration out of war-torn sectors of
the Middle East into these countries and further into Europe, coupled with a downturn in China’s exports.
In today’s post-recession era, consumer incomes and spending are again on the rise. However, even as
the economy has strengthened in the United States, rather than reverting to their old free-spending ways,
Americans are now showing an enthusiasm for frugality not seen in decades. Sensible consumption has
made a comeback, and it appears to be here to stay. The new consumer spending values emphasise simpler
living and more value for the dollar. Despite their rebounding means, consumers continue to buy less, clip
more coupons, swipe their credit cards less and put more in the bank.
Companies in all industries – from discounters to luxury brands – have tightened their budgets
and aligned their marketing strategies with the new economic realities. More than ever, marketers are
9780655702412_CH01.indd 23 3/3/20 10:41 AM

emphasising the value in their value propositions. They are focusing on value-for-the-money, practicality
and durability in their product offerings and marketing pitches.
In adjusting to the new economy, companies might be tempted to cut marketing budgets deeply
and to slash prices in an effort to coax jittery customers into opening their wallets. Although cutting
costs and offering selected discounts can be important marketing tactics in a slowing economy, smart
marketers understand that making cuts in the wrong places can damage long-term brand images and
customer relationships. The challenge is to balance the brand’s value proposition with the current times
while also enhancing its long-term equity. Thus, rather than slashing prices in uncertain economic
times, many marketers hold the line on prices and instead explain why their brands are worth it.
Measuring marketing’s contribution to

organisational performance
Businesses exist to create wealth for their owners, while not-for-profit organisations seek to survive in
order to continue satisfying those who depend on them. While some researchers initially took the view
that profits are an element of market orientation, we join others in
taking the view that profit is the objective of business and surpluses
the objective of not-for-profit organisations.30
As performance measurement has increasingly become the
domain of marketing management, one key question facing each
type of organisation is which objective (independently reported
from such sources as company reports) and subjective (self-
reported by managers) performance measures to use in assessing
performance. In one review of 150 prior studies covering the
period 1991–95, it was found that the three most widely used
measures were sales (and growth) (22 per cent of all measures),
market share (17 per cent) and profit contribution (11 per cent).31
Such financial measures as sales revenue and profits dominated
(67 per cent). Another study extended this by examining a further
46 empirical performance studies published between 1992 and
Marketing a social cause: Open Family Australia provides
outreach support and services to homeless and at-risk young 2003 (nearly all of them published between 1996 and 2003). They
people. found that while the majority of measures were still financially
Open Family Australia oriented (54 per cent of indicators used), non-financial measures
were increasingly being favoured.32
The seminal US studies by researchers Narver and Slater and
by Kohli and Jaworski employed subjective performance measures whereby managers self-reported their
market orientation and the organisation’s performance.33 A later UK study by Harris is one of very few that
employed both subjective and objective measures in assessing organisational performance.34 A meta-analysis
by Ellis took these and many other similar studies and reporting methods into account and concluded that,
on balance, there is a positive relationship between an organisation holding a market orientation whereby
it focuses on both customer needs and competitor activities, and the organisation’s performance using a
variety of financial and marketing measures or metrics.35 Marketing in Action 1.1 begins our examination
of marketing metrics in this book.
It should be evident from this commentary on measuring marketing’s performance that, to date, most
studies have used the performance indicated by management, rather than turning to more objective sources
such as company reports. There are conflicting findings on the connection between holding a market
orientation and organisational performance from studies in different parts of the world. Further studies are
needed to provide an unequivocal answer as to which measures to use and what value-adding contribution
marketing makes to both profit-oriented and not-for-profit organisations.
9780655702412_CH01.indd 24 3/3/20 10:41 AM

Marketing
in Action Are marketers really that ‘lousy at selling marketing’?
1.1
A former Australian marketing commentator, Neil Shoebridge, often commented For Tim Ambler, Roger Best and the many firms they have influenced, the
on the issue of why marketing management seem to find it difficult to sell the most important aspect is ‘pan-company marketing’. These firms have adopted
benefits of marketing to the financial management of organisations – particularly a market-oriented approach, which ensures that, from top to bottom, thanks
to top management. He went so far as to indicate that, ‘Marketers might be good to effective internal marketing, their employees see the only reason for the
at selling their companies’ products, but they have done a lousy job of selling organisation’s existence as satisfying customers. How? They are market-oriented
marketing.’ Why this might be so, and how the matter is being addressed, is the because they repeatedly add value at every point of contact – what Jan Carlzon
subject of this Marketing in Action box. of Scandinavian Airways referred to as ‘moments of truth’ – and at every purchase
and post-purchase situation. This market-oriented approach is also vital for
not-for-profit organisations, such as the Red Cross and the Australian Cancer
Why the difficulty in measuring Council, and indeed for all levels of government, political and administrative.
marketing effectiveness? Not adopting this approach may result in moments of misery for customers and a
falling-away in repeat business.
One difficulty is that, quite apart from the fact that even marketing academics The aspect of marketing referred to throughout this book, even when
and practitioners use the same words (e.g. brand equity, product innovation), examining a marketing metric that seems applicable at the budgetary level,
individually they ascribe different meanings to the words. This makes it difficult is the pan-company marketing perspective. Why? The simple answer is that,
to talk with certainty to others within their organisations. Another problem is while businesses might depend on shareholder satisfaction to have the funds
that, while those who continually ‘count the beans’ within these organisations to continue and expand the scope of their operations, all facets of the business
recognise the costs of marketing, they do not yet include such aspects as – including shareholder wealth – depend on customers and their repeated
‘brand equity’ on the assets side of the published financial statements of satisfaction. This means that all employees should see it as their duty to know
the organisation. To do so would, at the outset, require agreement on what how they contribute to customer satisfaction.
forms such an asset. To be fair, many sophisticated organisations do utilise a
‘dashboard’ approach to decision making and predicting the future of their Which marketing metrics?
business, and marketing performance measures, or metrics (metrics is here taken
to indicate a measuring system), such as ‘brand share’, ‘brand equity’ and ‘share The key to developing a metrics system is to identify a group of indicators (Ambler
of voice’, are indeed monitored and used along with other financial and non- recommends ‘a dozen or so’) that aid in managing the business and enable
financial measures. accurate cashflow predictions into the future. As with marketing research, we
Another important issue is that, when referring to marketing, we need can ask every question imaginable, but the answers to relatively few questions
to be clear about which aspect of marketing is being referred to. Shoebridge will indicate whether the customer will come back and spend more money on
is clearly suggesting that marketing managers are looking to measure a our product offering. Sometimes the answer to one question indicates they will
return on marketing expenditure at the ‘budgetary level’, and he cites the never come back. A non-financial marketing metric, such as ‘share of voice’
Australian Marketing Institute’s (AMI) ‘metrics tool kit’, which was developed (which includes social media word of mouth), is important to long-term ‘brand
with the assistance of a grant from the Australian Research Council. Often, attitude’, and both – in time – impact on financial measures such as profitability
this can simply mean trying to measure the return on integrated marketing and cashflow. The critical feature is to establish the leads and lags between the
communication (IMC), or perhaps on a single element such as advertising, indicators. As we see in Appendix 3’s Spotlight 7, the link is more solid and the
if that is the only communication tool used. There is a ‘functional’ aspect to effect more immediate for the direct and digital marketer – which knows its
marketing that sees practitioners in different types of organisations using customers by name – than for the FMCG marketer which stands removed from
different metrics and having different responsibilities. For example, marketing individual customers by a supply chain that includes wholesalers and retailers
management of a service firm such as Qantas uses different metrics and is (see Appendix 3’s Spotlight 4). All such market-oriented companies depend on
responsible for different facets of the business than those in a service firm such innovation for their life’s blood and continually need to develop new products
as the ANZ Banking Group. And both service firms differ in their metrics and that truly add value for customers (see Appendix 3’s Spotlight 6).
responsibilities from those involved in the manufacturing and marketing of We begin by referring to a ranking of performance measures (or analytic
fast-moving consumer goods (FMCG), such as Lever-Rexona. measures) in Spotlight 1 in Appendix 3.
9780655702412_CH01.indd 25 3/3/20 10:41 AM

The journey has begun Sources: Quotation from Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein,
Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing,
2006; Shoebridge quotation from Neil Shoebridge, ‘Marketers’ measure’, BRW, 1–7
We address this matter by presenting a marketing analytics spotlight – a mini December 2005, p. 63. The term pan-company marketing is from Tim Ambler, Marketing and
the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003. See also T Ambler &
case study – in Appendix 3 to introduce you to the many measures that are
F Kokkinaki, ‘Measures of marketing success’, Journal of Marketing Management, 13(7), 1997,
employed in assessing the performance that results from effective marketing. pp. 665–79; T Ambler, F Kokkinaki & S Puntoni, ‘Assessing marketing performance: Reasons
The marketing analytics spotlights should therefore be seen as the start of a journey for metrics selection’, Journal of Marketing Management, 20, 2004, pp. 475–98; T Ambler,
F Kokkinaki, S Puntoni & D Riley, ‘Assessing market performance: The current state of metrics’,
that will continue throughout your marketing studies and into your business life. Centre of Marketing, London Business School, Working Paper, 2001, pp. 1–68; Roger J Best,
As Farris and colleagues succinctly put it, ‘Being able to “crunch the numbers” is Market-Based Management, 4th edn, Pearson Prentice Hall: Upper Saddle River, NJ, 2005;
Competitive Fitness of Global Firms report, available at <www.corvaltec.com/index.html>,
vital to success in marketing. Knowing which numbers to crunch, however, is a accessed 9 January 2007; J-C Larréché, The Test of Business Capabilities? Highlights from
skill that develops over time.’ And so we ask you to work through the examples Measuring the Competitiveness of Global Firms 2002, Financial Times Prentice Hall: London,
2002, available at <www.corvaltec.com>, accessed 30 August 2003.
provided at the end of each chapter and begin your journey into the effective
use of marketing metrics. In particular, you will find mini case studies entitled Questions
‘Marketing analytics at work’, which are designed to allow you to work through
❶ What does the term marketing analytics refer to?
the various marketing performance measures faced by marketing management.
❷ List and describe the three aspects of marketing at the budgetary level that
A word of caution: Research studies conducted at different points in time,
can influence the measures used. (Hint: One is the functional aspect of
and in various locations, are not always able to support the findings of earlier
marketing.)
studies. It is therefore wise to read as widely as possible and to remain open-
❸ What is the sole reason for the company’s existence put forward in this
minded when confronted with conflicting evidence. Marketing has adopted the
Marketing in Action box? Do you agree?
scientific approach, and researchers continually seek to support or refute the
❹ Which (if any) one marketing performance measure do you believe is the
findings of earlier studies in the knowledge that ‘iron laws’ are unlikely to be
most important?
developed, even with continuous empirical investigation.
The growth of not-for-profit marketing

Over the years, marketing has been most widely applied in the business sector. In more recent times,
not-for-profit however, not-for-profit marketing has also become a major component in the strategies of many
marketing philanthropic organisations, universities, hospitals, museums, symphony orchestras, zoos and even churches.
Marketing as practised
Similarly, many private schools and, increasingly, universities, facing fluctuating domestic and
by a variety of
organisations whose international enrolments, rising costs and global competitors, are using marketing to compete for students
aim is to make surpluses and funds, both at home and abroad. They are redefining target markets, improving their communication
so as to continue their and promotion, and responding more effectively to student needs and wants. Many performing arts groups
operations, but that do
face huge operating deficits that they must cover by more aggressive donor marketing, particularly from
not seek to make profits
for shareholders. the corporate sector. Finally, many long-standing not-for-profit organisations – the YMCA, the Salvation
Army, the Red Cross and the Scouts – have lost members and are now modernising their missions and
‘products’ to attract more members and donations.36
Even government agencies have shown an increased interest in marketing. For example, the armed
services in many countries have marketing plans to attract recruits. And various government agencies are
now designing social marketing campaigns to reward and encourage energy conservation and concern for
the environment, to stimulate good corporate behaviour or to discourage smoking, excessive drinking and
drug use.
The continued growth of not-for-profit and public-sector marketing presents exciting challenges for
marketing managers.
Rapid globalisation
The world economy has undergone radical change during the past three decades. Geographical and cultural
distances have shrunk with the advent of jet airliners, telephone links (such as Japan’s DoCoMo iMode
interactive mobile phones), digital satellite-television broadcasting (such as Britain’s BSkyB and Japan’s
9780655702412_CH01.indd 26 3/3/20 10:41 AM

PERFECTV), internet email and instant messaging, social

networking and other technical advances, such as internet-capable
smartphones (iPhone and Android phones) and Video-over-IP
phone services (such as Google Hangouts and Microsoft’s Skype).
These technological advances have allowed companies to expand
significantly their geographical market coverage, purchasing and
manufacturing. The result is a vastly more complex marketing
environment for both companies and consumers.
Today, almost every marketing organisation, large or small,
is touched in some way by global competition. From the
American florist that buys its flowers from Dutch nurseries,
to the Melbourne clothing designer and Sydney retailer
that each source merchandise in China, to the American
electronics manufacturer competing with giant Japanese Telecommunications, media and technology (TMT): In this digital
rivals in its home markets, to the Australian consumer-goods age, for better or worse, technology has become an indispensable
part of our lives. The technology boom provides exciting new
producer introducing new products into emerging markets
opportunities for marketers.
abroad – companies are not only trying to sell more of their David Sacks/The Image Bank/Getty Images
locally produced goods in international markets, but are also
buying more components and supplies abroad. For example, an
American fashion designer may choose cloth woven from Australian wool with printed designs from Italy.
The designer designs a dress and electronically transmits the drawing to a factory in mainland China.
Finished dresses are airfreighted to New York where they are distributed to department and specialty
stores around the country.
Many domestically purchased goods and services are ‘hybrids’, with design, materials purchases,
manufacturing and marketing taking place in several countries. Australians who want to ‘Buy Australian’
might reasonably decide to avoid a Honda Civic or a Mitsubishi Lancer and purchase a Ford Focus.
Imagine their surprise when they learn the Focus is actually a German-made vehicle that sells in great
quantities in Europe. Imagine their further surprise at finding that Ford is an American company that also
has part ownership of Mazda, or that the Jaguar, Daimler, Rover and Land Rover brands are owned by
Indian car maker Tata, or that Zhejiang Geeley Holding Group of China owns Volvo. Consumers in many
other nations suffer similar surprises. Australian car marketer General Motors Holden is owned by US
giant General Motors. Iconic UK confectionery company Cadbury is now owned by US food giant Kraft.
Quintessentially American McDonald’s now serves 68 million customers daily in more than 36 000 local
restaurants in over 100 countries worldwide – nearly 70 per cent of its corporate revenues come from
outside the United States. Similarly, Nike markets in 190 countries, with non-US sales accounting for about
half of its worldwide sales. Even MTV Networks has joined the elite of global brands – its 150 channels
worldwide deliver localised versions of its pulse-thumping fare to 419 million homes in 164 countries
around the globe. And it reaches millions more daily via the more than 5000 mobile, console and online
games and virtual worlds that it shares on its more than 300 websites worldwide.37
Thus, managers in countries around the world are asking: Just what is global marketing? How does
it differ from domestic marketing? How do global competitors and forces affect our business? To what
extent should we ‘go global’? Many companies are forming strategic alliances with foreign companies,
even competitors, who serve as suppliers or marketing partners. The past few years have produced some
surprising alliances between competitors, such as Ford and Mazda, General Electric and Matsushita, Telstra
and News Corporation, Nokia and Microsoft, and Ericsson and Sony. Winning companies in the 21st
century may well be those that have built the best global networks.38
There is continued resistance from various groups to perceived negatives in the process of globalisation.
We examine these further in the next section.
9780655702412_CH01.indd 27 3/3/20 10:41 AM

Sustainable marketing: The call for more

environmental and social responsibility
A further factor in today’s marketing environment is the increased call for companies to take responsibility
for the social and environmental impact of their actions. Corporate ethics have become an important matter
in almost every business arena, from the corporate boardroom to the business-school classroom. Global
companies, with widely adopted brands, cannot ignore the problems they cause by moving operations
from one country to the next in search of lower labour costs. Such companies, and governments, can no
longer ignore the disruptions caused by the anti-globalisation movement, even if they do not agree with
the sentiments of this vociferous group. And few companies can disregard the well-organised and very
demanding environmental movement, spearheaded by organisations such as Greenpeace. While Tesla leads
the way with their fully electric vehicles, Audi, BMW, General Motors, Honda, Mercedes-Benz, Mitsubishi,
Peugeot and Toyota, like others, are putting forward an environmentally friendly face with their semi-
electric cars and other hybrids, showing their commitment to the environment via the web, including
providing support for local communities in this regard.39
Ethics and environmental movements are placing even stricter demands on companies as time passes.
No wonder, when in many eastern European countries the air is fouled, the water is polluted, the rivers
and the soil are poisoned by chemical dumping, and the effects of global warming are becoming evident.
Intensive farming in Australia has caused land salination, algal bloom (from pesticides and reduced water
flow in river systems) and general degradation of the waterways, and is destroying the Great Barrier Reef.
Worldwide, the outpouring of human effluent has affected the sea, and unfettered car-exhaust emissions
have degraded air quality and are contributing to changed weather patterns.
In 1992, 20 years after the United Nations Conference on Human Environment, representatives
from more than 100 countries attended the inaugural Earth Summit in Rio de Janeiro to consider how
to handle such problems as the destruction of rainforests, global warming, endangered species and other
environmental threats.
[The Summit] brought environment and development issues firmly into the public arena. Along
with the Rio Declaration and Agenda 21 it led to agreement on two legally binding conventions:
Biological Diversity and the Framework Convention on Climate Change. It also produced a
Statement of Forest Principles.40
The second Earth Summit was held in 2002 in Johannesburg, and the third in Brussels in 2005, the
Copenhagen Climate Summit was held in late 2009, while the fourth Earth Summit was held in Rio de Janeiro
in 2012.41 Global warming and other environmental issues make it imperative that marketing organisations
examine the best use of resources, in both inputs and outputs. However, as the Climate Summit resolutions
illustrate, getting individual countries to agree to carbon dioxide emission reductions remains difficult.
Some companies, such as Patagonia, Timberland, Method, Ben & Jerry’s and others, practice
caring capitalism, setting themselves apart by being civic-minded and responsible. They build social and
environmental responsibility into their company value and mission statements. For example, Ben & Jerry’s, a
division of Unilever, has long prided itself on being a ‘values-led business’, one that creates ‘linked prosperity’
for everyone connected to the brand – from suppliers to employees to customers and communities.42
So, what is marketing? Pulling it all

together
In Figure 1.1, we presented a simple model of the marketing process. Now that we have discussed all the
steps in the process, Figure 1.6 presents an expanded model that will help you pull it all together. What is
marketing? Simply put, marketing is the process of building profitable customer relationships by creating
value for customers and capturing value in return.
9780655702412_CH01.indd 28 3/3/20 10:41 AM

CREATE VALUE FOR CAPTURE VALUE

Understand the Design a Construct an Build Capture value

marketplace customer- integrated profitable from customers
and customer driven marketing relationships to create profits
needs and marketing program and create and customer
wants strategy that delivers customer equity
superior value delight
Research Select Product and Customer Create

customers customers service design: relationship satisfied,
and the to serve: build strong management: loyal customers
marketplace market brands build strong
segmentation relationships
and targeting with chosen
customers Capture
Pricing:
customer
create real
lifetime value
value
Manage Decide on a Partner

marketing value relationship
information and proposition: Distribution: management: Increase
customer data differentiation manage demand build strong share of
and and supply relationships market and
positioning chains with marketing share of
partners customer
Promotion:
communicate
the value
proposition
Harness Manage global Ensure ethical

marketing markets and social
technology responsibility
Figure 1.6 An expanded model of the marketing process
The first four steps of the marketing process focus on creating value for customers. The marketing
organisation first gains a full understanding of the marketplace by researching customer needs and managing
marketing information. It then designs a customer-driven marketing strategy based on the answers to two
simple questions. The first question is: ‘What consumers will we serve?’ (market segmentation and targeting).
Successful marketing companies know they cannot serve all customers in every way. Instead, they need to
focus their resources on the customers they can serve best and most profitably. The second marketing
strategy question is: ‘How can we best serve targeted customers?’ (differentiation and positioning). Here,
9780655702412_CH01.indd 29 3/3/20 10:41 AM

the marketer outlines a value proposition that spells out what values the company will deliver in order to
win target customers.
With its marketing strategy chosen, the company now constructs an integrated marketing program,
consisting of a blend of the marketing mix elements as shown in Figure 1.5, which transforms the marketing
strategy into real value for customers. The company develops market offerings (products) and creates
strong brand identities for them. It prices these offers to create real customer value and distributes the
offers to make them available to target consumers. Finally, the company designs promotion programs that
communicate the value proposition to target consumers and persuade them to act on the market offering.
Perhaps the most important step in the marketing process involves building value-laden, profitable
relationships with target customers. Throughout this process, marketers practise customer relationship
management to create customer satisfaction and delight. In creating customer value and relationships,
however, the company cannot go it alone. It must work closely with marketing partners both inside the
company and throughout the marketing system. Thus, beyond practising good customer relationship
management, firms must also practise good partner relationship management.
The first four steps in the marketing process create value for customers. In the final step, the company
reaps the rewards of its strong customer relationships by capturing value from customers. Delivering
superior customer value creates highly satisfied customers who will buy more and will buy again. This
helps the company to capture customer lifetime value and greater share of customer. The result is increased
long-term customer equity for the firm.
Finally, in the face of today’s changing marketing landscape, companies must take into account three
additional factors. In building customer and partner relationships, they must harness marketing technology,
take advantage of global opportunities and ensure they act in an ethical and socially responsible way.
9780655702412_CH01.indd 30 3/3/20 10:41 AM

Student To design a winning marketing strategy, the company must first decide who it
will serve. It does this by dividing the market into segments of customers (market
Learning segmentation) and selecting which segments it will cultivate (target marketing).
Centre Next, the company must decide how it will serve targeted customers (how it will
differentiate and position itself in the marketplace).
Marketing management can adopt one of five competing market orientations.
The production concept holds that management’s task is to improve production
Reviewing the learning objectives efficiency and bring down prices. The product concept holds that consumers
Today’s successful marketing organisations – whether large or small, for-profit favour products that offer the most in quality, performance and innovative
or not-for-profit, domestic or global – share a strong customer focus and a features; thus, little promotional effort is required. The selling concept holds
heavy commitment to marketing. The goal of marketing is to build and manage that consumers will not buy enough of the organisation’s products unless it
customer relationships. undertakes a large-scale selling and promotion effort. The marketing concept
holds that achieving organisational goals depends on determining the needs and
Learning Objective 1. Define marketing, and outline wants of target markets and delivering the desired satisfactions more effectively
the steps in the marketing process. and efficiently than competitors do. The societal marketing concept calls for
Marketing is the process by which companies create value for customers and generating customer satisfaction and long-run societal wellbeing through
build strong customer relationships in order to capture value from customers sustainable marketing strategies keyed both to achieving the company’s goals
in return. and to fulfilling its responsibilities.
The marketing process involves five steps. The first four steps create value for
customers. First, marketers need to understand the marketplace and customer Learning Objective 4. Discuss customer relationship
needs and wants. Next, marketers design a customer-driven marketing strategy management, and identify strategies for creating
with the goal of getting, keeping and growing target customers. In the third value for customers and capturing value from
step, marketers construct a marketing program that actually delivers superior customers in return.
value. All these steps form the basis for the fourth step, building profitable Broadly defined, customer relationship management is the process of
customer relationships and creating customer delight. In the final step, the engaging customers and building and maintaining profitable customer
company reaps the rewards of strong customer relationships by capturing value relationships by delivering superior customer value and satisfaction. Customer-
from customers. engagement marketing aims to make a brand a meaningful part of consumers’
conversations and lives through direct and continuous customer involvement
Learning Objective 2. Explain the importance of in shaping brand conversations, experiences and community. The aim of
understanding the marketplace and customers, and customer relationship management and customer engagement is to produce
identify the five core marketplace concepts. high customer equity, the total combined customer lifetime values of all of the
Outstanding marketing companies go to great lengths to learn about and company’s customers. The key to building lasting relationships is the creation
understand their customers’ needs, wants and demands. This understanding of superior customer value and satisfaction. In return for creating value for
helps them to design want-satisfying market offerings and to build value-laden targeted customers, the company captures value from customers in the form of
customer relationships by which they can capture customer lifetime value and profits and customer equity.
greater share of customer. The result is increased long-term customer equity for
the firm.
Learning Objective 5. Describe the major trends and
The core marketplace concepts are needs, wants and demands; market forces that are changing the marketing landscape in
offerings (products, services and experiences); value and satisfaction; exchange this age of relationships.
and relationships; and markets. Wants are the form taken by human needs when Dramatic changes are occurring in the marketing arena. The digital age has
shaped by culture and individual personality. When backed by buying power, created exciting new ways to learn about and relate to individual customers.
wants become demands. Companies address needs by putting forth a value As a result, advances in digital and social media have taken the marketing world by
proposition, a set of benefits they promise to consumers to satisfy consumers’ storm. Online, mobile and social media marketing offer exciting new opportunities
needs. The value proposition is fulfilled through a market offering, which delivers to target customers more selectively and engage them more deeply. The key is to
customer value and satisfaction, resulting in long-term exchange relationships blend the new digital approaches with traditional marketing to create a smoothly
with customers. integrated marketing strategy and mix.
The Great Recession caused consumers to rethink their buying priorities
Learning Objective 3. Identify the key elements of and bring their consumption back in line with their incomes. Even as the post-
a customer-driven marketing strategy, and discuss recession economy has strengthened, people are now showing an enthusiasm
the marketing management orientations that guide for frugality not seen in decades. The challenge is to balance a brand’s value
marketing strategy. proposition with current times while also enhancing its long-term equity.
9780655702412_CH01.indd 31 3/3/20 10:41 AM

In recent years, marketing has become a major part of the strategies for Airlines, British Airway, Cathay Pacific Airlines, Finnair, Iberia, LAN Airlines,
many not-for-profit organisations, such as universities, hospitals, museums, zoos, Japan Airlines, Malaysia Airlines, Qantas Airways, Qatar Airlines, Royal
symphony orchestras, foundations and even churches. Also, in an increasingly Jordanian, S7 Airlines, TAM, SriLankan Airlines – see <oneworld.com>)
smaller world, many marketers are now connected globally with their customers, that compete with other networks (such as Star Alliance – see <www.
marketing partners and competitors. Finally, today’s marketers are also re- staralliance.com>). The older notion of single companies competing in
examining their ethical and societal responsibilities. Marketers are being called single markets seems to be giving way to many such strategic alliances.
upon to take greater responsibility for the social and environmental impacts of Can you identify other markets where this process is evident? What are
their actions. the implications for marketing science and practice? (Learning Objective 4)
Pulling it all together, as discussed throughout the chapter, the major new (AACSB: Communication; Reflective Thinking)
developments in marketing can be summed up in a single concept: engaging ❺ Societal marketing concept. If this term means that the organisation should
customers and creating and capturing customer value. Today, marketers of determine the needs, wants and interests of target markets, then surely this
all kinds are taking advantage of new opportunities for building value-laden is the same thing as the marketing concept? Is this not simply duplication?
relationships with their customers, their marketing partners and the world Justify your answer. (Learning Objective 5) (AACSB: Communication;
around them. Reflective Thinking)
❻ Change management. A number of enterprises – large (HIH Insurance),
medium (One.Tel, Impulse Airlines, Ansett Airlines) and small – have
Discussion questions achieved notoriety by their spectacular failures. There seems to be a number
❶ Telling and selling. Is marketing practice little more than ‘telling and of reasons, including systems failure and management failure. Using such
selling’, while marketing science is really just a matter of carrying out sources as the financial press and magazines, identify how marketing may or
experiments, tests, surveys and other research to help organisations sell may not contribute to such failures and to other difficulties that businesses
more? Or is marketing practice truly concerned with satisfying customer are experiencing. (Learning Objective 5) (AACSB: Communication; Reflective
needs and wants by interacting and working with the customer, and marketing Thinking)
science concerned with furthering this aim? One way of discussing this is
to form class syndicates taking each position, armed with examples from Critical thinking exercises
the marketplace. (Learning Objective 1) (AACSB: Communication; Reflective ❶ Form a small group of three or four fellow students. Discuss a need or
Thinking) want you have that is not adequately satisfied by any offerings currently
❷ Customer satisfaction. If it is true that smart companies aim to completely in the marketplace. Think of a product or service that will satisfy that need
satisfy customers by promising only what they can deliver, and then or want. Describe how you will differentiate and position your offering in
delivering more than they promise, does this mean that those who follow the marketplace and develop the marketing program for your offering.
this dictum are market leaders and the most profitable in their industry Present your ideas to the other groups. (Learning Objective 2) (AACSB:
sector? This very topical issue is a matter for individual research using Communication; Reflective Thinking)
academic journals; the findings might then be pooled in class. Be aware that ❷ Consider a product that you use or a retailer where you shop frequently.
there is no simple answer. (Learning Objective 2) (AACSB: Communication; Estimate how much you are worth to the retailer or manufacturer of the
Reflective Thinking) brand you prefer if you remain loyal to that marketer for the rest of your
❸ Market orientation or marketing orientation. At a recent academic life (your customer lifetime value). What factors should you consider when
conference, a presenter was discussing the literature he had followed in deriving an estimate of your lifetime value to the company? How can the
devising his study of the connection between respondent organisations’ company increase your lifetime value? (Learning Objective 4) (AACSB:
market orientation and their sales performance. During the presentation, Communication; Reflective Thinking; Analytic Reasoning)
he inadvertently used the term marketing orientation. Some of the ❶ In a small group, create a presentation about careers in marketing. Search
audience became quite vocal at this point. Why might this be the case? the internet for information regarding the different career options available
Surely the two terms mean the same thing? (Learning Objective 3) (AACSB: in marketing, and the skills, education and experience necessary to advance
Communication; Reflective Thinking) in the field of marketing. Then select a company and describe the marketing
❹ Globalisation. As a response to globalisation, organisations such as airlines career opportunities available there. (Learning Objectives 1–4) (AACSB:
are partnering with foreign organisations, even competitors, to form strategic Communication; Reflective Thinking)
alliance networks (such as the oneworld® alliance of airberlin, American
9780655702412_CH01.indd 32 3/3/20 10:41 AM

Mini cases
1.1 Digital technologies in marketing
Publishing: To unbundle the app or not?
Newspaper and magazine publishers the world over are in a quandary. subscriptions separately. And while this has been taking place, hardcopy
Digital tablets such as Apple’s iPad, and a myriad of Google Android tablets readership has been dropping.
such as Samsung’s range, now bristle with apps which their owners have The Economist has a similar strategy that unbundles tablet editions from
downloaded courtesy of publishers such as Australasia’s Fairfax Media print. Pricing strategy is as one might expect in that the price for a print
Limited. Fairfax Media publish, among other assets, the Australian Financial subscription is more expensive than for a digital subscription, while print
Review (AFR) and BRW. plus digital costs more again. These publishers appear to be ready for the
Subscribe to the AFR on a five- or six-day basis and you get access, steady decline in print readers that every publisher is experiencing.43
through the AFR iPad app, to various newspaper features online. Fee- ❶ Thinking about your own reading habits, do you still read print versions
paying digital subscribers have free access to the app. In a similar strategy of newspapers and magazines? Why, or why not? (Learning Objectives
to that adopted by Time Inc., called ‘All Access’, the AFR gives its print 1, 2 and 4) (AACSB: Communication; Use of IT; Reflective Thinking)
subscribers access to tablet and smartphone apps and also provides ❷ Do you think the strategy adopted by The Economist reflects the
separate access to its digital editions and subscriber content from its needs, wants and demands of readers? (Learning Objectives 1, 2
website. Competitors, such as Hearst and Condé Nast, also sell app and 5) (AACSB: Communication; Reflective Thinking)
1.2 Customer-driven marketing strategy

Apple and Adobe Flash clash: Customer-driven?
Apple’s iDevices – iPods, iPhones and iPads – are globally popular. next chapter of the web’, and bloggers exclaim this is not just an ‘Adobe/
But where’s the flash? Adobe Flash, that is. Adobe’s Flash, the long-standing Apple problem . . . but an Apple/World problem’.
multimedia platform behind approximately 75 per cent of the animated and ❶ Does Apple appear to embrace the marketing concept? (Learning
streaming audio and video on the internet, is not supported by Apple’s Objectives 3, 4 and 5) (AACSB: Communication; Use of IT; Reflective
devices. Many purchasers were disappointed after spending hundreds of Thinking; Technology)
dollars on iPads and iPad Minis only to realise they could not play their ❷ Research the controversy surrounding this issue and debate whether
favourite online game or watch videos on their device. And they still cannot, Apple did the right thing for its customers by not including the
even with the latest-generation devices. Why not? It seems Apple’s late ubiquitous Adobe Flash software on Apple’s products. Is there a way
founder and CEO, Steve Jobs, did not like Flash and would not support it on around the dilemma for those wanting to watch Flash movies and play
Apple’s devices. Instead, app developers must conform to Apple’s operating Flash games on their iPhones? (Learning Objectives 1 and 5) (AACSB:
system, and existing applications on the web must convert to HTML5 to play Communication; Reflective Thinking)
on an Apple product. Adobe’s co-founders claim Apple is ‘undermining the
9780655702412_CH01.indd 33 3/3/20 10:41 AM

1.3 Marketing analytics at work

Transport for NSW: Customer satisfaction index
Every mode of transport stands or falls by its ability to satisfy customers. Having read the November CSI report, and examined Appendix 3 for
The New South Wales government has a vision that promotes better outcomes any similar marketing analytics spotlights you could draw on for inspiration,
for customers of its integrated public transport system. In meeting this goal, consider the following questions:
it tracks the views of over 17 000 randomly selected customers over time. ❶ Do you think that each of the satisfaction parameters mentioned
For example, the Customer Satisfaction Index (CSI) published in November (e.g. timeliness) would be of equal importance to customers? If not,
2015 covered seven surveys from November 2012 to November 2015. how would you calculate an overall CSI for Transport for NSW, taking
Customers were asked to rate their experience of their most recent trip or account of such differences? (Learning Objectives 2 and 3) (AACSB:
experience.44 Communication; Reflective Thinking; Sustainability)
The customer surveys used a seven-point scale (‘very dissatisfied’ to ‘very ❷ Might there be differences in the importance level for each parameter
satisfied’) to gather satisfaction levels for such parameters as timeliness, by transport mode? If so, how would you calculate an overall CSI for
safety and security, ticketing, convenience, accessibility, comfort, cleanliness, Transport for NSW, taking account of such differences? (Learning
information and customer service. Customer satisfaction for each transport Objectives 2 and 3) (AACSB: Communication; Reflective Thinking)
mode was monitored: train, bus, ferry, light rail and the urban taxi network.
1.4 Ethical reflection

The security of customer details
The football club, the Mighty Emus, has approached a marketing research questionnaire website. Barry sent the list of email addresses at the behest of
firm, FastAsk, to undertake a membership satisfaction survey. The club wants the club’s directors, even though he objected to this action because the email
FastAsk to send an email to each of its members with an email address and list includes subscribers who asked that their details not be given to third
to call the remainder using a computer-aided telephone system, inviting parties. Barry is fully aware of the amendments to the Australian Privacy Act
them to complete a web form (questionnaire accessed with a web browser) that came into effect on 21 December 2001; he knows that heavy penalties
that seeks their views on various aspects of the club’s performance, both may be imposed on those who do not comply with the provisions of the Act.
on-field and off-field. As an inducement to respond, the research company He is also aware of the Spam Act 2003 and the introduction of the Do Not
has suggested that a prize of one year’s free membership be offered to a Call Register Act 2006.45
winner drawn from a barrel. ❶ What are your views concerning the proposed marketing
The Mighty Emus’ marketing officer, Barry Bright, has passed the email research? (AACSB: Communication; Ethical Reasoning; Reflective
list to the research company so that they can invite members to visit the Thinking)
References
1 John C Narver & Stanley F Slater, ‘The effect of a market orientation on business Spring 2010, pp. 4–11; Roberto Friedmann, ‘What business are you in?’, Marketing
profitability’, Journal of Marketing, 54, October 1990, pp. 20–35; for a more Management, Summer 2011, pp. 18–23; and Al Ries, ‘“Marketing myopia” revisited:
embracing perspective on market orientation, see Paul D Ellis, ‘Market orientation and Perhaps a narrow vision is better business’, Advertising Age, 4 December 2013,
performance: A meta-analysis and cross-national comparisons’, Journal of Management <http://adage.com/print/245511>.
Studies, 43(5), 2006, pp. 1089–107. 6 Ralph Waldo Emerson offered this advice: ‘If a man . . . makes a better mousetrap . . .
2 See Philip Kotler & Kevin Lane Keller, Marketing Management, 15th edn, Pearson the world will beat a path to his door.’ Several companies, however, have built better
Education: Hoboken, NJ, 2016, p. 5. mousetraps and yet have failed.
3 The American Marketing Association offers the following definition: ‘Marketing is the 7 ‘The difference in creating companies and categories’, happycustomer, 4 March 2014,
activity, set of institutions, and processes for creating, communicating, delivering, <http://happycustomer.stellaservice.com/2014/03/04/column-the-difference-in-
and exchanging offerings that have value for customers, clients, partners, and society creating-companies-and-categories/>.
at large.’ See <www.marketingpower.com/_layouts/Dictionary.aspx?dLetter=M>, 8 See Michael E Porter & Mark R Kramer, ‘Creating shared value’, Harvard Business
accessed September 2015. Review, January–February 2011, pp. 63–77; Marc Pfitzer, Valerie Bockstette & Mike
4 See Daniel P Smith, ‘Keep in touch’, QSR Magazine, July 2013, <www.qsrmagazine. Stamp, ‘Innovating for shared value’, Harvard Business Review, September 2013,
com/executive-insights/keep-touch>; and Phil Wahba, ‘Back on target’, Fortune, pp. 100–7; ‘About shared value’, Shared Value Initiative, <http://sharedvalue.org/
1 March 2015, pp. 86–94. about-shared-value>, accessed September 2015; and ‘Shared value’, <www.fsg.org>,
5 See Theodore Levitt’s classic article, ‘Marketing myopia’, Harvard Business Review, accessed September 2015.
July–August 1960, pp. 45–56. For more recent discussions, see Minette E Drumright 9 Michael Krauss, ‘Evolution of an academic: Kotler on marketing 3.0’, Marketing
& Mary C Gentile, ‘The new marketing myopia’, Journal of Public Policy & Marketing, News, 30 January 2011, p. 12; and Simon Mainwaring, ‘Marketing 3.0 will be won
9780655702412_CH01.indd 34 3/3/20 10:41 AM

by purpose-driven, social brands’, Forbes, 16 July 2013, <www.forbes.com/sites/ 27 See Calla Cofield, ‘Social media: NASA’s not so secret weapon for the Orion test flight’,
simonmainwaring/2013/07/16/marketing-3-0-will-be-won-by-purpose-driven-social- Space, 3 December 2014, <www.space.com/27912-nasa-orion-spacecraft-social-
brands-infographic/>. media-blitz.html>; Laura Nichols, ‘NASA soars on social media with Orion spacecraft’,
10 For more on how to measure customer satisfaction, see D Randall Brandt, ‘For good PRWeek, 18 December 2015, <www.prweek.com/article/1327011>; ‘By the letters
measure’, Marketing Management, January–February 2007, pp. 21–5. EFT: Sesame Street muppets count down to NASA launch’, Collect Space, 24 November
11 See <www.ritzcarlton.com/en/about/gold-standards>, accessed November 2016. 2014, <www.collectspace.com/news/news-112514a-orion-eft1-muppets-countdown.
12 Information about the Harley Owners Group from <www.harley-davidson.com/ html>; and <www.nasa.gov>, accessed April 2016.
en_US/Content/Pages/HOG/HOG.html>, accessed January 2013. For further details in 28 Michael Applebaum, ‘Mobile magnetism’, Adweek, 25 June 2012, pp. S1–S9; and
Australia, see <https://members.hog.com>, accessed 2 April 2016. Bill Briggs, ‘M-commerce is saturating the globe’, Internet Retailer, 20 February 2014,
13 ‘Number of monthly active Twitter users worldwide from 1st quarter 2010 to 3rd <www.internetretailer.com/2014/02/20/m-commerce-saturating-globe>.
quarter 2016 (millions)’, statista, <statista.com/statistics/282087/number-of-monthly- 29 ‘Australians get mobile’, ACMA, 9 June 2015, <acma.gov.au/theACMA/engage-blogs/
active-twitter-users>, accessed November 2016. engage-blogs/Research-snapshots/Australians-get-mobile>.
14 Data from statista: The Statistics Portal, <www.statista.com>. 30 See Ajay K Kohli & Bernard J Jaworski, ‘Market orientation: The construct, research
15 For examples, see <http://mystarbucksidea.force.com>, accessed September 2015; and propositions and managerial implications’, Journal of Marketing, 54, April 1990,
‘Product review’, <www.productreview.com.au>, accessed 3 April 2016. pp. 1–18; and John C Narver & Stanley F Slater, ‘The effect of a market orientation on
16 See ‘#Bashtag: Avoiding user outcry in social media’, WordStream, 8 March 2013, business profitability’, Journal of Marketing, 54, October 1990, pp. 20–35.
<www.wordstream.com/blog/ws/2013/03/07/bashtag-avoiding-social-media- 31 Tim Ambler & Flora Kokkinaki, ‘Measure of marketing success’, Journal of Marketing
backlash>; and ‘What is hashtag hijacking?’, Small Business Trends, 18 August 2013, Management, 13(7), 1997, pp. 665–79.
<http://smallbiztrends.com/2013/08/what-is-hashtag-hijacking-2.html>. 32 Marcin Pont & Robin N Shaw, ‘Measuring marketing performance: A critique of
17 See <www.stewleonards.com/about-us/company-story>, accessed September 2015. empirical literature’, in R Kennedy (ed.), Proceedings of the Australian and New Zealand
18 See Mai Erne, ‘Calculating customer lifetime value’, HaraPartners, <www.harapartners. Marketing Academy Conference (ANZMAC), Adelaide, 2003, pp. 2064–73.
com/blog/calculating-lifetime-value/>, accessed September 2015. 33 John C Narver & Stanley F Slater, ‘The effect of a market orientation on business
19 See Timothy Stenovec, ‘Amazon prime members spend an astonishing $1,500 profitability’, Journal of Marketing, 54, October 1990, pp. 20–35; and Ajay K Kohli
a year, survey says’, Huffington Post, 27 January 2015, <www.huffingtonpost. & Bernard J Jaworski, ‘Market orientation: The construct, research propositions and
com/2015/01/27/amazon-prime-spending_n_6556374.html>; Brad Stone, ‘What’s in managerial implications’, Journal of Marketing, 54, April 1990, pp. 1–18.
the box? Instant gratification’, Bloomberg Businessweek, 29 November–5 December 34 Lloyd C Harris, ‘Market orientation and performance: Objective and subjective evidence
2010, pp. 39–40; and <www.amazon.com/gp/prime/ref=footer_prime>, accessed from UK companies’, Journal of Management Studies, 38(1), 2001, pp. 17–43.
September 2015. 35 Paul D Ellis, ‘Market orientation and performance: A meta-analysis and cross-national
20 Lloyd C Harris, ‘Market orientation and performance: Objective and subjective evidence comparisons’, Journal of Management Studies, 43(5), 2006, pp. 1089–1107.
from UK companies’, Journal of Management Studies, 38(1), 2001, pp. 17–43. 36 For other examples, and for a good review of not-for-profit marketing, see Philip
21 For more discussions on customer equity, see Roland T Rust, Valerie A Zeithaml & Kotler & Alan R Andreasen, Strategic Marketing for Nonprofit Organizations, Prentice
Katherine N Lemon, Driving Customer Equity, Free Press: New York, NY, 2000; Roland Hall: Englewood Cliffs, NJ, 1991; Cyndee Miller, ‘Churches turn to research for help in
T Rust, Katherine N Lemon & Valerie A Zeithaml, ‘Return on marketing: Using customer saving new souls’, Marketing News, 11 April 1994, pp. 1, 2; Philip Kotler & Karen Fox,
equity to focus marketing strategy’, Journal of Marketing, January 2004, pp. 109–27; Strategic Marketing for Educational Institutions, Prentice Hall: Englewood Cliffs, NJ,
Christian Gronroos & Pekka Helle, ‘Return on relationships: Conceptual understanding 1985; Bradley G Morrison & Julie Gordon Dalgleish, Waiting in the Wings: A Larger
and measurement of mutual gains from relational business engagements’, Journal Audience for the Arts and How to Develop It, ACA Books: New York, NY, 1987; Norman
of Business & Industrial Marketing, 27(5), 2012, pp. 344–59; and Peter C Verhoef Shawchuck, Philip Kotler, Bruce Wren & Gustave Rath, Marketing for Congregations:
& Katherine N Lemon, ‘Successful customer value management: Key lessons and Choosing to Serve People More Effectively, Abingdon Press: Nashville, TN, 1993.
emerging trends’, European Management Journal, February 2013, p. 1. 37 See Tom Lowry, ‘The game’s the thing at MTV networks’, BusinessWeek, 18 February
22 Based on Werner Reinartz & V Kumar, ‘The mismanagement of customer loyalty’, 2008, p. 51. Additional information from annual reports and other information found at
Harvard Business Review, July 2002, pp. 86–94. Also see Chris Lema, ‘Not all <www.mcdonalds.com> and <www.statista.com>, accessed April 2016.
customers are equal: Butterflies & barnacles’, 18 April 2013, <http://chrislema.com/ 38 For more on strategic alliances, see Jordan D Lewis, Partnerships for Profit: Structuring
not-all-customers-are-equal-butterflies-barnacles/>; Jill Avery, Susan Fournier & John and Managing Strategic Alliances, Free Press: New York, NY, 1990; Peter Lorange &
Wittenbraker, ‘Unlock the mysteries of your customer relationships’, Harvard Business Johan Roos, Strategic Alliances: Formation, Implementation, and Evolution, Blackwell
Review, July–August 2014, pp. 72–81; and ‘Telling customers “You’re fired!”’, Publishers: Cambridge, MA, 1992; and Frederick E Webster, Jr, ‘The changing role of
SalesAndMarketing.com, September/October 2014, p. 8. marketing in the corporation’, Journal of Marketing, October 1992, pp. 1–17.
23 See ‘Internet usage statistics’, Internet World Stats, <www.internetworldstats. 39 For more on Tesla, see <www.teslamotors.com/en_AU>, accessed April 2016.
com/stats.htm>, accessed April 2016; and ‘Mobile technology fact sheet’, <www. 40 For more on the Rio Earth Summit 1992, see <publications.gc.ca/Collection-R/LoPBdP/
pewinternet.org/fact-sheets/mobile-technology-fact-sheet/>, accessed April 2016. BP/bp317-e.htm>, accessed April 2016.
24 Campbell Simpson, ‘Australians are switching their TV watching to tablets and 41 For more on the Rio Earth Summit in 2012, see <sustainabledevelopment.un.org/rio20>,
smartphones’, Gizmodo, <gizmodo.com.au/2014/07/australians-are-switching-their-tv- accessed April 2016. For further developments, see ‘Sustainable development knowledge
watching-to-tablets-and-smartphones/>, accessed 5 April 2016; and Marla Schimke, platform’, <sustainabledevelopment.un.org>, accessed April 2016.
‘Mobile as marketing’s savior’, Adweek, 15 December 2014, p. 19. 42 See <www.benjerry.com/values>, <www.benandjerrysfoundation.org> and <www.
25 Chris Gayomali, ‘Brands are wasting their time and money on Facebook and unilever.com/brands-in-action/detail/ben-and-jerrys/291995>, accessed September
Twitter, report says’, Fast Company,19 November 2014, <www.fastcompany. 2015.
com/3038801>; ‘Greatness awaits: Sony PlayStation PS4 launch’, Empowered, <http:// 43 See Nat Ives, ‘Digital subs rising, The Economist unbundles tablet editions from print’,
groundswelldiscussion.com/groundswell/awards/detail.php?id=1174>, accessed April AdAge, 30 November 2012. For more on subscriptions, see <https://subscriptions.
2016; Roger Katz, ‘2015 will be the year of the brand community – Here’s why’, ClickZ, economist.com>, accessed April 2016.
23 January 2015, <www.clickz.com/clickz/column/2391666/2015-will-be-the-year- 44 Transport for NSW, Customer Satisfaction Index November 2015, NSW Government,
of-the-brand-community-here-s-why>; and <http://greatnessawaits.playstation.com/ <transport.nsw.gov.au/sites/default/files/b2b/publications/customer-satisfaction-index-
en-us/>, accessed April 2016. nov-2015.pdf>, accessed April 2016.
26 See Stuart Feil, ‘How to win friends and influence people’, Adweek, 12 September 45 For details of the Australian Privacy Act 2001 (Cth), see <www.privacy.gov.au>. See
2013, pp. S1–S7; and Salesforce.com, ‘Just published: 2015 state of marketing report’, <www.acma.gov.au/webwr/consumer_info/spam/spam_overview_for%20_business.
13 January 2015, <http://blogs.salesforce.com/company/2015/01/2015-state-of- pdf> for an overview of the Spam Act 2003 (Cth). See <www.privacy.gov.au/privacy_
marketing.html>, accessed 5 April 2016. rights/donotcall/index.html> for an overview of the Do Not Call Register Act 2006 (Cth).
9780655702412_CH01.indd 35 3/3/20 10:41 AM

Chapter
2 Sustainable marketing: Social

responsibility, ethics and legal
compliance
In this chapter, we examine the concepts of sustainable marketing, meeting the needs of consumers,
businesses and society – now and in the future – through socially and environmentally responsible marketing
actions. We start by defining sustainable marketing and then look at some common criticisms of marketing
as it affects individual consumers, and at public actions that promote sustainable marketing. Finally, we
see how companies themselves can benefit from proactively pursuing sustainable marketing practices that
bring value, not only to the individual consumers and businesses that we refer to as customers, but to
society as a whole. Sustainable marketing actions are more than just the right thing to do; they are also
good for business.
For a visual representation of the chapter, please see the concept map on the following page.
Learning Objective 1 Define sustainable marketing and discuss its importance.

Sustainable marketing pp. 38–39
Learning Learning Objective 2 Identify the main social criticisms of marketing.
Objectives Social criticisms of marketing pp. 39–45
Learning Objective 3 Define consumerism and environmentalism, and explain how these
concepts are linked to marketing strategies.
Consumer actions to promote sustainable marketing pp. 45–49
Learning Objective 4 Describe the principles of sustainable marketing.
Business actions towards sustainable marketing pp. 49–53
Learning Objective 5 Explain the role of ethics in marketing.
The role of ethics in marketing pp. 53–56
Learning Objective 6 Discuss the need for and value of a legal compliance program in
marketing.
Legal compliance in marketing pp. 56–62
9780655702412_CH02.indd 36 3/3/20 10:42 AM

Chapter 2 Sustainable marketing: Social responsibility, ethics and legal compliance 37
Cultura
LO 1
Few
Define sustainable marketing
l pollu
ocia s
and discuss its importance.
Ma
l goa
tion
Ba
teri
Sh
Po
nn
od
a
ed
or
ls
dy
lism
g
rketin
s
ob
or
er v
ha
s
a
ole
rm
i
m
ce
f
s
ful
LO 2
so
ce
pro Consumer
nc
Hig
h-p du
ic sm
e
Identify the main social res cts needs
sur NOW
criticisms of marketing. es
ti
elli
cri
Dec ng
epti
e to
ve p
ract
ices
plan Stra
High p
ons ing t nin te
ep g
A resp
con rket
LO 3 rices
gic ncept
c
Ma
co
Define consumerism and
environmentalism, and
Business
Business
FUTURE
needs
needs
NOW
explain how these
B u sin ess ap
concepts are linked to

marketing strategies.
mar
t
marketing
ce p
on e
•consum cietal ma iissssiioonn
g c nabl
So in
i
ke
g c etal sta
c
Sustain ented m ting •i arrkkeettiin
i
on S u e ti n
proac
ce p r k
t ma
•so
er-ori
able
LO 4
•• sseenns
hes
Describe the principles of

see--oof
mar eting novati g
C onsu m er
to p
sustainable marketing. needs

r
f--mm
ket
ke
ark
rot
FUTURE
ing ust ma
e ct
pri ome rke
en
a ti e c t
mma
•c
n
th
nc r-v tin
eed pro
s
t
on
ipl al
LO 5 s t o er
es ue
of f
ve
ng
vity g e n
ism
Explain the role of ethics ut u ct i
re g l a t ur e
tal
idua
g
in marketing. e n er a
en
Indiv ds of fu
nm
tions vir
o
Ma ee En
rke
tin
g
t he n
eth
ics m
LO 6 eris
sum
Discuss the need for and Legal c Con
ompliance
value of a legal compliance
program in marketing.
9780655702412_CH02.indd 37 3/3/20 10:42 AM

Sustainable marketing
Sustainable marketing calls for socially and environmentally responsible actions that meet the present needs
of customers while also preserving or enhancing the ability of future generations to meet their needs.
Figure 2.1 compares the sustainable marketing concept with other marketing concepts we will study in
later chapters.
The marketing concept recognises that organisations thrive by determining the current needs and
wants of target group customers and fulfilling those needs and wants more effectively and efficiently than
competitors do. It focuses on meeting the company’s short-term sales, growth and profit needs by giving
customers what they want now. However, satisfying consumers’ immediate needs and desires does not
always serve the future best interests of either customers or the business.
For example, early decisions by McDonald’s to market tasty but fat- and salt-laden fast foods created
immediate satisfaction for customers, and sales and profits for the company. However, critics assert that
McDonald’s and other fast-food chains have contributed to a longer-term national obesity epidemic,
damaging consumer health and burdening the national health system. In turn, many consumers have
begun looking for healthier eating options, causing a slump in fast-food industry sales and profits.
Beyond issues of ethical behaviour and social welfare, McDonald’s was also criticised for the sizeable
environmental footprint of its vast global operations, everything from wasteful packaging and solid-
waste creation to inefficient energy use in its stores. Thus, the strategy employed by McDonald’s was not
sustainable in terms of either consumer or company benefit.
Whereas the societal marketing concept identified in Figure 2.1 considers the future welfare of consumers,
and the strategic planning concept considers future company needs, the sustainable marketing concept considers
sustainable both. Sustainable marketing calls for socially and environmentally responsible actions that meet both
marketing the immediate and future needs of customers and the company.
Socially and For example, making wine is not generally considered to be the most environmentally sustainable of
environmentally
responsible marketing businesses; the process makes heavy demands on water for irrigation, and electricity and fuel in production,
that meets the present and there is also a great deal of waste from the winemaking processes. The packaging has a big impact on
needs of consumers and the environment, as does the transport required to move the wine to customers. Wirra Wirra is one of
businesses while also
Australia’s iconic wine brands, and it has made sustainability central to its business success. The company
preserving or enhancing
the ability of future values have, at their heart, ‘play’. But do not be fooled – the values mean ‘play safe’, ‘play together’, ‘play
generations to meet bold’, ‘play hard’ and ‘play fair’, and the company is concerned about what these mean in practice. Wirra
their needs. Wirra is very serious about playing fair with the environment. The vineyard is managed biodynamically –
based on principles of ecological self-sufficiency – with no chemicals or pesticides. The vineyard is located
in a region where the rainfall is often sufficient but, when it is not, Wirra Wirra use drip irrigation systems to
minimise water loss. Since 1994, the company has worked hard to reduce waste, reduce energy consumption
and reduce carbon emissions. They have planted over 4700 native trees since 2011. In 2016, the company’s
Strategic planning
Now Marketing concept
CONSUMERS
concept
NEEDS OF
Societal marketing Sustainable

Future
concept marketing concept
Now Future
NEEDS OF BUSINESS
Figure 2.1 Sustainable marketing
9780655702412_CH02.indd 38 3/3/20 10:42 AM

sustainability efforts were recognised by EPA South Australia as being

good for the environment and good for business.1
Truly sustainable marketing requires a smooth-functioning marketing
system in which consumers, companies, public policymakers and others
work together to ensure socially and environmentally responsible
marketing actions. Unfortunately, however, the marketing system does
not always work smoothly.
The following sections examine several sustainability questions: What

are the most frequent social criticisms of marketing? What steps have
private citizens taken to curb marketing ills? What steps have legislators
and government agencies taken to promote sustainable marketing? What
steps have enlightened companies taken to carry out socially responsible Sustainable marketing: Wirra Wirra sustainability
and ethical marketing that creates sustainable value for both individual practices offer value for customers and position the
customers and society as a whole? company for a profitable future.
Environment Protection Authority (SA); Grapes, moiraff/iStock/Getty
Images; Vineyard, halans/iStock/Getty Images
Social criticisms
of marketing
Marketing receives much criticism. Some of this criticism is justified; much is not. Social critics claim that
certain marketing practices hurt individual consumers, society as a whole and other business firms.
Marketing’s impact on individual customers

People have many concerns about how well the marketing system serves their interests. Surveys usually show
that consumers hold mixed, or even slightly unfavourable, attitudes towards marketing practices. Consumer
advocates, government agencies and other critics have accused marketing of harming consumers through
high prices, deceptive practices, high-pressure selling, shoddy or unsafe products, planned obsolescence
and poor service to disadvantaged consumers. Such questionable marketing practices are not sustainable in
terms of long-term consumer or business welfare.
High prices
Many critics charge that the marketing system causes prices to be higher than they would be under more
‘sensible’ systems. Such high prices are difficult to accept, especially when the economy takes a downturn.
Critics point to three factors: (1) high costs of distribution, (2) high advertising and promotion costs and
(3) excessive markups.
High costs of distribution

A longstanding charge is that greedy marketing channel intermediaries mark up prices beyond the value of
their services. As a result, distribution costs too much, and consumers pay for these excessive costs in the form
of higher prices. Resellers respond that intermediaries do work that would otherwise have to be done by
manufacturers or consumers. Their prices reflect services that consumers themselves want – more convenience,
larger stores and assortments, more service, longer store hours, return privileges and others. In fact, they argue,
retail competition is so intense that margins are actually quite low. Low-price stores, such as ALDI, Costco and
other discounters, pressure their competitors to operate efficiently and keep their prices down.
High advertising and promotion costs

Modern marketing is also accused of pushing up prices to finance unneeded advertising, sales promotion
and packaging. For example, a heavily promoted national brand sells for much more than a virtually
identical store-branded product. Critics charge that much of the packaging and promotion adds only
9780655702412_CH02.indd 39 3/3/20 10:42 AM

psychological value to the product, rather than functional value.

Marketers respond that although advertising adds to product
costs, it also adds value by informing potential buyers of the
availability and merits of a brand. Brand-name products may
cost more, but branding assures buyers of consistent quality.
Moreover, consumers can usually buy functional versions of
products at lower prices. However, they want and are willing to
pay more for products that also provide psychological benefits –
that make them feel wealthy, attractive or special.
Excessive markups
Critics also charge that some companies mark up goods
excessively. They point to the pharmaceutical industry, where
Social criticisms of marketing: A heavily promoted brand-name a pill costing five cents to make may cost the consumer $2 to
medicine sells for much more than a virtually identical non-branded buy, and to the high charges for car repairs, funerals and other
generic product does. Critics charge that promotion adds only
psychological value to the product rather than functional value.
services. Marketers respond that most businesses try to deal
Pharmaceutical companies counter that the costs of research and fairly with consumers because they want to build customer
development need to be recovered. relationships and repeat business. Also, they assert, consumers
© Dmitry Kalinovsky/Shutterstock.com often do not understand the reasons for high markups.
For example, pharmaceutical markups must cover the costs of
purchasing, promoting and distributing existing medicines, plus the high research and development costs
of formulating and testing new medicines. As pharmaceuticals company, GlaxoSmithKline, has stated in its
North American ads, ‘Today’s medicines finance tomorrow’s miracles.’2
Deceptive practices
Marketers are sometimes accused of deceptive practices that lead consumers to believe they will get more
value than they actually do. Deceptive practices fall into three groups: pricing, promotion and packaging.
Deceptive pricing includes such practices as falsely advertising ‘factory’ or ‘wholesale’ prices, or advertising
a large price reduction from a phony high retail-price list. Deceptive promotion includes practices such as
misrepresenting the product’s features or performance, or luring customers to the store for a bargain that
is out of stock. Deceptive packaging includes exaggerating package contents through subtle design, using
misleading labelling or describing size in misleading terms.
Deceptive practices have led to legislation and other consumer protection actions. For example, in
Australia, the laws governing the sale of goods and services come from a three-tiered scheme that includes
common law (reported decisions of courts), state legislation (such as the Sale of Goods Act and Fair Trading Act
in each state) and Commonwealth legislation (most notably, the Competition and Consumer Act 2010 (Cth)).3
Sale of Goods Act In brief, the Sale of Goods Act sets out consumer rights and remedies when purchasing from all manner
The Act sets out of vendors, while the Competition and Consumer Act 2010 and regulations are designed to protect
consumer rights
consumers by focusing on preventing restrictive practices of corporations. The Australian Competition and
and remedies when
purchasing from all Consumer Commission (ACCC), which administers the Commonwealth’s competition, fair-trading and
manner of vendors. consumer protection laws, publishes many guidelines listing deceptive practices. Despite the regulations,
Competition and some critics argue that deceptive claims are still prevalent.
Consumer Act 2010 The toughest problem is defining what is ‘deceptive’. For instance, an advertiser’s claim that its chewing
The Act and regulations gum will ‘rock your world’ is not intended to be taken literally. Instead, the advertiser might claim, it is
are designed to ‘puffery’ – innocent exaggeration for effect. However, others claim that puffery and alluring imagery can harm
protect consumers by
focusing on preventing consumers in subtle ways. Think about the popular and long-running MasterCard Priceless commercials
restrictive practices of that once painted pictures of consumers fulfilling their priceless dreams despite the costs. The ads suggested
corporations. that your credit card could make it happen. But critics maintain that such imagery by credit card companies
encouraged a spend-now-pay-later attitude that caused many consumers to overuse their cards.
9780655702412_CH02.indd 40 3/3/20 10:42 AM

Marketers argue that most companies avoid deceptive practices. Because such practices harm a
company’s business in the long run, they simply are not sustainable. Profitable customer relationships are
built upon a foundation of value and trust. If consumers do not get what they expect, they will switch to
more reliable products. In addition, consumers usually protect themselves from deception. Most consumers
recognise a marketer’s selling intent and are careful when they buy, sometimes even to the point of not
believing completely true product claims.
High-pressure selling
Salespeople are sometimes accused of high-pressure selling that persuades people to buy goods they
had not thought of buying. It is often said that insurance, real estate and used cars are sold, not bought.
Salespeople are trained to deliver smooth, canned talks to entice purchase. They sell hard because sales
contests promise big prizes to those who sell the most. Television infomercials hit their mark because they
use ‘yell and sell’ presentations that create a sense of consumer urgency which only those with strong
willpower can resist.
However, in most cases, marketers have little to gain from high-pressure selling. Such tactics may
work in one-time selling situations for short-term gain. In the main, selling involves building long-term
relationships with valued customers. High-pressure or deceptive selling can do serious damage to such
relationships. For example, imagine a Procter & Gamble key account manager trying to pressure a Coles
or Woolworths buyer, or a Hewlett-Packard key account manager trying to browbeat a Wesfarmers
information technology manager. It simply would not work.
Shoddy, harmful or unsafe products

Another criticism concerns poor product quality or function. One complaint is that, too often, products are
not made well and services are not performed well. A second complaint is that many products deliver little
benefit, or that they might even be harmful.
For example, think about the soft-drink industry. Many critics blame the plentiful supply of sugar-
laden, high-calorie soft drinks for the nation’s rapidly growing obesity epidemic. Studies show that nearly
two in three adult Australians are now overweight or obese. This weight increase comes despite repeated
medical studies showing that excess weight brings increased risks for heart disease, diabetes and other
maladies, even cancer.4 The critics are quick to fault what they see as greedy beverage marketers cashing in
on vulnerable consumers. Is the soft-drink industry being socially irresponsible by aggressively promoting
overindulgence to ill-informed or unwary consumers? Or
are they simply serving the wants of customers by offering
products that jolt their taste buds while letting consumers make
their own eating choices? Whereas some analysts criticise the
industry, others suggest that responsibility lies with consumers.
‘Soft drinks have unfairly become the whipping boy of most
anti-obesity campaigns,’ suggests one business reporter. As in
many matters of social responsibility, what is right and wrong
may be a matter of opinion.5
A third complaint concerns product safety. Product safety
has been a problem for several reasons, including company
indifference, increased product complexity and poor quality
control. For years, Choice – the non-profit testing and
Harmful products: Soft drinks have often been charged with
information organisation that publishes Consumer Reports responsibility for the growing obesity epidemic in Australia and
magazine and website – has reported various hazards in tested New Zealand; others argue that responsibility for consumption lies
products: electrical dangers in appliances, carbon monoxide with the consumer.
© Charlie Edwards/Shutterstock.com
poisoning from room heaters, injury risks from lawn mowers,
9780655702412_CH02.indd 41 3/3/20 10:42 AM

and faulty motor vehicle design, among many others. The organisation’s testing and other activities have
helped consumers make better buying decisions and encouraged businesses to eliminate product flaws.6
However, most manufacturers want to produce quality goods. The way a company deals with product
quality and safety problems can damage or help its reputation. Companies selling poor-quality or unsafe
products risk damaging conflicts with consumer groups and regulators. Unsafe products can result in
product liability suits and large awards for damages. More fundamentally, consumers who are unhappy
with a firm’s products may avoid future purchases and talk other consumers into doing the same. In today’s
social media and online review environment, word of poor quality can spread like wildfire. Thus, quality
missteps are inconsistent with sustainable marketing. Today’s marketers know that good quality results in
customer value and satisfaction, which, in turn, creates sustainable customer relationships.
Planned obsolescence
Critics have charged that some companies practise planned obsolescence, causing their products to become
obsolete before they actually should need replacement. They accuse some producers of using materials and
components that will break, wear, rust or rot sooner than they should. And, if the products themselves do
not wear out fast enough, other companies are charged with perceived obsolescence – continually changing
consumer concepts of acceptable styles to encourage more and earlier buying. An obvious example is
constantly changing clothing fashions.
Still others are accused of introducing planned streams of new products that make older models
obsolete. Critics claim that this occurs in the consumer electronics and computer industries. If you are
like most people, you probably have a drawerful of yesterday’s hottest technological gadgets – from mobile
phones and cameras to iPods and flash drives – now reduced to the status of fossils. It seems that anything
more than a year or two old is hopelessly out of date.
Marketers respond that consumers like style changes; they get tired of the old goods and want a new look
in fashion. Or they want the latest high-tech innovations, even if older models still work. No one has to buy
the new product and if too few people like it, it will simply fail. Finally, most companies do not design their
products to break down earlier because they do not want to lose customers to other brands. Instead, they
seek constant improvement to ensure that products will consistently meet or exceed customer expectations.
Much of the so-called planned obsolescence is the working of the competitive and technological forces in
a free society – forces that lead to ever-improving goods and services.
Poor service to disadvantaged consumers

Finally, the marketing system has been accused of poorly serving disadvantaged consumers. For example,
critics claim that rural and regional Australia, with disproportionately more low-income families, has
the highest rate of service exclusion – ‘particularly in relation to medical and dental services, child care
and financial services’. Moreover, in these regional communities, the cost of goods and services is higher.
For example, one study found that food costs 10–20 per cent more in regional Australia than it does in cities,
and petrol was 10 per cent more expensive. In other research, investigations revealed that the concentration
of bottle shops was six times higher in poorer neighbourhoods than in those of the typical well-off Australian.7
Clearly, better marketing systems must be built to service disadvantaged consumers. In fact, many
marketers profitably target such consumers with legitimate goods and services that create real value.
In cases in which marketers do not step in to fill the void, the government likely will. For example, the
ACCC and state consumer protection agencies can and do take action against sellers that advertise false
values, wrongfully deny services or charge disadvantaged customers too much.
Marketing’s impact on society as a whole

The marketing system has been accused of adding to several ‘evils’ in society at large, such as creating too
much materialism, too few social goods and a glut of cultural pollution.
9780655702412_CH02.indd 42 3/3/20 10:42 AM

False wants and too much materialism

Critics have charged that the marketing system urges too much interest in material possessions, and that
the Western world’s love affair with worldly possessions is not sustainable. Too often, people are judged
by what they own, rather than by who they are. The critics do not view this interest in material things as
a natural state of mind, but rather as a matter of false wants created by marketing. Marketers, they claim,
stimulate people’s desires for goods and create materialistic models of the good life. Thus, marketers have
seemingly created an endless cycle of mass consumption – creating false wants that benefit industry more
than they benefit consumers.
Marketers respond that such criticisms overstate the power of business to create needs. People have
strong defences against advertising and other marketing tools. Marketers are most effective when they
appeal to existing wants, rather than when they attempt to create new ones. Furthermore, people seek
information when making important purchases and often do not rely on single sources. Even minor
purchases that may be affected by advertising messages lead to repeat purchases only if the product delivers
the promised customer value. Finally, the high failure rate of new products shows that companies are not
able to control demand.
On a deeper level, our wants and values are influenced not only by marketers but also by family,
peer groups, religion, cultural background and education. If Australians and New Zealanders are highly
materialistic, these values arose out of basic socialisation processes that go much deeper than business and
mass media could produce alone. Moreover, consumption patterns and attitudes are also subject to larger
forces, such as the global economy (discussed in Chapter 3).
Too few social goods

Business has been accused of overselling private goods at the expense of public
goods. As private goods increase, they require more public services that are usually
not forthcoming. For example, an increase in motor vehicle ownership (private good)
requires more highways, traffic control, parking spaces and police services (public
goods). The overselling of private goods results in ‘social costs’. For cars, some of the
social costs include traffic congestion, petrol shortages and air pollution, which often
occur simply by cars sitting in traffic jams on overcrowded public roads.
A way must be found to restore a balance between private goods and public
goods. One option is to make producers bear the full social costs of their operations.
For example, the government is requiring motor vehicle manufacturers to build cars
with more-efficient engines and better pollution-control systems, and encouraging
the manufacture of cars that use alternative energy sources, such as hybrid electric
vehicles. Car makers will then raise their prices to cover the extra costs. If buyers find
the price of some cars too high, however, the producers of these cars will disappear.
Demand will then move to those producers that can support the sum of the private
and social costs.
A second option is to make consumers pay the social costs. For example, many
cities around the world are now charging ‘congestion tolls’ in an effort to reduce traffic
congestion. Time-of-day tolling was introduced on the Sydney Harbour Bridge to
encourage motorists to drive outside of peak times. In the morning and afternoon
peaks, the southbound charges are $4 a trip but after 7 pm until the next morning, the Social costs: All around Australia and in
New Zealand, congestion tolls similar to
fee is only $2.50. The toll is lower on weekends, too. And, in cities all around Australia those levied for driving at peak times on
and New Zealand, congestion tolls similar to those levied by the City of London, where the Sydney Harbour bridges are being
motorists pay to drive in downtown London, are being considered. These types of considered to help reduce the costs of a
congested city.
charges reduce traffic congestion and promote alternative transport use: people walk,
© Blaine Harrington/imagefolk
cycle and take public transport.8
9780655702412_CH02.indd 43 3/3/20 10:42 AM

Cultural pollution
Critics charge the marketing system with creating cultural pollution. They believe our senses are being
constantly assaulted by marketing and advertising. Commercials interrupt serious programs; pages of ads
obscure magazine articles; billboards mar beautiful scenery; spam fills our email inboxes. What’s more,
the critics claim, these interruptions continually pollute people’s minds with messages of materialism, sex,
power or status. Some critics are calling for sweeping changes.
Marketers answer the charges of ‘commercial noise’ with the following arguments. First, they hope that
their ads reach primarily the target audience. But because of mass-communication channels, some ads are
bound to reach people who have no interest in the product and are therefore bored or annoyed. People
who buy magazines they like or who opt-in to email, social media or mobile marketing programs rarely
complain about the ads because they involve products and services of interest.
Second, because of ads, many television, radio and online sites are free to users. Ads also help keep down
the costs of magazines and newspapers. Many people think commercials are a small price to pay for these
benefits. In addition, consumers find many television commercials entertaining and seek them out.
Finally, today’s consumers have alternatives. For example, they can skip over television commercials
on recorded programs or avoid them altogether on many subscription television and paid online channels.
In response, to hold consumer attention, advertisers are making their ads more entertaining and informative.
Marketing’s impact on other businesses

Critics also charge that a company’s marketing practices can harm other companies and reduce competition.
Three problems are involved: acquisitions of competitors, marketing practices that create barriers to entry,
and unfair competitive marketing practices.
Critics claim that firms are harmed and competition is reduced when companies expand by acquiring
competitors rather than by developing their own new products. The large number of acquisitions
and the rapid pace of industry consolidation over the past several decades have caused concern that
vigorous young competitors will be absorbed and competition will be reduced. For example, Coles
recently restructured a planned purchase of nine supermarkets from supaBARN because the ACCC
expressed concerns about reduced competition from the acquisition. In the restructured acquisition, the
sale was reduced to five supermarkets across the Australian Capital Territory and New South Wales.9
In virtually every major industry – retailing, entertainment, financial services, utilities, transportation,
motor vehicles, telecommunications, health care – the number of major competitors is shrinking.
Acquisition is a complex subject. In some cases,
acquisitions can be good for society. The acquiring company
may gain economies of scale that lead to lower costs and
lower prices. A well-managed company may take over
a poorly managed company and improve its efficiency.
An industry that was not very competitive might become
more competitive after the acquisition. But acquisitions can
also be harmful and, therefore, are closely regulated by the
government.
Critics have charged that marketing practices bar new
companies from entering an industry. Large marketing
companies can use patents and heavy promotion spending,
Impact on other businesses: Coles recently restructured a planned or can bind suppliers or dealers to keep out or drive out
purchase of nine supermarkets from supaBARN because the competitors. Those concerned with antitrust regulation
ACCC expressed concerns about reduced competition from the
recognise that some barriers are the natural result of the
acquisition.
economic advantages of doing business on a large scale.
9780655702412_CH02.indd 44 3/3/20 10:42 AM

Other barriers could be challenged by existing and new laws. For example, some critics have proposed
a progressive tax on advertising spending to reduce the role of selling costs as a major barrier to
market entry.
Finally, some firms have, in fact, used unfair competitive marketing practices with the intention of
hurting or destroying other firms. They may set their prices below costs, threaten to cut off business with
suppliers or discourage the buying of a competitor’s products. Although various laws work to prevent such
predatory competition, it is often difficult to prove that the intent or action was actually predatory.
In recent years, large retailers have been accused of using predatory pricing in selected market areas to
drive smaller, independent retailers out of business. However, whereas critics charge that the large retailers’
actions are predatory, others assert that its actions are just the healthy competition of a more efficient company
against less efficient ones. Nevertheless, the Competition and Consumer Act 2010 and the powers of the ACCC
seem to moderate the power of retailers and allegations of retailer margin squeezing made by suppliers.10

Few marketers want to abuse or anger consumers – it is simply ● Pick one of the instances of marketing abuses you listed above
not good business. Still, some marketing abuses do occur. and describe it in detail. How might you go about righting this
● Think back over the past three months or so and list any wrong? Write an action plan and then do something to remedy
instances in which you have suffered a marketing abuse the abuse. If we all took such actions when wronged, there
such as those just discussed. Analyse your list: What kinds of would be far fewer wrongs to right!
companies were involved? Were the abuses intentional? What
did the situations have in common?
Consumer actions to promote

sustainable marketing
Sustainable marketing calls for more responsible actions by both businesses and consumers. Because
some people view business as the cause of many economic and social ills, grassroots movements have
arisen from time to time to keep business in line. The two main movements have been consumerism and
environmentalism.
Consumerism
Consumerism is an organised movement of citizens and government agencies to improve the rights and consumerism
power of buyers in relation to sellers. Traditional sellers’ rights include the following: An organised movement
of citizens and
• the right to introduce any product in any size and style, provided it is not hazardous to personal
government agencies
health or safety; or, if it is, to include proper warnings and controls whose aim is to improve
• the right to charge any price for the product, provided no discrimination exists among similar kinds the rights and power
of buyers of buyers in relation to
sellers.
• the right to spend any amount to promote the product, provided it is not defined as unfair
competition
• the right to use any product message, provided it is not misleading or dishonest in content or
execution
• the right to use any buying incentive programs, provided they are not unfair or misleading.
Traditional buyers’ rights include:
• the right not to buy a product that is offered for sale
• the right to expect the product to be safe
• the right to expect the product to perform as claimed.
9780655702412_CH02.indd 45 3/3/20 10:42 AM

Comparing these rights, many believe that the balance of power lies on the seller’s side. True, the buyer
can refuse to buy. But critics believe that the buyer has too little information, education and protection to
make wise decisions when facing sophisticated sellers. Consumer advocates call for the following additional
consumer rights:
• the right to be well informed about important aspects of the product
• the right to be protected against questionable products and marketing practices
• the right to influence products and marketing practices in ways that will improve the ‘quality of life’
• the right to consume now in a way that will preserve the world for future generations of consumers.
Each proposed right has led to more specific proposals by consumerists. The right to be informed
includes the right to know the true interest on a loan (truth in lending), the true cost per unit of a brand
(unit pricing), the ingredients in a product (ingredient labelling), the nutritional value of foods (nutritional
labelling), product freshness (open dating) and the true benefits of a product (truth in advertising).
Consumerism: The ACCC provides information about unit pricing to help consumers make
more informed decisions. In this example, the higher-priced laundry detergent has the lower unit
price.
Proposals related to consumer protection include strengthening consumer rights in cases of business
fraud, requiring greater product safety, ensuring information privacy and giving more power to government
agencies. Proposals relating to quality of life include controlling the ingredients that go into certain products
and packaging, and reducing the level of advertising ‘noise’. Proposals for preserving the world for future
consumption include promoting the use of sustainable ingredients, recycling and reducing solid wastes, and
managing energy consumption.
Sustainable marketing is up to consumers as well as to businesses and governments. Consumers have not
only the right, but also the responsibility, to protect themselves instead of leaving this function to someone
else. Consumers who believe they got a bad deal have several remedies available, including contacting the
company or the media; contacting federal, state or local agencies; and taking the complaint to small-claims
court. Consumers should also make good consumption choices, rewarding companies that act responsibly
while punishing those that do not.
Environmentalism
Whereas consumerists consider whether the marketing system is efficiently serving consumer wants,
environmentalists are concerned with marketing’s effects on the environment and with the environmental
environmentalism costs of serving consumer needs and wants. Environmentalism is an organised movement of concerned
An organised movement citizens, businesses and government agencies that aims to protect and improve people’s current and future
of concerned citizens
living environment.
and government
agencies that aims to Environmentalists are not against marketing and consumption; they simply want people and organisations
protect and improve to operate with more care for the environment. They call for doing away with what sustainability advocate
people’s current and Unilever CEO Paul Polman calls ‘mindless consumption’. According to Polman, ‘The road to
and future living
environment. well-being doesn’t go via reduced consumption. It has to be done via more responsible consumption.’11
The marketing system’s goal, the environmentalists assert, should not be to maximise consumption,
consumer choice or consumer satisfaction, but rather to maximise life quality. Life quality means not only
the quantity and quality of consumer goods and services, but also the quality of the environment.
9780655702412_CH02.indd 46 3/3/20 10:42 AM

Environmentalism is concerned with damage to the ecosystem caused by global warming, resource
depletion, toxic and solid wastes, litter, reduced availability of fresh water and other problems. Other issues
include the loss of recreational areas and the increase in health problems caused by poor air quality, polluted
water and chemically treated food.
Over the past several decades, such concerns have resulted in laws and regulations governing industrial
commercial practices that affect the environment. Some companies have strongly resented and resisted such
environmental regulations, claiming they are too costly and have made their industries less competitive.
These companies responded to consumer environmental concerns by doing only what was required to
avert new regulations or to keep environmentalists quiet.
In recent years, however, most companies have accepted responsibility for doing no harm to the
environment. They have shifted from protest to prevention, and from regulation to responsibility.
More and more companies are adopting policies of environmental sustainability. Today’s enlightened environmental
companies are taking action, not because someone is forcing them to or to reap short-run profits but sustainability
because it is the right thing to do – because it is for their customers’ wellbeing, the company’s wellbeing and A management
approach that involves
the planet’s environmental future. For example, consumer-products giant, Unilever, has successfully built developing strategies
its core mission around environmental sustainability – its aim is to ‘make sustainable living commonplace’.12 that both sustain the
Figure 2.2 shows a grid that companies can use to gauge their progress towards environmental environment and
produce profits for the
sustainability. It includes both internal and external ‘greening’ activities that will pay off for the firm and
company.
environment in the short run, and ‘beyond greening’ activities that will pay off in the longer term.
At the most basic level, a company can practise pollution prevention. This involves more than pollution
control – that is, cleaning up waste after it has been created. Pollution prevention means eliminating or
minimising waste before it is created. Companies emphasising pollution prevention have responded with
internal ‘green marketing’ programs – designing and developing ecologically safer products, recyclable and
biodegradable packaging, better pollution controls and more energy-efficient operations. For example,
Nike makes shoes out of ‘environmentally preferred materials’, recycles old sneakers and educates young
people about conservation, reuse and recycling. Its revolutionary woven Flyknit shoes are lightweight,
comfortable and durable but produce 66 per cent less material waste in production – the material wasted in
making each pair of Flyknits weighs only as much as a sheet of paper.13
At the next level, companies can practise product stewardship – minimising not just pollution from
production and product design but all environmental impacts throughout the full product life cycle, and
all the while reducing costs. Many companies are adopting design for environment (DFE) and cradle-to-cradle
practices. These involve thinking ahead and designing products that are easier to recover, reuse, recycle
TODAY: TOMORROW:
GREENING BEYOND GREENING
Pollution prevention New clean technology

INTERNAL Eliminating or reducing Developing new sets
waste before it is of environmental
created skills and capabilities
Product stewardship Sustainability vision

EXTERNAL Minimising environmental Creating a strategic
impact throughout the framework for future
entire product life cycle sustainability
Figure 2.2 The environmental sustainability portfolio

Source: Adapted from Stuart L Hart, ‘Beyond greening: Strategies for a sustainable world’, Harvard Business Review, January 1997.
9780655702412_CH02.indd 47 3/3/20 10:42 AM

or safely return to nature after usage, becoming part of the ecological cycle. DFE and cradle-to-cradle
practices not only help to sustain the environment; they can also be highly profitable for the company.
For example, more than a decade ago, IBM started a business – IBM Global Asset Recovery Services –
designed to reuse and recycle parts from returned mainframe computers and other equipment. In 2014, IBM
processed more than 34 400 tonnes of end-of-life products and product waste worldwide, stripping down
old equipment to recover chips and valuable metals. It finds uses for more than 99 per cent of what it takes
in, sending less than 1 per cent to landfills and incineration facilities. What started out as an environmental
effort has now grown into a multi-billion-dollar IBM business that profitably recycles electronic equipment
at 22 sites worldwide.14
Today’s ‘greening’ activities focus on improving what companies already do to protect the environment.
The ‘beyond greening’ activities identified in Figure 2.2 look to the future. First, internally, companies
can plan for new clean technology. Many organisations that have made good sustainability headway are still
limited by existing technologies. To create fully sustainable strategies, they will need to develop innovative
new technologies.
Further, companies can develop a sustainability vision, which serves as a guide to the future.
It shows how the company’s products and services, processes and policies must evolve, and what new
technologies must be developed to get there. This vision of sustainability provides a framework for
pollution control, product stewardship and new environmental technology for the company and
others to follow.
Today, most companies focus on activities associated with the upper-left quadrant of the grid in
Figure 2.2, investing most heavily in pollution prevention. Some forward-looking companies practise
product stewardship and are developing new environmental technologies. Few companies have well-
defined sustainability visions. However, emphasising only one or a few quadrants in the environmental
sustainability grid can be short-sighted. Investing only in the activities in the left half of the grid puts a
company in a good position today but leaves it vulnerable in the future. In contrast, a heavy emphasis
on the activities in the right half of the grid suggests that a company has good environmental vision but
lacks the skills needed to implement it. Thus, companies should work at developing all four dimensions of
environmental sustainability.
Environmentalism creates some special challenges for global marketers. As international trade
barriers come down and global markets expand, environmental issues are having an ever-greater impact on
international trade. Countries in many regions are generating
strict environmental standards. However, environmental
policies still vary widely from country to country. Countries
such as Australia, Denmark, Germany, Japan, New Zealand
and the United States have fully developed environmental
policies and high public expectations. But major countries such
as China, India, Brazil and Russia are in only the early stages
of developing such policies. Moreover, environmental factors
that motivate consumers in one country may have no impact
on consumers in another. For example, PET soft-drink bottles
cannot be used in San Francisco. However, they are preferred
in France, which has an extensive recycling process for them.15
Thus, international companies have found it difficult to
Environmentalism: Attitudes to PET soft-drink bottles vary from develop standard environmental practices that work around
country to country, making it difficult for marketers to develop the world. Instead, they are creating general policies and then
standard environmental practices. translating these policies into tailored programs that meet
© alterfalter/Shutterstock
local regulations and expectations.
9780655702412_CH02.indd 48 3/3/20 10:42 AM

Public actions to regulate marketing

Public concerns about marketing practices usually lead to public attention and legislative proposals. New
Bills are then debated – many are defeated, others are modified and a few become workable laws.
Many of the laws that affect marketing are identified in Chapter 3. The task is to translate these laws
into the language that marketing executives understand as they make decisions about competitive relations,
products, price, promotion and channels of distribution. Figure 2.3 summarises the main legal issues facing
marketing management.
SELLING DECISIONS PRODUCT DECISIONS

Bribing? Product additions and deletions?
Stealing trade secrets? Patent protection?
Disparaging customers? Product quality and safety?
Misrepresenting? Product warranty?
Disclosure of customer
rights?
Unfair discrimination? PACKAGING DECISIONS
Fair packaging and
ADVERTISING DECISIONS labelling?
False advertising? Excessive cost?
Deceptive advertising? Scarce resources?
Bait-and-switch advertising? Pollution?
Promotional allowances and
services?
PRICE DECISIONS
CHANNEL DECISIONS Price fixing?
Exclusive dealing? Predatory pricing?
Exclusive territorial Price discrimination?
distributorship? Minimum pricing?
Tying agreements? Price increases?
Dealer’s rights? Deceptive pricing?
COMPETITIVE RELATIONS DECISIONS
Anti-competitive acquisition?
Barriers to entry?
Predatory competition?
Figure 2.3 Major legal issues facing marketing management

123RF/Iurii Sokolov
Business actions towards sustainable

marketing
At first, many companies opposed consumerism, environmentalism and other elements of sustainable
marketing. They thought the criticisms were either unfair or unimportant. But by now, most companies
have grown to embrace sustainability marketing principles as a way to create both immediate and future
customer value and strengthen customer relationships.
Sustainable marketing principles

Under the sustainable marketing concept, a company’s marketing should support the best long-run
performance of the marketing system. It should be guided by five sustainable marketing principles:
(1) consumer-oriented marketing, (2) customer-value marketing, (3) innovative marketing, (4) sense-of-mission
marketing and (5) societal marketing.
9780655702412_CH02.indd 49 3/3/20 10:42 AM

Consumer-oriented marketing
consumer- Consumer-oriented marketing means that the company should consider and organise its marketing
oriented activities from the consumer’s point of view. It should work hard to sense, serve and satisfy the needs
marketing of a defined group of customers, both now and in the future. All of the good marketing companies that
The philosophy of
sustainable marketing we discuss in this book have this in common: an all-consuming passion for delivering superior value to
which holds that the carefully chosen customers. Only by seeing the world through its customers’ eyes can the company build
company should lasting and profitable customer relationships.
consider and organise its
marketing activities from
the consumer’s point of Customer-value marketing
view. According to the principle of customer-value marketing, the company should put most of its
resources into customer-value-building marketing investments. Many things marketers do – one-shot sales
customer-value promotions, cosmetic packaging changes, direct-response advertising – may raise sales in the short run but
marketing
A principle of add less value than would actual improvements in the product’s quality, features or convenience. Enlightened
sustainable marketing marketing calls for building long-run consumer loyalty and relationships by continually improving the
which holds that a value consumers receive from the firm’s market offering. By creating value for consumers, the company can
company should put capture value from consumers in return.
most of its resources
into customer-value-
building marketing Innovative marketing
investments.
The principle of innovative marketing requires that the company continuously seek real product and
marketing improvements. The company that overlooks new and better ways to do things will eventually
innovative lose customers to another company that has found a better way. For nearly 50 years, through innovative
marketing
A principle of marketing, Nike has built the ever-present swoosh into one of the world’s best-known brand symbols.
sustainable marketing When sales languished in the late 1990s and new competitors made gains, Nike knew it had to reinvent
which requires that itself via product and marketing innovation. Over the past few years, Nike has unleashed a number of highly
a company seek real
successful new products. For example, with the relatively recent launch of the Nike Flyknit Racer, Nike
product and marketing
improvements. reinvented the very way that shoes are manufactured. Top off Nike’s new products with a heavy investment
in social media content and Nike remains the world’s largest sports-apparel company, 44 per cent larger
than its closest rival, adidas. Both Forbes and Fast Company recently anointed Nike as the world’s number-
one most innovative company.16
Sense-of-mission marketing
sense-of-mission Sense-of-mission marketing means that the company should define its mission in broad social terms,
marketing rather than in narrow product terms. When a company defines a social mission, employees feel better about
A principle of their work and have a clearer sense of direction. Brands linked with broader missions can serve the best
sustainable marketing
which holds that a long-run interests of both the brand and consumers. For example, defined in narrow product terms, the
company should define mission of outdoor gear and apparel maker Patagonia might be ‘to sell clothes and outdoor equipment’.
its mission in broad However, Patagonia states its mission more broadly, as one of producing the highest-quality products
social terms, rather
while doing the least harm to the environment. From the start, Patagonia has pursued a passionately held
than in narrow product
terms. social responsibility mission. Each year since 1985, the company donates its time, services and at least
1 per cent of sales or 10 per cent of pre-tax profits to hundreds of grassroots environmental groups all
over the world that are working to help reverse the environmental tide (see the Patagonia case study in
Appendix 1).17
However, having a ‘double bottom line’ of values and profits is no easy proposition. Over the
years, companies such as Patagonia and The Body Shop – known and respected for putting ‘principles
before profits’ while focusing on making the world a better place – have, at times, struggled with less-
than-stellar financial returns. In recent years, however, a new generation of social entrepreneurs has
9780655702412_CH02.indd 50 3/3/20 10:42 AM

emerged, well-trained business managers who know that to do good, they must first do well in terms of
profitable business operations. For example, ASRC Catering provides catering events throughout the
Melbourne area while at the same time providing training and careers in hospitality for people seeking
asylum. The company was recognised in the Social Enterprise Awards 2016 for their contribution to
social and economic empowerment for asylum seekers. The business has experienced phenomenal
success and this has enabled them to invest over $750 000 in support programs for asylum seekers over
the last five years.18
Moreover, today, socially responsible business is no longer the sole province of small, socially conscious
entrepreneurs. Many large, established companies and brands – from IKEA and Nike to BHP Billiton and
Coca-Cola – have adopted substantial social and environmental responsibility missions.
Societal marketing
Following the principle of societal marketing, a company makes marketing decisions by societal
considering consumers’ wants and interests, the company’s requirements and society’s long-run marketing
The idea that a
interests. The company is aware that neglecting consumer and societal long-run interests is a
company’s marketing
disservice to consumers and society. Alert companies view societal problems as opportunities (see decisions should
Marketing in Action 2.1). consider consumers’
Sustainable marketing calls for products that are not only pleasing but also beneficial. The difference wants, the company’s
requirements,
is shown in Figure 2.4. Products can be classified according to their degree of immediate consumer
consumers’ long-run
satisfaction and long-run consumer benefit. Deficient products, such as bad-tasting and ineffective medicine, interests and society’s
have neither immediate appeal nor long-run benefits. Pleasing products give high immediate satisfaction long-run interests.
but may hurt consumers in the long run. Examples include cigarettes and junk food. Salutary products have
low immediate appeal but may benefit consumers in the long run; for instance, bicycle helmets or some
insurance products. Desirable products give both high immediate satisfaction and high long-run benefits,
such as a tasty and nutritious breakfast food.
Examples of desirable products abound. The ranges of compact fluorescent and LED light bulbs by
companies such as Nelson and Mirabella provide good lighting at the same time as they give long bulb
life and energy savings. Both GMH’s hybrid Volt and Toyota’s hybrid Prius give a quiet ride and fuel
efficiency. Companies should try to turn all their products into desirable products. The challenge posed by
pleasing products is that they sell very well but may end up hurting the consumer. The product opportunity,
therefore, is to add long-run benefits without reducing the product’s pleasing qualities. The challenge posed
by salutary products is to add some pleasing qualities so that they will become more desirable in consumers’
minds.
IMMEDIATE SATISFACTION
Low High
CONSUMER BENEFIT
High Salutary products Desirable products

LONG-RUN
Low Deficient products Pleasing products
Figure 2.4 Societal classification of products
9780655702412_CH02.indd 51 3/3/20 10:42 AM

Marketing
Peoples Coffee: Making a difference, one cup at a time
in Action
2.1
In 2015, the 193 member states of the United Nations adopted an agenda for signatories to the Global Compact believe it is possible to do this in a way that
sustainable development to end poverty, fight inequality and tackle climate also contributes to the wider communities in which the businesses operate.
change. The 17 sustainable development goals cover everything from zero hunger However, there is a new type of business emerging that flips this perspective
and gender equality to decent work and economic growth. The goals provide an entirely on its head. Social enterprises are ‘businesses that trade intentionally to
important framework for governments to transform our world. But the goals go tackle social problems’. In Australia and New Zealand, there is no legal definition
much further. They ask individuals and business to consider how they can make of a social enterprise but they are usually businesses that have a social mission,
a contribution. For individuals, it can be small actions that collectively make big that make most of their money by trading and that use most of their profit to
differences, such as reporting bullies, recycling and reusing, and shopping smart. advance their social objectives.
And, for businesses, the call is to play a larger role in advancing sustainable One such business is Wellington-based Peoples Coffee. They make coffee –
development. roasting beans – selling it direct to coffee lovers and to cafés. The business believes
Over 9000 companies and 3000 other organisations have signed up to they can change the world, one cup of coffee at a time. These fair-trade-focused
the United Nations Global Compact, committed to universal sustainability coffee makers want to use ‘trade as a mechanism for change in the coffee industry’.
principles and supporting United Nations goals. Companies that have signed up Their philosophy is simple: ‘Buy Coffee. Get Change.’ The social enterprise’s blog
to the Global Compact include both small businesses, such as South Australian explains that coffee production has a long history of exploitation, which left many
packaging manufacturers Streamline Cartons Pty Ltd, and large companies, of the small farmers who produce the coffee beans receiving very little for their
such as Air New Zealand and Telstra. Non-government organisations such as efforts. This is because these small farmers need to use middlemen (and often
The Ethics Centre, and local governments such as the Rotorua Lakes Council many) to access profitable export markets.
and Maribyrnong City Council, are also participants. For 118 Australian and To make sure these small-lot farmers get more in their pockets when they
New Zealand signatories to the Global Compact, sustainability ‘begins with a sell their produce, Peoples Coffee buys their beans from Trade Aid Importers (a
principled approach to doing business’. broker that buys only from farmer co-operatives). A co-operative is a business
Each of the managers, leaders and owners that are signatories to the or organisation that is owned and run by the people who work there or use
Global Compact believe it is possible for businesses to make a difference to the its services – in this case, the farmers. Peoples Coffee also checks to make sure
world by the way they operate. Business goals are usually to make a profit but their coffee beans come from those farmer co-operatives that ensure sustainable
Sustainable marketing: The 10 principles of the United Nations Global Compact shape the way
participants do business
Human rights
Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and
Principle 2: make sure that they are not complicit in human rights abuses.
Labour
Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;
Principle 4: the elimination of all forms of forced and compulsory labour;
Principle 5: the effective abolition of child labour; and
Principle 6: the elimination of discrimination in respect of employment and occupation.
Environment
Principle 7: Businesses should support a precautionary approach to environmental challenges;
Principle 8: undertake initiatives to promote greater environmental responsibility; and
Principle 9: encourage the development and diffusion of environmentally friendly technologies.
Anti-corruption
Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.
Source: The Ten Principles of the UN Global Compact, <www.unglobalcompact.org/what-is-gc/mission/principles>.
9780655702412_CH02.indd 52 3/3/20 10:42 AM

production and real benefits for the farmers and their communities. They do this the female inmates and also a sense of accomplishment. As one inmate explained,
by visiting the small farmers at harvest time, together with their broker, Trade ‘my gran and my mum are really proud of me’. Projects like this and others mean
Aid Importers. that Peoples Coffee really are ‘People for the common great’! In their own small
Another reason Peoples Coffee uses Trade Aid Importers is that they deal way, the business is contributing to the United Nations sustainable development
directly with the farmer co-operative about the prices that will be paid for the goals to eliminate poverty, to create opportunities for decent work and economic
coffee beans. Usually, global coffee prices are set by the New York Coffee Futures development, and to ensure sustainable patterns of consumption and production.
market (the stock exchange where traders agree to buy and sell a stock certificate Sources: ‘Sustainable development goals: 17 goals to transform our world’,
for a set price on a particulate future date). In dealing directly with the farmers’ <www.un.org/sustainabledevelopment/>; and United Nations Global Compact
<www.unglobalcompact.org/>; accessed December 2016. Deidre Mussen, ‘Behind
co-operative (via Trade Aid Importers), Peoples Coffee ensures that prices are fair bars barista training a boost for Arohata Women’s Prison inmates’, 10 July 2015,
for the farmers and that they themselves remain competitive. <www.stuff.co.nz/business/better-business/70122580/behind-bars-barista-training-a-
Peoples Coffee also want to make a difference locally, so they invest their profits boost-for-arohata-womens-prison-inmates>, accessed December 2016; and also Peoples
Coffee website, <http://peoplescoffee.co.nz/>, and blog, <http://peoplescoffee.co.nz/
in ways that help New Zealanders. For example, the social enterprise provides barista blog/>, accessed December 2016. For a definition of social enterprise, see ‘Social enterprise
training for women in Arohata Prison. The program offers transferable job skills for definition’, <www.socialtraders.com.au/about-social-enterprise/what-is-a-social-enterprise/
social-enterprise-definition/>, accessed December 2016.
Questions
❶ Take a look at the United Nations sustainability development goals.
Then, working in a small group, search online for social enterprises and
businesses that have a mission to make a difference, with a focus on one
of the UN sustainability development goals. What evidence is there that
the businesses are having an impact?
❷ Research the Peoples Coffee website, <http://peoplescoffee.co.nz/>, and
blog, <http://peoplescoffee.co.nz/blog/>. Write a blog post that explains
how the business’s sustainable business and marketing practices address
some of the common criticisms of marketing.
❸ One commentator has argued that social businesses need metrics of
Social change: Peoples Coffee aim to change the world one performance, just as businesses-for-profit do. For a business with a profit-
cup of coffee at time by buying fair, trading fair and investing focused mission the metric is often profitability. Identify performance
in social initiatives such as the Arohata project. metrics that could be used to evaluate the performance of Peoples Coffee.
Peoples Coffee
Make sure you consider all aspects of the business’s social mission.
The role of ethics in marketing

Good ethics are a cornerstone of sustainable marketing. In the long run, unethical marketing harms
customers and society as a whole. Further, it eventually damages a company’s reputation and effectiveness,
jeopardising its very survival. Thus, the sustainable marketing goals of long-term consumer and business
welfare can be achieved only through ethical marketing conduct.
Marketing ethics
Conscientious marketers face many moral dilemmas. The best thing to do is often unclear. Because not
all managers have fine moral sensitivity, companies and professional associations need to develop corporate
marketing ethics policies – broad guidelines that everyone in the profession and organisation must follow.
These policies should cover distributor relations, advertising standards, customer service, pricing, product
development and general ethical standards.
The finest guidelines cannot resolve all the difficult ethical situations the marketer faces. Table 2.1
lists some difficult ethical issues marketers could face during their careers. If marketers choose immediate
9780655702412_CH02.indd 53 3/3/20 10:42 AM

Table 2.1 Some morally difficult situations in marketing

1. Your R&D department has slightly changed one of your company’s products. It is not really ‘new and improved’, but you know
that putting this statement on the package and in advertising will increase sales. What would you do?
2. You have been asked to add a stripped-down model to your line of laser printers, which could be advertised to pull customers
into stores. The product will not be very good, but salespeople will be able to switch buyers up to higher-priced units. You are
asked to give the green light for the stripped-down version. What would you do?
3. You are thinking of hiring a product manager who has just left a competitor’s company. The potential employee would be more
than happy to tell you all the competitor’s plans for the coming year. What would you do?
4. One of your top dealers in an important territory recently has had family troubles, and his sales have slipped. It looks like it will
take him a while to straighten out his family situation. Meanwhile, you are losing many sales. Legally, on performance grounds,
you can terminate the dealer’s franchise and replace him. What would you do?
5. You have a chance to win a big retail account that will mean a lot to you and your company. The retail buyer hints that a ‘gift’
would influence the decision. Your assistant recommends sending a large-screen television to the buyer’s home, as the company
forbids its buyers to accept gifts from suppliers. What would you do?
6. You have heard that a competitor has a new product feature that will make a big difference in sales. The competitor will
demonstrate the feature in a private dealer meeting at the annual trade show. You can easily send a snooper to this meeting to
learn about the new feature. What would you do?
7. You have to choose between three ad campaigns outlined by your digital advertising agency. The first (a) is a soft-sell, honest,
straight-information campaign. The second (b) uses sex-loaded emotional appeals and exaggerates the product’s benefits.
The third (c) involves a noisy, somewhat irritating commercial that is sure to gain audience attention. Pre-tests show that the
campaigns are effective in the following order: c, b and a. What would you do?
8. You are interviewing a capable female applicant for a job as salesperson. She is better qualified than the male applicants
who have been interviewed. Nevertheless, you know that in your industry some important customers prefer dealing with male
salespeople, and you will lose some sales if you hire her. What would you do?
sales-producing actions in all these cases, their marketing behaviour might well be described as immoral
or even amoral. If they refuse to go along with any of the actions, they might be ineffective as marketing
managers and unhappy because of the constant moral tension. Managers need a set of principles that will
help them determine the moral importance of each situation and decide how far they can go in good
conscience.
But what principle should guide companies and marketing managers on issues of ethics and social
responsibility? One philosophy is that such issues are decided by the free market and legal system. Under
this principle, companies and their managers are not responsible for making moral judgments. Companies
can in good conscience do whatever the market and legal systems allow. However, history provides an
endless list of examples of company actions that were legal but highly irresponsible.
A second philosophy puts responsibility not on the system but in the hands of individual companies and
managers. This more-enlightened philosophy suggests that a company should have a ‘social conscience’.
Companies and managers should apply high standards of ethics and morality when making corporate
decisions, regardless of ‘what the system allows’.
Each company and marketing manager must work out a philosophy of socially responsible and ethical
behaviour. Under the societal marketing concept, each manager must look beyond what is legal and allowed
ethical marketing and develop standards based on personal integrity, corporate conscience and long-run consumer welfare.
An approach to Dealing with issues of ethics and social responsibility in an open and forthright way helps to build
marketing whereby strong customer relationships based on honesty and trust. In fact, many companies now routinely include
organisations recognise
that the task of consumers in the social responsibility process.
marketing is to be As with environmentalism, the issue of ethics and ethical marketing conduct presents special
enlightened to society’s challenges for international marketers. Business standards and practices vary a great deal from one
views, and ethical
country to the next. For example, bribes and kickbacks are illegal for Australian and New Zealand firms.
towards society as a
whole as well as to Yet these are still standard business practices in many countries. The World Bank estimates that more than
customers. US$1 trillion per year’s worth of bribes are paid out worldwide. One study showed that the most flagrant
9780655702412_CH02.indd 54 3/3/20 10:42 AM

bribe-paying firms were from Indonesia, Mexico, China and Russia. Other countries where corruption is
common include Sierra Leone, Kenya and Yemen. The least corrupt were companies from the Netherlands,
Switzerland, Belgium and Japan.19 The question arises as to whether a company must lower its ethical
standards to compete effectively in countries with lower standards. The answer is ‘no’. Companies should
make a commitment to a common set of shared standards worldwide.
Many industrial and professional associations have suggested codes of ethics, and many companies are
now adopting their own codes. For example, the Australian Marketing Institute, an association of marketing
practitioners and scientists, developed the code of professional conduct shown in Figure 2.5. Other codes
that are of particular relevance to marketers and consumers alike include the Australian Market and Social
Research Society Code of Professional Behaviour (see Chapter 5) and the Australian Direct Marketing
Association (ADMA) Code of Practice.20
The ACCC regards these voluntary codes as helpful measures to deliver increased consumer protection.
However, for a code to work effectively, the ACCC reminds that a code of practice needs to be carefully
managed and monitored for effectiveness, and there need to be specific consequences for non-compliance.
For example, the ADMA provides a protocol for consumers to make complaints about members and for
those complaints to be investigated.
Companies are also developing programs to teach managers about important ethical issues and to help
them find the proper responses. They hold ethics workshops and seminars and create ethics committees.
Furthermore, many companies have appointed high-level ethics officers to champion ethical issues and
help resolve ethics problems and concerns facing employees. Most companies have established their own
codes of ethical conduct. Still, written codes and ethics programs do not ensure ethical behaviour. Ethics
and social responsibility require a total corporate commitment. They must be a component of the overall
corporate culture.
1 Members shall conduct their professional activities with respect for the public interest.
2 Members shall at all times act with integrity in dealing with clients or employers, past and present, with their fellow members and with the
general public.
3 Members shall not intentionally disseminate false or misleading information, whether written, spoken or implied, or conceal any relevant fact.
They have a duty to maintain truth, accuracy and good taste in advertising, sales promotion and all other aspects of marketing.
4 Members shall not represent conflicting or competing interests except with the express consent of those concerned given only after full
disclosure of the facts to all interested parties.
5 Members, in performing services for a client or employer, shall not accept fees, commissions or any other valuable consideration in connection
with those services from any one other than their client or employer except with the consent (express or implied) of both.
6 Members shall refrain from knowingly associating with any enterprise which uses improper or illegal methods in obtaining business.
7 Members shall not intentionally injure the professional reputation or practice of another member.
8 If a member has evidence that another member has been guilty of unethical practices it shall be their duty to inform the Institute.
9 Members have a responsibility to continue the acquisition of professional skills in marketing and to encourage the development of these skills
in those who are desirous of entry into, or continuing in, the profession of marketing management.
10 Members shall help to improve the body of knowledge of the profession by exchanging information and experience with fellow members and
by applying their special skill and training for the benefit of others.
11 Members shall refrain from using their relationship with Institute in such manner as to state or imply an offical accerditation or approval
beyond the scope of membership of the Institute and its aims, rules and policies.
12 The use of the Institute’s distinguishing letters must be confined to Institute activities, or the statement of name and business address on a
card, letterhead and published articles.
13 Members shall cooperate with fellow members in upholding and enforcing this Code.
Figure 2.5 Australian Marketing Institute Code of Professional Conduct

Source: Available at <www.ami.org.au/imis15/AMI/About/Our_Code/AMI/About_Folder/OUR_CODE.aspx>, accessed 30 December 2016. Courtesy of the Australian Marketing Institute.
9780655702412_CH02.indd 55 3/3/20 10:42 AM

The sustainable company

At the foundation of marketing is the belief that companies that fulfil the needs and wants of customers will
thrive. Companies that fail to meet customer needs or that intentionally or unintentionally harm customers,
others in society or future generations, will decline. Sustainable companies are those that create value for
customers through socially, environmentally and ethically responsible actions.
Sustainable marketing goes beyond caring for the needs and wants of today’s customers. It means
having concern for tomorrow’s customers in assuring the survival and success of the business, shareholders,
employees and the broader world in which they all live. Sustainable marketing provides the context in
which companies can build profitable customer relationships by creating value for customers in order to
capture value from customers in return, now and in the future.
Legal compliance in marketing

Many examples of unethical marketing also violate the law. In the most serious cases, the breaches have
resulted in criminal sanctions and heavy penalties that have caused the entire business to fail. Today’s
marketers must be ‘legally literate’. They must realise that almost every decision made in marketing has
some legal significance. Whether hiring salespeople, commissioning advertising materials, introducing a
new product, designing labels or putting warnings on packages, there are legal ramifications. Some of these
are obvious; some are not.
One of the best ways to ensure an organisation acts ethically and legally is to have a culture of good
legal compliance ethical practice and a legal compliance program. A legal compliance program is a system designed
program to identify, manage and reduce the risk of breaking the law. More than that, a compliance program can
A system designed to
also be a strategic asset that provides a business with a competitive advantage in the marketplace by
identify, manage and
reduce the risk of ensuring ethical practice, high-quality performance and the positives created by such behaviour. Such a
breaking the law. culture can be fostered only by top management commitment and implemented by way of continuing
education. A senior manager should be placed in charge of such a program, probably at a level reporting
to the CEO.21
Putting a compliance program in place

Australian Standards guide business in many ways. Australian Standard AS3806 and its successor, the
recently released ISO 19600, are useful in guiding the implementation of a compliance program in
marketing. A well-designed executive compliance management system enables a marketing manager to
ensure the business is fulfilling all its obligations under the laws and regulations that impact the business, as
well as addressing the commitments the company has made regarding its operations to its staff, customers
and the various other actors in its microenvironment.
Australian Standard AS3806 was used as the basis for the new international standard ISO 19600, which
retains the focus on key aspects of compliance, including: commitment, implementation, monitoring and
measuring and continual improvement. The new international standard brings a stronger emphasis on a
risk-based approach to compliance. Figure 2.6 shows the elements of a compliance management system.
Guided by the principles of good governance, the company must establish a compliance management
system and policy. A compliance management system requires the business to consider the scope of the
system, and the issues, people and interests to be covered. The system is based on a continuous process that
involves identifying obligations, evaluating risks and then developing plans to address compliance risks.
Plans to ensure compliance are implemented and then evaluated, and outcomes are shared with various
stakeholders. The business must also manage non-compliance and identify areas for improvement. Finally,
the loop is closed by identifying new compliance issues and risk, and the process begins again. The process
is generic and can be used to assist both public and private organisations with developing, implementing
and maintaining effective compliance management systems.
9780655702412_CH02.indd 56 3/3/20 10:42 AM

Identification
of external and
ESTABLISH
internal issues
Determining the scope and
Good governance
establishing the compliance
principles
management system
Identification
of interested parties’
requirements
Establishing
compliance policy
Identification of compliance
obligations and evaluating
compliance risks
Maintain Develop
Leadership commitment,
Managing Independent compliance Planning to address
non-compliances and function, Responsibilities compliance risks and to
continual improvement at all levels, Support achieve objectives
functions
Evaluate Implement
IMPROVE
Performance evaluation Operational planning

and compliance and control of
reporting compliance risks
Figure 2.6 Compliance management system

Source: Adapted from AS_ISO:2014, Australian Standards Figure 1
While Australian and International Standards are not legally binding, they can prevent a breach of the
law. The ACCC has indicated that it regards AS3806 as the ‘benchmark’ for compliance programs and
commentators expect that the new international standard will also be well regarded.22
Legal education
All marketers need to learn about legal compliance. At various times, the courts have ordered a compliance
program to be implemented and have commented adversely where firms have avoided their responsibilities
in this regard. For example, in addition to corrective advertising following a misrepresentation of the
country of origin of certain products, the ACCC required Bunnings to institute a compliance program in
accordance with AS3806 and to audit the program for three years.23
The courts have also pointed out that, where a compliance program exists, it must be updated.
Compliance programs are designed to ensure employees not only comply with the law, but also that they
know when to seek legal advice. This serves to reduce the likelihood of expensive litigation, both in terms of
9780655702412_CH02.indd 57 3/3/20 10:42 AM

fees and fines. It also reduces the probability of loss of corporate reputation among shareholders, customers
and the broader community.
Legal education programs tend to cover four sets of relationships that need to be monitored in a legal
compliance program:
1 Relationships with competitors – to avoid market rigging, group boycotts, price fixing and other
uncompetitive practices.
2 Relationships with suppliers – to avoid resale price maintenance and such vertical restraints as may serve
to reduce competition.
3 Relationships with other parties, such as patent licensees – to avoid infringing intellectual property rights,
and patents and licence arrangements generally.
4 The relationship with the industry itself – to avoid using trade associations or groupings of firms that
might violate sections of the legislation prohibiting arrangements or understandings that substantially
lessen competition.
Coverage of a legal compliance program

The following commentary concerning legal compliance in marketing has been adapted from a coverage
suggested by Professor Eugene Clark.24 It is not intended to be all-encompassing, but seeks to give
marketers a guide to key areas that should form part of a legal compliance program. Marketers who do not
have at least a basic understanding of these issues may be living dangerously and putting both themselves
and their company at serious risk.
Competition law
Most developed countries have made provision in their legislation for the prohibition of various forms of
anti-competitive conduct. Examples of such activities include contracts, arrangements or understandings
that substantially lessen competition; price fixing among competitors; the misuse of market power; vertical
price maintenance; resale price maintenance; mergers and acquisitions; or exclusive dealing arrangements
that have a substantially lessening effect on competition within a particular marketplace. The main source
of Australian competition law is Part IV of the Competition and Consumer Act 2010 and case decisions
interpreting this legislation.25
Contract and consumer law

Laws governing the sale of goods and services deal with the matter differently in different countries
although the intent of the legislation is much the same. In Australia, a three-tiered system of laws governs
the sale of goods and services, comprising common law (reported decisions of courts), state legislation (such
as the Sale of Goods Act and Fair Trading Act in each state) and Commonwealth legislation (in particular, the
Competition and Consumer Act 2010).
The following are some of the more important developments in this area:
• Unconscionability –guidelines covering consumer as well as business-to-business activities that are
deemed to be unconscionable (Competition and Consumer Act 2010, Part IVA).
• Estoppel – preventing a person from departing from a representation or promise he or she has made,
before or during a contract, in unconscionable circumstances and where detriment is caused to a
person who has acted in reliance on that representation. The aim is to ensure that business people act
in good faith and honour the legitimate expectations of those with whom they deal.
• Consumer protection – enhanced remedies for enforcement of consumer laws; increased financial
penalties for offences against consumer protection legislation; and ‘post-sale’ protection for
subsequent owners of goods.
• Complaints handling – more assistance to help companies identify and remedy weaknesses in their
present schemes; for example, access to justice reports, Standards Australia, and Australian Standard
‘Complaints Handling’ (AS4269).26
9780655702412_CH02.indd 58 3/3/20 10:42 AM

• Tendering, outsourcing and partnering – legal reforms governing tendering and outsourcing.
• Electronic commerce – reforms to cover electronic contracting, electronic funds transfer (EFT and
EFTPOS); use of ‘smart’ card technology; privacy in internet (and digital derivatives) commerce; and
cybercrime such as hacking and identity theft.
Standards
There continues to be a proliferation of standards at both global and national levels, within regions and at
local level within nation-states. The movement to standardise legal requirements between countries (e.g.
the World Trade Organization, or WTO) and trading partners also continues (e.g. the China–Australia
Free Trade Agreement).
Product liability
All marketing organisations know of the importance of quality control, yet somehow this does not always
translate into error-free design, error-free manufacture, durable finished goods and accurate labelling. Class
actions are endemic in the United States. In Australia and New Zealand, there has been a steady growth
in class actions. This is because legislation introduced in Australia during 1992 liberalised the ability of
plaintiffs to engage in representative or class actions.27
Marketing communication
As we will see in Chapters 11 to 13, marketing communication takes many forms, any and all of which can
be misinterpreted by customers. For example, a sales representative might stretch the truth when a lack
of product knowledge means that a sale might be lost. This is usually the result of inadequate training.
Misinterpretation is one thing but when communications are seen as harmful or unfair to consumers there
may be significant consequences.
Marketing organisations need to consider the legal implications of their choice of promotional tools
and the information they provide customers. Where mistakes are discovered, businesses must move swiftly
to remedy the errors. We are likely to see continuing legal attention paid to such areas as advertising of
products claiming to be ‘organically grown’, ‘low-fat’ or ‘low GI’; non-disclosure of genetically modified
foods; country-of-origin labelling; and privacy issues surrounding advertising on the web.
Consumers frequently complain about unwanted messages and telephone calls and the legislation and
regulations provide specific protections for consumers from businesses and organisations creating these
unwanted communications.
Unwanted messages
The Spam Act 2003 (Cth) is designed to ensure that those sending commercial electronic messages, such
as email and text messages, are doing so only when the recipient has ‘opted-in’ to receive the message and,
having done so, has the opportunity to be removed from such lists. That is, the sending of unsolicited
commercial electronic messages – singly or in bulk – is prohibited under the Act. The Act also requires
that the message clearly state who is sending the message and provide information for the recipient about
how to be removed from the list. Today, spam that people receive is more than likely to originate overseas,
and prosecutions are therefore much more difficult to effect. However, the Australian Communications
and Media Authority (ACMA) makes provisions for consumers to report and complain about spam and
undertakes to investigate consumer concerns.28
Unwanted calls
The Do Not Call Register Act 2006 (Cth) aims to reduce the number of fixed-line and mobile telephone
calls people receive from those trying to sell products or services or conduct research. The Act enabled a
register to be set up in May 2007 so that individuals who did not want to receive telemarketing calls can
register their landline and mobile phone numbers. Telemarketing organisations are required to check their
telephone lists against the register to ensure they are not unwittingly breaching the legislation.
9780655702412_CH02.indd 59 3/3/20 10:42 AM

Registration does not mean that all unwanted telephone calls stop. There are exemptions from the
prohibition: charities, registered political parties, independent MPs and candidates, religious organisations,
educational institutions (calling students and alumnae), government bodies and certain types of service
calls. For example, when a business needs to recall a product, it is permitted to make calls to numbers on
the register.29
ACMA has also established the Telemarketing and Research Industry Standard 2007 to govern
telemarketing and research calls. The Standard applies to all types of businesses and organisations, including
exempt organisations. The Standard covers such matters as permitted calling hours, minimum information
requirements, calling line identification and when calls must be ended. For example, marketing research is
allowed, but it is time-controlled – telephone research is not allowed on a Sunday after 5 pm. Telemarketing
is not allowed at all on Sundays.30
Sales and after-sales finance

When considering the matter of sales and after-sales finance, the first question marketing organisations
must answer is whether or not credit will be extended to customers, and then what will be the nature of
those credit facilities. It is sometimes said that second-hand car buyers do not buy cars; rather, they buy
finance. By this is meant that car dealers differentiate their offerings by way of the financial terms offered to
buyers, many of whom are low-income earners. The details of any credit policy must be spelled out: basic
trading terms, settlement terms, rebate policy, collection procedures and use of credit referencing, among
others.
Once again, this is an area where employee education is vital. Employees involved in credit negotiations
in Australia need to know such aspects of the law as the Consumer Credit Code, contract law, bills of sale,
privacy legislation, commercial law, small claims procedures, bankruptcy provisions and, if a corporation,
the Competition and Consumer Act 2010.
Franchising
Franchises are one of the most popular and fastest-growing forms of business. Franchising is an area where
specialised legal knowledge is required because of the exclusive rights and obligations granted under a
franchise agreement. Such rights might relate to exclusive distribution rights in a particular geographic
area, or the obligation to run a business in a particular manner and to pay management or other fees to
the franchisor. Franchise agreements associated with image fast-food chains extend as far as giving the
franchisor the right to decide who the business may be sold to and under what circumstances the agreement
might or might not be renewed.
A new Franchising Code of Conduct came into effect in 2015 and is a mandatory code under section
51AE of the Competition and Consumer Act 2010. It applies to all franchise agreements formed after 1 October
1998, with some provisions applying only to agreements made after 1 January 2015. The Code requires
a comprehensive set of disclosures and provides a dispute-resolution procedure for franchise disputes.
The main aim of the Code is to assist franchisees in making an informed decision prior to signing a
franchising agreement. The Code is enforced by the ACCC.31
In addition to the Code and amendment regulations, many other laws apply to franchising, including
the consumer protection provisions of the Competition and Consumer Act 2010, contract law, tort law, and
intellectual property issues such as passing off.
Intellectual property
Most marketers are aware of the need to be careful about making claims in relation to products and services,
but many do not know as much about areas such as intellectual property (IP). IP involves such issues
as copyright, trademarks, patents, designs, trade secrets and domain names. Yet, in an information age,
intellectual property is rapidly becoming our most important asset. For example, the McDonald’s trademark
is worth billions of dollars and ‘Big M’ is very diligent in protecting it. IP is to be distinguished from other
9780655702412_CH02.indd 60 3/3/20 10:42 AM

forms of property, such as real property (e.g. land) or tangible personal property (e.g. a mobile phone).
IP is a specialised area, requiring input from a number of professionals, starting with accountants and
lawyers. Training in this area of legal compliance is needed on a national basis, as well as at the corporation
level. Often driven by international developments, such as free trade agreements, intellectual property intellectual
(IP) laws are constantly changing and marketers must be vigilant to ensure they are up-to-date about laws property (IP) law
that affect them. Law involving such
areas as copyright,
The main areas covered by intellectual property laws include the following. trademarks, patents,
Copyright protects individual ideas as expressed in various permanent forms, such as original literary, designs, trade secrets
dramatic, musical or artistic works, sound recordings, films and broadcasts.32 A website featuring the opening and domain names.
of the Olympic Games may, for example, involve several elements of copyright. The opening score for the
copyright
Olympic Anthem is a musical work. The lyrics constitute a literary work, and the broadcast of the event is Protects individual
itself protected. Likewise, photographs of sportspeople and sports events are copyright-protected as artistic ideas as expressed
works. Works of architecture, such as Melbourne’s Etihad Stadium, also enjoy copyright protection and in permanent forms
such as original literary,
may not be copied without authorisation. In fact, we each own the IP in our own photographic images.33 dramatic, musical or
Design refers to the overall appearance of the product resulting from one or more of its visual features. artistic works, sound
Good examples of the marketability of design are seen in products such as Apple’s iPhones and iPads.34 recordings, films and
Trademarks can be any sign capable of being represented graphically to distinguish goods or services. broadcasts.
A trademark may consist of words, including personal names, designs, letters, numerals or the shape of design
goods or their packaging. Even sounds (the Harley sound) or smells (e.g. scented yarn) and distinctive Overall appearance of a
combinations of colours may be capable of trademark protection. The Australian Football League has product, resulting from
one or more of its visual
registered the sound of a football siren for football and associated services. Marques such as ‘Mercedes-
features.
Benz’ can be worth billions of dollars.35
Patent protection is given to an invention of a device, substance, method or process that is considered trademark
useful. A new drug, a new app, a new method of doing electronic business, a new tool or a new engine are Any sign capable of
being represented
all examples of possible patents. Standard patents can take a long time to process and be very expensive. graphically, distinguishing
For this reason, Australia recently developed the ‘innovation patent’ process to protect smaller inventions a good or service.
(e.g. a gadget). The filing procedures and level of inventiveness required of an innovation patent are less
onerous.36 patent
A means of legal
The Circuit Layouts Act 1989 protects the owners of computer-chip circuitry for 20 years. Such
protection given to the
layout design is especially important in computer game simulations.37 invention of a device,
Some IP (e.g. trade secrets) can be protected only if it is treated as confidential information. substance, method
For example, Coca-Cola’s secret formula, a secret recipe or a hot new marketing concept may be given legal or process that is
considered useful.
protection as long as it is kept in commercial confidence. Employees who access such trade secrets on a
confidential basis have a legal duty to keep the information confidential and to use it only for the purposes Circuit Layouts Act
agreed upon. 1989
The Competition and Consumer Act 2010 often comes into play in IP marketing cases. For example, using Legislation protecting
Ian Thorpe’s image and likeness, without permission, to sell your swimming pools would be a breach of the ownership of
computer-chip circuitry
the Act because you would be giving the impression there was a connection or relationship between you for 20 years.
and Ian Thorpe that you do not have. The same conduct may also violate other laws, such as the tort of
‘passing off’. confidential
Marketing management people are likely to be under contract and therefore are protected by common information
law to the extent that, if their common law rights are breached, they can sue their employer for breach of Intellectual property that
can be protected only
contract. Or, they may make use of other applicable statute law provisions, such as that for misleading and by keeping it confidential
deceptive conduct under the Competition and Consumer Act 2010 (e.g. Steve Targett’s lawsuit against the ANZ (e.g. trade secrets).
Banking Group) or discrimination under the Equal Opportunity Act (e.g. former PricewaterhouseCoopers
partner Christina Rich’s case, alleging discriminatory behaviour by her employer). Courts may be more
likely to look at ‘implied terms’, such as obligations of trust and confidence, or the incorporation of
terms derived from company policy documents, and generally be prepared to ensure there is fair play by
9780655702412_CH02.indd 61 3/3/20 10:42 AM

employers. On the other side of the coin, employees need to ensure they are not seen to be ‘unemployable’
based on their willingness to litigate.38
There are many other legal developments that the marketer should be aware of, but this brief outline
gives you the basic idea. Importantly, legal compliance is not a once-off affair. A legal compliance program
must be constantly reviewed, audited and updated to keep abreast of important changes in the legal and
ethical environment of business.

Consumers and businesses alike take actions to promote responses are consistent with sustainable marketing
sustainable marketing. Let us pause for a moment and consider principles and businesses that have behaved less favourably.
the benefits of working together. ● From your online search, choose one instance where the
● Search online for examples of consumerism or company has not promoted sustainable marketing and
environmentalism. Look at the responses of different identify the risks, obligations and legislation that might
businesses to this issue, and identify businesses where impact the company.
9780655702412_CH02.indd 62 3/3/20 10:42 AM

Student doing no environmental harm. They are adopting policies of environmental

sustainability – developing strategies that both sustain the environment and
Learning produce profits for the company. Both consumerism and environmentalism are
Centre important components of sustainable marketing.
Learning Objective 4. Describe the principles of

sustainable marketing.
Reviewing the learning objectives Many companies originally opposed these social movements and laws, but most
In this chapter, we discussed many important sustainable marketing concepts
of them now recognise a need for positive consumer information, education and
related to marketing’s sweeping impact on individual consumers, other businesses
protection. Under the sustainable marketing concept, a company’s marketing
and society as a whole. You learned that sustainable marketing requires socially,
should support the best long-run performance of the marketing system. It should
environmentally and ethically responsible actions that bring value not just to
be guided by five sustainable marketing principles: consumer-oriented marketing,
present-day consumers and businesses, but also to future generations and
customer-value marketing, innovative marketing, sense-of-mission marketing
to society as a whole. Sustainable companies are those that act responsibly
and societal marketing.
to create value for customers in order to capture value from customers in return,
now and in the future.
Learning Objective 5. Explain the role of ethics in
marketing.
Learning Objective 1. Define sustainable marketing
and discuss its importance. Increasingly, companies are responding to the need to provide company policies
and guidelines to help their managers deal with questions of marketing ethics.
Sustainable marketing calls for meeting the present needs of consumers and
Of course, even the best guidelines cannot resolve all the difficult ethical
businesses while still preserving or enhancing the ability of future generations
decisions that individuals and firms must make. But there are some principles
to meet their needs. Whereas the marketing concept recognises that companies
that marketers can choose among. One principle states that such issues should
thrive by fulfilling the day-to-day needs of customers, sustainable marketing
be decided by the free market and legal system. A second, and more enlightened,
calls for socially and environmentally responsible actions that meet both the
principle puts responsibility not on the system but in the hands of individual
immediate and future needs of customers and the company. Truly sustainable
companies and managers. Each firm and marketing manager must work out a
marketing requires a smooth-functioning marketing system in which consumers,
philosophy of socially responsible and ethical behaviour. Under the sustainable
companies, public policy makers and others work together to ensure responsible
marketing concept, managers must look beyond what is legal and allowable and
marketing actions.
develop standards based on personal integrity, corporate conscience and long-
Learning Objective 2. Identify the main social term consumer welfare.
criticisms of marketing.
Learning Objective 6. Discuss the need for and value
Marketing’s impact on individual consumer welfare has been criticised for
of a legal compliance program in marketing.
its high prices, deceptive practices, high-pressure selling, shoddy or unsafe
products, planned obsolescence and poor service to disadvantaged consumers. Marketing organisations should adopt a legal compliance program in an
Marketing’s impact on society has been criticised for creating false wants and endeavour to prevent legal problems. Such a program should uncover any
too much materialism, too few social goods and cultural pollution. Critics have business practices that might expose the company to criticism or legal action.
also criticised marketing’s impact on other businesses for harming competitors On a broader scale, such a program enables an organisation to meet the claims of
and reducing competition through acquisitions, practices that create barriers to being an ethical marketer that it makes in its mission statement or its statement
market entry, and unfair competitive marketing practices. Some of these concerns of values. The programs require continuous employee education and may, in
are justified; some are not. some instances, be a defence in the event of employee malfeasance.
Learning Objective 3. Define consumerism and Discussion questions

environmentalism, and explain how these concepts ❶ What is sustainable marketing? Explain how the sustainable marketing
are linked to marketing strategies. concept differs from the marketing concept and the societal marketing
Concerns about the marketing system have led to citizen action movements. concept. (Learning Objectives 1 and 4) (AACSB: Communication; Reflective
Consumerism is an organised social movement intended to strengthen the Thinking)
rights and power of consumers relative to sellers. Alert marketers view it as an ❷ Social criticisms of marketing. Critics have charged that some businesses
opportunity to serve consumers better by providing more consumer information, and marketing contribute to planned obsolescence. What evidence
education and protection. Environmentalism is an organised social movement do you see supporting such a criticism? Discuss the bases for this claim
seeking to minimise the harm done to the environment and quality of life by and how marketers refute them. (Learning Objectives 1 and 2) (AACSB:
marketing practices. Most companies are now accepting responsibility for Communication; Reflective Thinking)
9780655702412_CH02.indd 63 3/3/20 10:42 AM

❸ Marketing’s impact on other businesses and society. How can marketers and develop an argument to counter this point of view. (Learning Objectives 2
respond to the criticism that marketing creates false wants and encourages and 3) (AACSB: Communication; Teamwork; Reflective Thinking)
❷ Do a Google search on environment or sustainability awards to learn about
materialism? (Learning Objectives 1 and 2) (AACSB: Communication;
the various awards programs recognising environmental consciousness
Reflective Thinking)
and sustainable practices, including those in Australasia. Select one that
❹ Promoting sustainable marketing. Can an organisation focus on both
recognised a business for a sustainable marketing practice and develop
consumerism and environmentalism at the same time? Explain. (Learning
a brief presentation explaining why the company received the award.
Objectives 3 and 4) (AACSB: Communication; Reflective Thinking)
(Learning Objectives 1, 2, 3 and 4) (AACSB: Communication; Use of IT;
❺ Legal compliance. What are the key features of a compliance system? What
are the benefits for a marketer of developing and managing such a system?
❸ In a small group, discuss each of the morally difficult situations in marketing
(Learning Objective 6) (AACSB: Communication; Reflective Thinking)
presented in Table 2.1. What legal and ethical guidance is applicable to
each? Make a decision about each situation; clarify the costs and benefits
Critical thinking exercises of your decision, as well as the risks that apply in each context. (Learning
❶ Watch The Story of Stuff video at <http://storyofstuff.org/movies/>, or choose
Objectives 5 and 6) (AACSB: Communication; Reflective Thinking)
one of these videos: The Story of Bottled Water, The Story of Electronics or
The Story of Cosmetics. In a small group, critique the message in the video
Mini cases
2.1 Consumerism
Teenagers and social media
Facebook changed its policy and now allows teenagers’ posts to become to teenagers wanting the ability to post publicly, primarily for fundraising
public. Before the change, Facebook would allow 13- to 17-year-old and promoting extracurricular activities, such as sports and other school
users’ posts to be seen only by their ‘friends’ and ‘friends of friends’. Now, and student organisations. Facebook has added precautions, such as a pop-
however, their posts can be seen by anyone on the network if the teenagers up warning before teenagers can post publicly and making ‘seen only by
choose to make their posts ‘public’. Twitter, another social medium gaining friends’ as the default that must be changed if the teenager desires posts
popularity with teenagers, has always let users, including teenagers, share to be public.
tweets publicly. But because of Facebook’s vast reach, privacy advocates ❶ What social criticism might be levelled at Facebook? Is Facebook
are very concerned about this latest development, particularly when it acting responsibly or merely trying to monetise children, as critics
comes to children’s safety. Online predators and bullying are real safety claim? (Learning Objective 2) (AACSB: Communication; Ethical
issues facing youth. Other criticisms of Facebook’s decision boil down to Reasoning)
money – some argue that the change was just about monetising children. ❷ Develop some creative strategies for marketers to reach this
Facebook can offer a younger demographic to advertisers wanting to reach demographic on Facebook without alienating parents. (Learning
them. Facebook defended its actions, saying the change in policy is due Objective 4) (AACSB: Communication; Reflective Thinking)
2.2 Role of ethics in marketing

Ethisphere’s most ethical
Each year, Ethisphere honours businesses all over the world for their banks have been recognised among the most ethical businesses in the
ethical business standards and practices. They point out that these world. How can a banker be ethical? Ethisphere’s approach to evaluating
businesses also often financially out-perform other similar businesses. businesses’ ethical practices considers five ethical dimensions: (1) ethics
In 2016, the list included 131 companies from 21 countries and many and compliance programs, (2) corporate citizenship and responsibility,
varied industries – everything from automotive to telecommunications. You (3) culture of ethics, (4) governance and leadership, and (5) innovation and
might be surprised to know – given the number of complaints made each reputation (see ‘World’s most ethical companies® honorees’ at <https://
year by customers of banks (the Financial Ombudsman Service receives ethisphere.com/>).
thousands of disputes, many about banks – that a number of Australian
9780655702412_CH02.indd 64 3/3/20 10:42 AM

❶ Choose a business with which you are familiar (it could be your bank). ❷ What particular codes of practice and standards should marketers
Review the business’s website and, using Ethisphere’s five ethical in the business be aware of and how can these codes and
dimensions, evaluate the marketing practices of the business. What are standards assist in improving the ethical practice of the business
the best and worst aspects of the marketing activities of the business you are researching? (Learning Objective 6) (AACSB: Application of
you are reviewing? (Learning Objective 5) (AACSB: Use of IT; Ethical Knowledge)
Reasoning)

The costs of sustainability
Today, almost every supermarket has lines of organic and natural foods. amount. Further assume that the organic farmer’s variable costs of
If you have priced organic foods, you know they are more expensive. $0.80 per unit (100 grams) are twice as much as a conventional farmer’s
For example, a dozen conventionally farmed eggs at one supermarket cost variable costs. Refer to Appendix 3 ‘Marketing analytics spotlights’ to
$4.79 (unit price $0.80 per 100 grams) whereas organic eggs from the answer the following questions.
same producer are priced at $5.49 for half a dozen (unit price $1.83 per ❶ Most large egg producers sell eggs directly to retailers. Using the
100 grams). One study found that the average price of organic foods is prices above, what is the farmer’s price per dozen to the retailer for
about 80 per cent more than that of conventional foods. However, if prices conventional and organic eggs if the margin is 20 per cent, based on
get too high, consumers will not purchase the organic options. Organic its retail price? (AACSB: Communication; Analytical Reasoning)
farming often costs much more than conventional farming, and those ❷ How many dozen eggs does a conventional farmer need to sell to break
higher costs are passed on to consumers. Suppose that a conventional egg even? How many does an organic farmer need to sell to break even?
farmer’s average fixed costs per year for conventionally farmed eggs are (AACSB: Communication; Analytical Reasoning)
$1 million, but an organic egg farmer’s fixed costs are three times that

Rent to buy
For some consumers, rent-to-buy plans might be the only way they could report, the Australian Securities and Investments Commission (ASIC) found
ever afford to purchase some expensive home appliances. Take a look at that customers are sometimes paying nearly 50 times more interest on a
<www.productreview.com.au> and you will see stories of a family with a rent-to-buy purchase than they would on an outstanding balance on a
poor credit rating urgently needing a new refrigerator being thankful for the typical credit card. And, worse still, consumers receiving benefits were often
option to rent to buy. One happy customer explains that the rent-to-buy charged much higher prices than those advertised. In short, there seem to
option offered the assurance of a manageable payment, a good quality item, be enormous ethical challenges with rent-to-buy services.39
a good price (often such businesses have great buying power), insurance ❶ Suppose you were a marketing manager for a rent-to-buy service.
and support for replacements. Customers pay more overall when they rent What sustainable marketing practices would you implement to protect
to buy but they can buy items they would never otherwise be able to afford. vulnerable consumers? (Learning Objective 4) (AACSB: Application of
However, for every good review there is a multitude of bad reviews, raising Knowledge; Ethical Reasoning)
concerns with everything from problems with direct debits, harassment, poor ❷ A compliance management system requires that a business have a
communication and no statements, to massive cancellation fees and more. thorough understanding of the ethical and legal issues and people
The Money Smart website, <www.moneysmart.gov.au>, offers consumers impacted by the business’s operations. What legal and ethical issues
advice to avoid the pitfalls of rent-to-buy schemes. However, each year, many and which groups of people should be considered by a rent-to-buy
vulnerable consumers seem to be caught unprepared, paying exorbitant service provider when developing a compliance management system?
prices and undergoing a very poor customer-service experience. In a recent (Learning Objective 6) (AACSB: Application of Knowledge)
9780655702412_CH02.indd 65 3/3/20 10:42 AM

References
1 See Wirra Wirra company website, <www.wirrawirra.com/who-are-we/>; as well as and its applicability to legal compliance programs, see <www.accc.gov.au>, accessed
‘Good for environment, good for business’, EPA South Australia, <www.epa.sa.gov.au/ December 2016.
files/11680_case_studies_apr2016.pdf>; both accessed December 2016. 22 See ‘ISO 19600:2014’, <www.iso.org>; and also Standards Australia,
2 See Textart.ru database of slogans for GlaxoSmithKline taglines, <www.textart.ru/ <www.standards.org.au>; both accessed December 2016. Other information from
advertising/slogans/pharmaceutical-company.html>, accessed January 2017. CompliSpace, ‘A new global standard for compliance: ISO 19600’, 15 September
3 For more on the Competition and Consumer Act 2010, see the 1 January 2011 2014, <https://complispace.wordpress.com/2014/09/15/a-new-global-standard-
compilation at ComLaw, <www.comlaw.gov.au/Details/C2011C00003>, accessed for-compliance-iso-19600/>; Ernst & Young, ‘ISO 19600 International standard for
December 2016. Also see the ‘Consumers’ page on the Australian Competition and compliance management’, 2015,<www.ey.com/Publication/vwLUAssets/EY-iso-19600-
Consumer Commission (ACCC) website, <accc.gov.au/consumers>, accessed international-standard-for-compliance-management/$FILE/EY-iso-19600-international-
December 2016. standard-for-compliance-management.pdf>; and Governance Institute of Australia,
4 ‘Overweight and obesity’, Australian Institute of Health and Welfare, <www.aihw.gov. ‘New compliance standard: AS/ISO 19600:2015’, 11 August 2015,
au/overweight-and-obesity/>, accessed December 2016. <www.governanceinstitute.com.au/news-media/news/2015/aug/new-compliance-
5 Elena Ferretti, ‘Soft drinks are the whipping boy of anti-obesity campaigns’, Fox News, standard-asiso-196002015/>; all accessed December 2016.
1 June 2012, <www.foxnews.com/leisure/2012/06/01/soda-ban/>, accessed December 23 Australian Competition and Consumer Commission, ‘Bunnings Building Supplies Pty
2016; and see also ‘Obesity: Sugar-sweetened beverages, obesity and health’, Ltd’, <http://registers.accc.gov.au/content/index.phtml/itemId/351238>, accessed
Australian National Preventative Health Agency, 2014. December 2016.
6 See the Choice website for reports, <www.choice.com.au/>, accessed December 2016. 24 Eugene Clark is co-author, with G Cho and A Hoyle, of Marketers and the Law, Law
7 See, for example, ‘A snapshot of poverty in rural and regional Australia’, National Rural Health Book Company: Sydney, 2000.
Alliance Inc., 14 October 2013, <http://ruralhealth.org.au/documents/publicseminars/2013_ 25 For more on the Competition and Consumer Act 2010, see the 12 November 2016
Sep/Joint-report.pdf>; and also, ‘Bottle shops concentrated in low income Victoria’, Turning compilation at Australian Government, Federal Register of Legislation, <https://www.
Point, 14 December 2011, <www.turningpoint.org.au/Media-Centre/Latest_News/Bottle- legislation.gov.au/Details/C2016C01082>, accessed January 2017.
shops-concentrated-in-low-income-Victoria.aspx>; accessed December 2016. 26 ‘The essential elements of complaint handling: A discussion of the Australian
8 See Sydney Harbour Bridge and Harbour Tunnel toll charges at <www.rms.nsw.gov.au/ Standard on complaints handling (AS4269)’, <www.accc.gov.au/content/index.
roads/using-roads/motorways-tolling/paying-tolls/sydney-harbour-bridge-tunnel.html>; phtml/itemId/95997>; and see also SAI Global Limited, ISO 10002:2004 Customer
and also Jim O’Rourke, ‘Toll war revs up: Sydney drivers face congestion tax or road satisfaction – Guidelines for complaints handling in organizations, <www.saiglobal.
user-pay system’, The Daily Telegraph, 12 July 2015, <www.dailytelegraph.com.au/news/ com/PDFTemp/Previews/OSH/AS/AS10000/10000/10002-2006.pdf>; both accessed
nsw/new-congestion-tax-could-hit-drivers-hard-as-experts-call-for-a-reduction-in-road- December 2016.
tolls-and-the-way-it-is-collected/news-story/a86f832973f572a2772575bd7375ee4a>; 27 Referred to as ‘representative proceedings’ in state legislation; for example, Supreme
and Maria Slade, ‘Tolling will be needed on Auckland’s motorways to combat congestion: Court Act 1986 (Vic). See N Francey, ‘High Court clears the way for class actions’,
Report’, Stuff, 21 June 2016; all accessed December 2016. Australian Lawyer, 27 May 1995, on Carnie v Esanda Finance Corporation Ltd, in which
9 ‘Coles’ takeover approved by ACCC’, Inside Retail, 10 March 2016, <www.insideretail. the High Court took a broad view of such legislation and thus cleared the way for more
com.au/blog/2016/03/10/coles-takeover-approved-by-accc/>, accessed December 2016. representative actions to be utilised at the state level as well as at federal level.
10 See for example, Mal Gill, ‘Cheap mil and contracts on ACCC radar’, Farm Weekly, 28 For a good consolidation of the Spam Act 2003, visit Commonwealth Consolidated
9 November 2016, <www.farmweekly.com.au/news/agriculture/cattle/general-news/ Acts at <www.austlii.edu.au/au/legis/cth/consol_act/sa200366/>, accessed
cheap-milk-and-contracts-on-accc-radar/2754124.aspx>, accessed December 2016. December 2016. See also NOIE, ‘Spam Act 2003: An overview for business’, Australian
11 See Philip Kotler, ‘Reinventing marketing to manage the environmental imperative’, Communications Authority, <www.acma.gov.au/webwr/consumer_info/spam/spam_
Journal of Marketing, July 2011, pp. 132–5; and Kai Ryssdal, ‘Unilever CEO: For overview_for%20_business.pdf>, accessed December 2016.
sustainable business, go against “mindless consumption”’, Marketplace, 11 June 2013, 29 To see more on the Do Not Call Register Act 2006 and/or to register your telephone
<www.marketplace.org/topics/sustainability/consumed/unilever-ceo-paul-polman- numbers, visit the Australian Communications and Media Authority, <www.donotcall.
sustainble-business>, accessed December 2016. gov.au>, accessed December 2016.
12 See Unilever’s Australia website, <www.unilever.com.au/sustainable-living/>, accessed 30 The Telemarketing and Research Industry Standard 2007 is due to be updated. For
December 2016. current information about the standard, see the ACMA website, <www.acma.gov.au>,
13 Matthew Townsend, ‘Is Nike’s Flyknit the swoosh of the future?’, Bloomberg, 15 March accessed December 2016.
2012, <www.bloomberg.com/news/articles/2012-03-15/is-nikes-flyknit-the-swoosh-of- 31 For more information about the Franchising Code of Conduct, see the Australian
the-future>, accessed December 2016. Competition and Consumer Commission website, <www.accc.gov.au/business/
14 See Alan S Brown, ‘The many shades of green’, Mechanical Engineering, January 2009, industry-codes/franchising-code-of-conduct>; and also the Federal Register of
p. 22; and also IBM Global Asset Recovery Australia website, <www-03.ibm.com/ Legislation for the Competition and Consumer (Industry Codes—Franchising)
financing/au/recovery/>, accessed December 2016. Regulation 2014, and Competition and Consumer Act 2010 and amendments,
15 ‘San Francisco becomes the first city to ban sale of plastic bottles’, Second Nexus, <www.legislation.gov.au/>; all accessed December 2016.
13 March 2015, <http://secondnexus.com/ecology-and-sustainability/san-francisco- 32 The Copyright Act 1968 and amendments are available on the Federal Register of
ban-sale-plastic-bottles/>, accessed December 2016. Legislation, <www.legislation.gov.au/>, accessed December 2016.
16 See Haydn Shaughnessy, ‘The world’s most innovative companies, a new view’, 33 See Privacy Law and Policy Reporter, <www.austlii.edu.au/au/journals/PLPR/1999/59.
13 January 2013, <www.forbes.com/sites/haydnshaughnessy/2014/01/13/a-new- html>, accessed December 2016.
way-of-looking-at-the-worlds-most-innovative-companies/#b050ac51cfe3>; and also, 34 Designs Act 2003 and amendments, <www.legislation.gov.au/>, accessed
‘The most innovative companies of 2013’, Fast Company, <www.fastcompany.com/ December 2016.
most-innovative-companies/2013>; accessed December 2016. 35 Trade Marks Act 1995 and amendments, and also Trade Marks Regulations 1995,
17 See ‘Inside Patagonia’, <www.patagonia.com.au/inside-patagonia>, accessed <www.legislation.gov.au/>, accessed December 2016.
December 2016. 36 Patents Act 1960 and amendments, and also Patents Regulation 1991, <www.
18 See ASRC Catering, <www.catering.asrc.org.au/about/>; and also ‘ASRC Catering: legislation.gov.au/>; and also IP Australia website, <www.ipaustralia.gov.au>;
Catering for a cause’, Social Enterprise Awards 2016, <http://socialenterpriseawards. all accessed December 2016.
com.au/catering-for-a-cause-asrc-catering/>, accessed December 2016. 37 Circuit Layouts Act 1989 and amendments, and Circuit Layouts Regulations 1990,
19 See Transparency International, ‘Bribe payers index’, <www.transparency.org/research/ <www.legislation.gov.au/>, accessed December 2016.
bpi/overview>; and ‘Global corruption barometer 2013’, <www.transparency.org/ 38 Tracy Ong & Marsha Jacobs, ‘Workers choose new ways to sue’, Australian Financial
gcb2013>; both accessed December 2016. Review, 7 September 2007, pp. 10–11.
20 See the Australian Direct Marketing Association Code of Practice at <www.adma. 39 See Australian Securities and Investments Commission, ‘ASIC finds the cost of consumer
com.au>; and the Australian Market and Social Research Society Code of Professional leases can be as high as 884%’, 11 September 2015, <www.asic.gov.au/about-asic/
Behaviour, <www.amsrs.com.au>; both accessed December 2016. media-centre/find-a-media-release/2015-releases/15-249mr-asic-finds-the-cost-of-
21 This section on legal compliance in marketing relies on an initial report by Eugene consumer-leases-can-be-as-high-as-884/>; and also Money Smart website,
Clark, Professor of Law, Griffith University. For more on Australian Standard AS3806 <www.moneysmart.gov.au/>; both accessed December 2016.
9780655702412_CH02.indd 66 3/3/20 10:42 AM

SESSION Understanding the
2
marketplace and
buyer behaviour
• The marketplace and customers: Analysing the
environment
• Buyer behaviour: Understanding consumer and
business buyers
9780655702412_CH03.indd 67 3/3/20 5:33 PM

Chapter
3
The marketplace and customers:
Analysing the environment
In Session 1 (Chapters 1 and 2), you learned about the basic concepts of marketing and sustainable
marketing. We now look at the first step of the marketing process – understanding the marketplace and
customer needs and wants. In this chapter, you will discover that marketing operates in a complex and
changing environment. Other actors in this environment – suppliers, intermediaries, customers, competitors,
publics and others – may work with or against the company. Major environmental forces – demographic,
economic, natural, technological, political and cultural – shape marketing opportunities, pose threats and
affect the company’s ability to build customer relationships. To develop effective marketing strategies, you
must first understand the environment in which marketing operates.
Learning Objective 1 Describe the environmental forces that affect the company’s ability
to serve its customers.
Learning The marketing environment p. 70
Objectives The company’s microenvironment pp. 70–73
The company’s macroenvironment pp. 74–91
Learning Objective 2 Explain how changes in the demographic and economic environments
affect marketing decisions.
Demographic environment pp. 74–81
Economic environment pp. 81–82
Learning Objective 3 Identify the main trends in the firm’s natural and technological
environments.
Natural environment pp. 82–84
Technological environment p. 84
Learning Objective 4 Explain the key changes in the political and cultural environments.
Political and social environment pp. 86–88
Cultural environment pp. 88–91
Learning Objective 5 Discuss how companies can react to the marketing environment.
Responding to the marketing environment p. 91–92
Managing the marketing effort p. 92–96
9780655702412_CH03.indd 68 3/3/20 5:33 PM

Chapter 3 The marketplace and customers: Analysing the environment 69
LO 1
Describe the environmental forces
that affect the company’s ability to Demogra
phic
serve its customers.
Eco
no
Customers
mi
c
LO 2 s
Explain how the changes in the lic
b
Pu
demographic and economic
nt
T
nt
i n t h e m i c r o e nv i r o n m e
MACROE
Natu
OECONOMI ENVIRONMEN
environments affect
me
ors
n
marketing decisions. he macroenviro
Competit
ral
CONOMIC ENVIRONMEN
C
inter m ed
Market iaries
al
LO 3
n
olo gic
i
ing
Identify the main trends in the

MICR
rce
io n s
firm’s natural and technological
Fo
n
Tech
Act
T
environments.
Su
lie
pp
r s
The company
c a
liti
l
Po
LO 4
Explain the key changes in the
l
political and cultural environments. Cultura
RESPONDING TO THE
MARKETING
LO 5 ENVIRONMENT
Discuss how companies can react to
the marketing environment.
Proactive Reactive
9780655702412_CH03.indd 69 3/3/20 5:33 PM

70 Session 2 Understanding the marketplace and buyer behaviour
The marketing environment

A company’s marketing environment consists of the actors and forces outside of marketing that affect
marketing management’s ability to build and maintain successful relationships with target customers.
Companies constantly watch and adapt to the changing environment.
More than any other group in the company, marketers must be the environmental trend trackers and
opportunity seekers. Although every manager in an organisation needs to observe the outside environment,
marketers have two special aptitudes. They have disciplined methods – marketing research and marketing
intelligence – for collecting information about the marketing environment. They also spend more time in
customer and competitor environments. By carefully studying the environment, marketers can adapt their
strategies to meet new marketplace challenges and opportunities.
The marketing environment is made up of a microenvironment and a macroenvironment.
The microenvironment consists of the actors close to the company that affect its ability to serve its
customers – the company, suppliers, marketing intermediaries, competitors, publics and customer
markets. The macroenvironment consists of the larger societal forces that affect the microenvironment –
demographic, economic, natural, technological, political and cultural forces. We look first at the
company’s microenvironment.
The company’s microenvironment

Marketing management’s job is to build relationships with customers by creating customer value and
satisfaction. However, marketing managers cannot do this alone. Figure 3.1 shows the main actors in the
marketer’s microenvironment. Marketing success will require building relationships with other company
departments, suppliers, marketing intermediaries, competitors, various publics and customers that combine
to make up the company’s value delivery network.
The company
In designing marketing plans, marketing management takes other company groups into account –
groups such as top management, finance, research and development, purchasing, operations and
keting Compet
Mar ediaries itors
rm
inte
rs Pu
lie b
pp
lic
Su
s
pany
Cust
The com
omers
MARKETING
Figure 3.1 Actors in the microenvironment
9780655702412_CH03.indd 70 3/3/20 5:33 PM

accounting. All of these interrelated groups form the internal environment. Top management sets the
company’s mission, objectives, broad strategies and policies. Marketing managers make decisions within
the strategies and plans made by top management. Then, marketing managers must work closely with
other company departments. With marketing taking the lead, all departments – from manufacturing and
finance to legal and human resources – share the responsibility for understanding customer needs and
creating customer value.
Suppliers
Suppliers form an important link in the company’s overall customer value delivery system. They
provide the resources needed by the company to produce its goods and services. Supplier problems can
seriously affect marketing. Marketing managers must be attentive to supply availability and costs. Supply
shortages or delays, labour strikes and other events can cost sales in the short run and damage customer
satisfaction in the long run. Rising supply costs may force price increases that can harm the company’s
sales volume.
Most marketers today treat their suppliers as partners in creating and delivering customer value. In an
Australian study, researchers found that strong supplier relationships contributed significantly to business
performance, and that when businesses focus on the whole supply chain (customers and suppliers) they will
do even better.1
Marketing intermediaries
Marketing intermediaries help the company to promote, sell and distribute its products to final marketing
buyers. They include resellers, physical distribution firms, marketing services agencies and financial intermediaries
Businesses that help the
intermediaries. Resellers are distribution channel firms that help the company find customers or make sales
company to promote,
to them. These include wholesalers and retailers who buy and resell merchandise. Selecting and partnering sell and distribute its
with resellers is not easy. No longer do manufacturers have many small, independent resellers from which products to final buyers.
to choose. They now face large and growing reseller organisations, such as Woolworths, Target,
Financial intermediaries: Accounting firms, such as Nudge Accounting, which provides services to small-
business owners, are among the many financial intermediaries that comprise the broader value network
in which a business operates. Managing these relationships is also important.
Nudge Accounting
9780655702412_CH03.indd 71 3/3/20 5:33 PM

The Warehouse, Myer and Kmart. These organisations frequently have enough power to dictate terms or
even to shut smaller manufacturers out of large markets.
Physical distribution firms help the company to stock and move goods from their points of origin to their
destinations (see also Chapter 10). Marketing services agencies are the marketing research firms, advertising
agencies, media firms and marketing consulting firms that help the company to target and promote its
products to the right markets. Financial intermediaries include banks, credit companies, insurance companies,
accountants and other businesses that help finance transactions or manage the risks associated with the
buying and selling of goods.
Like suppliers, marketing intermediaries form an important component of the company’s overall value
delivery system. In its quest to create satisfying customer relationships, the company must do more than
just optimise its own performance. It must partner effectively with marketing intermediaries to optimise the
performance of the entire system.
Thus, today’s marketers recognise the importance of working with their intermediaries as partners
rather than simply as channels through which they sell their products. For example, when Coca-Cola signs
on as the exclusive beverage provider for a fast-food chain such as McDonald’s or Subway, it provides much
more than just soft drinks. It also pledges powerful marketing support.
Competitors
The marketing concept states that to be successful a company must provide greater customer value and
satisfaction than its competitors do. Thus, marketers must do more than simply adapt to the needs of
target consumers. They also must gain strategic advantage by positioning their offerings strongly against
competitors’ offerings in the minds of consumers. No single competitive marketing strategy is best for all
companies. Each firm should consider its own size and industry position compared to those of its competitors.
Large firms with dominant positions in an industry can use certain strategies that smaller firms cannot
afford. But being large is not enough. There are winning strategies for large firms, but there are also losing
ones. And small firms can develop strategies that give them better rates of return than large firms enjoy.
Publics
public The company’s marketing environment also includes various publics. A public is any group that has an
Any group that has actual or potential interest in or impact on an organisation’s ability to achieve its objectives. We can identify
an actual or potential
interest in or impact on
seven types of publics:
an organisation’s ability 1 Financial publics. This group influences the company’s ability to obtain funds. Banks, investment
to achieve its objectives. houses and shareholders are the main financial publics.
2 Media publics. This group carries news, features and editorial opinion. It includes television and radio
stations, newspapers, magazines, and blogs and other social media.
3 Government publics. Management must take government developments into account. Marketers must often
consult the company’s legal advisers on issues of product safety, truth in advertising and other matters.
4 Citizen-action publics. A company’s marketing decisions may be questioned by consumer organisations,
environmental groups, minority groups and others. Its public relations department can help it stay in
touch with consumer and citizen groups.
5 Local publics. This group includes local residents and community organisations. Large companies
usually appoint a community relations officer to deal with the community, attend meetings, answer
questions and contribute to worthwhile causes. For example, mining giant BHP Billiton knows that
working alongside the community in which it operates is crucial, and, by making social investments
in those communities, it aims to contribute to a resilient and diversified local economy. In one
program, the company partners with the Art Gallery of South Australia to present the TARNANTHI
Festival of Contemporary Aboriginal and Torres Strait Islander Art, which includes a two-day art
fair. In 2015, the fair featured the work of over 1000 Aboriginal and Torres Strait Islander artists and
generated nearly half a million dollars in sales for the artists and art centres.2
9780655702412_CH03.indd 72 3/3/20 5:33 PM

Public: BHP Billiton supports Aboriginal and Torres Strait Islander artists through the TARNANTHI Art Fair
as part of its commitment to Indigenous peoples.
Courtesy Art Gallery of South Australia, Adelaide
6 General public. A company needs to be concerned about the general public’s attitude towards its
products and activities. The public’s image of the company affects its buying.
7 Internal publics. This group includes workers, managers, volunteers and the board of directors. Large
companies use newsletters, a company website and other means to inform and motivate their internal
publics. When employees feel good about their company, this positive attitude spills over to external publics.
A company can prepare marketing plans for these major publics as well as for its customer markets.
Suppose the company wants a specific response from a particular public, such as goodwill, favourable word
of mouth or donations of time or money. The company would have to design an offer to this public that is
attractive enough to produce the desired response.
Customers
As we have emphasised throughout, customers are the most important actors in the company’s
microenvironment. The aim of the entire value delivery system is to serve target customers and create
strong relationships with them. The company might target any or all of five types of customer markets.
Consumer markets consist of individuals and households that buy goods and services for personal consumption.
Business markets buy goods and services for further processing or for use in their production process,
whereas reseller markets buy goods and services to resell at a profit. Government markets are made up of
government agencies that buy goods and services to produce public services, or to transfer the goods and
services to others who need them. Finally, international markets consist of these buyers in other countries,
including consumers, producers, resellers and governments. Each market type has special characteristics
that call for careful study by the seller (see Chapter 4 for more on consumer and business markets).

Take a moment to reflect on the complex network of actors that ● In Chapter 10, we discuss marketing intermediaries involved
make up a firm’s microenvironment. with physical distribution. Here, we also consider the service
● Think about your breakfast McMuffin, the company intermediaries that are part of the microenvironment.
McDonald’s, and its suppliers, intermediaries, competitors, Compile a list of all the different types of service
publics and customers. Draw a diagram showing the intermediaries and make notes on why they need to be
microenvironment for McDonald’s restaurants. considered as part of the company’s microenvironment.
9780655702412_CH03.indd 73 3/3/20 5:33 PM

The company’s macroenvironment

The company and all of the other actors operate in a larger macroenvironment of forces that shape
opportunities and pose threats to the company. Figure 3.2 shows the six main forces in the company’s
macroenvironment. In the remaining sections of this chapter, we examine these forces and show how they
affect marketing plans.
Demographic environment
demography Demography is the study of human populations in terms of size, density, location, age, gender, race,
The study of human occupation and other statistics. The demographic environment is of major interest to marketers because it
populations in terms of
involves people, and people make up markets. The world population is growing at an explosive rate. It now
size, density, location,
age, gender, race, exceeds 7.4 billion people and will grow to more than 8.5 billion by the year 2030.3 The world’s large and
occupation and other highly diverse population poses both opportunities and challenges.
statistics. Changes in the world demographic environment have major implications for business. So,
marketers keep close track of demographic trends and developments in their markets, both at home
and abroad. They analyse changing age and family structures, geographic population shifts, educational
characteristics and population diversity. Here, we discuss the most important demographic trends in
Australia and New Zealand.
Changing age structure of the population

In 2016, the Australian and New Zealand populations stood at 24.2 million and 4.7 million, respectively,
and the combined population may reach around 35 million by the year 2030.4 The single most important
demographic trend in Australasia is the changing age structure of the population. Primarily because of
falling birthrates and longer life expectancies, the Australian and New Zealand populations are rapidly
getting older. In 1980, the median age was 29.4 years (in Australia) and 27.9 years (in New Zealand), and,
by 2020, it is estimated to be about 38 years.5 This ageing of the population will have a significant impact
on markets and those who service them. The Australian and New Zealand populations contain several
generational groups. Here, we discuss the four largest groups – the baby boomers, Generation X, the
Millennials and Generation Z – and their impact on today’s marketing strategies.
ral Technol
Natu ogic
al
ic Po
om lit
on
ica
Ec
l
c
aphi
Cultu
Demogr
ral
COMPANY
Figure 3.2 Major forces and the company’s macroenvironment
9780655702412_CH03.indd 74 3/3/20 5:33 PM

The baby boomers

The post-World War II baby boom produced 7 million baby
boomers in Australia and New Zealand, born between 1946
and 1964. Over the years, the baby boomers have been one of
the most powerful forces shaping the marketing environment.
The youngest boomers are now in their fifties; the oldest are in
their seventies.
The baby boomers are the wealthiest generation in Australian
history, accounting for about 25 per cent of the Australian
population but controlling an estimated 53 per cent of the national Targeting boomers: The name says it all! ‘Fun Over 50’ tap into
wealth. The boomers constitute a lucrative market for financial baby boomers’ desire to experience life to the fullest.
Fun Over 50
services, new housing and home renovation, new cars, travel and
entertainment, dining out, health and fitness products, and just
about everything else.6 baby boomers
At a recent industry forum, advertising experts advised that brands focusing on younger demographic People born during the
period following World
groups are missing a big opportunity. Boomers ‘outspend every other generation in every category, yet
War II, between 1946
advertisers remain obsessed with extolling youth and targeting young audiences’. Less than 10 per cent and 1964.
of the total annual advertising expenditure targets these older Australians. But, with interest in this group
growing, it is not surprising to see the launch of a specialist agency, My Generation Advertising, devoted
to advertising to baby boomers. The agency is pretty sure it understands the over-50s because they
themselves are boomers too.7
It would be a mistake to think of the older boomers as slowing down. Instead, they see themselves as
entering new life phases. The more active boomers – sometimes called zoomers – have no intention of
abandoning their youthful lifestyles as they age. They travel, they buy luxury products, they are tech-savvy,
they shop online and they have money to spend. Thus, although the boomers buy lots of products that
help them deal with issues of ageing – from vitamins to blood pressure monitors to Good Grips kitchen
tools – they also constitute a lucrative market for products and services that help them to live life to the
fullest. For example, Fun Over 50 offers travel in style for older Australians and New Zealanders. Travellers
enjoy adventure-packed days, new places and new experiences. The travel business aims to fulfil boomers’
desire to experience life to the fullest.
Generation X
The baby boom was followed by a ‘birth dearth’, creating another generation of over 4 million people in
Australia and New Zealand born between 1965 and 1976. Author Douglas Coupland calls them
Generation X because they lie in the shadow of the boomers. Generation X
Comprising a population considerably smaller than the boomer generation that precedes them and People born between
1965 and 1976, in
the Millennials who follow, the Generation Xers are a sometimes-overlooked consumer group. Social the ‘birth dearth’ that
commentator Mark McCrindle points out that, ‘They have worked hard, are bearing the burden of taxes, followed the baby
done dutiful parenting and haven’t made much of a fuss. They have just [got] on with it.’ Although Gen boom.
Xers seek success, they are less materialistic than the other groups; they prize experience, not acquisition.
For many of the Gen Xers who are parents, family comes first – both children and their ageing parents
– and career second.8
From a marketing standpoint, the Gen Xers are a more sceptical bunch. They tend to research
products heavily before they consider a purchase, prefer quality to quantity and tend to be less receptive
to overt marketing pitches. They are more likely to be receptive to irreverent ad pitches that make fun of
convention and tradition. The first to grow up in the internet era, Generation X is a connected generation
that embraces the benefits of new technology. Of the over 80 per cent of Gen Xers online, roughly a third
spend more than an hour a day connected. Three-quarters are doing the banking and social networking
9780655702412_CH03.indd 75 3/3/20 5:33 PM

and more than half have bought goods and services online in the last three months, while nearly a fifth
are studying.9 A National Australia Bank study showed that younger Gen Xers are spending more money
online each month than any other generation. This group makes up almost a quarter of Australian online
sales. Not surprisingly, Gen Xers are much more likely to click through online advertising. Despite their
spending, they are also savvy consumers who seek out information before they buy. As one expert notes,
‘Generation Xers tend to use information not as a point of pride but as assurance that they are not being
taken advantage of by marketers and are getting the best deal possible.’10
The Gen Xers, now middle-aged, have grown up and are taking over. They have increasingly displaced
the lifestyles, culture and values of the baby boomers. They are firmly into their careers, and many are
proud homeowners with growing families. They are the most-educated generation to date, and they possess
hefty annual purchasing power.
It is not surprising, then, that many brands and organisations focus on Gen Xers as a prime target
segment. For example, the Heart Foundation’s Mums United campaign taps straight into the Gen Xers’
concern for family. The word-of-mouth campaign aimed to ‘get Australian mums to band together and make
small lifestyle changes within their families and local communities – with the ultimate goal of improving the
shape of Australia’. The successful campaign used a social media company to reach over 1500 mums who
all had large social networks. They ran events, and many of the participants blogged, encouraging others to
take on ‘one of the “Mums United” healthier living changes’. The Gen X-focused campaign produced over
800 000 offline conversations and nearly 80 000 online ones, roughly twice as many as the target set before
the campaign. The companion website offers information to help mums ‘change the shape’ of their families,
including suggestions for family fun activities, a family activity tracker, a junk-food swapper and recipes.
Links to social media help to maintain the buzz after the initial word-of-mouth campaign.11
Millennials
Millennials Both the baby boomers and Gen Xers will one day be passing the reins to the Millennials (also called
(Generation Y) Generation Y). Born between 1977 and 2000, these children of the baby boomers number approximately
The children of baby 9.5 million in Australia and New Zealand combined, a population that dwarfs the Gen Xers and is larger
boomers, born between
1977 and 2000. even than the baby boomer segment. Spanning more than 20 years, the youngest are just finishing secondary
school and the oldest have established careers. Many have families, homes and debt while others are single
with few responsibilities. Compared to the baby boomers and Gen Xers, the Millennials are the most
educated, and those who are employed have good jobs with above-average income. But they are also the
most financially strapped generation; for some, high unemployment is a factor while others are saddled
with debt, ranging from credit cards to loans. Still, because of their numbers, the Millennials make up a
huge and attractive market, both now and in the future.12
One characteristic that all Millennials have in common is their comfort with digital technology.
They do not just embrace technology; it is a way of life. The Millennials were the first generation to
grow up in a world filled with computers, mobile phones, satellite television, iPods and iPads, and
online social media. One study found that over 96 per cent of Millennials use the web, making up over
40 per cent of all Australian internet users, with many spending well over two hours per day online.
With their high ownership of smartphones, which enable easy access to the mobile web, this is not
surprising.
Marketers of all kinds now target the Millennials segment, from car makers to political campaigns.
More than sales pitches from marketers, Millennials seek authenticity and opportunities to shape their
own brand experiences and share them with others. One marketer identifies what she calls ‘universal
Millennial truths: being transparent, authentic, immediate and versatile’.13 Reaching these sceptical,
message-saturated consumers requires creative marketing approaches. Airbnb and Uber are the
quintessential millennial brands – offering the connected millennial consumer authenticity (Airbnb invites
users to ‘Get lost in a city with insiders’) and immediacy (Uber offers ‘Your ride, on demand’). Mini is
9780655702412_CH03.indd 76 3/3/20 5:33 PM

targeting Millennials with an Instagram competition:

29 000 likes to win a new Mini Ray. As part of the launch of
the Mini Ray in Australia, Instagram users are encouraged
to post images, games, gifs, challenges, video and stunts,
each with one of the car’s accent colours – pink, green
or yellow – and all tagged #MINIRAY29K. The online
promotion combines with the outdoor, print and digital
advertising. The national marketing manager for Mini
explains: ‘Given traditional . . . channels don’t typically
resonate well with the millennial set, we wanted to find
a way to reach them in a medium they engage with every
day.’ The car itself taps into the millennial desire to shape
the brand experience, with options to personalise each
car with the driver’s choice of coloured accents. With its
promise of head-turning fun, the campaign and the car Millennials: Mini Ray speaks to the millennial mindset, with its launch
speak to the heart of the millennial mindset at a price campaign on Instagram #MINIRAY29K and the car itself – offering head-
turning fun!
point that is affordable for this group.14
Creative agency: Ogilvy Australia. Media agency: Vizeum
Generation Z
Hard on the heels of the Millennials is Generation Z, young people born after 2000 (although many Generation Z
analysts include people born after 1995 in this group). The approximately 6 million Australian and People born after
2000 (although many
New Zealand Gen Zers make up important children’s, tweens’ and teens’ markets. In Australia, the analysts include people
tweens alone are estimated to be spending $11–$21 per week, with an annual combined spend of over born after 1995) who
$1 billion. These young consumers also represent tomorrow’s markets – they are now forming brand make up the children’s,
relationships that will affect their buying well into the future.15 tweens’ and teens’
markets.
Even more than the Millennials, the defining characteristic of Gen Zers is their utter fluency
and comfort with digital technologies. In the words of one researcher, ‘Generation Z are digital
integrators, in that they have integrated technology seamlessly into their lives, and having used it
from the youngest age, it is almost like the air that they breathe, permeating almost all areas of their
lifestyle and relationships.’ Gen Zers do not wear watches because they carry a phone and use that to
tell time (as well as checking the weather, getting directions, taking selfies and catching up with friends
and family).
Gen Zers blend the online and offline worlds seamlessly as they socialise and shop. According to recent
studies, despite their youth, more than half of all Generation Z tweens and teens do product research
before buying a product or having their parents buy it for them. Of those who shop online, more than half
prefer shopping online in categories ranging from electronics, books, music, sports equipment and beauty
products to clothes, shoes and fashion accessories.
Companies in almost all industries market products and services aimed at Generation Z. For example,
many retailers have created special lines or even entire stores appealing to Gen Z buyers and their parents
– consider Cotton On Kids, Jacadi and Factorie (for clothing); EB-Games (for gaming); Toys Paradise,
Kidzinc and Toys2Learn (for toys); Gymbaroo (for activities) and Smiggle (for stationery); and the large
chain stores, such as Target, Myers and Big W, all carry children’s lines.
Marketing to Gen Zers and their parents presents special challenges. Traditional media are still
important to this group. Magazines such as K-Zone and Girlfriend are popular with some Gen Z segments,
as are television channels such as ABC Kids and the Disney Channel. But marketers know they must meet
Gen Zers where they hang out and shop. Increasingly, that is in the online and mobile worlds. Although
the under-13 set remains barred from social media such as Facebook and Instagram – at least officially –
the social media will play a crucial marketing role as the children and tweens grow into teens.
9780655702412_CH03.indd 77 3/3/20 5:33 PM

Today’s children are notoriously fickle and hard to pin down, and they have short attention spans.
The key is to engage these young consumers and let them help to define their brand experiences.
Another Generation Z concern involves children’s privacy and their vulnerability to marketing pitches.
Companies marketing to this group must do so responsibly or risk the wrath of parents and public
policy makers.
Generational marketing
Do marketers need to create separate products and marketing programs for each generation? Some experts
warn that marketers need to be careful about ‘turning off’ one generation each time they craft a product
or message that appeals effectively to another. Others caution that each generation spans decades of time
and many socioeconomic levels. For example, marketers often split the baby boomers into three smaller
groups – leading-edge boomers, core boomers and trailing-edge boomers – each with its own beliefs and
behaviours. Similarly, they split Generation Z into children, tweens and teens.
Thus, marketers need to form more precise age-specific segments within each group. More importantly,
defining people by their birthdates may be less effective than segmenting them by their lifestyle, life stage
or the common values they seek in the products they buy. We discuss many other ways to segment markets
in Chapter 6 .
The changing family

The ‘traditional household’ consists of a husband, wife and children (and sometimes grandparents).
Although two-parent families still make up a very large part of Australian and New Zealand families, this
pattern is changing. Today, approximately 40 per cent of all family households in both countries have two
parents living at home but, in the next 20 years, this is expected to fall slightly in Australia and closer to
38 per cent in New Zealand. During the same period, the
proportion of single-parent families is expected to stay much the
same, at about 17 per cent. What is changing is the steady increase
in the number of families with no children living at home –
expected to increase from about 38 per cent to 41 per cent of
all families in Australia, and to a massive 45 per cent of all New
Zealand families in the next 20 years. This big shift is partly due
to the ageing population, but also to the fact that some couples
are choosing not to have children. As the population ages, there
will also be an increasing number of one-person households –
from about 24–25 per cent to about 27–28 per cent of all
households in the next 20 years. All this means that the average
household size in both New Zealand and Australia is expected to
decline over the next two decades.16 More people are divorcing
or separating, choosing not to marry, marrying later or marrying
without intending to have children. Marketers must increasingly
consider the needs of non-traditional households, because their
numbers are now growing more rapidly compared to traditional
households. Each group has distinctive needs and buying habits.
The number of women working outside the home has also
increased, growing from 52 per cent of all women in the 1990s
Changing families: HelloFresh invites time-poor families to to 58 per cent today. In many families, both parents are working
‘Discover the joy of cooking!’ without the hassle of the planning full-time although this does vary, depending on the age of the
and shopping. children. Meanwhile, though comprising only a small number,
Supplied by HelloFresh Australia
more men are staying at home with their children and managing
9780655702412_CH03.indd 78 3/3/20 5:33 PM

the household while their partners go to work.17 The significant number of women in the workforce has
spawned the child day-care business and increased consumption of career-oriented women’s clothing,
financial services and convenience foods and services. With limited time yet loving to cook, families have
responded favourably to the new-to-market subscription food boxes, such as HelloFresh and My Food Bag.
Each week, time-poor families receive a delivery of everything they need to prepare between three and
five meals. The food is convenient, healthy and home-cooked. HelloFresh invites customers to ‘Discover
the joy of cooking!’ without the hassle of the planning and shopping: a perfect solution for the changing
Australian family.18
Geographic shifts in population

This is a period of great migratory movements between and within countries. Australians, for example, are
mobile people, with about 40 per cent of all Australian residents moving every five years. Young and old
alike are moving to urban communities, such as Melbourne and Brisbane, and to larger coastal towns, such
as Hervey Bay in Queensland and Nelson Bay in New South Wales. At the same time, greater numbers
of older people are moving to regional towns and the coast (such as Geelong and the Sunshine Coast).
The same types of broad population moves can be seen in New Zealand. New Zealanders tend to live in urban
centres (such as Auckland, Wellington and Dunedin); however, larger regional towns are also popular among
retirees (for example, Wanaka and Thames or Coromandel). New Zealanders are also moving northward,
with a slow but definite increase relative to the South Island. There was a population shift following the 2010
Christchurch earthquake, with people leaving – and more recently returning to – the city. And quite possibly
there will be further population shifts following the massive 7.8 Kaikoura earthquake in 2016. People move
for many reasons, but employment and social/lifestyle considerations are important factors. Such population
shifts interest marketers because people in different regions buy differently. For example, consumers in the
north of both Australia and New Zealand are more likely to buy air-conditioning and swimming pools, and
window double-glazing is more likely to be in demand in the colder southern regions.19
In both Australia and New Zealand, and for more than a century, there has been a gradual geographic
shift of population from rural to metropolitan areas. The metropolitan areas have a faster pace of living,
more commuting, higher incomes and a greater variety of goods and services than can be found in the
small towns and rural communities that dot the country. The largest cities account for most of the sales of
expensive apparel, perfumes, luggage and works of art. These cities also support the opera, ballet and other
forms of ‘high culture’. In the 1960s, Australians made an exodus from the inner cities to the suburbs.
The larger cities became surrounded by even larger suburbs. Australians living in the suburbs engage in more
casual, outdoor living and greater neighbour interaction; they have lower incomes and younger families.
Suburbanites buy station wagons, four-wheel-drive recreational vehicles, aluminium and fibreglass boats,
home-workshop equipment, garden furniture, lawn and gardening tools, and outdoor cooking equipment.
Now, however, many suburban areas, such as Melbourne’s Eastern Suburbs, are undergoing a renewal, with
in-fill high-rise apartment blocks dominating the landscape as younger couples, retirees and singles, priced
out of the market, look for homes in well-established suburban communities.20
The shift in where people live has also caused a shift in where they work. For example, the migration
to suburban areas has resulted in a rapid increase in the number of people who ‘telecommute’ – work from
home or in a remote office and conduct their business by phone or via the internet. This trend, in turn, has
created a booming SOHO (small office/home office) market. Estimates of the extent of teleworking vary
greatly; however, recent studies have reported that as many as one in three employees is involved in some
teleworking each week. While most teleworkers work from home, a number report working from clients’
offices and others from cafés.21
Many marketers are actively courting the lucrative telecommuting market. For example, Officeworks
provides almost every piece of equipment the serious teleworker could want. From shredders to
stationery, smart pens and smartphones, as well as computers and the desks to put them on, Officeworks
9780655702412_CH03.indd 79 3/3/20 5:33 PM

has everything needed to set up a home office. The company even sells complete office furniture
collections, promising to ‘create an office environment that is a joy to work in each day’. Technology plays
a big role in successful teleworking, so web-meeting services, such as Zoom and GoToMeeting, are part
of the essential tool kit for the stay-at-home worker. With such apps, people can meet and collaborate
online via computer, tablet or smartphone, no matter what their work location. And companies ranging
from Salesforce.com to Google and Dropbox offer Cloud-computing apps that let people collaborate
and share documents anywhere and everywhere through the internet and mobile devices.22
A better-educated, more white-collar, more professional

population
Australians and New Zealanders are becoming better educated. Over 40 per cent of the Australian population
and 34 per cent of the New Zealand population have attended university. While only 33 per cent of those
over age 55 have completed any post-secondary study, the number increases to more than 47 per cent for
people aged 25–34. Individuals who achieve higher educational outcomes are often better off in a number
of ways; importantly, their lifestyles are different and they earn more. The rising number of educated people
will increase the demand for quality products, books, magazines, travel, personal computers, tablet devices
and internet services.23
The workforce is also becoming more white-collar. Today,
nearly 70 per cent of Australians are employed in white-collar
jobs. Job growth is now strongest for community and services
workers as well as for professional workers, and weakest for
labourers. This trend is expected to continue. The rising number
of educated professionals will affect not just what people buy but
also how they buy.24
Increasing diversity
Countries vary in their ethnic and racial makeup. At one
extreme is Japan, where almost everyone living there is
Japanese. The populations in both Australia and New Zealand
are much more diverse, with nearly one in three people born
overseas. In Australia, migrants from the United Kingdom
make up the biggest group, but many people living in Australia
who were born overseas are from New Zealand, China and
India. The mix is a little different in New Zealand, with the
largest migrant groups coming equally from the United
Kingdom, Ireland and Asia. Pacific Islanders comprise another
big cultural group. Aboriginal and Torres Strait Islander
peoples in Australia, and Maoˉ ri in New Zealand, are also
important groups in both communities. Each national group
has specific wants and different buying habits. Many marketers
of food, clothing, furniture and other products have targeted
specially designed products and promotions to one or more of
these groups.25
Diversity goes beyond ethnic heritage. For example, many
Diversity: Link Disability Magazine readership includes people who major companies have recently begun to explicitly target gay
are living with a disability, their families and carers, and health-care and lesbian consumers. One estimate puts the Australian
professionals. The magazine provides a way for marketers to speak buying power of lesbian, gay, bisexual, transgender and
directly to these audiences.
intersex people (LGBTI) at a massive $20 billion per annum.
9780655702412_CH03.indd 80 3/3/20 5:33 PM

According to the Pink Media Group (which represents media owners across g ay- and lesbian-focused
media channels), gay and lesbian consumer households typically have single or double incomes and
often have no children. Consequently, the LGBTI markets tend to have higher disposable incomes
and are often trendsetters. They ‘tend to spend more on luxury goods, travel, technology and fashion’,
though they buy many of the same brands as do all Australians. They are also brand-loyal – an attractive
characteristic for any market segment.26
As a result of television shows such as Modern Family, and openly gay celebrities and public figures
such as Ellen DeGeneres, politician Penny Wong and Apple CEO Tim Cook, the LGBTI community has
increasingly emerged into the public eye. A number of media now provide companies with access to this
market. For example, LOTL and DNA are successful magazines with a combined readership of over
200 000. Melbourne radio station JOY 94.9 also serves this market. Companies in a wide range of industries
are now targeting the LGBTI community with gay-specific marketing efforts. For example, Medibank
featured same-sex couples in their recent ‘Health care for every kind of family’ television campaign.
The inclusive ad shows a diverse mix of families, including same-sex families, and concludes with the phrase,
‘With Medibank, I am better’.27
Another diversity group is the estimated 4.3 million Australians and over 1 million New Zealanders
living with a disability. Most individuals with a disability are active consumers. As one expert explains,
people with disabilities ‘are getting out and about’ and they ‘have disposable income’. Many marketers
now recognise that the worlds of people with disabilities and those without are one and the same.
Marketers, such as McDonald’s, have featured people with disabilities in their mainstream advertising.
Other companies use specially targeted media to reach this segment. There is a range of websites and
print media with a greater proportion of readers who are living with a disability, their families and carers,
as well as health-care service providers. For example, Link Disability Magazine advertises a wide range
of services for both persons with a disability and those without.28
As the populations in Australia and New Zealand grow more diverse, successful marketers will continue
to diversify their marketing programs to take advantage of opportunities in fast-growing segments.

Pause here and think about how deeply these demographic factors ● Identify a specific company that has done a good job
affect all of us and, as a result, marketing strategies. of reacting to the shifting demographic environment –
● Apply these demographic developments to your own life. generational segments (baby boomers, Gen Xers, Millennials
Discuss some specific examples of how changing demographic or Gen Zers), the changing family and increased diversity.
factors affect you and your buying behaviour. Compare this company with one that has done a poor job.
Economic environment
Markets require buying power as well as people. The economic environment consists of factors that economic
affect consumer purchasing power and spending patterns. Economic factors can have a dramatic effect on environment
Factors that affect
consumer spending and buying behaviour. For example, until fairly recently, consumers spent freely,
consumer purchasing
fuelled by income growth, a boom in the stock market, rapid increases in housing values and other power and spending
economic good fortunes. They bought and bought, seemingly without caution, amassing record levels of patterns.
debt. However, the free spending and high expectations of those days were dashed by the global economic
recession of 2008–09.
Consumers have now adopted a back-to-basics sensibility in their lifestyles and spending patterns that
will likely persist for years to come. They are buying less and looking for greater value in the things they do
buy. In turn, value marketing has become the watchword for many marketers. Marketers in all industries are
looking for ways to offer today’s more financially frugal buyers greater value – just the right combination
9780655702412_CH03.indd 81 3/3/20 5:33 PM

of product quality and good service at a fair price. For example, Target promises customers ‘great quality
and lower prices every day’ and even marketers of luxury items are emphasising good value. For instance,
Australian online jeweller, Sheils, promises ‘the best prices, value and products’ and to ‘deliver service,
quality and jewellery unlike any other jeweller in Australia’.29
Changes in income
Marketers should pay attention to income distribution as well as to income levels. Over the past several
decades, the rich have grown richer, the middle class has shrunk and the poor have remained poor.
The top 20 per cent of Australian households earn nearly 50 per cent of the country’s adjusted gross
household income. In contrast, the bottom 40 per cent of Australian households earn just 13.3 p er cent
of the country’s adjusted gross household income. This changing pattern of income distribution is similar
in many Western countries, including New Zealand.30
This distribution of income has created a tiered market. Many companies, such as Bang & Olufsen and
Tiffany & Co., aggressively target the affluent. Others – such as Australian discount retailers The Reject
Shop and Crazy Clarks, and The Warehouse in New Zealand – target those with more modest means.
Still other companies tailor their marketing offers across a range of markets, from the less affluent to the
very affluent. For example, Ford offers cars ranging from the low-priced Ford Fiesta, starting at $19 451, to
the luxury Mustang GT convertible, starting at $72 433.31
Changing consumer spending patterns

Most household income is spent on food, housing and transportation. However, consumers at different
income levels have different spending patterns. Some of these differences were noted more than a century
Engel’s laws ago by Ernst Engel, who studied how people shifted their spending as their income rose. He found that as
Differences noted family income rises, the percentage spent on food declines, the percentage spent on housing remains about
more than a century constant (except for such utilities as gas, electricity and public services, which decrease), and both the
ago by Ernst Engel in
percentage spent on most other categories and that devoted to savings increase. Engel’s laws generally
how people shift their
spending patterns have been supported by later studies.
across food, housing, Changes in major economic variables, such as income, cost of living, interest rates, and savings and
transportation, health borrowing patterns, have a large impact on the marketplace. Companies monitor these variables by using
care and other goods
economic forecasting. Businesses do not have to be wiped out by an economic downturn or caught short in
and services as family
income rises. a boom. With adequate warning, they can take advantage of changes in the economic environment.
Natural environment
natural The natural environment involves the natural resources that are needed as inputs by marketers or that
environment are affected by marketing activities.
Natural resources that
are needed as inputs by
At the most basic level, unexpected happenings in the physical environment – anything from weather
marketers or that are to natural disasters – can affect companies and their marketing strategies. For example, in early 2016,
affected by marketing unseasonably warm El Niño conditions significantly impacted the sales of winter clothing. In fact, retail
activities. sales were down across Australia – the milder weather meant that shoppers, who typically head to shopping
centres when it is very cold or very hot, stayed away, significantly impacting impulse purchases. In contrast,
the milder weather was great news for outdoor entertainment businesses, such as the rooftop bar at the
Glenmore Hotel in The Rocks, or the Sydney Bridge climb. Although companies cannot prevent such
natural occurrences, they should prepare for dealing with them.32
At a broader level, environmental sustainability concerns have grown steadily over the past three
decades. In many cities around the world, air and water pollution have reached dangerous levels. World
concern continues to mount about the possibilities of global warming, and many environmentalists fear we
soon will be buried in our own rubbish.
Marketers should be aware of several trends in the natural environment. The first involves
growing shortages of raw materials. Air and water may seem to be infinite resources, but some groups
9780655702412_CH03.indd 82 3/3/20 5:33 PM

see long-term dangers. Air pollution chokes many of the world’s large cities, and water shortages are
already a big problem in most of Australia, and in some parts of New Zealand and the world. By 2030,
more than one in three of the world’s human beings will not have enough water to drink.33 Renewable
resources, such as forests and food, also have to be used wisely. Non-renewable resources, such as
oil, coal and various minerals, pose a serious problem. Businesses making products that require these
scarce resources face large cost increases, even if the materials remain available.
A second environmental trend is increased pollution. Industry will almost always damage the quality of
the natural environment. Consider the disposal of chemical and nuclear wastes; the dangerous mercury
levels in the ocean; the quantity of chemical pollutants in the soil and food supply; and the littering of
the environment with non-biodegradable bottles, plastics and other packaging materials. Waste bakery
products have been reduced at Goodman Fielder, one of Australia’s leading food companies, by identifying
new uses for the waste. Working with a company specialising in animal nutrition, waste bakery products are
now converted to pet food.34
A third trend is increased government intervention in natural resource management. The governments
of different countries vary in their concern and efforts to promote a clean environment. Some, such as the
German government, vigorously pursue environmental quality. Others, especially those of many poorer
nations, do little about pollution, largely because they lack the needed funds or political will. Even the
richer nations lack the vast funds and political accord needed to mount a worldwide environmental effort.
The general hope is that companies around the world will accept more social responsibility, and that less-
expensive devices can be found to control and reduce pollution.
Both Australia and New Zealand have organisations established by government to protect the
environment: the Environmental Protection Authority (EPA) in New Zealand and various state
environmental protection authorities in Australia. The role of each authority varies from state to state and
country to country, but their general focus is on protecting the environment. This includes everything
from enforcing environmental laws, to conducting environmental impact assessments and maintaining
emissions trading schemes. In the future, companies doing business in Australia and New Zealand can
expect continued strong controls from government and pressure groups. Instead of opposing regulation,
marketers should help develop solutions to the material and energy problems facing the world.
Concern for the natural environment has spawned an environmental sustainability movement. environmental
Today, enlightened companies go beyond what government regulations dictate. They are developing strategies sustainability
Developing strategies
and practices that create a world economy that the planet can support indefinitely. Environmental sustainability
and practices that create
means meeting present needs without compromising the ability of future generations to meet their needs. a world economy that
Many companies are responding to consumer demands with more environmentally responsible the planet can support
products. Others are developing recyclable or biodegradable packaging, recycled materials and components, indefinitely.
better pollution controls and more energy-efficient operations. For example, LUSH Australia was recently
recognised for its sustainable business practices, reflected in its core values: fighting animal testing, freshest
cosmetics online, ethical buying, 100% vegetarian, handmade, and naked packaging. They sell solid
shampoos that do not need packaging; unavoidable packaging is recycled or repurposed; and they source
sustainably produced raw materials. At the other end of the marketing spectrum, Auckland manufacturer
Environmental sustainability: LUSH is committed to producing handmade goods

that minimise the impact on the environment.
LUSH Fresh Handmade Cosmetics
9780655702412_CH03.indd 83 3/3/20 5:33 PM

Cemix has developed a new concrete, Envirocrete, which uses 50 per cent recycled materials. A major
hardware chain has picked up this product and distributes it throughout New Zealand.35
Companies today are looking to do more than just good deeds. More and more, they are recognising the
link between a healthy ecology and a healthy economy. They are learning that environmentally responsible
actions can also be good business.
Technological environment
technological The technological environment is perhaps the most dramatic force now shaping our destiny.
environment Technology has released such wonders as antibiotics, robotic surgery, miniaturised electronics, laptop
Forces that create new computers and the internet. It also has released such horrors as nuclear missiles, chemical weapons and
technologies, creating
new products and assault rifles. Additionally, it has given rise to such mixed blessings as the automobile, television and credit
market opportunities. cards. Our attitude towards technology depends on whether we are more impressed with its wonders – or
with its blunders.
New technologies can offer exciting opportunities for marketers. For example, what would you think
about having tiny little transmitters implanted in all the products you buy that would allow tracking of the
products from their point of production through use and disposal? Or how about a bracelet with a chip
inserted that would let you make and pay for purchases, receive personalised specials at retail locations, or
even track your whereabouts or those of friends? On the one hand, such technology would provide many
advantages to both buyers and sellers. On the other hand, it could be a bit scary for consumers concerned
with, for example, invasion of their privacy. Either way, with the advent of radio-frequency identification
(RFID) transmitters, it is already happening.
Many firms are already using RFID technology to track products and customers at various points in
the distribution channel. For example, libraries around Australia and New Zealand are using 3M RFID
tracking systems to manage their books. Tags are fixed on each item and then library visitors can check-out
their own books; librarians can use a hand-held reader to check the collection and to assist with re-shelving
items; and, finally, when a book comes back to the library, the RFID tag is automatically tracked as the book
passes into the return bin.36
The technological environment changes rapidly, creating new markets and opportunities. However,
every new technology replaces an older technology. Transistors hurt the vacuum-tube industry, digital
photography hurt the film business, and digital downloads and streaming are hurting the CD and
DVD businesses. When old industries fight or ignore new technologies, their businesses decline.
Thus, marketers should monitor the technological environment closely. Companies that do not keep
up will soon find their products outdated. If that happens, they will miss new product and market
opportunities (see Marketing in Action 3.1 for trending technological development that many marketers
are currently exploring).
Investment in research and development will be crucial for companies and nations. Scientists today
are researching a wide range of promising new products and services, ranging from practical solar energy,
electric cars, paint-on computer and entertainment video displays, and powerful computers that you can
wear or fold into your pocket, to go-anywhere concentrators that produce drinkable water from the air.
Many companies are adding marketing people to research and development teams in an effort to obtain
a stronger marketing orientation. The challenge in each case is not only technical but also commercial –
that is, to make practical, affordable versions of these products. (See also Chapter 8, where we explore new-
product development and innovation in more detail.)
As products and technology become more complex, the public needs to know that these are safe.
Thus, government agencies investigate and ban potentially unsafe products. In Australia and New Zealand,
there is a comprehensive set of laws and guidelines to help businesses develop new products that are safe
for all users (especially children). Marketers should be aware of these regulations when applying new
technologies and developing new products.
9780655702412_CH03.indd 84 3/3/20 5:33 PM

Marketing
in Action The quite real virtual experience
3.1
What is reality? When it comes to some experiences, is virtual reality any less real
than – well – real reality? If you attend your marketing lecture online, is it less
real than a face-to-face lecture? Let us suppose you enjoyed the lecture in the
comfort of your own home (or office) and, because it was delivered using a virtual
reality system, you could look around and see your classmates, you could chat
with your work group and complete an in-class assessment, but you did not have
to go out in the heat (or cold) to get there. You did not have to spend an hour
and a half in traffic or on public transport, and you made it to your friend’s party
without skipping class on Friday night. That seems pretty real and really useful.
This is the promise of the virtual experience – something as real as reality –
with all the conveniences, flexibility and even safety of not being there. For example,
as part of an event to promote safety, NRMA insurance offered drivers the chance
to experience a virtual car accident in two different cars – first in a modern car and
then in a car designed 30 years ago. Wearing a virtual reality (VR) headset and
inside a car rigged with a hydraulic system to sync with the VR vision, the crash
testers experienced the accident and walked away – a bit shaken but not hurt.
The promotion really brought home the message of car safety to drivers.
RMIT University in Melbourne has a Virtual Experience Laboratory, which
has been designed for students and industry to explore how VR can be used in
industrial settings. The lab provides opportunities to consider how activities can
be transformed to enhance the design and testing of complex systems, to make Virtual destinations: Hamilton Island used
dangerous jobs safer, to enable access to remote locations and to make many virtual reality to offer visitors at various industry
other process and activities easier. This type of tool and other VR systems offer exhibitions around the world a unique and
breathtaking experience of the Great Barrier Reef.
unique opportunities for marketers.
How better to transport visitors to the beauty on
For example, Qantas used a virtual destinations tour with first-class travellers,
the doorstep of this magnificent island resort?
who, wearing VR headsets, had the opportunity to see before they landed, with virtual
Hamilton Island
tours of Kakadu National Park and the Great Barrier Reef. In fact, Hamilton Island’s
luxury resort, qualia, recently made great use of VR at an international travel and
accommodation exhibition in Las Vegas. Exhibitors toured the Great Barrier Reef and
Sources: Adam Bender, ‘Oculus Rift shows (virtual) reality of car crashes’, Computerworld,
Hamilton Island by helicopter. At the same exhibition, Business Events Sydney offered 17 March 2014, <www.computerworld.com.au/article/540645/oculus_rift_shows_virtual_
an even more knuckle-clenching bridge climb. But it is important to get the content reality_car_crashes/>; Adam Bender, ‘Qantas tests virtual reality for in-flight entertainment’,
Computerworld, 29 January 2015, <www.computerworld.com.au/article/565044/qantas-
right when using VR for destination marketing. As one visitor to the exhibition noted, tests-virtual-reality-in-flight-entertainment/>; ‘Virtual experiences laboratory’, RMIT University,
‘content really is key when it comes to virtual reality experiences’ – get it wrong and, <www.rmit.edu.au/about/our-locations-and-facilities/facilities/research-facilities/virtual-
experiences-laboratory>. Quotes from ‘Integrating virtual reality into the event world’,
instead of a great communication tool, the experience will be ‘dull and flat’ and no The Nibbler, 3 November 2016, <www.thenibbler.com.au/article/integrating-virtual-reality-
marketer manager wants that perception connected with their brand. into-the-event-world/> ; and Daniel Kreps, ‘ABBA plan “previously unimagined” virtual reality
experience’, Rolling Stone, 26 October 2016, <www.rollingstone.com/music/news/abba-plan-
Virtual reality is not just about creating new and exciting promotional previously-unimagined-virtual-reality-experience-w446845>; all accessed December 2016.
experiences – it offers unique opportunities to create new products. Consider
the last concert ticket you bought – how much did it cost you? It is not unusual Questions
for tickets to cost in the region of $300–$400. Rolling Stone magazine recently ❶ Virtual reality offers exciting possibilities for marketing communications
shared details of a new project between the iconic 70’s band, ABBA, and music and new product innovation. Choose a brand you know really well – how
entrepreneur, Simon Fuller. The Swedish band has consistently resisted requests to would you use VR to augment consumer experiences?
reform, playing only once in the last 30 years. But, in 2018, that is all to change as ❷ The sales team for a mid-sized real-estate business has asked you to
a new generation of fans will get the opportunity to see ABBA perform ‘live’. Details develop a VR sales strategy for their business. The company is keen to reach
of the project are yet to be revealed but it is said to include both VR and artificial out to new market segments (both buyers and sellers) with a VR experience.
intelligence technologies to ‘create new forms and entertainment and content’. What advice would you give to the company and the sales team?
9780655702412_CH03.indd 85 3/3/20 5:33 PM

Political and social environment

political Marketing decisions are strongly affected by developments in the political environment. The political
environment environment consists of laws, government agencies and pressure groups that influence or limit various
Laws, government
organisations and individuals in a given society.
agencies and pressure
groups that influence
or limit various Legislation regulating business
organisations and Even the strongest advocates of free-market economies agree that the system works best with at least some
individuals in a given regulation. Well-conceived regulation can encourage competition and ensure fair markets for goods and
society.
services. Thus, governments develop public policy to guide commerce – sets of laws and regulations that
limit business for the good of society as a whole. Almost every marketing activity is subject to a wide range
of laws and regulations.
Legislation affecting business around the world has increased steadily over the years. Australia and New
Zealand have many laws covering issues such as competition, fair trade practices, environmental protection,
product safety, truth in advertising, consumer privacy, packaging and labelling, pricing and other important
areas. Understanding the public policy implications of a particular marketing activity is not a simple matter.
For example, in Australia, there are many laws created at the national, state and local levels, and these
regulations often overlap. Moreover, regulations are constantly changing – what was allowed last year may
now be prohibited, and what was prohibited may now be allowed. Marketers must work hard to keep up
with changes in regulations and their interpretations.
Business legislation has been enacted for a number of reasons. The first is to protect companies from
each other. Although business executives may praise competition, they sometimes try to neutralise it when
it threatens their business. So, laws are passed to define and prevent unfair competition. In Australia, such
laws are enforced by the Australian Competition and Consumer Commission (ACCC), an independent
authority established by the Commonwealth government.
The second purpose of government regulation is to protect consumers from unfair business practices.
Some firms, if left alone, would make shoddy products, invade consumer privacy, tell lies in their advertising,
and deceive consumers through their packaging and pricing. Unfair business practices have been defined
and are enforced by various agencies.
The third purpose of government regulation is to protect the interests of society against unrestrained
business behaviour. Profitable business activity does not always create a better quality of life. Regulation
arises to ensure that firms take responsibility for the social costs of their production or products.
International marketers will encounter dozens, or even hundreds, of agencies set up to enforce trade
policies and regulations. The Australian and New Zealand governments have established many of these
bodies – for example, Food Standards Australia New Zealand (FSANZ) is a statutory body jointly established
by the two countries to ensure safe food supply in both Australia and New Zealand. This authority develops
and administers the Australia New Zealand Food Standards Code, which sets standards in food production,
processing and labelling. Similarly, the ACCC is Australia’s national agency dealing with competition
matters and is the agency responsible for enforcing the Competition and Consumer Act 2010 (Cth).
This Act covers a wide range of business activities, but most relevant to marketers is Schedule 2, which sets
out the Australian Consumer Law (ACL). The ACL deals with deceptive advertising, consumer guarantees
and product safety, among other matters. Other agencies are organised at state level – for example,
environmental protection authorities are established in each Australian state. These organisations affect
business processes and can have a significant impact on marketing performance, and effective managers will
keep up with developments and changes in these authorities.
New laws and their enforcement will continue to increase. Business executives must monitor these
developments when planning their products and marketing programs. Marketers need to know about the
main laws protecting competition, consumers and society. They need to understand these laws at the local,
state, national and international levels.
9780655702412_CH03.indd 86 3/3/20 5:33 PM

Increased emphasis on ethics and socially responsible actions

Written regulations cannot possibly cover all potential marketing abuses, and existing laws are often
difficult to enforce. However, beyond written laws and regulations, business is also governed by social
codes and rules of professional ethics.
Socially responsible behaviour

Enlightened companies encourage their managers to look beyond what the regulatory system allows and
simply ‘do the right thing’. These socially responsible firms actively seek out ways to protect the long-term
interests of their consumers and the environment.
Almost every aspect of marketing involves ethics and social responsibility issues. Unfortunately, because
these issues usually involve conflicting interests, well-meaning people can honestly disagree about the
right course of action in a given situation. Thus, many industrial and professional trade associations have
developed codes of ethics – for example, the Market Research Society of New Zealand (MRSNZ) and the
Australian Association of National Advertisers (AANA). Additionally, more companies are now developing
policies, guidelines and other responses to complex social responsibility issues.
The boom in online marketing has created a new set of social and ethical issues. Critics worry most
about online privacy issues. There has been an explosion in the amount of personal digital data available.
Users themselves supply some of these data. They voluntarily place highly private information on social
networking sites, such as Facebook or LinkedIn, or on genealogy sites that are easily searched by anyone
with a computer or smartphone.
However, much of the information is systematically developed by businesses seeking to learn more
about their customers, often without consumers realising they are under the microscope. Legitimate
businesses track consumers’ online browsing and buying behaviour and collect, analyse and share digital
data from every move consumers make at their online sites. Critics are concerned that companies may now
know too much and that some companies might use digital data to take unfair advantage of consumers.
Although most companies fully disclose their internet privacy policies, and most work to use data to
benefit their customers, abuses do occur. As a result, consumer advocates and policymakers are taking
action to protect consumer privacy. In both Australia and New Zealand, there is legislation regarding what
Cause-related marketing: Qantas partners with UNICEF with its ‘Change for
Good’ campaign. Qantas passengers share their spare change to support UNICEF’s
global health, child protection and education programs.
Qantas
9780655702412_CH03.indd 87 3/3/20 5:33 PM

companies are able to do with the personal information they collect about their customers, employees and
various publics. Legislation aside, responsible businesses tell their customers and publics how they will
use such information. For example, the Australian Broadcasting Corporation (ABC) states that it ‘will be
transparent about how and why we collect and use your information’, and makes its privacy policy available
on its website.37 In Chapters 2 and 5, we discuss these and other societal marketing issues in greater depth.
Cause-related marketing
To exercise their social responsibility and build more positive images, many companies are now linking
themselves to worthwhile causes. These days, every product seems to be tied to some cause. Buy fresh
daffodils or a daffodil pin from Coles and support the Cancer Council. Or next time you travel with Qantas,
put your foreign and local currency in the ‘Change for Good’ envelope and support UNICEF’s global
health, child protection and education programs.38 In fact, some companies are founded entirely on cause-
related missions. Under the concept of ‘value-led business’ or ‘social enterprise’, their mission is to use
business to make the world a better place.
Cause-related marketing has become a primary form of corporate giving. It lets companies ‘do well by
doing good’ by linking purchases of the company’s products or services with fundraising for worthwhile
causes or charitable organisations. Companies now sponsor dozens of cause-related marketing campaigns
each year. Many are backed by large budgets and a full complement of marketing activities. Beyond being
socially admirable, it also makes good economic sense, for both the company and its customers. Companies
can do good in the world while still being profitable.39
Cause-related marketing has stirred some controversy. Critics worry that it is more a strategy for
selling than a strategy for giving – that ‘cause-related’ marketing is really ‘cause-exploitative’ marketing.
Thus, companies using cause-related marketing might find themselves walking a fine line between increased
sales and an improved image, and facing charges of exploitation.
However, if handled well, cause-related marketing can greatly benefit both the company and the cause.
The company gains an effective marketing tool while building a more positive public image. The charitable
organisation or cause gains greater visibility and important new sources of funding and support.
Cultural environment
cultural The cultural environment is made up of institutions and other forces that affect a society’s basic values,
environment perceptions, preferences and behaviours. People grow up in a particular society that shapes their basic
Institutions and other beliefs and values. They absorb a world view that defines their relationships with others. The following
forces that affect a
society’s basic values, cultural characteristics can affect marketing decision making.
perceptions, preferences
and behaviours. Persistence of cultural values
People in a given society hold many beliefs and values. Their core beliefs and values have a high degree of
persistence. For example, most Australians believe in working, getting married, giving to charity and being
honest. These beliefs shape more specific attitudes and behaviours found in everyday life. Core beliefs and values
are passed on from parents to children and are reinforced by schools, churches, business and government.
Secondary beliefs and values are more open to change. Believing in marriage is a core belief; believing
that people should get married early in life is a secondary belief. Marketers have some chance of changing
secondary values but little chance of changing core values. For example, family-planning marketers could
argue more effectively that people should get married later, rather than not getting married at all.
Shifts in secondary cultural values

Although core values are fairly persistent, cultural swings do take place. Consider the impact of popular
music groups, movie personalities and other celebrities on young people’s hairstyling and clothing norms.
Marketers want to predict cultural shifts in order to spot new opportunities or threats. Several firms offer
‘futures’ forecasts in this connection. For example, Trendwatching.com has tracked consumer value trends for
9780655702412_CH03.indd 88 3/3/20 5:33 PM

years – its annual Trend Report analyses and interprets the forces that shape
consumers’ lifestyles and their marketplace interactions. The main cultural
values of a society are expressed in people’s views of themselves and others,
as well as in their views of organisations, society, nature and the universe.
People’s views of themselves

People vary in their emphasis on serving themselves versus serving others.
Some people seek personal pleasure, wanting fun, change and escape.
Others seek self-realisation through religion, recreation or the avid pursuit
of careers or other life goals. Some people see themselves as sharers and
joiners; others as individualists. People use products, brands and services as
a means of self-expression, and they buy products and services that match
their views of themselves. Mass mingling: Rather than diminishing human interaction,
Marketers can target their products and services based on such self- today’s social media and mobile communications are causing
people to increasingly tap into their networks of friends.
views. For example, Shoes of Prey appeals to those women who want to
© Africa Studio/Shutterstock.com
express their individualism. The online shoe store invites the designer in
everyone to create their perfect shoe by personalising the shape, colour
and heel height. Appealing to people’s desires for self-expression and individualism, the website exhorts:
‘Our passion is handcrafting quality, customized shoes that are as unique as you are.’40
People’s views of others

People’s attitudes towards, and interactions with, others shift over time. In recent years, some analysts have
voiced concerns that the internet age would result in diminished human interaction, as people buried their
heads in their computers or emailed and texted rather than interacting personally. Instead, today’s digital
technologies seem to have launched an era of what one trend watcher calls mass mingling. Rather than
interacting less, people are using online social media and mobile communications to connect more than ever.
The more people meet, network, message and socialise online, the more likely they are to eventually meet
up with friends and followers in the real world.41
However, these days, even when people are together, they are often ‘alone together’. Groups of
people may sit or walk in their own little ‘bubbles’, intensely connected to tiny screens and keyboards.
One expert describes the latest communication skill as ‘maintaining eye contact with someone while you
text someone else; it’s hard but it can be done,’ she says. ‘Technology-enabled, we are able to be with one
another, and also elsewhere, connected to wherever we want to be.’42 Thus, whether the new technology-
driven communication is a blessing or a curse is a matter of much debate.
This new way of interacting strongly affects how companies market their brands and communicate with
customers. Consumers increasingly connect to friends and online brand communities to learn about and
buy products and to shape and share brand experiences. As a result, it is important for brands to participate
in these networks, too. (See Chapter 13 for more on digital marketing.)
People’s views of organisations

People vary in their attitudes towards corporations, government agencies, trade unions, universities and
other organisations. By and large, people are willing to work for major organisations and expect them, in
turn, to carry out society’s work.
The past two decades have seen a sharp decrease in confidence in and loyalty towards business and
political organisations and institutions. In the workplace, there has been an overall decline in organisational
loyalty. Company downsizing and restricted hours combined with excessively high senior-management
salary packages have bred cynicism and distrust. In just the last decade, rounds of layoffs resulting from the
global recession, along with corporate scandals and other unsettling activities, have resulted in a further loss
of confidence in big business. Many people today see work not as a source of satisfaction but as a required
9780655702412_CH03.indd 89 3/3/20 5:33 PM

chore to earn money with which to enjoy their non-work hours. This trend suggests that organisations
need to find new ways to win consumer and employee confidence.
People’s views of society

People vary in their attitudes towards their society – patriots defend it, reformers want to change it,
malcontents want to leave it. People’s orientation to their society influences their consumption patterns
and attitudes towards the marketplace. Australian attitudes to patriotism became polarised in the 1990s as
the debate over whether Australia should become a republic became politicised. And, in the recent decade,
concerns over terrorism, asylum seekers, refugees, business failures and general disquiet have served to raise
the level of patriotism in Australia, sometimes at the expense of other cultural groups.
Whichever country we examine, people’s orientation to their society influences their consumption
patterns, level of savings and attitudes towards the marketplace. Marketers need to monitor consumers’
changing social orientations and adapt their strategies accordingly. Many companies have responded to
renewed consumer patriotism with ‘Made in Australia’ themes and flag-waving promotions. However,
marketers must take care when responding to such strong national emotions.
People’s views of nature

People vary in their attitudes towards the natural world – some feel ruled by it, others feel in harmony
with it and still others seek to master it. A long-term trend has been people’s growing mastery over nature
through technology and the belief that nature is bountiful. More recently, however, people have recognised
that nature is finite and fragile, and that it can be destroyed or spoiled by human activities.
This renewed love of things natural has created a market of consumers who seek out everything from
natural, organic and nutritional products to fuel-efficient cars and alternative medicines. These consumers make
up a sizable and growing market. For example, Thunderpants, a New Zealand clothing company, produces
locally made organic cotton clothing. The company website explains that their business model is based on slow
growth principles: ‘family before business and lifestyle over work’. They aim to make quality clothing from
organic cotton, locally produced fabric and locally produced garments. The range includes everything from
undies, socks, swimwear and leisure wear, and they even have items that can be hand-coloured. Committed to
keeping it real, the company has a test kitchen where new product ideas are road-tested by customers. They
also support many charities with a special range called ‘Sausage Sizzle Philanthropants’, where $1 from every
purchase is donated to the current month’s charity. Customers can pick a condiment to go with their purchase,
and so add an extra dollar or ten to the order as a donation: tomato sauce for $1, mustard for $2 – right on up
to ‘The Works’ for $10.43
Food producers have also found fast-growing
markets for natural and organic products. In Australia,
The Raw Food Store sells a range of raw and organic
foods and sustainable products. ‘We wanted to share
this passion with other families who want to make
conscious choices not only for their health, their
children but for the planet,’ the company’s website
states.44
Research shows that the Australian organic
industry is worth over $1.7 billion each year. The
market is growing at a phenomenal rate of 15 per
cent each year. Today, buyers of organic products are
People’s view of nature: Responding to concerns about the health of the not a great deal different from other consumers –
planet, Thunderpants produce high-quality, locally made organic clothing. The their age, income and education are similar to those
company sets family before business and lifestyle over work. of other buyers; what is different, however, is their
Thunderpants Ltd
attitudes. They have strong feelings for the wellbeing
9780655702412_CH03.indd 90 3/3/20 5:33 PM

of the planet, their communities and themselves. Niche marketers have sprung up to serve this market, and
traditional food chains, such as Woolworths and New World, have added separate natural and organic food
sections. Over the next few years, we can expect to see organic produce become increasingly mainstream.45
People’s views of the universe

Finally, people vary in their beliefs about the origin of the universe and their place in it. Although most
Australians follow a particular set of religious beliefs, religious conviction and practice have been declining
through the years and church attendance has fallen steadily. Over 22 per cent of Australians now say they
have no religious affiliation.46 However, the fact that people are dropping out of organised religion does
not mean they are abandoning their faith. Research conducted by the Australian Centre on Quality of
Life at Deakin University to investigate quality of life shows a general increasing level of satisfaction with
spirituality or religion.47 Some futurists have noted a renewed interest in spirituality, perhaps as a part of
a broader search for a new inner purpose. People have been moving away from materialism and ‘dog-eat-
dog’ ambition to seek more permanent values – family, community, Earth, faith – and a more certain grasp
of right and wrong. This changing spiritualism affects consumers in everything from the television shows
they watch and the books they read to the products and services they buy.

Pause for a moment and consider that, beyond the demographic Which part of the macroenvironment most impacted your
factors, the other parts of the macroenvironment also affect our decision?
lives and shape marketing strategies. ● Reflect on your views of yourself, others, organisations,
● Take a moment to consider how the economic environment, society and nature. How are they shaping your purchasing
the natural environment, the technological environment decisions? What brands most align, and least align, with
and the political and social environment have shaped your views? What marketing strategies seem to particularly
the decisions you have made about a recent purchase. resonate with you in relation to these views?
Responding to the marketing

environment
Someone once observed, ‘There are three kinds of companies: those who make things happen, those who
watch things happen, and those who wonder what’s happened.’48 Many companies view the marketing
environment as an uncontrollable element to which they must react and adapt. They passively accept the
marketing environment and do not try to change it. They analyse the environmental forces and design
strategies that will help the company avoid the threats and take advantage of the opportunities the
environment provides.
Other companies take a proactive stance towards the marketing environment. Rather than assuming
that strategic options are bounded by the current environment, these firms develop strategies to change the
environment. Companies and their products often create and shape new industries and their structures –
products such as Uber’s ride, Apple’s iPad and iPhone, and Google’s search engine.
Even more, rather than simply watching and reacting to environmental events, proactive companies
take aggressive actions to affect the publics and forces in their marketing environment. Such companies hire
lobbyists to influence legislation affecting their industries and stage media events to gain favourable press
coverage. They take to the social media and run blogs to shape public opinion. They instigate legal actions
and file complaints with regulators to keep competitors in line, and they form contractual agreements to
better control their distribution channels.
By taking action, companies can often overcome seemingly uncontrollable environmental events.
For example, whereas some companies view the seemingly ceaseless online rumour mill as something over
which they have no control, others work proactively to prevent or counter negative word of mouth.
9780655702412_CH03.indd 91 3/3/20 5:33 PM

Marketing management cannot always control environmental forces. In many cases, it must settle
for simply watching and reacting to the environment. For example, a company would have little success
in trying to influence geographic population shifts, the economic environment or major cultural values.
It also pays to remember that the other organisations that make up part of a business’s microenvironment
will also be trying to control their own environment – which makes things even more unpredictable and
uncontrollable for the marketing business. Despite this unpredictability, smart marketing managers will
take a proactive – rather than a reactive – approach to the marketing environment.
Managing the marketing effort

In addition to being good at the marketing in marketing management, companies also need to pay
attention to the management. Managing the marketing process requires the four marketing management
functions shown in Figure 3.3 – analysis, planning, implementation and control. The company first develops
company-wide strategic plans and then translates them into marketing and other plans for each division,
product and brand. Through implementation, the company turns the plans into actions. Control consists
of measuring and evaluating the results of marketing activities and taking corrective action where needed.
Finally, marketing analysis provides information and evaluations needed for all of the other marketing
activities.
Marketing analysis
Managing the marketing function begins with a complete analysis of the marketing organisation’s situation.
SWOT analysis The marketer should conduct a SWOT analysis, by which it evaluates the company’s overall strengths (S),
An overall evaluation weaknesses (W), opportunities (O) and threats (T) (see Figure 3.4). Strengths include internal capabilities,
of the company’s
resources and positive situational factors that may help the company to serve its customers and achieve its
strengths (S),
weaknesses (W), objectives. Weaknesses include internal limitations and negative situational factors that may interfere with
opportunities (O) and the company’s performance. Opportunities are favourable factors or trends in the external environment that
threats (T). the company may be able to exploit to its advantage. And threats are unfavourable external factors or trends
that may present challenges to performance.
ANALYSIS
Planning Implementation Control
Develop Carry out Measure results

strategic plans the plans
Evaluate results
Develop
marketing plans
Take corrective
action
Figure 3.3 Managing marketing: Analysis, planning, implementation and control
9780655702412_CH03.indd 92 3/3/20 5:33 PM

POSITIVE NEGATIVE
S W
Strengths Weaknesses
Internal capabilities that Internal limitations that may
INTERNAL may help a company interfere with a company’s
reach its objectives ability to achieve its
objectives
O T
Opportunities Threats
External factors that the Current and emerging
EXTERNAL company may be able to external factors that may
exploit to its advantage challenge the company’s
performance
Figure 3.4 SWOT analysis: Strengths (S), weaknesses (W), opportunities (O) and threats (T)
The company should analyse its markets and marketing environment to find attractive opportunities
and identify environmental threats. It should analyse company strengths and weaknesses, as well as current
and possible marketing actions, to determine which opportunities it can best pursue. The goal is to match
the company’s strengths to attractive opportunities in the environment, while eliminating or overcoming the
weaknesses and minimising the threats. Marketing analysis provides inputs to each of the other marketing
management functions.
Marketing planning
Through strategic planning, the company decides what it wants to do with each business unit. Marketing
planning involves deciding on marketing strategies that will help the company attain its overall strategic
objectives. A detailed marketing plan is needed for each business, product or brand. What does a marketing
plan look like? Our discussion focuses on product or brand marketing plans.
Table 3.1 outlines the main sections of a typical product or brand marketing plan. (See Appendix 2
for a sample marketing plan.) The marketing plan begins with an executive summary that briefly reviews
major assessments, goals and recommendations. The main section of the plan presents a detailed SWOT
analysis of the current marketing situation as well as potential threats and opportunities. The plan next
states major objectives for the brand and outlines the specifics of a marketing strategy for achieving
them.
A marketing strategy consists of specific strategies for target markets, positioning, the marketing mix
and marketing expenditure levels. It outlines how the company intends to create value for target customers
in order to capture value in return. In this section, the planner explains how each strategy responds to
the threats, opportunities and critical issues spelled out earlier in the plan. Additional sections of the
marketing plan lay out an action program for implementing the marketing strategy along with the details of
a supporting marketing budget. The last section outlines the controls that will be used to monitor progress,
measure return on marketing investment and take corrective action. marketing
implementation
Marketing implementation The process that turns
Planning good strategies is only a start towards successful marketing. A brilliant marketing strategy counts marketing strategies and
plans into marketing
for little if the company fails to implement it properly. Marketing implementation is the process that
actions in order to
accomplish strategic
marketing objectives.
9780655702412_CH03.indd 93 3/3/20 5:33 PM

Table 3.1 Contents of a marketing plan

Section Purpose
Executive summary Presents a brief summary of the main goals and recommendations of the plan for management review,
helping top management to find the plan’s major points quickly. A table of contents should follow the
executive summary.
Current marketing Describes the target market and company’s position in it, including information about the market, product
situation performance, competition and distribution. This section includes:
• A market description, which defines the market and major segments, then reviews customer needs
and factors in the marketing environment that may affect customer purchasing.
• A product review, which shows sales, prices and gross margins of the major products in the product
line.
• A review of competition, which identifies the main competitors and assesses their market positions
and strategies for product quality, pricing, distribution and promotion.
• A review of marketing channels and logistics, which evaluates recent sales trends and other
developments in the major distribution channels.
Threats and Assesses major threats and opportunities that the product might face, helping management to anticipate
opportunities analysis important positive or negative developments that might have an impact on the firm and its strategies.
Objectives and issues States the marketing objectives the company would like to attain during the plan’s term and discusses
key issues that will affect their attainment.
Marketing strategy Outlines the broad marketing logic by which the business unit hopes to create customer value and
relationships and the specifics of target markets, positioning and marketing expenditure levels. How will
the company create value for customers in order to capture value from customers in return? This section
also outlines specific strategies for each marketing mix element and explains how each strategy responds
to the threats, opportunities and critical issues spelled out earlier in the plan.
Action programs Spells out how marketing strategies will be turned into specific action programs that answer the
following questions: What will be done? When will it be done? Who will do it? How much will it cost?
Budgets Details a supporting marketing budget that is essentially a projected profit and loss statement. It shows
expected revenues (forecasted number of units sold and the average net price) and expected costs of
production, distribution and marketing. The difference is the projected profit. Once approved by higher
management, the budget becomes the basis for materials buying, production scheduling, personnel
planning and marketing operations.
Controls Outlines the controls that will be used to monitor progress and allow higher management to review
implementation results and identify products that are not meeting their goals. It includes measures of
return on marketing investment.
turns marketing plans into marketing actions in order to accomplish strategic marketing objectives. Whereas
marketing planning addresses the what and why of marketing activities, implementation addresses the who,
where, when and how.
Many managers think that ‘doing things right’ (implementation) is as important as, or even more
important than, ‘doing the right things’ (strategy). The fact is that both are critical to success, and companies
can gain competitive advantages through effective implementation. One firm can have essentially the same
strategy as another, yet win in the marketplace through faster or better execution. Still, implementation is
difficult – it is often easier to think up good marketing strategies than it is to carry them out.
In an increasingly connected world, people at all levels of the marketing system must work together
to implement marketing strategies and plans. At Ryobi, for example, marketing implementation for the
company’s power tools, garden tools and other home products requires day-to-day decisions and actions by
thousands of people both inside and outside the organisation. Marketing managers make decisions about
target segments, branding, packaging, pricing, promoting and distributing. They talk with engineering
about product design, with manufacturing about production and inventory levels, and with finance about
funding and cashflows. They also connect with outside people, such as advertising agencies to plan ad
9780655702412_CH03.indd 94 3/3/20 5:33 PM

campaigns and the news media to obtain publicity support. The salesforce urges Bunnings, Mitre 10 and
other retailers to advertise Ryobi products, provide ample shelf space and use company displays.
Marketing department organisation

Marketing organisations must design a marketing organisation that can carry out marketing strategies and
plans. If the company is very small, one person might do all of the research, selling, advertising, customer
service and other marketing work. As the company expands, a marketing department emerges to plan and
carry out marketing activities. In large companies, this department contains many specialists, comprising
product and market managers, sales managers and salespeople, market researchers, advertising experts, web
designers and social media specialists, among others.
To lead such large marketing organisations, many companies have a chief marketing officer (or CMO)
position. The CMO heads up the company’s entire marketing operation and represents marketing on the
company’s top management team. The CMO position puts marketing on an equal footing with other
C-level executives, such as the chief executive officer (CEO) and the chief financial officer (CFO).
As a member of top management, the CMO’s role is to champion the customer’s cause – to be the ‘chief
customer officer’. To that end, British Airways even went so far as to rename its top marketing position as
Director of Customer Experience.49
Modern marketing departments can be arranged in several ways. The most common form of
marketing organisation is the functional organisation. Under this organisation, different marketing
activities are headed by a functional specialist – a sales manager, advertising manager, marketing research
manager, customer service manager or new product manager. A company that sells across the country
or internationally often uses a geographic organisation. Companies with many very different products or
brands often create a product management organisation. Using this approach, a product manager develops
and implements a complete strategy and marketing program for a specific product or brand.
Product management first appeared at Procter & Gamble (P&G) in 1929. A new company product,
Camay soap, was not doing well and a young P&G executive was assigned to give his exclusive attention to
developing and promoting this product. He was successful, and the company soon extended this approach
to other products.50 Since then, many firms, especially consumer-products companies, have set up product
management organisations.
For companies that sell one product line to many different types of markets and customers that
have different needs and preferences, a market or customer management organisation might be best. A
market management organisation is similar to the product
management organisation. Market managers are responsible
for developing marketing strategies and plans for their specific
markets or customers. This system’s main advantage is that the
company is organised around the needs of specific customer
segments. Many companies develop special organisations to
manage their relationships with large customers. For example,
companies such as Procter & Gamble and Black & Decker
have large teams, or even whole divisions, set up to serve large
customers such as Coles, Woolworths, ALDI or Kmart.
Large companies that produce many different products
flowing into many different geographic and customer markets
usually employ some combination of the functional, geographic,
product and market organisation forms. Marketing planning: Marketers must continually plan their analysis,
Marketing organisation has become an increasingly implementation and control activities.
important issue in recent years. More and more, companies © Nyul | 123RF
9780655702412_CH03.indd 95 3/3/20 5:33 PM

are shifting their brand management focus towards customer management – moving away from managing
only product or brand profitability and towards managing customer profitability and customer equity.
They think of themselves not as managing portfolios of brands but as managing portfolios of customers.
And rather than managing the fortunes of a brand, they see themselves as managing customer–brand
experiences and relationships. This is particularly the case in direct and digital marketing, which we
discuss in Chapter 13.
Marketing control
Because many surprises occur during the implementation of marketing plans, marketers must practise
marketing control constant marketing control – evaluating the results of marketing strategies and plans, and taking
Measuring and evaluating corrective action to ensure that objectives are attained. Marketing control involves four steps. Management
the results of marketing
first sets specific marketing goals. It then measures its performance in the marketplace and evaluates the
strategies and plans and
taking corrective action causes of any differences between expected and actual performance. Finally, management takes corrective
to ensure that objectives action to close the gaps between its goals and its performance. This may require changing the action
are achieved. programs or even changing the goals.
Operating control involves checking ongoing performance against the annual plan and taking
corrective action when necessary. Its purpose is to ensure that the company achieves the sales,
profits and other goals set out in its annual plan. It also involves determining the profitability of
different products, territories, markets and channels. Strategic control involves looking at whether the
company’s basic strategies are well matched to its opportunities. Marketing strategies and programs
can quickly become outdated, and each company should periodically reassess its overall approach to
the marketplace.
9780655702412_CH03.indd 96 3/3/20 5:33 PM

Student for alert companies. The technological environment creates both opportunities
and challenges. Companies that fail to keep up with technological change will
Learning miss out on new-product and marketing opportunities.
Centre Learning Objective 4. Explain the key changes in

the political and cultural environments.
The political environment consists of laws, agencies and groups that influence or
Reviewing the learning objectives limit marketing actions. The political environment has undergone three changes
In this chapter and in Chapters 4 and 5, we examine the environments of that affect marketing worldwide: increasing legislation regulating business,
marketing and how companies analyse these environments to better understand strong government agency enforcement and greater emphasis on ethics and
the marketplace and consumers. Companies must constantly monitor and manage socially responsible actions. The cultural environment is made up of institutions
the marketing environment in order to seek opportunities and ward off threats. and forces that affect a society’s values, perceptions, preferences and behaviours.
The marketing environment consists of all the actors and forces influencing the The environment shows trends towards new technology-enabled communication,
company’s ability to transact business effectively with its target market. a lessening trust of institutions, greater appreciation for nature, a changing
spiritualism and the search for more meaningful and enduring values.
Learning Objective 1. Describe the environmental
forces that affect the company’s ability to serve its Learning Objective 5. Discuss how companies
customers. can react to the marketing environment.
The company’s microenvironment consists of other actors close to the company Companies can passively accept the marketing environment as an uncontrollable
that combine to form the company’s value delivery network or that affect its element to which they must adapt, avoiding threats and taking advantage of
ability to serve its customers. It includes the company’s internal environment opportunities as they arise. Or they can take a proactive stance, working with
– its several departments and management levels – as it influences marketing environmental changes rather than simply reacting to them. Whenever possible,
decision making. Marketing channel firms – suppliers and marketing companies should try to be proactive, rather than reactive.
intermediaries, including resellers, physical distribution firms, marketing services
agencies and financial intermediaries – cooperate to create customer value. Five
types of customer markets include consumer, business, reseller, government and
international markets. Competitors vie with the company in an effort to serve Discussion questions
customers better. Finally, various publics have an actual or potential interest in or ❶ Suppliers, marketing organisations and marketing intermediaries.
impact on the company’s ability to meet its objectives. It is evident that there are suppliers and marketing intermediaries who,
The macroenvironment consists of larger societal forces that affect the together with the marketers they supply and support, must work together
entire microenvironment. The six types of forces making up the company’s to satisfy customer needs, wants and demands. Is marketing more than
macroenvironment are demographic, economic, natural, technological, political and promoting and selling a branded product produced by a single marketing
cultural forces. These forces shape opportunities and pose threats to the company. organisation? If so, how is marketing undertaken? (Learning Objective 1)
(AACSB: Reflective Thinking)
Learning Objective 2. Explain how changes in the ❷ Changing populations. Given that Australia and New Zealand’s populations
demographic and economic environments affect are having children later, and are working longer and living longer, how
marketing decisions. might these changes affect the fortunes of marketing organisations in these
Demography is the study of the characteristics of human populations. Today’s countries? (Learning Objective 2) (AACSB: Reflective Thinking)
demographic environment shows a changing age structure, shifting family profiles, ❸ Households, families and advertising content. There have been major shifts
geographic population shifts, a better-educated and more white-collar population, in the composition of households in Australia. For one thing, there are fewer
and increasing diversity. The economic environment consists of factors that affect households comprising a male and female with their biological young.
buying power and patterns. The economic environment is characterised both by The modern family may take many different structures (not unlike the
greater consumer concern for value and by shifting consumer spending patterns – television program, Modern Family). Do you think advertisers reflect these
seeking just the right combination of good quality and service at a fair price. changes in their advertising? Do they need to? Justify your answer. What
The distribution of income also is shifting. The rich have grown richer, the middle demographic changes should be reflected in advertising and marketing
class has shrunk and the poor have remained poor, leading to a two-tiered market. communications? (Learning Objective 2) (AACSB: Reflective Thinking)
❹ Nature and technology. The natural and technological environments of business
Learning Objective 3. Identify the main trends in present some of the biggest opportunities and challenges for marketers of the
the firm’s natural and technological environments. future. Resources are constrained; we are reaching peak oil; water and energy
The natural environment shows three main trends: shortages of certain raw costs are increasing; and there is considerable pressure for businesses and
materials, higher pollution levels and more government intervention in natural marketers to be more sustainable. Yet, at the same time, technology presents
resource management. Environmental concerns create marketing opportunities promises of solutions through innovation. However, innovation is expensive
9780655702412_CH03.indd 97 3/3/20 5:33 PM

and changes are occurring at such a fast pace that most businesses can barely Critical thinking exercises
keep up. Some businesses are responding by simplifying and reducing costs, and ❶ A small online retailer sells high-quality organic children’s clothing made
others are innovating and increasing costs. What are the advantages of each in New Zealand to customers in Asia. Identify the microenvironments
approach? What market segments might find each approach attractive? What and macroenvironments for this business. What are the main issues that
can marketers do to be proactive about managing these changes? (Learning the company should monitor closely over the next decade? (Learning
Objectives 3 and 5) (AACSB: Reflective Thinking) Objective 1) (AACSB: Communication; Application of Knowledge)
❺ Cause-related marketing. Opportunities abound for businesses to connect ❷ In a small group, discuss cultural trends in Australia or New Zealand.
with their publics and relate to the social and political changes taking place Research one of these trends in depth and create an infographic illustrating
in their communities through cause-related marketing. Each year, companies the trend’s impact on marketing. Present your infographic and discuss the
invest millions of dollars in sponsoring charities, sporting events, cultural implications of these factors for marketers. (Learning Objective 2) (AACSB:
groups, health organisations and the arts. There is an immense social benefit Teamwork; Use of IT; Diversity)
that comes from this; however, there are both advantages and disadvantages ❸ The Communications Council provides a list of many of the advertising
for the marketer and, sometimes, for the sponsored organisation. The benefits codes and regulations affecting marketing in Australia and New Zealand.
are more obvious but what are some of the drawbacks of cause-related Visit the Communications Council website <www.communicationscouncil.
marketing for the business and the sponsored organisation? In what cultural org.au> and browse the resource centre to learn about these regulations
contexts (if any) would cause-related marketing be inappropriate? (Learning and codes. Write a brief report on one code or regulation and how it impacts
Objective 4) (AACSB: Reflective Thinking) businesses and consumers. (Learning Objective 4) (AACSB: Communication;
Use of IT, Application of Knowledge)
Mini cases
3.1 Microeconomic environment
Connecting with the network
Running a small business is pretty lonely sometimes. The owner is not only ❶ Conduct an online search and find the local Chamber of Commerce or
the CEO, but also the chief financial officer, production manager, distribution business networking organisation in your area. What benefits do they
manager, sales coordinator and marketing manager all rolled into one. With all list for being part of the network? What challenges do you foresee
these responsibilities it is no wonder that small-business owners have a few for the small-business owner joining the network? What would
things keeping them awake at night. Among their top-10 concerns are cashflow be the benefits of connecting with competitors from a marketing
and profitability – hardly a revelation. You might be surprised to learn that making perspective? (Learning Objective 1) (AACSB: Information Technology;
connections is on that list, too. Connections are important – they represent new Reflective Thinking)
customers, distributors, suppliers and the marketing intermediaries that can ❷ Business Chambers or Chambers of Commerce often take on an
make a difference between a successful business and one that fails. advocacy role – raising concerns on behalf of business owners – with
Chambers of Commerce are run the world over and provide support different political and government groups. Imagine you own a
to members, aiming to inspire business vitality and growth. They provide small business. What are the issues you would like to raise with
networking opportunities for members, free resources and often have the government? What marketing concerns that are particularly
mentoring services as well. The Auckland Chamber of Commerce is one such relevant to various publics would you like to have voiced by your
organisation. At its regular events and training sessions, a small-business owner local Chamber of Commerce from a business owner’s perspective?
is likely to connect with many different business owners, some competitors, (Learning Outcome 1) (AACSB: Reflective Thinking; Application of
suppliers, other marketing intermediaries and perhaps even some customers. Knowledge)
9780655702412_CH03.indd 98 3/3/20 5:33 PM

3.2 Technological environment

Uber and the sharing economy
Changes in the technological environment have created amazing attacked, of kidnappings and driver accidents, questioning the thoroughness
opportunities for new business models while, at the same time, threatened of background checks of the 160 000-plus Uber drivers around the world.
traditional models. For example, Airbnb has shaken up the hospitality industry Some countries have banned Uber because of these issues.
by allowing people to rent out spare rooms or their entire homes to strangers, ❶ Describe how Uber’s business model works and the role technology
and Uber’s ride-sharing business allows consumers to hire a ride from drivers has played in its success. What are the arguments in favour of banning
looking to earn extra money with their vehicles. And with Uber, the consumer these types of businesses? What are the arguments in favour of
does not have to worry about having enough cash or giving their credit card defending them? (Learning Outcome 3) (AACSB: Communication; Use
to the driver – payments are all done through the Uber app. Traditional hotel of IT; Reflective Thinking)
and cab companies are crying foul, claiming that these businesses are not ❷ Describe examples of two other businesses based on the sharing
playing by the same regulatory rules to which they themselves are subject. economy model and create a new business idea based on this concept.
Others are concerned about safety amid reports of riders allegedly being (Learning Outcome 3) (AACSB: Communication; Reflective Thinking)

Exploring demographic trends
Marketers are interested in demographic trends related to such variables following table shows the income share (%) and the mean weekly income
as age, ethnicity and population. The Australian Census Bureau provides ($) for all households in Australia. The quintiles show households grouped
considerable demographic information that is useful for marketers. The into five equally sized bands. Take a close look at the data.
Gross household income, Australia: 1994–95 and 2013–14

1994–95 2013–14
Income share (%) Mean income per week ($) Income share (%) Mean income per week ($)
Lowest quintile 3.9 253 4.2 435
Second quintile 9.4 604 8.9 922
Third quintile 16.1 1037 15.0 1552
Fourth quintile 24.9 1604 23.3 2403
Highest quintile 45.8 2954 48.5 5002
Source: Australian Bureau of Statistics, Household Income and Wealth, Australia 2013–14, Cat. No. 6523, Table 1.2 Gross household income, <www.abs.gov.au>.
❶ In 1994–95, the third quintile (the middle 20 per cent of all households) For example, in 1994–95, the mean weekly household income of the
had a 16.1 per cent income share but, by 2013–14, this quintile had second quintile was 2.4 times greater than that of the lowest quintile
dropped to a 15.0 per cent income share. Calculate the percentage in the same year. The mean weekly household income of the highest
change in share of income for this group. In real terms, what do you quintile was a massive 11.7 times more than that of the lowest
think this change means for families in this middle-class group? quintile. Calculate the relative differences in mean weekly income for
(AACSB: Communication; Analytical Thinking; Reflective Thinking) all quintiles compared to the lowest quintile for each series. Prepare
❷ Notice how significantly the mean weekly income for each group has a short talk describing the differences and the changes in household
changed between1994–95 and 2013–14. One way to evaluate the income between 1994–95 and 2013–14. What are the implications
changes is to consider the relative differences between each group. for marketers? (AACSB: Communication; Analytical Thinking)
9780655702412_CH03.indd 99 3/3/20 5:33 PM


Greenwashing Index
You might have heard about citizen science, where scientific investigation out or masks important information, making the green claim sound better
is crowdsourced, with volunteers from all over the world working alongside than it is’.51
scientists to gather, evaluate and classify data. Together, the collective ❶ Working in a group, choose an ad that everyone has seen. First working
achieves something that would take individual scientists years and decades individually, rate the ad using the Greenwashing Index criteria (rate
to do. Crowdsourced projects and citizen watchdog groups are active in the ad out of five for each criterion). Now share your evaluations with
marketing, too. The Greenwashing Index <http://greenwashingindex.com/> the group. How similar are your views? (Learning Objective 4) (AACSB:
is a collaborative project between EnviroMedia (a social marketing business) Communication, Teamwork, Ethical Reasoning)
and the University of Oregon. At the website, citizen marketers post details ❷ A small car-washing business prides itself on its green and socially
of advertisements promoting the environmental qualities of a product or sustainable credentials. The company uses recycled water and
company, they rate the ads and then other citizen marketers rate the ad, too. biodegradable detergents, and wastewater is recovered and reused to
It is difficult for a business to fake sustainability when people from all over irrigate landscaping in the local shopping centre where the business is
the world keep the business honest and each other informed. located. The business also works closely with social organisations to
The Greenwashing Index uses five scoring criteria to rate each ad (high provide work for young adults with intellectual disabilities, paying fair
scores are unfavourable), including ‘(1) the ad misleads with words, (2) the wages and offering an employee social-networking program. Prepare
ad misleads with visuals and/or graphics, (3) the ad makes a green claim an ad storyboard that shares the green and social credentials of the
that is vague or seemingly improbable, (4) the ad overstates or exaggerates business. Present your ad to the class. (Learning Objective 4) (AACSB:
how green the product/company/service actually is, and (5) the ad leaves Communication; Ethical Reasoning; Application of Knowledge).
References
1 Prakash J Singh & Damien Power, ‘The nature and effectiveness of collaboration ‘How to bridge the marketing gap between Gen X and Gen Y’, Business News Daily,
between firms, their customers and suppliers: A supply chain perspective’, Supply Chain 21 November 2011.
Management, 14(1), 2009, pp. 189–200. 11 ’The original social network – Heart Foundation’s “Mums United” campaign’, Marketing
2 BHP Billiton, ‘BHP Billiton boosts support for Aboriginal and Torres Strait Islander Magazine, 17 January 2013; and also the Heart Foundation’s campaign website,
art’, Community & Sustainability News,17 November 2016, <www.bhpbilliton.com/ <www.heartfoundation.org.au/campaigns/mums-united>, accessed November 2016.
society/communitynews/bhp-billiton-boosts-support-for-aboriginal-and-torres-strait- 12 Emma Reynolds, ‘Stop whingeing, Gen Y. You’ve got it pretty good’, news.com.au,
islander-art#>; and see also TARNANTHI website, <http://tarnanthi.com.au/>, accessed 9 March 2016, <www.news.com.au/finance/economy/australian-economy/stop-
November 2016. whingeing-gen-y-youve-got-it-pretty-good/news-story/86bb67d3614c81e4fa320a510
3 ’World population clock’, Worldometers, <www.worldometers.info/world-population/>, bc9f758>; Sylvia Pennington, ‘Can Gen Y get ahead or are they destined to be poorer
accessed November 2016. This website provides continuously updated projections of than their parents?’, Sydney Morning Herald, 16 March 2016, <www.smh.com.au/
the world populations, sourced from the United Nations and the United States Census money/can-gen-y-get-ahead-or-are-they-destined-to-be-poorer-than-their-parents-
Bureau. 20160310-gnfptw.html>; both accessed November 2016.
4 Population figures are from the Australian Bureau of Statistics, <www.abs.gov.au>; 13 See Greg Petro, ‘Millennial engagement and loyalty – make them part of the process,’
and Statistics New Zealand, <www.stats.govt.nz>, all accessed November 2016. Forbes, 21 March 2013, <www.forbes.com/sites/gregpetro/2013/03/21/millennial-
5 Median age data from statista, <www.statista.com>, accessed November 2016. engagement-and-loyalty-make-them-part-of-the-process/>; and ‘AT&T’s Catherine
6 See ‘Australia’s generations by wealth and income’, The McCrindle Blog, 1 June Borda spills the secrets to millennial marketing’, Adweek, 3 March 2015, <www.
2016, <www.mccrindle.com.au/the-mccrindle-blog/income-and-wealth-distribution>, adweek.com/print/163219>; both accessed November 2016.
accessed November 2016. 14 See Airbnb and Uber websites at <www.airbnb.com.au/ > and <www.uber.com/en-AU/
7 See Lucy Battersby, ‘Advertisers ignoring the big-spending baby boomers’, Sydney cities/sydney>, respectively, both accessed November 2016; and also Ben Ice, ‘Mini goes
Morning Herald, 25 July 2016, <www.smh.com.au/business/media-and-marketing/ after Gen Y with an Instagram popularity contest’, Marketing Magazine, 3 August 2016,
advertisers-ignoring-the-big-spending-baby-boomers-20160722-gqbghg.html>; <www.marketingmag.com.au/news-c/miniray29k-instagram-competition/>; Mini Ray
Lindsay Bennett, ‘New agency targets baby boomer market’, AdNews, 8 March 2016, website, <www.mini.com.au/models/special-editions/ray/>; both accessed November 2016.
<www.adnews.com.au/news/new-agency-targets-baby-boomer-market>; and also 15 See the Generation Z website from McCrindle Research, <http://generationz.com.au/>,
My Generation Advertising website, <www.mygenerationads.com.au>; all accessed accessed November 2016.
November 2016. 16 Compiled based on household and family statistics, <www.stats.govt.nz> and <www.
8 Quotes from Charis Chang, ‘Generation X is the forgotten, “silent” generation’, abs.gov.au>, accessed November 2016; Statistics New Zealand, National Family and
news.com.au, 4 October 2016, <www.news.com.au/finance/work/generation-x-is- Household Projections, 29 October 2015, <www.stats.govt.nz>, accessed November
the-forgotten-silent-generation/news-story/415e0dd19f33588f0ae86d8890c52395>, 2016; and Australian Bureau of Statistics, Household and Family Projections, Australia
accessed November 2016. 2011–2036, Cat. No. 3260, 19 March 2015.
9 Australian Bureau of Statistics, Household Use of Information Technology, Australia, 17 Australian Bureau of Statistics, Family Characteristics and Transitions, Australia
2014–15, Cat. No. 8146.0, released 18 February 2016. 2012–13, Cat. No. 4442, 26 February 2015.
10 ’Does anyone pay attention to online advertising?’, Roy Morgan Research press release, 18 See HelloFresh website, <www.hellofresh.com.au>; and also ‘Subscription
7 October 2013; ‘NAB online retail sales index: Indepth report – June 2016’, NAB food boxes: Are they worth it?’, news.com.au, 23 June 2015, <www.news.
Business Research and Insights, <http://business.nab.com.au/nab-online-retail-sales- com.au/lifestyle/food/eat/subscription-food-boxes-are-they-worth-it/news-story/
index-june-2016-17897/>, accessed November 2016; quotes from David Mielach, b8cdbd8dd2417226274856ecd3ae28b9>, accessed November 2016.
9780655702412_CH03.indd 100 3/3/20 5:33 PM

19 Compiled based on Statistics New Zealand, Subnational Population Estimates: At 30 November 2016.
June 2016 (Provisional), 21 October 2016, <www.stat.govt.nz>; and Australian Bureau 33 The 2030 Water Resources Group, <www.2030wrg.org>, accessed November 2016;
of Statistics, Migration, Australia, 2014–2015, Cat. No. 3412, 30 March 2016, <www. and ‘The world’s water,’ Pacific Institute, <www.worldwater.org/data.html>, accessed
abs.gov.au>; both accessed November 2016. November 2016.
20 ’Trentwood sales call for more in-fill sites in Melbourne’s Eastern Suburbs’, The Urban 34 See Office of Environment and Heritage, ‘Sustainable practices on the rise
Developer, 29 November 2016, <www.theurbandeveloper.com/development-sales- at Goodman Fielder’, <www.environment.nsw.gov.au/resources/business/
show-demand-fill-sites-melbournes-eastern-suburbs/>, accessed November 2016. sustainabilityadvantage/100022-cs-goodman-fielder.pdf>, accessed November 2016.
21 Nick Toscano, ‘One in three Australian workers now regularly works from home’, 35 See LUSH website, <https://au.lush.com/>, and The Australian Business Awards
Sydney Morning Herald, 21 September 2016, <www.smh.com.au/business/workplace- website, <www.australianbusinessawards.com.au/2016-winners/australian-business-
relations/one-in-three-australian-workers-now-regularly-work-from-home-20160921- award-for-sustainability/lush-2/>, both accessed November 2016; and see also ‘Cemix’
grl3a1.html>, accessed November 2016. Envirocrete awarded again’, Scoop Business, 17 August 2011, <www.scoop.co.nz/
22 See company websites, including Officeworks, <www.officeworks.com.au>; Zoom, stories/BU1108/S00557/cemix-envirocrete-awarded-again.htm>; and the Cemix
<https://zoom.us/>; Dropbox, <www.dropbox.com>; and Salesforce.com, <www. website, <www.cemix.co.nz/envirocrete/>, accessed November 2016.
salesforce.com/au/>; all accessed November 2016. 36 ’3M library systems’, 3M, <http://solutions.3m.com.au/wps/portal/3M/en_AU/SSD_
23 OECD, Education at a Glance 2014: OECD Indicators, OECD Publishing, 2014, Library/library-technologies/productivity-security/self-service-checkout/RFID-selfcheck-
<www.oecd.org/education/>, accessed November 2016. systems/>, accessed November 2016.
24 Australian Bureau of Statistics, Australian Labour Market Statistics, July 2014, 37 See ‘ABC privacy policy’, <http://about.abc.net.au/abc-privacy-policy/>, accessed
Cat. No. 6105, 8 July 2014, <www.abs.gov.au>, accessed November 2016. November 2016.
25 Statistics New Zealand, New Zealand General Social Survey: 2014, 26 May 2015, 38 See Cancer Council website, <www.cancer.org.au/get-involved/corporate-partnerships/
<www.stats.gov.nz>; and Australian Bureau of Statistics, Migration, Australia, 2014–15, inspirational-partner-stories/coles.html >, and also Qantas website <www.qantas.com/
Cat. No. 3412.0, 30 March 2016, <www.abs.gov.au>; both accessed November 2016. travel/airlines/community-initiatives/global/en>; both accessed November 2016.
26 See Pink Media Group, <www.pinkmediagroup.com/>; Pink Monitor 2014, <http:// 39 ’How Fortune’s “Change the World” companies profit from doing good’, Fortune,
pinkmediagroup.com/news/41/Pink-Monitor-Research->; see also ‘Thinking pink: 18 August 2016, <http://fortune.com/2016/08/18/change-world-companies-profit/>,
The purchasing power of gay Aussies’, Roy Morgan Research, 29 June 2016, <www. accessed November 2016.
roymorgan.com/findings/6866-power-of-the-pink-dollar-201606271639>; all accessed 40 See Shoes of Prey website, <www.shoesofprey.com/>, accessed November 2016.
November 2016. 41 ’Mass mingling’, trendwatching.com, July 2010, <www.trendwatching.com/trends/
27 See LOTL and DNA magazine websites for readership information, <www.lotl.com/> massmingling/>, accessed November 2016.
and <www.dnamagazine.com.au/>, respectively; accessed November 2016; and also 42 Sherry Turkle, ‘The flight from conversation’, New York Times, 22 April 2012, p. SR1.
Media Information Pack, <www.pinkmediagroup.com/>, accessed November 2016; 43 See Thunderpants website, <www.thunderpants.co.nz/>, accessed December 2016.
and ‘New Medibank ad features same-sex couples’, Gay News Network, 8 February 44 See The Raw Food Store website, <www.therawfoodstore.com.au/>, accessed
2016, <http://gaynewsnetwork.com.au/news/national/new-medibank-ad-features- December 2016.
same-sex-couples-20293.html>, accessed November 2016. 45 ’Australian organic market report 2014’, Australian Organic, <http://austorganic.com/
28 Australian Bureau of Statistics, Disability, Ageing and Carers, Australia: First Results ao-market-report/>, accessed December 2016.
2015, Cat. No. 4430.0, 29 April 2016; Statistics New Zealand, Disability Survey 2013, 46 Australian Bureau of Statistics, ‘B14 religious affiliation by sex’, <http://stat.data.abs.
17 June 2014, <www.stats.govt.nz>, accessed November 2016; ‘Dive into diversity’, gov.au>, accessed December 2016.
BandT, 4 April 2013, <www.bandt.com.au>; and website for Link Disability Magazine, 47 Robert A Cummins, Jacqui Woerner, Melissa Weinberg, James Collard, Linda
<http://linkonline.com.au/>, accessed November 2016. Hartley-Clark, Krystine Horfiniak & Charini Perera, Australian Unity Wellbeing Index
29 Brand promises from Target website, <www.target.com.au/quality>; and also Sheils Survey 29.0: The Wellbeing of Australians – Two Extra Hours, Mothers and Mothers-in-
website, <www.shiels.com.au/the-shiels-365-promise>; both accessed November 2016. Law, Deakin University: Melbourne, 2013, <www.deakin.edu.au/research/acqol/auwbi/
30 Australian Bureau of Statistics, Household Income and Wealth, Australia, 2013–14, survey-reports/>, accessed December 2016.
Cat. No. 6523.0, 4 September 2015; and also Ministry of Social Development, 48 See Philip Kotler, Kotler on Marketing, Free Press: New York, NY, 1999, p. 3; and
Household Incomes in New Zealand: Trends in Indicators of Inequality and Hardship Philip Kotler, Marketing Insights from A to Z, John Wiley & Sons: Hoboken, NJ, 2003,
1982 to 2015, August 2016, <www.msd.govt.nz/about-msd-and-our-work/publications- pp. 23–4.
resources/monitoring/household-incomes/index.html>; accessed November 2016. 49 Tim Dunn, ‘Is the era of CMO over?’, Adweek, 2 March 2015, p. 14.
31 Prices from Ford Australia website, <www.ford.com.au>, accessed November 2016. 50 For more on brand and product management, see Kevin Lane Keller, Strategic Brand
32 Dana McCauley, ‘How this crazy warm weather is wreaking havoc with Australia’s Management, 4th edn, Pearson: Upper Saddle River, NJ, 2012.
biggest retailers’, news.com.au, 28 April 2016, <www.news.com.au/finance/ 51 The scoring criteria are from ‘Greenwashing Index scoring criteria’, <http://
business/retail/how-this-crazy-warm-weather-is-wreaking-havoc-with-australias- greenwashingindex.com/about-greenwashing/#score>, accessed January 2017.
biggest-retailers/news-story/5c5c39ac8731cedd92e13890face00cc>, accessed
9780655702412_CH03.indd 101 3/3/20 5:33 PM

Chapter
4 Buyer behaviour: Understanding

consumer and business buyers
In Chapter 5, we will consider how marketers obtain, analyse and use marketing information to gain
customer and market insights as a basis for creating customer value and relationships. In this chapter, we
take a closer look at the most important element of the marketplace – customers. The aim of marketing is
to affect how customers think about and behave towards the organisation and its market offerings. But to
affect the whats, whens and hows of buying behaviour, marketers must first understand the whys. We look first
at final consumer buying influences and processes, and then at the buying behaviour of business customers. You
will see that understanding buying behaviour is an essential, but very difficult, task.
Learning Objective 1 Identify the consumer market and the main factors that influence
consumer buyer behaviour.
Learning Consumer markets and consumer buyer behaviour pp. 104–17
Objectives Learning Objective 2 Identify and discuss the stages in the buyer decision process.
The buyer decision process pp. 117–20
Learning Objective 3 Describe the adoption and diffusion process for new products.
The buyer decision process for new products pp. 120–22
Learning Objective 4 Define the business market and identify the main factors that influence
business buyer behaviour.
Business markets and business buyer behaviour pp. 122–28
Learning Objective 5 List and define the steps in the business buying decision process.
The business buying process pp. 128–31
E-procurement: Buying on the internet pp. 131–32
Business-to-business digital and social media marketing p. 132
9780655702412_CH04.indd 102 3/3/20 10:43 AM

Chapter 4 Buyer behaviour: Understanding consumer and business buyers 103
The environment Buyer decision process Buyer response

LO 1
Identify the consumer Marketing Other Buyer’s black box Buying attitudes
market and the main stimuli stimuli and preferences
Buyer’s characteristics
factors that influence Product Economic Purchase behaviour
Buyer’s decision process
consumer buyer
Price Technological Brand and company
behaviour.
Placement Social relationship behaviour
logistics Cultural
Promotion
People
Processes
LO 2
Identify and discuss Need Information Evaluation of Purchase Post-purchase
the stages in the recognition search alternatives decision behaviour
buyer design process.
CONSUMER BUYER BEHAVIOUR
LO 3 Early Late
Describe the adoption majority majority
and diffusion process Early
for new products. adopters
Innovators Laggards
Time of adoption of innovations
The environment Buyer decision process Buyer response
Marketing Other The buying organisation

LO 4 stimuli stimuli
Product or
Define the business service choice
market and identify Product Economic The buying centre
Supplier choice
the main factors that Price Technological Buying Order quantities
influence buyer Placement Social decision
Delivery terms and
behaviour. logistics Cultural process
times
Promotion Competitive Service terms
People
Payment
Processes
Problem General need Product Supplier

recognition description specification search
LO 5
List and define the
steps in the business
buying decision process. Proposal Supplier Order-routine Performance
solicitation selection specification review
BUSINESS BUYER BEHAVIOUR
9780655702412_CH04.indd 103 3/3/20 10:43 AM

Consumer markets and consumer

buyer behaviour
consumer buyer Consumer buyer behaviour refers to the buying behaviour of final consumers – individuals
behaviour and households that buy goods and services for personal consumption. All of these final consumers
The buying behaviour
combine to make up the consumer market. The combined Australian and New Zealand consumer
of final consumers –
individuals and market consists of nearly 28 million people who consume more than $1 trillion worth of goods and
households – that buy services each year, making it one of the larger markets in the world. The world consumer market
goods and services for consists of more than 7.3 billion people who annually consume an estimated $50 trillion worth of
personal consumption.
goods and services.1 Consumers around the world vary tremendously in age, income, education level
and tastes. They also buy an incredible variety of goods and services. How these diverse consumers
consumer market
All the individuals and relate with each other, and with other parts of the world around them, impacts their choices among
households that buy various products, services and companies. Here, we examine the fascinating array of factors that affect
or acquire goods and consumer behaviour.
services for personal
consumption.
Model of consumer behaviour
Consumers make many buying decisions every day, and the buying decision is the focal point of the
marketer’s effort. Most large companies research consumer buying decisions in great detail in order to
answer questions about what consumers buy, where they buy, how and how much they buy, when they buy
and why they buy. Marketers can study actual consumer purchases to find out what they buy, where and
how much. But learning about the whys of consumer buying behaviour is not so easy – the answers are often
locked deep within the consumer’s mind.
Often, consumers themselves do not know exactly what influences their purchases. ‘The
human mind doesn’t work in a linear way,’ says one marketing expert. ‘The idea that the mind
is a computer with storage compartments where brands or logos or recognisable packages are
stored in clearly marked folders that can be accessed by cleverly written ads or commercials
simply doesn’t exist. Instead, the mind is a whirling, swirling, jumbled mass of neurons bouncing
around, colliding and continuously creating new concepts and thoughts and relationships inside
every single person’s brain all over the world.’ Another expert agrees: ‘There are a lot of black
holes in what we observe people are doing, why they’re doing it, and what’s going on in the
brain.’2
The central question for marketers is: How do consumers respond to various marketing efforts the
company might use? The starting point is the stimulus–response model of buyer behaviour, shown in
Figure 4.1. This figure shows that marketing and other stimuli enter the consumer’s ‘black box’ and
produce certain responses. Marketers must work out what is in the buyer’s black box. Marketing stimuli
consist of the marketing mix elements: product, price, placement logistics and promotion, together with
the people, processes and physical evidence involved. Other stimuli include major forces and events
in the buyer’s environment: economic, technological, political, social and cultural. All these inputs enter
the buyer’s mind, a black box where they are turned into a set of observable buyer responses: buying
attitudes and preferences, the buyer’s brand and company relationship behaviour, and what he or she
buys, when, where and how often.
The marketer wants to understand how the stimuli are changed into responses inside the
consumer’s black box, which has two parts. First, the buyer’s characteristics influence how he or
she perceives and reacts to the stimuli. Second, the buyer’s decision process itself affects the buyer’s
behaviour. We look first at buyer characteristics as they affect buyer behaviour and then discuss the
buyer decision process.
9780655702412_CH04.indd 104 3/3/20 10:43 AM

THE ENVIRONMENT BUYER’S BLACK BOX BUYER RESPONSES

Marketing Other Buyer’s characteristics Buying attitudes and
stimuli Economic Buyer’s decision process preferences
Product Technological Purchase behaviour: what the
Price buyer buys, when, where and
Social how much
Placement Cultural
logistics Brand and company
relationship behaviour
Promotion
People
Processes
Physical
evidence
Figure 4.1 Model of buyer behaviour
Characteristics affecting consumer behaviour

Consumer purchases are influenced strongly by cultural, social, personal and psychological characteristics,
shown in Figure 4.2. For the most part, marketers cannot control such factors, but they must take them
into account. We must also acknowledge influences such as marketing programs (which marketers can
control).
Cultural factors
Cultural factors exert a broad and deep influence on consumer behaviour. The marketer needs to understand
the role played by the buyer’s culture, cultural group and social class. culture
The set of basic values,
Culture perceptions, wants and
behaviours learned by
Culture is the most basic cause of a person’s wants and behaviours. Human behaviour is largely learned.
a member of society
Growing up in a particular society, children learn basic values, perceptions, wants and behaviours from their from family and other
family and other important institutions. Global marketers must be fully aware of the cultures in each important institutions.
CULTURAL
SOCIAL
Culture PERSONAL
Reference groups PSYCHOLOGICAL
Age and life-cycle stage
Motivation
Occupation
Perception BUYER
Cultural group Family Economic situation
Learning
Lifestyle
Beliefs and attitudes
Personality and self-concept
Roles and status
Social class
Figure 4.2 Factors influencing consumer behaviour
9780655702412_CH04.indd 105 3/3/20 10:43 AM

market and adapt their marketing strategy accordingly. Failure to adjust to these differences can result in
ineffective marketing or embarrassing mistakes.
Marketers are always trying to identify cultural shifts in order to discover new products that might
be wanted. For example, the cultural shift towards greater concern about health and fitness has created
a huge industry for health-and-fitness services, exercise equipment and clothing, organic foods and
a variety of diets. The shift towards informality has resulted in more demand for casual clothing and
simpler home furnishings.
Cultural group
cultural group Each culture contains smaller cultural groups, or groups of people with shared value systems based on
A group of people with common life experiences and situations. The cultures in Australia and New Zealand are diverse and
shared value systems
richly varied, comprising First Peoples, Anglo-Saxon/Celtic early immigrants (although there were
based on common
life experiences and significant groups of migrants from China early in the histories of both countries) and, in the last 80 years
situations. or so, immigrants from throughout Europe, Asia and the South Pacific. Marketers must respond to the
diversity of their market and design products and marketing programs tailored to the needs of these
diverse groups.
People with a similar ethnic background often have shared value systems. However, individuals
may also share identities of gender, sexual preference, age, political affiliation, class and religious
belief. These factors will affect food preferences, clothing choices, recreational pursuits and even
aspirations, such as career goals. Different cultural groups place different values on marriage,
for example. Young couples may or may not be encouraged to marry (and for gay and lesbian
couples, such formalised recognition of their relationships may not be possible). Thus, cultural and
sociopolitical factors may combine and affect individual interest in all manner of products, as well as
brand preferences.
Individuals may identify more or less strongly with their cultural groups at different times and
in different contexts. So, while marketers may use membership of cultural groups as a convenient
way of segmenting markets and as a focus for strategy development, they should take care to avoid
oversimplification of a group.
The First Peoples of both Australia and New Zealand are themselves very diverse.3 In New Zealand,
Maoˉ ri share a common language, albeit with distinct regional dialects, and a common oral history and
heritage. In contrast, ‘Indigenous Australia is
multicultural, with over 350 distinct languages
and nations and varied histories, traditions,
laws and lifestyles. Apart from their traditional
cultural heritage, Indigenous people today live
complex and contemporary lifestyles that draw
upon the customs, traditions and lifestyles of
every subsequent immigrant group within their
community. Therefore, Indigenous people,
like all other Australians and New Zealanders,
are diverse and fluid in their cultural group
memberships.’4
As the world population ages, mature
consumers are becoming a very attractive market.
Mature consumers: Older consumers are tech-friendly and more socially active As of 2015, the entire ‘baby boomer’ generation,
than ever. the largest and wealthiest demographic cohort
SeniorMatch
in the country, has moved into the 50-plus
9780655702412_CH04.indd 106 3/3/20 10:43 AM

age bracket. They control a larger proportion of wealth, income and consumption than any current or
previous generation. Despite some financial setbacks resulting from the global economic downturn,
mature consumers remain an attractive market for companies in all industries, from pharmaceuticals,
groceries, beauty products and clothing, to consumer electronics, travel and entertainment, and financial
services.5
Contrary to popular belief, mature consumers are not ‘stuck in their ways’. A recent study showed
that older consumers for products such as stereos, computers and mobile phones are more willing to
shop around and switch brands than their younger Generation X counterparts.6
The growing cadre of mature consumers creates an attractive market for a wide range of services.
For example, the social networking site ‘Older Dating Online’ targets older consumers who are
interested in forming new relationships and friendships. And their desire to look as young as they
feel also makes more-mature consumers good candidates for cosmetics and personal-care products,
health foods, fitness products and other items that combat the effects of ageing. Marketers are
also noticing that ‘It’s more powerful to promote shared and interesting experiences, over product
ownership’ for these older consumers. For example, ‘There is a boom in mature women travelling
and wanting safe and interesting experiences.’ Young at Heart Holidays has developed its service
for just this market segment, with holidays in Australia and selected international destinations
for couples, singles and friends travelling together. Its ‘Big Book of Holidays’ reassures travellers
that they can ‘pack their bags, we’ll do the rest’, offering ‘escorted itineraries, relaxed pace,
terrific companions, interesting places, quality accommodation, good meals and genuine personal
attention’.7
Social class
Almost every society has some kind of hierarchy or social class structure. India has a rigid caste system
whereas Australia, New Zealand and South-East Asian countries have a class system that permits
movement between the classes. Completing tertiary education may result in a better job and movement
up the social scale; losing a prestigious position may cause a slide down the social scale. Social classes social class
are relatively permanent and ordered divisions in a society, whose members share similar values, interests Relatively permanent
and ordered divisions
and behaviours.
in a society, whose
Social class is not determined by a single factor. A number of classification schemes have been members share similar
developed, ranging from those using occupation and education to those based on a combination of values, interests and
occupation, income, education, wealth and other variables. Marketers are interested in social class behaviours.
when it is relevant, because people within a given social class tend to exhibit similar behaviour,
including buying behaviour.
Researchers, such as Mark McCrindle, have suggested that social class may not be a good basis for
developing marketing strategies. Although there is a class system in Australia, Australians seem not to
place themselves within such groups as ‘working class’ and, in any event, the groups are so large as to
make them ineffective as market segments.8
Social factors
A consumer’s behaviour also is influenced by social factors, such as the consumer’s small groups, family, social
roles and social status.
Groups and social networks

Many small groups influence a person’s behaviour. Groups that have a direct influence and to which a group
Two or more people
person belongs are called membership groups. In contrast, reference groups serve as direct (face-to-face) or
who interact to
indirect points of comparison or reference in forming a person’s attitudes or behaviour. People often are accomplish individual or
influenced by reference groups to which they do not belong. For example, an aspirational group is one to mutual goals.
9780655702412_CH04.indd 107 3/3/20 10:43 AM

which the individual wishes to belong, such as when a young couple renting indicate a desire, regardless of
how difficult it may be, to become home-owners.9
Marketers try to identify the reference groups of their target markets. Reference groups expose
a person to new behaviours and lifestyles, influence the person’s attitudes and self-concept, and
create pressures to conform that may affect the person’s product and brand choices. The importance
of group influence varies across products and brands. It tends to be strongest when the product is
visible to others whom the buyer respects.
opinion leader Marketers of brands subjected to strong group influence must work out how to reach opinion
Person within a leaders – people within a reference group who, because of special skills, knowledge, personality or
reference group who,
because of special skills, other characteristics, exert social influence on others. Some experts call these people the influentials or
knowledge, personality leading adopters. One study found that these influencers are ‘four times more likely than average
or other characteristics, consumers to belong to five or more organisations, four times more likely to be considered experts, and
exerts social influence
twice as likely to recommend a product they like’. Another survey found that when consumers are
on others.
looking for advice about a decision they have to make, they are turning to trusted online sources for
that advice, rather than to family.10
Marketers often try to identify opinion leaders for their products and to direct marketing efforts
towards them. They use buzz marketing by enlisting or even creating opinion leaders to serve as ‘brand
ambassadors’ who spread the word about their products. Many companies are now creating brand
ambassador programs in an attempt to turn influential but everyday customers into brand evangelists.
The Australian Red Cross has recently invited Soup to help increase blood donations by targeting
new donors. Soup is a leading word-of-mouth agency with a membership base of more than 75 000
inf luencers who spread the word about brands in both Australia and New Zealand. Soup recruits
‘soupers’ – people who ‘love having their say’ and who are well connected and interested. Soup does not
pay its members; instead, they are given free samples and asked for their ‘honest opinions’. In return,
clients using this type of opinion leader service hope for positive recommendations for their brands.11
Over the past few years, a new type of social interaction has exploded on to the scene – online social
online social networking. Online social networks are online communities where people socialise or exchange
networks information and opinions. Social networking media range from blogs and social networking websites,
Online social
such as Facebook, YouTube, Instagram and Reddit, to entire virtual worlds, such as Second Life,
communities – blogs,
social networking InWorldz, Eve, IMVU and Gaia Online. This new form of high-tech buzz has big implications for
websites or even virtual marketers and is being used more and more by consumers to provide advice in decision making.12
worlds – where people Marketers are working to harness the power of these new social networks to promote their products
socialise or exchange
and build closer customer relationships. Instead of throwing more one-way commercial messages at
information and opinions.
ad-weary consumers, they hope to use social networks to interact with consumers and become a part of
their conversations and lives.
For example, Australian band Powderfinger used Twitter to organise ‘guerrilla’ gigs in Brisbane, Sydney
and Melbourne. The number of the band’s online followers tripled in just one day. And companies such as
AirAsia, Nike and Xbox have had great success in responding to customer questions on Facebook, Twitter,
Weibo and other social media platforms. They use these platforms as a major component of their customer
service strategy to engage with and service customers, whether things are positive or not. A company
executive explains, ‘Social networks are tools that help build and leverage our relationship with the
consumer. Ultimately, we are about connecting with the consumer where they are’ to listen and to help.13
Other companies post ads or custom videos on video-sharing sites such as YouTube. For example,
when Yarra Valley Water launched its ‘Choose Tap’ campaign with a YouTube video, it received over
95 000 hits in just a few weeks. The video portrays customers in a fictional pop-up store – Dupé – which
sells ‘Organic Fresh Air’ and ‘All Natural February Moonlight’. The store website displays the product
range, and the shopping cart links to the campaign tagline, ‘Buying bottled air just doesn’t make sense.
It’s just like buying bottled water.’14
9780655702412_CH04.indd 108 3/3/20 10:43 AM

But marketers must be careful when tapping

into online social networks. Results are difficult
to measure and control. Ultimately, the users
control the content, so social network marketing
attempts can easily backfire. For example, the
Taxi Council of Victoria used Twitter to try to
fight the disruptive onslaught of Uber by asking
people to share their taxi stories on Twitter with
#YourTaxis. Within hours, this campaign that was
designed to promote Victorian Taxis’ goodwill
descended into horror for the industry body as
consumers used the platform to vent their hatred
for taxis. Their competitor, Uber, even used
this as a promotional opportunity of their own
by targeting stories covering this debacle.15 We
look more closely at online social networks as a
marketing tool in Chapter 13.
Family
Family members can strongly influence buyer
behaviour. The family is the most important
consumer/buying organisation in society, and it
has been researched extensively. Marketers are
interested in the roles and influence of the husband,
wife and children on the purchase of different
products and services.
Husband–wife involvement varies widely Online social networks: Yarra Valley Water’s YouTube campaign, which compared
by product category and by stage in the buying selling bottled water to selling bottled air, had over 95 000 hits in just a few weeks.
Campaign creative by Ogilvy
process. Buying roles change with evolving
consumer lifestyles. In Australia and New Zealand, women have traditionally been the main purchasing
agent for the family in the areas of food, household products and clothing. But with more women working,
others are doing more of the family’s purchasing. One recent study found that at least half of all grocery
shopping is being done by men. Another found that ‘not only do 79 per cent of men like shopping, but
29 per cent say they love it’. In the past, men have been more likely to be ‘mission shoppers’ – in and out
as quickly as possible to get whatever it is they are searching for. But this new study found that ‘27 per cent
of men would spend more with retailers who design and coordinate the online and in-store experience’,
and ‘19 per cent would spend more if technology is used to enable them to shop with more confidence
and ease’. These findings have very clear implications for how marketers design in-store experiences.16
Children may also have a strong influence on family buying decisions. One study found that children
significantly influence family decisions about everything from where they take holidays to what cars
and mobile phones they buy. Most children spend money on toys and sweets, but some also buy books
and magazines, DVDs and music. In recognition of the power of child shoppers, many companies
devote parts of their website to children. Sanitarium has a kids’ page on its Weet-Bix website, and
broadcasters such as the ABC and TVNZ, and subscription services such as Netflix, have websites
devoted to their young viewers.17
Roles and status

A person belongs to many groups – family, clubs, organisations. The person’s position in each group can
be defined in terms of both their role and their status. A role consists of the activities people are expected
9780655702412_CH04.indd 109 3/3/20 10:43 AM

to perform according to the persons around them. Each role carries a status reflecting the general esteem
given to it by society.
People usually choose products appropriate to their roles and status. Consider the various roles a
working mother plays. In her company, she plays the role of a brand manager; in her family, she plays
the role of wife and mother; at her favourite sporting events, she plays the role of avid fan. As a brand
manager, she will buy the kind of clothing that reflects her role and status in her company; and as a fan,
she supports her team by wearing the club’s colours to home games.
Personal factors
A buyer’s decisions also are influenced by personal characteristics, such as age and life-cycle stage,
occupation, education, economic situation, lifestyle, personality and self-concept.

People change the goods and services they buy over their lifetimes. Tastes in food, clothes, furniture and
recreation are often age-related. Buying is also shaped by the stage of the family life cycle – the stages through
which families might pass as they mature over time. Life-stage changes usually result from demographics and
life-changing events – marriage, having children, purchasing a home, divorce, children going to university,
changes in personal income, moving out of the house and retirement. Marketers often define their target
markets in terms of life-cycle stage and develop appropriate products and marketing plans for each stage.
Age and family life cycle are not the only time-related impacts of the way people consume goods
and services. Major life events also shape consumption. These impacts may even be cross-generational:
the early death of a parent impacts on people’s buying behaviour just as much as getting married does.
These issues are explored further in Marketing in Action 4.1.
Occupation
A person’s occupation affects the goods and services bought. Manual workers tend to buy rugged work
clothes whereas executives tend to buy business suits. Marketers try to identify the occupational groups
that have an above-average interest in their products and services. A company can even specialise in making
products needed by a given occupational group.
For example, Spear’s Specialty Shoes fills a tiny niche in the shoe world by making high-end shoes
for – of all things – clowns (and some team mascots and even store Santas). Founder Gary Spear, a
former clown himself, discovered a need for good, comfortable clown shoes with reasonable delivery
times. Over the past 25 years, his company has built a worldwide reputation. At the company’s website
(<www.spearshoes.com>), professional clowns can browse different colours and styles and design their
own shoes. It is a fun niche, but these shoes are no joke. Made for professional clowning around, they
are made with lightweight soles and serious padding, at a starting price of US$360 a pair.18
Economic situation
A person’s economic situation will affect his or her store and product choices. Marketers watch trends
in personal income, savings and interest rates. Recent research shows that nearly half of all Australian
consumers are prioritising saving and, when they do spend, many are buying from offshore online
retailers. In the face of these trends, most companies are taking steps to redesign, reposition and reprice
their products. For example, Budget Direct repositioned its brand with the ‘Captain Risky’ campaign.
The discount insurer rolled out the campaign in the face of continued pressure on household finances
as well as increased competition and complexity in the insurance market. It offered consumers a value
proposition emphasising price and simplicity: ‘We don’t insure Captain Risky, to keep prices low.’19
lifestyle
A person’s pattern of
Lifestyle
living as expressed in
his or her activities, People coming from the same subculture, social class and occupation may have quite different lifestyles.
interests and opinions. Lifestyle is a person’s pattern of living as expressed in his or her psychographics. It involves measuring
9780655702412_CH04.indd 110 3/3/20 10:43 AM

Marketing
Consumer behaviour: A whole life story
in Action
4.1
Mature consumers behave very differently from teenagers. Marketers understand a change in hairstyle and a new wardrobe, and for others by excessive purchasing,
this, so age is one of the ways markets are segmented. The markets for drinking or gambling. Why people respond differently to life events is not clear,
entertainment, mobile communications and travel are often segmented by but researcher George Moschis, with his work on life course perspectives, has
age. Breakfast cereals use age (among other factors) to segment their market. been throwing some light on the issue. Moschis suggests that the way life events
But sometimes age segmentation does not work – for example, the market impact on consumption is moderated by a person’s ‘socialisation, stress and coping
for luxury goods is not defined by age. Researchers have also found that some responses and development and growth’. Thus, a response to negative life events,
behaviour of consumers seems to have less to do with age than with life events. such as the death of a parent, will depend on how a person handles stress and the
Materialism and compulsive consumption appear to be orientations to buying coping strategies they employ. But it will also be affected by their socialisation and
that are particularly affected by life events. their view of their new role in the family. So, contrary to traditional perspectives
Materialism reflects a longing for material possessions rather than spiritual with a simple ‘cause and effect’ view of consumer behaviour, Moschis’s work casts
fulfilment. Some people are more materialistic than others. This orientation is consumer behaviour as being much more complex.
seen in a number of the lifestyle and values segments identified by companies Marketers are yet to establish just how to deal with this view of the consumer,
such as SBI (<www.strategicbusinessinsights.com/vals/>) and Roy Morgan but there is no doubt that it is likely to change the way they think about their markets.
(<www.roymorgan.com>). Research has shown that children’s responses to
family disruptions (such as their parents’ divorce) may later impact on their
own tendency towards materialistic consumption. We also know that people
who have experienced considerable financial hardship often have conspicuous
consumption patterns. Similar negative early life experiences are also linked
to compulsive consumption – often of unhelpful products or services, such as
cigarettes or gambling.
However, it is not just negative consumption behaviour that develops as a
result of earlier life events. These events may also affect how and when we get
married, have children, the type of work we do, where we live and where we
do our shopping – in fact, everything we do. So, what a person buys and how
they consume should be seen as a result of their whole life story and not just a
particular age or stage of their life cycle.
Segmenting consumer markets by age or even life-cycle stage may need to be
revised in light of this view of a consumer. The consumption patterns of a young
mother whose husband has just died in the line of duty as a police officer may be
much more like those of a 60-year-old woman whose husband recently died in a Research suggests that consumer
car accident than those of women her own age or stage in life (young mother). behaviour is complex, and is shaped by
the whole history of life events.
However, there is a great deal we do not know about how life events translate
Lucy Lambriex/Getty
into differences in consumption. For some people, ending a relationship is marked by
Sources: Excerpts from A Rindfleisch, J E Burroughs & F Denton, ‘Family structure, materialism and compulsive consumption’, Journal of Consumer Research, 23, 1997, pp. 312–25;
J A Roberts, C Manolis & J Tanner, Jr, ‘Family structure, materialism, and compulsive buying’, Journal of the Academy of Marketing Science, 31(3), 2003, pp. 300–11; and George P Moschis,
‘Life course perspectives on consumer behaviour’, Journal of the Academy of Marketing Science, 35, 2007, pp. 295–307.
Questions
❶ Reflect on your life. Draw a timeline and mark the main events in your life – for example, leaving home, starting your first job, your first serious relationship
and so on. Have there been any major life events that you see playing out in the way you consume goods and services? Compare your experiences with the life
events of a friend and their consumption patterns.
❷ Identify some goods and services that would benefit from market segmentation approaches based on life events rather than on other segmentation
variables.
9780655702412_CH04.indd 111 3/3/20 10:43 AM

consumers’ major AIO dimensions – activities (work, hobbies, shopping, sports, social events), interests
(food, fashion, family, recreation) and opinions (about themselves, social issues, business, products).
Lifestyle captures something more than the person’s social class or personality; it profiles his or her whole
pattern of acting and interacting in the world.
Leading lifestyle researchers, Roy Morgan Research Centre, provide lifestyle and values
segmentation for the Australian market. This omnibus research has identified 10 Australian lifestyle
groups (Morgan Values Segments™). Among other lifestyle differences, these groups are shown to have
different media and entertainment consumption patterns, which is useful information for marketers
keen to reach different parts of their potential market.20
When used carefully, the lifestyle concept can help marketers understand changing consumer
values and how they affect buying behaviour. Consumers do not just buy products; they buy the values
and lifestyles those products represent. For example, Harley Davidson does not just sell motorbikes;
it sells adventure and freedom: ‘We fulfill dreams of personal freedom.’ And Driza-Bone sells more
than just rugged clothing; it recognises individualism and invites customers to ‘make your own story’.21
Personality and self-concept

personality Each person’s distinct personality influences his or her buying behaviour. Personality refers to the unique
The unique psychological psychological characteristics that distinguish a person or group. Personality is usually described in terms of
characteristics that
distinguish a person or traits such as self-confidence, dominance, sociability, autonomy, defensiveness, adaptability and aggressiveness.
group. Personality can be useful in analysing consumer behaviour for certain product or brand choices.
The idea is that brands also have personalities, and that consumers are likely to choose brands with
brand personality personalities that match their own. A brand personality is the specific mix of human traits that may
The specific mix of be attributed to a particular brand. One researcher identified five brand personality traits: sincerity
human traits that may be
(down-to-earth, honest, wholesome and cheerful); excitement (daring, spirited, imaginative and up-to-
attributed to a particular
brand. date); competence (reliable, intelligent and successful); sophistication (upper-class and charming); and
ruggedness (outdoorsy and tough).22
Most well-known brands are strongly associated with one particular trait: IKEA with ‘functionality’,
MTV with ‘youthfulness’ and Dove with ‘sincerity’. Hence, these brands will attract people who are
high on the same personality traits.
Many marketers use a concept related to personality – a person’s self-concept (also called self-image).
The idea is that people’s possessions contribute to and reflect their identities – that is, ‘we are what
we have’. Thus, in order to understand consumer behaviour, the marketer must first understand the
relationship between consumer self-concept and possessions.23
Air New Zealand applies these concepts to engage with its customers in everything from its
advertising, to its in-flight safety videos and its motion sickness bags. The airline brand personality has
an ‘irreverent sense of fun’ according to a recent customer experience study. The airline is such a hit that
bloggers all over the world post and re-post the engaging in-flight videos – search online for themed
videos inspired by films such as The Hobbit, events such as the Rugby World Cup, celebrities such as Betty
White and Bear Grylls, and a take-off (pardon the pun!) of life in Hollywood. One blogger said of an
in-flight safety video from ‘Middle Earth’: ‘It captures everything I love about New Zealand, and about
Air New Zealand – a sense of pride in what they do, but in a way that shows they have a sense of humor.’24
Psychological factors
A person’s buying choices are further influenced by four main psychological factors: (1) motivation,
(2) perception, (3) learning, and (4) beliefs and attitudes.
Motivation
A person has many needs at any given time. Some are biological, arising from states of tension, such as
hunger, thirst or discomfort. Others are psychological, arising from the need for recognition, esteem or
9780655702412_CH04.indd 112 3/3/20 10:43 AM

belonging. A need becomes a motive when it is aroused

to a sufficient level of intensity. A motive (or drive)
is a need that is sufficiently pressing to direct the person
to seek satisfaction. Psychologists have developed
theories of human motivation. Two of the most popular
– the theories of Sigmund Freud and Abraham Maslow –
have quite different meanings for consumer analysis and
marketing.
Sigmund Freud assumed that people are largely
unaware of the real psychological forces shaping
their behaviour. He saw the person as growing up
and repressing many urges. These urges are never
eliminated or under perfect control; they emerge in
dreams, in slips of the tongue, in neurotic and obsessive
Motivation: An ageing baby boomer who buys a sports car might explain
behaviour or, ultimately, in psychoses. that he simply likes the feel of the wind in his (thinning) hair. At a deeper
Freud’s theory suggests that a person’s buying level, he may be buying the car in order to feel young and independent
decisions are affected by subconscious motives that again.
© Monkey Business Images | Dreamstime.com
even the buyer may not fully understand. Thus, an
ageing baby boomer who buys a sporty BMW Z4
convertible might explain that he simply likes the feel of the wind in his (thinning) hair. At a deeper motive (drive)
level, he may be trying to impress others with his success. At a still deeper level, he may be buying the A need that is sufficiently
pressing to direct
car in order to feel young and independent again.
the person to seek
The term motivation research refers to qualitative research designed to probe consumers’ hidden, satisfaction of the need.
subconscious motivations. Consumers often do not know or cannot describe just why they act as they
do. Thus, motivation researchers use a variety of probing techniques to uncover underlying emotions
and attitudes towards brands and buying situations.
Many companies employ teams of psychologists, anthropologists and other social scientists to
carry out motivation research. One ad agency routinely conducts one-on-one, therapy-like interviews
to delve into the inner workings of consumers. Another company asks consumers to describe their
favourite brands as animals or cars (say, Holden versus Ford) in order to assess the prestige associated
with various brands. Still others rely on hypnosis, dream therapy or soft lights and mood music to plumb
the murky depths of consumer psyches. These approaches, included in the area of interpretive consumer
research, allow marketers to dig deeper into consumer psyches and develop better marketing strategies
by recognising the experiential, symbolic, ideological and sociocultural aspects of consumer behaviour.25
Abraham Maslow sought to explain why people are driven by particular needs at particular times.
Why does one person spend much time and energy on personal safety and another on gaining the
esteem of others? Maslow’s answer is that human needs are arranged in a hierarchy, as shown in
Figure 4.3, from the most pressing at the bottom to the least pressing at the top.26 These needs include
physiological needs, safety needs, social needs, esteem needs and self-actualisation needs.
A person tries to satisfy the most important need first. When that need is satisfied, it will stop
being a motivator and the person will then try to satisfy the next most important need. For example,
starving people (physiological need) will not take an interest in the latest happenings in the art world
(self-actualisation needs), nor in how they are seen or esteemed by others (social or esteem needs), nor
even in whether they are breathing clean air (safety needs). But as each important need is satisfied, the
next most important need will come into play. Of course, consumer motivations are complex and will
not always be strictly hierarchical; and although Maslow’s work has been criticised, it suggests that
marketers should reflect on the types of needs consumers may be satisfying when they buy goods and
services.
9780655702412_CH04.indd 113 3/3/20 10:43 AM

Self-
actualisation
needs
Self-development
and realisation
Esteem needs
Self-esteem, recognition, status
Social needs
Sense of belonging, love
Safety needs
Security, protection
Physiological needs
Hunger, thirst
Figure 4.3 Maslow’s hierarchy of needs

Source: Abraham H Maslow, Robert D Frager (Editor) & James Faidman (Editor), Motivation and Personality, 3rd edn, © 1987. Printed and electronically
reproduced by kind permission of Pearson Education, Inc., Upper Saddle River, NJ.
Perception
A motivated person is ready to act. How the person acts is influenced by his or her own perception of the
situation. All of us learn by the flow of information through our five senses: sight, hearing, smell, touch
and taste. However, each of us receives, organises and interprets this sensory information in an individual
perception way. Perception is the process by which people select, organise and interpret information to form a
The process by meaningful picture of the world.
which people select,
People can form different perceptions of the same stimulus because of three perceptual processes:
organise and interpret
information to form a selective attention, selective distortion and selective retention. We are exposed to a great amount of
meaningful picture of stimuli every day. For example, individuals are exposed to an estimated 3000 to 5000 ad messages daily.
the world. The cluttered digital environment adds 30 billion online display ads shown each day, 500 million tweets
sent daily, 144 000 hours of video uploaded daily
on YouTube, and 4.75 billion pieces of content
shared on Facebook every day.27 It is impossible to
pay attention to all these stimuli. Selective attention
– the tendency for people to screen out most of
the information to which they are exposed –
means that marketers must work especially hard
to attract the consumer’s attention.28
Even noticed stimuli do not always come
across in the intended way. Each person fits
incoming information into an existing mindset.
Selective distortion describes the tendency of people
to interpret information in a way that will support
what they already believe. For example, if you
Selective perception: It is impossible for people to pay attention to the distrust a company, you might perceive even honest
thousands of ads that they see every day, so they screen most of them out. ads from the company as being questionable.
© Andrey Bayda/Shutterstock.com
Selective distortion means that marketers must try
9780655702412_CH04.indd 114 3/3/20 10:43 AM

to understand the mindsets of consumers and how these will affect interpretations of advertising and
sales information.
People also will forget much of what they learn. They tend to retain information that supports
their attitudes and beliefs. Because of selective retention, consumers are likely to remember good points
made about a brand they favour and to forget good points made about competing brands. Because of
selective attention, distortion and retention, marketers must work hard to get their messages through.
This fact explains why marketers use so much drama and repetition in sending messages to their
market.
Interestingly, although most marketers worry about whether their offers will be perceived at
all, some consumers worry they will be affected by marketing messages without even knowing
it – through subliminal advertising. More than 50 years ago, a researcher announced that he had
flashed the phrases ‘Eat popcorn’ and ‘Drink Coca-Cola’ on a screen in a movie theatre in the
United States every five seconds for 1/300th of a second. He reported that although viewers did not
consciously recognise these messages, they absorbed them subconsciously and bought 58 per cent
more popcorn and 18 per cent more Coke.29 Suddenly, advertisers and consumer-protection groups
became intensely interested in subliminal perception. People voiced fears of being brainwashed,
and California and Canada declared the practice illegal. Although the researcher later admitted to
making up the data, the issue has not died. Some consumers still fear they are being manipulated by
subliminal messages.
Numerous studies by psychologists and consumer researchers have found little or no link between
subliminal messages and consumer behaviour. Recent brain-wave studies have found that, in certain
circumstances, our brains may register subliminal messages. However, it appears that subliminal advertising
simply does not have the power attributed to it by its critics. Most advertisers scoff at the notion of an
industry conspiracy to manipulate consumers through ‘invisible’ messages. Says one industry insider:
[Some consumers believe we are] wizards who can manipulate them at will. Ha! Snort! Oh my
sides! As we know, just between us, most of [us] have difficulty getting a 2 per cent increase in sales
with the help of $50 million in media and extremely liminal images of sex, money, power, and other
[motivators] of human emotion. The very idea of [us] as puppeteers, cruelly pulling the strings of
consumer marionettes, is almost too much to bear.30
Learning
When people act, they learn. Learning describes changes in an individual’s behaviour arising from learning
experience. Learning theorists say that most human behaviour is learned. Learning occurs through the Changes in an
individual’s behaviour
interplay of drives, stimuli, cues, responses and reinforcement.
arising from experience.
A drive is a strong internal stimulus that calls for action. A drive becomes a motive when it is
directed towards a particular stimulus object. For example, a person’s drive for self-actualisation might
motivate him or her to look into buying a camera. The consumer’s response to the idea of buying a
camera is conditioned by the surrounding cues. Cues are minor stimuli that determine when, where and
how the person responds. For example, the person might spot several camera brands in a shop window,
hear of a special sale price or discuss cameras with a friend. These are all cues that might influence a
consumer’s response to his or her interest in buying the product.
Suppose the consumer buys a Nikon camera. If the experience is rewarding, the consumer will
probably use the camera more and more, and his or her response will be reinforced. Then, the next time
the consumer shops for a camera, or for binoculars or some similar product, the probability is greater
that he or she will buy a Nikon product. The practical significance of learning theory for marketers is
that they can build up demand for a product by associating it with strong drives, using motivating cues
and providing positive reinforcement.
9780655702412_CH04.indd 115 3/3/20 10:43 AM

Beliefs and attitudes

People acquire beliefs and attitudes by doing and learning. These beliefs and attitudes, in turn, influence
belief their buying behaviour. A belief is a descriptive thought that a person has about something. Beliefs may be
A descriptive thought based on real knowledge, opinion or faith, and may or may not carry an emotional charge. Marketers are
that a person holds
about something. interested in the beliefs that people formulate about specific products and services, because these beliefs
make up product and brand images that affect buying behaviour. If some of the beliefs prevent purchase,
the marketer will want to launch a campaign to correct them.
People have attitudes regarding religion, politics, clothes, music, food and almost everything
attitude else. Attitude describes a person’s relatively consistent evaluations, feelings and tendencies towards
A person’s consistently an object or idea. Attitudes put people into a frame of mind of liking or disliking things, of moving
favourable or
unfavourable towards or away from them. From the definition, we can see that attitudes are made up of three parts
evaluations, feelings and – our thoughts and beliefs (cognition), our feelings (affect) and an intention to behave in a certain
tendencies towards an way (conation). This understanding led to the development of the most common model marketers,
object or idea. psychologists, consumer researchers and others use to make sense of consumer attitudes – the
tricomponent attitude model shown in Figure 4.4.
As its name suggests, the tricomponent attitude model displays (models) our attitudes in terms
of three (‘tri’) parts (‘components’). The cognitive component of our attitudes refers to our beliefs,
thoughts and the attributes we associate with the attitude object. They develop through our
experiences with, our observations of, and through information we have learned about, the actual
object of the attitude. This component of our attitude is the one we are most likely to be aware of
compared to the others. It is also more susceptible to change through logical persuasion. The affective
component of our attitudes refers to our feelings and emotions linked to the attitude object. This
component of our attitude is based on a personal judgment and can be positive (we like something),
negative (we dislike something) or neutral (we are indifferent). The affective component of our
attitude impacts on the other components of the attitude – it can represent how we evaluate our
cognitive beliefs and also how we act in relation to the object. Further, the stronger our feelings and
emotion in relation to the object, the stronger the attitude is likely to be. The conative component of
our attitude refers to how we act, or would act, should the situation arise in relation to the attitude
object. It can be difficult to separate from the other two components and is the only component of
our attitude that is visible.
Our camera buyer may hold attitudes such as ‘Buy the best’ (conative), ‘Japanese companies make
the best electronics products in the world’ (cognitive) and ‘Creativity and self-expression are among
Conation Affect
Cognition
Figure 4.4 A simple representation of the tricomponent attitude model

Source: L Schiffman, A O’Cass, A Paladino & J Carlson, Consumer Behaviour, 6th edn, Pearson, Sydney, 2013.
9780655702412_CH04.indd 116 3/3/20 10:43 AM

the most important things in life’ (affective). If so, the

Nikon camera would fit well into the consumer’s existing
attitudes.
Attitudes are difficult to change. A person’s attitudes
fit into a pattern, and to change one attitude may require
difficult adjustments in many others. Thus, a company should
usually try to fit its products into existing attitudes rather
than attempt to change attitudes. For example, today’s food
marketers now cater to people’s new attitudes about health
and wellbeing with a range of products offering alternatives
to high-sugar treats. Wholeberry Folk has launched a new
range of bake-at-home treats with these consumer attitudes
in mind. The range of cupcakes and biscuits uses spelt Attitudes: Wholeberry Folk’s bake-at-home range taps into people’s
attitudes about health and wellbeing.
flour and real fruit. A company representative explains: ‘As
Packaging designed for Wholeberry Folk by Vicki Nhieu
parents we have a moral obligation to feed our children
healthy food, so when it comes to sweet treats we created
an alternative.’31
We can now appreciate the many forces acting on consumer behaviour. The consumer’s choice
results from the complex interplay of cultural, social, personal and psychological factors.
The buyer decision process

Now that we have looked at the influences that affect buyers, we are ready to look at how consumers make
buying decisions. Figure 4.5 shows that the buyer decision process consists of five stages: (1) need recognition,
(2) information search, (3) evaluation of alternatives, (4) purchase decision and (5) post-purchase behaviour. Clearly,
the buying process starts long before the actual purchase and continues long after. Marketers need to focus
on the entire buying process rather than on just the purchase decision.
The figure suggests that consumers pass through all five stages with every purchase. But in
more routine purchases, consumers often skip or reverse some of these stages. A woman buying
her regular brand of toothpaste would recognise the need and go straight to the purchase decision,
skipping information search and evaluation. However, we use the model in Figure 4.5 because
it shows all the considerations that arise when a consumer faces a new and complex purchase
situation.
Stages in the buyer decision process

Need recognition
The buying process starts with need recognition – the buyer recognises a problem or need. The need can be
triggered by internal stimuli when one of the person’s normal needs – hunger, thirst, sex – rises to a level high
enough to become a drive. A need can also be triggered by external stimuli. For example, an advertisement or
a discussion with a friend might get you thinking about buying a new car. At this stage in the buyer decision
Need Information Evaluation of Purchase Post-purchase

recognition search alternatives decision behaviour
Figure 4.5 The buyer decision process
9780655702412_CH04.indd 117 3/3/20 10:43 AM

process, the marketer should research consumers to find out what kinds of needs or problems arise, what
brought these about and how they led the consumer to this particular product.
Information search
An interested consumer may or may not search for more information. If the consumer’s drive is strong and
a satisfying product is near at hand, the consumer is then likely to buy it. If not, he or she may store the
need in memory or undertake an information search related to the need. For example, once you have decided
you need a new car, at the very least, you will probably pay more attention to car ads, cars owned by friends
and conversations about cars. Or you may actively search the web, talk with friends and gather information
in other ways. The amount of searching you do will depend on the strength of your drive, the amount
of information you start with, the ease of obtaining more information, the value you place on additional
information and the satisfaction you get from searching.
Consumers can obtain information from any of several sources. These include personal sources
(family, friends, neighbours, acquaintances), commercial sources (advertising, salespeople, dealer websites,
packaging, displays), public sources (mass media, consumer rating organisations, internet searches) and
experiential sources (handling, examining, trialling/using the product). The relative influence of these
information sources varies with the product and the buyer.
Generally, the consumer receives the most information about a product from commercial sources –
those controlled by the marketer. The most effective sources, however, tend to be personal. Commercial
sources normally inform the buyer, but personal sources legitimise or evaluate products for the buyer.
A recent study revealed that consumers find sources of user-generated content – discussion forums,
blogs, online review sites and social networking sites – 20 per cent more influential, 35 per cent more
memorable and 50 per cent more trusted than other types of media when making a purchase decision.32
As more information is obtained, the consumer’s awareness and knowledge of the available brands
and features increase. In your car information search, you may learn about the several brands available.
The information might also help you to drop certain brands from consideration. A company must
design its marketing mix to make prospects aware of and knowledgeable about its brand. The company
should carefully identify consumers’ sources of information and the importance of each source.
Evaluation of alternatives
We have seen how the consumer uses information to arrive at a set of final brand choices. How does the
consumer choose among the alternative brands? The marketer needs to know about alternative evaluation
– that is, how the consumer processes information to arrive at brand choices. Unfortunately, consumers do
not use a simple and single evaluation process in all buying situations. Instead, several evaluation processes
are at work.
The consumer arrives at attitudes towards different brands through some evaluation procedure.
How consumers go about evaluating purchase alternatives depends on the individual consumer and
the specific buying situation. In some cases, consumers use careful calculations and logical thinking.
At other times, the same consumers do little or no evaluating; instead, they buy on impulse and rely on
intuition. Sometimes consumers make buying decisions on their own; sometimes they turn to friends,
online reviews or salespeople for buying advice.
Suppose you have narrowed your car choices to three brands. And suppose you are primarily
interested in four attributes – price, style, fuel economy and performance. By this time, you have
probably formed beliefs about how each brand rates on each attribute. Clearly, if one car rated best on
all the attributes, the marketer could predict you would choose that brand. However, the brands will
no doubt vary in appeal. You might base your buying decision mostly on one attribute, and your choice
would be easy to predict. If you wanted style above everything else, you would buy the car that you
think has the most style. But most buyers consider several attributes, each with different importance.
9780655702412_CH04.indd 118 3/3/20 10:43 AM

By knowing the importance you assigned to each attribute, the marketer could predict your car choice
more reliably. Marketers should study buyers to find out how they actually evaluate brand alternatives.
If they know what evaluative processes go on, marketers can take steps to assist buyers in their decision
making.
Purchase decision
In the evaluation stage, the consumer ranks brands and forms purchase intentions. Generally, the consumer’s
purchase decision will be to buy the most preferred brand, but two factors can come between the purchase
intention and the purchase decision. The first factor is the attitudes of others. If someone important to you thinks
you should buy the lowest-priced car, then the chances of your buying a more expensive car are reduced.
The second factor is unexpected situational factors. The consumer may form a purchase intention
based on such factors as expected income, expected price and expected product benefits. However,
unexpected events may change the purchase intention. For example, the economy might take a turn
for the worse, a close competitor might drop its price or a friend might report being disappointed in
your preferred car. Thus, preferences – and even purchase intentions – do not always result in actual
purchase choice.
Post-purchase behaviour
The marketer’s job does not end when the product is bought. After purchasing the product, the consumer
will be satisfied or dissatisfied and will engage in post-purchase behaviour that is of interest to the marketer.
What determines whether the buyer is satisfied or dissatisfied with a purchase? The answer lies in the
relationship between the consumer’s expectations and the product’s perceived performance. If the product falls
short of expectations, the consumer is disappointed; if the product meets expectations, the consumer is
satisfied; if it exceeds expectations, the consumer is delighted. The larger the gap between expectations and
performance, the greater the consumer’s dissatisfaction. This suggests that sellers should promise only what
their brands can deliver so that buyers are satisfied. cognitive
Almost all major purchases, however, result in cognitive dissonance, or discomfort caused by dissonance
Buyer discomfort
post-purchase conflict. After the purchase, consumers are satisfied with the benefits of the chosen caused by post-purchase
brand and are glad to avoid the drawbacks of the brands not bought. However, every purchase conflict.
involves compromise. So, consumers feel uneasy
about acquiring the drawbacks of the chosen
brand and about losing the benefits of the brands
not purchased. Thus, consumers feel at least some
post-purchase dissonance for every purchase.33
Why is it so important to satisfy the customer?
Customer satisfaction is a key to building
profitable relationships with consumers – to
keeping and growing consumers and reaping their
customer lifetime value. Satisfied customers buy a
product again, talk favourably to others about the
product, pay less attention to competing brands
and advertising, and buy other products from
the company. Many marketers go beyond merely
meeting the expectations of customers – they aim
to delight the customer.
A dissatisfied consumer responds differently. Cognitive dissonance: Steel Blue aims to reduce post-purchase conflict with a
Bad word of mouth often travels further and faster comfort guarantee.
Steel Blue boots, www.steelblue.com.au
than good word of mouth. It can quickly damage
9780655702412_CH04.indd 119 3/3/20 10:43 AM

consumer attitudes about a company and its products. But companies cannot simply rely on dissatisfied
customers to volunteer their complaints when they are dissatisfied. Most unhappy customers never
tell the company about their problem. Therefore, a company should measure customer satisfaction
regularly. It should set up systems that encourage customers to complain. In this way, the company can
learn how well it is doing and how it can improve.
By studying the overall buyer decision, marketers may be able to find ways to help consumers move
through it. For example, if consumers are not buying a new product because they do not perceive a
need for it, marketing might launch advertising messages that trigger the need and show how the
product solves customers’ problems. If customers know about the product but are not buying because
they hold unfavourable attitudes towards it, the marketer must find ways either to change the product
or to change consumer perceptions.
Roles in the buying process

Marketers need to know which people are involved in the buying decision and what role each person
plays. Identifying the decision maker in many transactions is fairly easy. Men normally choose their own
shoes, and women choose their own pantyhose. Other products, however, may involve group decisions.
For example, choosing a movie to share with friends is usually a group decision. Five different roles can be
identified in most buying processes: initiator, influencer, decider, buyer and user.
The initiator is the person who first suggests or thinks of the idea of buying a particular product or
service. For example, in your home this is the person who notices that you are out of breakfast cereal.
The influencer is someone whose views or advice carry some weight in making the final buying decision.
Continuing the breakfast cereal example, this could be any member of the family whose preferences are
important, but it could also be the family doctor who has made dietary recommendations. The person
who ultimately makes a buying decision or any part of it – whether to buy, what to buy, how to buy or
where to buy – is the decider. But the decider may not be the actual buyer. The buyer is the person who
makes an actual purchase, and the user is the person who consumes or uses a product or service.
Knowing the main participants and the roles they play helps the marketer to fine-tune the marketing
and communication program.
The buyer decision process for new

products
We have looked at the stages buyers go through in trying to satisfy a need. Buyers may pass quickly or
slowly through these stages, and some of the stages may even be reversed. Much depends on the nature of
the buyer, the product and the buying situation.
new product We now look at how buyers approach the purchase of new products. A new product is a good,
A good, service or service or idea that is perceived by some potential customers as new. It may have been around for a
idea that is perceived
while, but our interest is in how consumers learn about products for the first time and make decisions
by some potential
customers as new. on whether to adopt them. The adoption process is ‘the mental process through which an individual
passes from first learning about an innovation to final adoption’, and adoption is the decision by an
individual to become a regular user of the product.34
Stages in the adoption process

Consumers go through five stages in the process of adopting a new product:
• Awareness: The consumer becomes aware of the new product, but lacks information about it.
• Interest: The consumer seeks information about the new product.
• Evaluation: The consumer considers whether trying the new product makes sense.
• Trial: The consumer tries the new product on a small scale to improve his or her estimate of its value.
• Adoption: The consumer decides to make full and regular use of the new product.
9780655702412_CH04.indd 120 3/3/20 10:43 AM

This model suggests that the new-product marketer should think about how to help consumers
move through the adoption process stages. For example, car brands offer detailed and effusive adoption process
information about their makes and models via various media, websites, personal selling and so on The mental process
through which an
(interest); and car dealers commonly offer incentives to potential new car buyers – such as attractive
individual passes from
finance deals, extended warranties and after-sales servicing (interest and evaluation), extended first hearing about
test-drive periods (trial) and so on – to move consumers to adopt a new car. an innovation to final
adoption.
Individual differences in innovativeness
People differ greatly in their readiness to try new products. In each product area, there are ‘consumption
pioneers’ and early adopters. Other individuals adopt new products much later. People can be classified
into the adopter categories shown in Figure 4.6. After a slow start, an increasing number of people adopt
the new product. The number of adopters reaches a peak and then drops off as fewer non-adopters remain.
Five groups of adopters have been identified.
The five adopter groups have differing values. Innovators are venturesome – they try new ideas
at some risk. Early adopters are guided by respect – they are opinion leaders in their communities
and adopt new ideas early but carefully. The early majority are deliberate – although they rarely are
leaders, they adopt new ideas before the average person. The late majority are sceptical – they adopt an
innovation only after a majority of people have tried it. Finally, laggards are tradition bound – they are
suspicious of changes and adopt the innovation only when it has become something of a tradition itself.
This adopter classification suggests that an innovating firm should research the characteristics of
innovators and early adopters in their product category and direct initial marketing efforts towards
them. In general, innovators tend to be relatively younger, better educated and higher in income than
later adopters and non-adopters. They are more receptive to unfamiliar things, rely more on their own
values and judgment, and are more willing to take risks. They are less brand-loyal and more likely to
take advantage of special promotions such as discounts, coupons and samples.
Influence of product characteristics on rate of

adoption
The characteristics of the new product affect its rate of adoption. Some products catch on almost overnight
– for example, the Apple iPad, which flew off retailers’ shelves at an astounding rate from the day the product
Lagging adopters
16%
100
Late majority
34%
% share of all adopters
75
Early majority
34%
50
25 Early adopters
13.5%
Innovators
2.5%
0
Time of adoption of innovation
Figure 4.6 Adopter categorisation on the basis of relative time of adoption of innovations
9780655702412_CH04.indd 121 3/3/20 10:43 AM

was introduced. Other products take a longer time to gain acceptance. For example, digital television
was first launched in Australia in 2001 and, in the first five years of transmission, fewer than one-third of
Australian households were watching digital TV (the figure is now 89 per cent).35
Five characteristics are especially important in influencing an innovation’s rate of adoption (we will
use high-definition television (HDTV) as an example as we work through these characteristics):
• Relative advantage: the degree to which the innovation appears superior to existing products. HDTV
offers substantially improved picture quality. This sped up its rate of adoption.
• Compatibility: the degree to which the innovation fits the values and experiences of potential consumers.
HDTV, for example, is highly compatible with the lifestyles of the television-watching public.
However, in the early years, HDTV was not yet compatible with programming and broadcasting
systems, slowing adoption. Now, as more and more high-definition programs and channels have
become available, the rate of HDTV adoption has increased.
• Complexity: the degree to which the innovation is difficult to understand or use. HDTVs are not very
complex. Therefore, as more programming has become available and prices have fallen, the rate of
HDTV adoption is increasing faster than that of more complex innovations.
• Divisibility: the degree to which the innovation may be tried on a limited basis. Early HDTVs were
very expensive, slowing the rate of adoption. As prices fall, adoption rates are increasing.
• Communicability: the degree to which the results of using the innovation can be observed or described
to others. HDTV is easy to demonstrate and describe, and this will enhance the uptake by consumers.
Other characteristics influence the rate of adoption, such as initial and ongoing costs, risk and
uncertainty, and social approval. The new-product marketer must research all these factors when
developing the new product and its marketing program.

Here is a good place to pause and apply the concepts you have understanding of customers and their buying behaviour to
examined in the first part of this chapter. build better customer relationships?
● Think about a specific major purchase you have made ● Think about a company, such as Intel, which sells its products
recently. What buying process did you follow? What major to computer makers and other businesses rather than to
factors influenced your decision? final consumers. How would Intel’s marketing to business
● Pick a company or brand that we have discussed in a customers differ from Apple’s marketing to final consumers?
previous chapter. How does the company you chose use its The second part of the chapter deals with this issue.
Business markets and business buyer

behaviour
In one way or another, most large companies sell to other organisations. Companies such as Pacific Dunlop,
Dell Computer, IBM, Caterpillar and countless others in various industries sell most of their products to
business buyer other businesses. Even large consumer-product companies, which make products used by final consumers,
behaviour must first sell their products to other businesses. For example, Nestlé makes many familiar consumer brands
The buying behaviour
of the organisations that – beverages (Milo, Nesquik), baking products (Carnation, Choc Bits), snacks (Uncle Tobys, Roll-Ups,
buy goods and services Le Snak) and others. But to sell these products to consumers, Nestlé must first sell them to its wholesaler
for use in the production and retailer customers, who in turn serve the consumer market. Nestlé also sells products directly to other
of other products and
businesses that use the products to make their own finished products.
services or to resell or
rent them to others at Business buyer behaviour refers to the buying behaviour of the organisations that buy goods
a profit. and services for use in the production of other products and services that are sold, rented or supplied
9780655702412_CH04.indd 122 3/3/20 10:43 AM

to others. It also includes the behaviour of retailing and wholesaling firms that acquire goods to resell
or to rent to others at a profit. In the business buying process, business buyers determine which products
and services their organisations need to purchase, and then find, evaluate and choose among alternative
suppliers and brands. Business-to-business (B2B) marketers must do their best to understand business
markets and business buyer behaviour. Then, like businesses that sell to final buyers, they must build
profitable relationships with business customers by creating superior customer value.
Business markets
The business market is huge. In fact, business markets involve far more dollars and items than do consumer
markets. For example, think about the large number of business transactions involved in the production and
sale of a single set of Dunlop tyres. Various suppliers sell Dunlop the rubber, steel, equipment and other
goods that it needs to produce tyres. Dunlop then sells the finished tyres to retailers, who in turn sell them
to consumers. Thus, many sets of business purchases were made for only one set of consumer purchases. In
addition, Dunlop sells tyres as original equipment to manufacturers who install them on new vehicles, and as
replacement tyres to companies that maintain their own fleets of company cars, trucks, buses or other vehicles.
Business marketing includes resellers (the reseller market) and manufacturers (the industrial market).
We can also think of institutional and government markets as being part of this group, as much of the
discussion on business marketing also applies to marketing to, and by, governments and institutions.
In some ways, business markets are similar to consumer markets. Both involve people who assume
buying roles and make purchase decisions to satisfy needs. However, business markets differ in many
ways from consumer markets. The main differences are in market structure and demand, the nature of the
buying unit, and the types of decisions and the decision process involved.
Market structure and demand

The business marketer normally deals with far fewer but far larger buyers than the consumer marketer does.
Even in large business markets, a few buyers often account for most of the purchasing. For example, when
Dunlop sells replacement tyres to final consumers, its potential market includes the owners of the millions derived demand
of cars currently in use around the world. But Dunlop’s fate in the business market depends on getting orders Business demand that
ultimately comes from
from one of only a handful of large car makers. The smaller number of buyers creates greater dependencies
(derives from) the
and, as a result, closer relationships tend to develop between buyer and seller in business markets. demand for consumer
Further, business demand is derived goods.
demand – it ultimately comes from (derives from)
the demand for consumer goods. Hewlett-Packard,
Dell, Lenovo and others buy Intel microprocessor
chips because consumers buy personal computers.
If consumer demand for computers drops, so will
the demand for microprocessors. Therefore, B2B
marketers sometimes promote their products
directly to final consumers to increase business
demand. For example, Intel advertises heavily to
personal computer buyers, selling them on the
virtues of Intel and its microprocessors. Recent
ads from Intel speak to users, asking them to ‘Look
Inside’ – reminding us all to ask what is inside
because it should be ‘Intel Inside’. The increased
demand for Intel chips boosts demand for the PCs Derived demand: Intel advertises heavily to sell users on the virtues of the
containing them, and both Intel and its business company and its microprocessors.
Intel Corporation
partners win.
9780655702412_CH04.indd 123 3/3/20 10:43 AM

Many business markets have inelastic demand; that is, total demand for many business products is
not affected much by price changes, especially in the short run. A drop in the price of leather will not
cause shoe manufacturers to buy much more leather unless it results in lower shoe prices that, in turn,
will increase consumer demand for shoes.
Finally, business markets have more fluctuating demand. The demand for many business goods and
services tends to change more – and more quickly – than the demand for consumer goods and services
does. A small percentage increase in consumer demand can cause large increases in business demand.
Sometimes a rise of only 10 per cent in consumer demand can cause as much as a 200 per cent rise in
business demand during the next period.
Nature of the buying unit

Compared with consumer purchases, a business purchase usually involves more decision participants
and a more professional purchasing effort. Often, business buying is done by trained purchasing agents
who spend their working lives learning how to buy better. The more complex the purchase, the more
likely it is that several people will participate in the decision-making process. Buying committees
made up of technical experts and top management are common in the buying of major goods.
Beyond this, B2B marketers now face a new breed of higher-level, better-trained supply managers.
Therefore, companies must have well-trained marketers and salespeople to deal with these well-
trained buyers.
Types of decisions and the decision process

Business buyers usually face more complex buying decisions than do consumer buyers. Business
purchases often involve large sums of money, complex technical and economic considerations, and
interactions among many people at many levels of the buyer’s organisation. Because the purchases are
more complex, business buyers may take longer to make their decisions. The business buying process
also tends to be more formalised than the consumer buying process. Large business purchases usually
call for detailed product specifications, written purchase orders, careful supplier searches and formal
approval.
Rather than make outright purchases, businesses will often lease products. Leasing is common with
computers, shop machinery, packaging equipment, heavy-construction equipment, delivery trucks,
machine tools and company motor vehicles. The lessee gains many advantages, including conserving
capital, getting the seller’s latest products, receiving better service and gaining some tax advantages.
The lessor often ends up with a larger net income and the chance to deal with customers who could not
afford outright purchase. For example, ORIX Australia is a company that specialises in the financing
and management of commercial and passenger vehicles, and provides finance for manufacturing and
construction plant and equipment. It supplies commercial finance, leasing, property finance, business
finance and specialist fleet-management leasing services.
Finally, in the business buying process, the buyer and seller are often much more dependent
on each other. B2B marketers may roll up their sleeves and work closely with their customers
supplier during all stages of the buying process – from helping customers to define problems, to finding
development solutions, to supporting after-sale operation. They often customise their offerings to individual
Systematic development customer needs. In the short run, sales go to suppliers who meet buyers’ immediate product
of networks of supplier–
partners to ensure and service needs. In the long run, however, B2B marketers keep a customer’s sales, and create
an appropriate and customer value by meeting current needs and by partnering with customers to help them solve
dependable supply of their problems.
products and materials In recent years, relationships between customers and suppliers have been changing from downright
for use in making
products or reselling adversarial to close and friendly. In fact, many customer companies are now practising supplier
them to others. development – that is, systematically developing networks of supplier–partners to ensure an
9780655702412_CH04.indd 124 3/3/20 10:43 AM

appropriate and dependable supply of products and materials that they will either use in making their
own products or resell to others. For example, Caterpillar no longer calls its buyers ‘purchasing agents’
– they are managers of ‘purchasing and supplier development’. Giant Swedish furniture retailer IKEA
does not just buy from its suppliers; it involves them deeply in the process of delivering a stylish and
affordable lifestyle to IKEA’s customers.
Business buyer behaviour

At the most basic level, marketers want to know how business buyers will respond to various marketing
stimuli. Figure 4.7 shows a model of business buyer behaviour. In this model, marketing and other stimuli
affect the buying organisation and produce certain buyer responses. These stimuli enter the organisation
and are turned into buyer responses. In order to design good marketing strategies, the marketer must
understand what happens within the organisation to turn stimuli into purchase responses.
Within the organisation, buying activity consists of two main parts: the buying centre, made up
of all the people involved in the buying decision, and the buying decision process. The model shows
that the buying centre and the buying decision process are influenced by internal organisational,
interpersonal and individual factors, as well as by external environmental factors.
The model in Figure 4.7 suggests four questions about business buyer behaviour: What buying
decisions do business buyers make? Who participates in the buying process? What are the main
influences on buyers? How do business buyers make their buying decisions?
Main types of buying situations

There are three main types of buying situations.36 At one extreme is the straight rebuy, which is a fairly
straight rebuy
routine decision. At the other extreme is the new task, which may call for thorough research. In the middle A business buying
is the modified rebuy, which requires some research. situation in which the
In a straight rebuy, the buyer reorders something without any modifications. It is usually buyer routinely reorders
something without any
handled on a routine basis by the purchasing department. Based on past buying satisfaction, the modifications.
buyer simply chooses from the various suppliers on its list. ‘In’ suppliers try to maintain product and
service quality. They often propose automatic reordering systems so that the purchasing agent will modified rebuy
save reordering time. ‘Out’ suppliers try to find new ways to add value or exploit dissatisfaction so A business buying
that the buyer will consider them. situation in which the
buyer wants to modify
In a modified rebuy, the buyer wants to modify product specifications, prices, terms or suppliers.
product specifications,
The modified rebuy usually involves more decision participants than does the straight rebuy. The ‘In’ prices, terms or
suppliers may become nervous and feel pressured to put their best foot forward to protect an account. suppliers.
THE ENVIRONMENT THE BUYING ORGANISATION BUYER RESPONSES

Marketing Other Product or
The buying centre
stimuli stimuli service choice
Product Economic Buying Supplier choice
Price Technological decision Order quantities
process
Placement Political Delivery terms and
logistics Cultural (Interpersonal and times
Promotion Competitive individual influences) Service terms
People Payment
Processes (Organisational influences)
Figure 4.7 A model of business buyer behaviour
9780655702412_CH04.indd 125 3/3/20 10:43 AM

‘Out’ suppliers may see the modified rebuy situation as an opportunity to make a better offer and gain
new business.
new task A company buying a product or service for the first time faces a new-task situation. In such cases, the
A business buying greater the cost or risk, the larger the number of decision participants and the greater their efforts to collect
situation in which the
information. The new-task situation is the marketer’s greatest opportunity and challenge. The marketer
buyer purchases a
product or service for not only tries to reach as many key buying influences as possible, but also provides help and information.
the first time. The buyer makes the fewest decisions in the straight rebuy and the most in the new-task situation.
In the new-task situation, the buyer must decide on product specifications, suppliers, price limits,
payment terms, order quantities, delivery times and service terms. The order of these decisions varies
with each situation, and different decision participants influence each choice.
Many business buyers prefer to buy a complete solution to a problem from a single seller instead of
buying separate products and services from several suppliers and putting them together. The sale often
goes to the firm that provides the most complete system for meeting the customer’s needs and solving
systems selling its problems. Such systems selling (or solutions selling) is often a key business marketing strategy
(solutions selling) for winning and holding accounts.
Buying a packaged
Thus, Elders does more than offer trading options for farmers in Australia and New Zealand.
solution to a problem
from a single seller, thus It develops entire solutions for its primary producer clients. For example, Elders offers everything from
avoiding all the separate farm supplies, such as seeds, chemicals and fencing, through to market reports, insurance, financial
decisions involved planning and banking solutions. But the company does not stop there; it also offers farm advice, export
in a complex buying
and real estate services – all this on top of the traditional trade in crops, livestock and wool. A farmer
situation.
would be hard-pressed to find something that Elders could not do for his or her business.37
Participants in the business buying process

Who does the buying of the trillions of dollars’ worth of goods and services needed by business organisations?
buying centre The decision-making unit of a buying organisation is called its buying centre and comprises all the
All the individuals and individuals and units that play a role in the business purchase decision-making process. This group includes
units that play a role in
the business purchase
the actual users of the product or service, those who make the buying decision, those who influence the
decision-making process.
Solutions selling: Elders bundles a complete system of services for farmers, offering everything from farm
supplies to finance.
Elders
9780655702412_CH04.indd 126 3/3/20 10:43 AM

buying decision, those who do the actual buying and those who
control buying information.
The buying centre is not a fixed and formally identified
unit within the buying organisation. It is a set of buying roles
assumed by different people for different purchases. Within
the organisation, the size and makeup of the buying centre will
vary for different products and for different buying situations.
For some routine purchases, one person – say, a purchasing
agent – may assume all the buying centre roles and serve as the
only person involved in the buying decision. For more complex
purchases, the buying centre may include 20 or 30 people from
different levels and departments in the organisation.
The buying centre concept presents a major marketing
Buying centre: The buying centre for a company buying a corporate
challenge. The business marketer must learn who participates jet will include obvious people, such as the pilot and the CEO, but
in the decision, each participant’s relative influence, and may also include less obvious people.
what evaluation criteria each decision participant uses. This Martin Harvey | Getty Images
can be difficult.
The buying centre usually includes some obvious participants who are involved formally in the
buying decision. For example, the decision to buy a corporate jet will probably involve the company’s
CEO, chief pilot, a purchasing agent, some legal staff, a member of top management and others
formally charged with the buying decision. It may also involve less obvious, informal participants,
some of whom may actually make or strongly affect the buying decision. Sometimes, even the people
in the buying centre are not aware of all the buying participants. For example, the decision about
which corporate jet to buy may actually be made by a corporate board member who has an interest in
flying and who knows a lot about aircraft. This board member may work behind the scenes to sway
the decision. Many business buying decisions result from the complex interactions of ever-changing
buying centre participants.
The main influences on business buyers

Business buyers are subject to many influences when they make their buying decisions. Some marketers
assume the main influences are economic. They think buyers will favour the supplier who offers the
lowest price or the best product or the most service. They concentrate on offering strong economic
benefits to buyers. However, business buyers actually respond to both economic and personal factors. Far
from being cold, calculating and impersonal, business buyers are human and social as well. They react to
both reason and emotion.
Today, most B2B marketers recognise that emotion plays an important role in business buying
decisions. For example, you might expect that an advertisement designed to help small businesses
avoid fraud would stress the risks of fraud and the need to be vigilant. But Consumer Affairs Victoria
ads appeal to business owners’ emotions by injecting humour into an otherwise uninteresting issue.
The ‘Stevie’s Scam School’ online campaign introduces small business owners to some of the most
common scams, using ‘Stevie’, a reformed ‘scam artist’. The series of six ‘quirky and entertaining’
videos certainly captured attention, with each one receiving thousands of ‘hits’.38
When suppliers’ offers are very similar, business buyers have little basis for a strictly rational
choice. Because they can meet organisational goals with any supplier, buyers can allow personal factors
to play a larger role in their decisions. However, when competing products differ greatly, business
buyers are more accountable for their choices and tend to pay more attention to economic factors.
Figure 4.8 lists various groups of influences on business buyers – environmental, organisational,
interpersonal and individual.39
9780655702412_CH04.indd 127 3/3/20 10:43 AM

ENVIRONMENTAL
ORGANISATIONAL
Economic developments INTERPERSONAL
INDIVIDUAL
Objectives
Supply conditions Authority
Age
Policies
Technological change Income
Status
Procedures Education BUYERS
Political and regulatory Job position
developments Organisational Empathy
Personality
structure
Competitive developments Risk attitudes
Persuasiveness
Systems
Culture and customs
Figure 4.8 Major influences on business buyer behaviour
Business buyers are heavily influenced by environmental factors, such as economic, technological,
political, competitive, and social and cultural developments. For example, during economic downturns,
business buyers – just like final consumers – tighten their budgets and spending. Like final consumers,
they are looking for greater value in everything they buy. During such times, even more so than normally,
B2B marketers must sharpen their value propositions and help customers find effective and efficient
solutions. ‘Anyone who says the economy is not a challenge is totally in denial,’ says one B2B marketing
expert. Companies ‘need to look at the needs of customers. It’s customer, customer, and customer now.’40
Organisational factors are also important. Each buying organisation has its own objectives, policies,
procedures, structure and systems, and the business marketer must understand these factors well.
Questions such as these arise: How many people are involved in the buying decision? Who are they?
What are their evaluative criteria? What are the company’s policies and limits on its buyers?
The buying centre usually includes many participants who influence each other, so interpersonal factors
also influence the business buying process. However, it is often difficult to assess such interpersonal
factors and group dynamics. Buying centre participants do not wear tags that label them as ‘key decision
maker’ or ‘not influential’. Nor do buying centre participants with the highest rank always have the
most influence. Interpersonal factors are often very subtle. Whenever possible, business marketers
must try to understand these factors and design strategies that take them into account.
Finally, each participant in the business buying decision process brings in personal motives,
perceptions and preferences. These individual factors are affected by personal characteristics, such as
age, income, education, professional identification, personality and attitudes towards risk. Also, buyers
have different buying styles. Some may be technical types who make in-depth analyses of competitive
proposals before choosing a supplier. Other buyers may be intuitive negotiators who are adept at
pitting the sellers against one another for the best deal.
The business buying process

Figure 4.9 lists the eight stages of the business buying process.41 Buyers who face a new-task buying situation
usually go through all stages of the buying process. Buyers making modified or straight rebuys may skip
some of the stages. When examining business buying behaviour, it becomes clear that the buying situation
has a greater impact than the type of product/service being purchased.
9780655702412_CH04.indd 128 3/3/20 10:43 AM

Problem General need Product Supplier

recognition description specification search
Proposal Supplier Order-routine Performance

solicitation selection specification review
Figure 4.9 Stages of the business buying process
We now examine these eight stages for the typical new-task buying situation.
The buying process begins with problem recognition – when someone in the company recognises a
problem or need that can be met by acquiring a specific product or service. Problem recognition can
result from internal or external factors. Business marketers use their salesforces or advertising to alert
customers to potential problems and then show how their products provide solutions. For example,
a Sharp ad notes that a multifunction printer (MFP) can present data security problems and asks,
‘Is your MFP a portal for identity theft?’ The solution? Sharp’s data security kits ‘help prevent sensitive
information from falling into the wrong hands’.
Having recognised a need, the buyer next prepares a general need description that describes the product or
characteristics and quantity of the needed items or solutions. For standard purchases, this process service value
presents few problems. For complex items, however, the buyer may need to work with others – analysis
Carefully analysing a
engineers, users, consultants – to define what is needed. The team may want to rank the importance product’s or service’s
of reliability, durability, price and other attributes desired in the item. In this phase, the alert components to
business marketer can help the buyers define their needs and provide information about the value determine if they can be
of different product characteristics. redesigned and made
more effectively and
Once the buying organisation has defined the need, it develops the item’s technical product efficiently to provide
specifications, often with the help of a value analysis engineering team. Product or service value greater value.
analysis is an approach to cost reduction in which the company
carefully analyses a product’s or service’s components to
determine if they can be redesigned and made more effectively
and efficiently to provide greater value. The team decides on
the best product or service characteristics and specifies them
accordingly. Sellers, too, can use value analysis as a tool to help
secure new accounts and retain existing accounts. Especially in
a weak economy, improving customer value and helping
customers find more cost-effective solutions gives the business
marketer an important edge both in keeping current customers
loyal and in winning new business. By showing buyers a better
way to make an object, outside sellers can turn straight rebuy
situations into new-task situations that give them a chance to
Problem recognition: Business marketers of office products,
obtain new business.
such as Sharp or HP, use their salesforce or advertising to
In the next buying process step, the buyer conducts a supplier alert customers to potential data security problems with their
search to find the best vendors. The buyer can locate qualified multifunction printers and then show how their products
suppliers through trade directories, computer searches or provide solutions.
© Mayuree Moonhirun/Shutterstock.com
recommendations from others. Today, more and more companies
9780655702412_CH04.indd 129 3/3/20 10:43 AM

are turning to the internet to find suppliers. For marketers, this has levelled the playing field – the
internet gives smaller suppliers many of the same advantages as larger competitors. The newer the
buying task and the more complex and costly the item, the greater the amount of time the buyer will
spend searching for suppliers. The supplier’s task is to get listed in major directories and build a good
reputation in the marketplace. Salespeople should watch for companies in the process of searching
for suppliers and make certain their firm is considered.
In the proposal solicitation stage of the business buying process, the buyer invites qualified suppliers
to submit proposals. When the purchase is complex or expensive, the buyer will usually require detailed
written proposals or formal presentations from each potential supplier. In response, business marketers
must be skilled in researching, writing and presenting proposals. The proposals should be marketing
documents, not just technical documents. They should spell out how the seller’s solution creates greater
value for the customer compared to competing solutions.
The buyer next reviews the proposals and selects a supplier or suppliers. During supplier selection,
the buyer will consider many supplier attributes and their relative importance. Such attributes
include product and service quality, reputation, on-time delivery, ethical corporate behaviour, honest
communication and competitive prices. The members of the buying centre will rate suppliers against
these attributes and identify the best suppliers.
In the end, the buyer may select a single supplier or a few suppliers. Advantages of a single
supplier may be that special relationships can be formed that allow for better prices and terms, as
the buyer and supplier are mutually reliant on each other. However, advantages of having more than
one supplier include that buyers can avoid being totally dependent on one supplier, and to allow
comparisons of prices and performance of several suppliers over time. Today’s supplier development
managers often want to develop a full network of supplier–partners that can help the company bring
more value to its customers.
The buyer now prepares an order-routine specification. It includes the final order with the chosen
supplier or suppliers and lists items such as technical specifications, quantity needed, expected time
of delivery, return policies and warranties. In the case of maintenance, repair and operating items,
buyers may use blanket contracts rather than periodic purchase orders. A blanket contract creates
a long-term relationship in which the supplier promises to resupply the buyer as needed at agreed
prices for a set time period.
Many large buyers have a vendor-managed inventory, in which they turn over ordering and inventory
responsibilities to their suppliers. Under such systems, buyers share sales and inventory information
directly with key suppliers. The suppliers then monitor inventories and replenish stock automatically
as needed. For example, most major suppliers to large retailers, such as Big W and Target, assume
vendor-managed inventory responsibilities.
The final stage of the business buying process is the supplier performance review, in which
the buyer assesses the supplier’s performance and provides feedback. For example, Coles has
issued a set of supplier guidelines and policies and regularly evaluates each supplier in terms of
quality, delivery and other performance variables. Recognising the importance of relationship
development, Coles also asks suppliers to provide feedback on them as a customer.42 The
performance review may lead the buyer to continue, modify or drop the arrangement. The seller’s
job is to monitor the same factors used by the buyer to make sure that the seller is giving the
expected satisfaction.
The eight-stage buying-process model provides a simple view of business buying as it might occur
in a new-task buying situation. The actual process is usually much more complex. In the modified rebuy
or straight rebuy situation, some of these stages would be compressed or bypassed. Each organisation
buys in its own way, and each buying situation has unique requirements.
9780655702412_CH04.indd 130 3/3/20 10:43 AM

Different buying centre participants may be involved at different stages of the process. Although
certain buying-process steps usually do occur, buyers do not always follow them in the same order, and
they may add other steps. Often, buyers will repeat certain stages of the process. Finally, a customer
relationship might involve many different types of purchases ongoing at a given time, all in different
stages of the buying process. The seller must manage the total customer relationship, not just individual
purchases.
E-procurement: Buying on the

internet
Advances in information technology have changed the face of the B2B marketing process. Electronic
purchasing, often called e-procurement, has grown rapidly in recent years. Virtually unknown e-procurement
less than a decade ago, online purchasing is standard procedure for most companies today. Purchasing through
electronic connections
E-procurement gives buyers access to new suppliers, lowers purchasing costs, and hastens order between buyers and
processing and delivery. In turn, business marketers can connect with customers online to share sellers – usually online.
marketing information, sell products and services, provide customer support services and maintain
ongoing customer relationships.
Companies can do e-procurement in any of several ways. They can conduct reverse auctions, in
which they put their purchasing requests online and invite suppliers to bid for the business. Or they
can engage in online trading exchanges, through which companies work collectively to facilitate the
trading process. There are a number of public exchanges (such as Community Exchange System
Australia) but these are giving way to private trading exchanges, such as Exostar. Exostar connects
buyers and sellers in the aerospace and defence industry. Its goal is to improve trading efficiency and
reduce costs among industry trading partners. Initially a collaboration among five leading aerospace
and defence companies – Boeing, Lockheed Martin, Raytheon, BAE Systems and Rolls-Royce –
Exostar has now connected more than 100 000 businesses in 150 countries around the world.43
Companies also can conduct e-procurement by setting up their own company buying sites.
For example, the Water Corporation operates a company trading site on which it posts its buying needs
and invites bids, negotiates terms and places orders. Or companies can create extranet links with key
suppliers or partners. For instance, Gloria Jean’s Coffees uses an extranet to manage relationships with
its franchisees.44
B2B e-procurement yields many benefits. First, it shaves transaction costs and results
in more efficient purchasing for both buyers and suppliers. E-procurement reduces the time
between order and delivery. And a web-powered purchasing program eliminates the paperwork
associated with traditional requisition and ordering procedures and helps an organisation keep
better track of all purchases. Finally, beyond the cost and time savings, e-procurement frees
purchasing people from a lot of drudgery and paperwork. In turn, this enables them to focus on
more strategic issues, such as finding better supply sources and working with suppliers to reduce
costs and develop new products. B2B marketers can help customers who wish to purchase online
by creating well-designed, easy-to-use websites.
The rapidly expanding use of e-procurement, however, also presents some problems. For example,
at the same time that the web makes it possible for suppliers and customers to share business data and
even collaborate on product design, it can also erode decades-old customer–supplier relationships.
Many buyers now use the power of the web to pit suppliers against one another and to search out
better deals, products and turnaround times on a purchase-by-purchase basis.
E-procurement can also create potential security disasters. Although email and home-banking
transactions can be protected through basic encryption, the secure environment that businesses
9780655702412_CH04.indd 131 3/3/20 10:43 AM

need in order to carry out confidential interactions is sometimes still lacking. Companies are
spending millions for research on defensive strategies to keep hackers at bay. Cisco Systems, for
example, specifies the types of routers, firewalls and security procedures that its partners must
use to safeguard extranet connections. In fact, the company goes even further – it sends its own
security engineers to examine a partner’s defences and holds the partner liable for any security
breach that originates from its computers.
Business-to-business digital and social

media marketing
In response to customers’ rapid shift towards online buying, today’s B2B marketers are now using a wide
range of digital and social media marketing approaches – from websites, blogs, mobile apps, e-newsletters
and proprietary online networks to mainstream social media, such as Facebook, LinkedIn, YouTube,
Google+ and Twitter – to engage customers and manage customer relationships anywhere, any time.
The use of digital and social media channels in business marketing is not just growing, it is exploding.
Digital and social media marketing have rapidly become the new space for engaging business customers.
Compared with traditional media and sales approaches, digital and social media can create greater
customer engagement and interaction. B2B marketers know they are not really targeting businesses
– rather, they are targeting individuals in those businesses who affect buying decisions. And today’s
business buyers are always connected via their digital devices – whether they are PCs, tablets or
smartphones. Digital and social media play an important role in engaging these always-connected
business buyers in a way that personal selling alone cannot. Instead of the old model of sales reps
calling on business customers at work or maybe meeting up with them at trade shows, the new digital
approaches facilitate anytime, anywhere connections among a wide range of people in the selling
and customer organisations, giving both sellers and buyers more control of and access to important
information. B2B marketing has always been social network marketing, but today’s digital environment
offers an exciting array of new networking tools and applications.
9780655702412_CH04.indd 132 3/3/20 10:43 AM

Student Learning Objective 3. Describe the adoption and

diffusion process for new products.
Learning The product adoption process is made up of five stages: awareness, interest,
Centre evaluation, trial and adoption. New-product marketers must think about how to
help consumers move through these stages. With regard to the diffusion process
for new products, consumers respond at different rates, depending on consumer
and product characteristics. Consumers may be innovators, early adopters, early
Reviewing the learning objectives majority, late majority or laggards. Each group may require different marketing
In this chapter, we have looked closely at consumer and business buyer behaviour.
approaches. Marketers often try to bring their new products to the attention of
The Australian and New Zealand consumer market consists of nearly 28 million
potential early adopters, especially those who are opinion leaders.
people who consume over $1 trillion worth of goods and services each year. The
business market involves even more dollars and items than the consumer market. Learning Objective 4. Define the business market
Understanding buyer behaviour is one of the biggest challenges marketers face. and identify the main factors that influence business
buyer behaviour.
Learning Objective 1. Identify the consumer market
and the main factors that influence consumer buyer The business market comprises all organisations that buy goods and services
for use in the production of other products and services or for the purpose of
behaviour.
reselling or renting them to others at a profit. As compared to consumer markets,
The consumer market consists of all the individuals and households who buy
business markets usually have fewer, larger buyers who are more geographically
or acquire goods and services for personal consumption. A simple model of
concentrated. Business demand is derived demand, and the business buying
consumer behaviour suggests that marketing stimuli and other major forces enter
decision usually involves more, and more professional, buyers.
the consumer’s ‘black box’. This black box has two parts: buyer characteristics
Business buyers make decisions that vary with the three types of buying situations:
and the buyer’s decision process. Once in the black box, the inputs result in buyer
straight rebuys, modified rebuys and new tasks. The decision-making unit of a buying
responses, such as buying attitudes and preferences and purchase behaviour.
organisation – the buying centre – can consist of many different persons playing
Consumer buyer behaviour is influenced by four key sets of buyer
many different roles. The business marketer needs to know the following: Who are
characteristics: cultural, social, personal and psychological. Marketers who
the main buying centre participants? In what decisions do they exercise influence,
understand these factors can identify interested buyers and shape products and
and to what degree? What evaluation criteria does each decision participant use?
appeals to serve consumer needs better. Culture is the most basic determinant of a
The business marketer also needs to understand the main environmental,
person’s wants and behaviour. People in different cultural and social class groups
organisational, interpersonal and individual influences on the buying process.
have different product and brand preferences. Social factors – such as small
group, social network and family influences – strongly affect product and brand Learning Objective 5. List and define the steps in
choices, as do personal characteristics, such as age, life-cycle stage, occupation, the business buying decision process.
economic circumstances, lifestyle, personality and self-concept. Finally, consumer
The business buying decision process itself can be quite involved, with eight basic
buying behaviour is influenced by four main sets of psychological factors –
stages: problem recognition, general need description, product specification,
motivation, perception, learning, and beliefs and attitudes. Each of these factors
supplier search, proposal solicitation, supplier selection, order-routine specification
provides a different perspective for understanding the workings of the buyer’s
and performance review. Buyers who face a new-task buying situation usually
black box.
go through all stages of the buying process. Buyers making modified or straight
Learning Objective 2. Identify and discuss the stages rebuys may skip some of the stages. Companies must manage the overall customer
relationship, which often includes many different buying decisions in various stages
in the buyer decision process.
of the buying decision process. Recent advances in information technology have
When making a purchase, the buyer goes through a decision process consisting
given birth to ‘e-procurement’, by which business buyers are purchasing all kinds
of need recognition, information search, evaluation of alternatives, purchase
of products and services online. Business marketers are increasingly connecting
decision and post-purchase behaviour. During need recognition, the consumer
with customers online to share marketing information, sell products and services,
recognises a problem or need that could be satisfied by a product or service.
provide customer support services and maintain ongoing customer relationships.
Once the need is recognised, the consumer moves into the information search
stage. With information in hand, the consumer proceeds to alternative evaluation
and assesses brands in the choice set. From there, the consumer makes a Discussion questions
purchase decision and actually buys the product. In the final stage of the buyer ❶ Nature or nurture? Does it matter to marketing scientists and/or marketing
decision process, post-purchase behaviour, the consumer takes action based on practitioners that there is no firm resolution concerning the degree to
satisfaction or dissatisfaction. The marketer’s job is to understand the buyer’s which human behaviour is determined by internal characteristics, such as
behaviour at each stage and the influences that are operating. our physiological and psychological makeup, or whether it is determined
through learned cultural and social responses? Explain your answer. (Learning
Objective 1) (AACSB: Reflective Thinking)
9780655702412_CH04.indd 133 3/3/20 10:43 AM

❷ Consumer purchasing behaviour – so many influences. Figure 4.2 graphically

the small business need to do to join an online procurement system?
depicts the many influences on consumer purchasing behaviour. Are some
(Learning Objective 5) (AACSB: Reflective Thinking)
influences more important than others? Might marketing management
❼ Vertical integration, outsourcing and the business buying process. Many
focus on the wrong influences at times? Justify your answer. For example,
companies that were formerly vertically integrated, producing their own
the early marketers of instant cake mixes could not see that the users had
raw materials or parts, are now using outside suppliers to produce them
been left with nothing to do, and may have felt guilty about using such a
instead (outsourcing). Are there any longer-term dangers in outsourcing?
convenient product rather than devoting the time and energy to family care
What if the company outsources to the same company that produces for its
that society of the day saw as necessary. Psychological influences were far
closest competitor? What are your thoughts on how outsourcing and vertical
stronger than the influence of marketers until they enabled the consumer to
integration change the business buying process? What implications do you
‘add an egg’. (Learning Objective 1) (AACSB: Reflective Thinking)
foresee for marketers? (Learning Objective 5) (AACSB: Reflective Thinking)
❸ Are there consumer motives that cannot be expressed, because the
consumer cannot admit to them? When consumers buy an oral hygiene
product because it removes bad breath, it may be a precautionary measure Critical thinking exercises
or it may be because they have been told by their dentist that they have ❶ Two households are situated on opposite sides of the same street in your city
halitosis due to gum disease. However, there are products that consumers or town. One male head of household is a self-employed truck driver, while
buy where they cannot admit the real reason, even to themselves. Might this the other is a Malaysian-born university lecturer. Each household comprises
be the case where an older male buys a bright red sports car? Explain your two adults and two children in their early teens. The truck driver’s wife is
answer. Suggest other purchases where there might also be hidden motives. not in paid work, whereas the lecturer’s wife works as a laboratory assistant
(Learning Objective 2) (AACSB: Reflective Thinking) in a local hospital. The gross income before tax for each household is
❹ It is great to be the company that is ahead of the game, bringing new goods $175 000 per annum. Work in groups to develop a presentation showing
and services to market and profoundly changing the way that an industry the likely lifestyle for each household. Describe how this impacts on the
works – but is it a winning strategy? When Apple launched the iPod and buying behaviour of each household member. (Learning Objective 1)
iTunes, it changed the shape of the music industry forever. A few years later, it (AACSB: Communication; Teamwork)
brought the iPhone and iPad to the market, changing telephony forever and ❷ The buying decision process for consumer and business buyers has many
creating a whole new category of electronic devices – the tablet. However, similar elements, but there are also differences between the processes for
in recent years, Apple has struggled in the face of intense competition in these two distinctly different types of buyers. Refer to Figures 4.5 (consumer
both the mobile phone and tablet markets. Is there room to be a ‘me-too’ buying process) and 4.9 (business buying process), and use these diagrams
marketer and sell established goods and services to the later adopters? to draw the buying process for (a) a consumer purchasing a new iPad Air,
Or is out in front, selling to innovators and early adopters, the only place to and (b) a large business buyer, such as global miner BHP Billiton, purchasing
be? How can companies make the most of differences in innovativeness in the same iPad Air. How are the buying processes similar and different for
consumers by developing different offerings for each segment? (Learning each type of buyer? (Learning Objectives 2 and 4) (AACSB: Communication;
Objective 3) (AACSB: Reflective Thinking) Application of Knowledge)
❺ The changing role of the buying centre. Using the internet as the basis of ❸ Business buying occurs worldwide, so marketers need to be aware of cultural
procurement means that purchasing agents also become responsible for factors influencing business customers. In a small group, select a country
quality as well as costs. How might this additional responsibility change the and develop a multimedia presentation on proper business etiquette and
role of the purchasing department or buying centre within the company? manners, including appropriate appearance, behaviour and communication.
(Learning Objective 4) (AACSB: Reflective Thinking) Include a map showing the location of the country, as well as a description
❻ Procurement and the small business. How can a small Australian business of its demographics, culture and economic history. (Learning Objective 4)
employing fewer than five employees become a part of the supply chain (AACSB: Communication; Diverse and Multicultural Work Environments;
of global businesses? Can an online procurement system help, or is the Use of IT; Teamwork)
business still too small to be considered part of such a system? What does
9780655702412_CH04.indd 134 3/3/20 10:43 AM

Mini cases
4.1 Consumer behaviour
Friend or foe?
Have you noticed that some of your Facebook friends like certain advertisements? ❶ Which factors are marketers who advertise on Facebook using to
Marketers know what Facebook users like and are using that knowledge to influence consumers? Would you be influenced by an ad if you saw that
influence users’ friends. Social-context ads are based on data collected on the your friends ‘liked’ it? (Learning Objective 1) (AACSB: Communication;
‘likes’ and friends of Facebook users. When you click on an ad indicating you Use of IT; Reflective Thinking)
like it, you are also giving Facebook permission to share that ‘like’ with all of ❷ How would you feel about Facebook using your name in these types
your friends. Marketers like this feature because it appears as though you are of ads, or advertising integrating itself into conversations with your
endorsing the brand to your friends. The more you click on the ‘Like’ button in friends? (Learning Objective 1) (AACSB: Communication; Reflective
ads, the greater the chance they will migrate on to your wall and become part Thinking)
of your conversations rather than stay on the perimeter of the page.
4.2 Business buyer behaviour

Genuine spare parts – or are they?
Manufacturers of heavy earth-moving equipment, cranes and engines that performance’. Assume that the genuine company-branded parts are
power heavy transport vehicles are business marketers who attempt to made for them by the same firm that makes non-genuine parts. Is this
persuade their customers to buy genuine spare parts. As in many other business an ethical issue? Explain your reasoning. (Learning Objectives 4 and 5)
situations, customers often find that non-genuine spare parts are cheaper than (AACSB: Communication; Reflective Thinking)
the genuine parts. However, the original manufacturer (sometimes called ❷ In the situation above, there is clearly no material difference between
the original equipment manufacturer, or OEM) may attempt to convince the genuine or non-genuine parts. What major influences on business
marketplace that genuine parts will not harm their product, while by implication buyer behaviour might sway a buyer’s decision towards genuine or
non-genuine brands may well cause harm. In many cases, the genuine parts are non-genuine parts? (Learning Objective 5) (AACSB: Communication;
actually made by the same supplier as the non-genuine brands. Application of Knowledge)
❶ Consider the situation where the OEM claims that its genuine parts
and lubricants will ‘protect your investment’ by offering ‘superior

Where are the customers?
Understanding the buying process of customers is crucial for any business, and Café and Café Bean – whose owners are worried about their ability to stay in
nowhere more so than in the highly competitive food and hospitality industry. business given the small number of customers who walk through their doors
Cafés typically have very tight operating margins, so even a few more customers each day. As the shopping centre owner, you really want both businesses to
each day can mean the difference between a thriving business and a failing be successful, so you do some research to help the owners understand their
one. Suppose that, in a local shopping centre, there are two cafés – HuggaMug businesses better. Your research revealed the following information:
HuggaMug Café (%) Café Bean (%)

Awareness: Percentage of visitors to the shopping centre who mentioned the name of the
67 52
café (unprompted recall)
Awareness: Percentage of visitors to the shopping centre who correctly identified the loca-
53 86
tion of the café (prompted recall)
Perceived quality: For those visitors to the shopping centre who were aware of the café, the
88 74
percentage agreeing or agreeing strongly that ‘the café sells good food/coffee’
Perceived value: For those visitors to the shopping centre who were aware of the café, the
72 71
percentage agreeing or agreeing strongly that ‘the café is good value’
Satisfaction: Percentage of the café customers who are very likely to visit the café the next
92 78
time they visit the shopping centre
Satisfaction: Percentage of the café customers who have recommended the café to others 68 52
9780655702412_CH04.indd 135 3/3/20 10:43 AM

4.3 Marketing analytics at work continued

❶ Review the information provided in the table above, then describe ❷ Based on the information provided, what advice would you give
the problems that each business is facing in terms of the steps in the the owner of each café to assist them to improve their profitability?
buying process. (Learning Objective 2) (AACSB: Analytical Thinking) (Learning Objective 2) (AACSB: Application of Knowledge)

Old technology for developing markets
The world is changing so fast, new products are old even before they are discounted rate. But is that fair? Surely, consumers in those developing
out of their box. And no product becomes dated more quickly than the markets would also benefit from the newer technology. It might be argued
mobile phone. With new releases coming one after another, many brands that this is a form of ‘dumping’. This practice might be acceptable when
have different-generation phones on the market at the same time. Take the it is a mobile phone, but what about a pharmaceutical product? Should
iPhone, for example. The iPhone 6s and iPhone 6s Plus were still being the newest technology in medicines only be available to the markets that
sold in most markets when the iPhone 7 and iPhone 7 Plus were released. can afford it? Or is it reasonable for a company to try to recover the costs
Obviously, Apple wants customers to buy its new phone, but it must also of new-product development by selling first to the markets that can most
try to sell its earlier-generation stock. One option for Apple would be to afford high initial prices and then progressively rolling out the product to
ship the ‘older’ phones to developing markets and sell them there at a different markets?
References
1 The combined GDP figures are from Australian Bureau of Statistics, 1350.0 9 Rick Morton, ‘The Australian dream: Soon, fewer than 50 per cent will own home’, The
Australian Economic Indicators, 2012, <www.abs.gov.au/ausstats/abs@.nsf/Products/ Australian, 20 July 2016, <www.theaustralian.com.au/news/nation/the-australian-
C34AA10E6A85E801CA257A2B001788FF?opendocument>; Statistics New Zealand, dream-soon-fewer-than-50-per-cent-will-own-home/news-story/3fe46d2b31ccc858ced
Retail Trade Survey, 2016, <www.stats.govt.nz/browse_for_stats/industry_sectors/ f66d50af8e336>, accessed July 2016.
RetailTrade/RetailTradeSurvey_HOTPMar16qtr/Commentary.aspx#total-value-rise>; 10 For a discussion of influencers, see Clive Thompson, ‘Is the tipping point toast?’,
The World Bank, Household Final Consumption Expenditure, <http://data.worldbank. Fast Company, February 2008, pp. 75–105; Edward Keller & Jonathan Berry, The
org/indicator/NE.CON.PRVT.CD?locations=AU>; and United States Census Bureau, Influentials, Free Press: New York, NY, 2003; Monique Perry, ‘Aussies still place most
<www.census.gov/topics/population.html>. These websites provide continuously trust in earned media’, Nielsen, September 2013, <www.nielsen.com/au/en/news-
updated projections of the Australian, New Zealand and world populations and were insights/insights-hub/2013/trust-in-advertising.html>, accessed July 2016; and Esther
all accessed July 2016. Han, ‘Analysis paralysis: Why shoppers spoilt for choice often regret purchases’, The
2 Don E Schultz, ‘Lines or circles’, Marketing News, 5 November 2007, p. 21; and Age, 14 July 2016, <www.theage.com.au/business/consumer-affairs/analysis-paralysis-
Elizabeth A Sullivan, ‘Pick your brain’, Marketing News, 15 March 2009, pp. 10–13. why-shoppers-spoilt-for-choice-often-regret-purchases-20160713-gq4rak.html>,
3 For more on the cultures of the Indigenous population of Australia, see <www. accessed July 2016.
abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/1301.0~2012~Main%20 11 See The Soup, <www.thesoup.com.au/>, accessed July 2016; and ‘Red Cross Blood
Features~Aboriginal%20and%20Torres%20Strait%20Islander%20Peoples~14>; and Service’, <www.socialsoup.com/case-study/red-cross-blood-service/>, accessed July 2016.
for New Zealand, see Te Ahukaramū Charles Royal, ‘Māori’, Te Ara – The Encyclopedia 12 See, for example, ‘Aussies spoilt for choice in a world of information overload’, <www.
of New Zealand, <www.TeAra.govt.nz/en/maori>, all accessed July 2016. choosi.com.au/blog/aussies-spoilt-for-choice-in-information-overload>, accessed July
4 Excerpts drawn from private correspondence with Professor Michael McDaniel, Dean, 2016.
Indigenous Education, Badanami Centre for Indigenous Education, University of 13 See Britteny Helmrich, ‘10 companies that totally rock customer service on social
Western Sydney, 2007. media’, 15 December 2014, <www.businessnewsdaily.com/7578-social-media-
5 See Ian Chaston, ‘Older consumer opportunities: Small firm response in a selected group customer-service.html>, accessed July 2016; Erica Swallow, ‘How Nike outruns the
of UK service sector markets’, Service Industries Journal, 31(3), 2011, pp. 371–84; social media competition’, 22 September 2011, <http://mashable.com/2011/09/22/
Susi Banks, ‘7.3 million and cashed up – but nobody’s marketing to them’, Marketing nike-social-media/#cxlT7UOW8GqD>, accessed July 2016; Jessica Smith, ‘Social
Magazine, 7 November 2013, <www.marketingmag.com.au/news-c/7-3-million-and- media and digital: Nike doesn’t just do it. They get it’, <www.linkedin.com/
cashed-up-but-nobodys-marketing-to-them/>, accessed July 2016; and Kate O’Loughlin, pulse/20140721193207-42400039-social-digital-nike-doesn-t-just-do-it-they-get-it>,
Nancy Humpel & Hal Kendig, ‘Impact of the global financial crisis on employed Australian accessed July 2016; and ‘Powderfinger harness Twitter power’, Marketing News,
baby boomers: A national survey’, Australasian Journal on Aging, 29(2), pp. 88–91. 9 October 2009.
6 See Dick Stroud & Kim Walker, Marketing to the Ageing Consumer, Palgrave McMillan: 14 ‘Yarra Valley Water posts ad campaign comparing bottled water to air’, news.com.au,
UK, 2013; and ‘Boom time of America’s new retirees feel entitled to relax – and intend 8 November 2013, <www.news.com.au/lifestyle/food/yarra-valley-water-posts-ad-
to spend’, Financial Times, 6 December 2007, p. 9. campaign-comparing-bottled-water-to-air/story-fneuz92c-1226756184811>, accessed
7 See <www.olderdatingonline.com/australia/>, accessed July 2016; and Susi Banks, July 2016; ‘Yarra Valley Dupé stunt: Who knew a utility company could be so funny?’,
‘7.3 million and cashed up – but nobody’s marketing to them’, Marketing Magazine, Marketing Magazine, 28 October 2013; see the YouTube video, <www.youtube.com/
7 November 2013, <www.marketingmag.com.au/news-c/7-3-million-and-cashed-up- watch?v=q3oAv0BjtN4>, and the Facebook page, <www.facebook.com/ChooseTap>,
but-nobodys-marketing-to-them/>, accessed July 2016. accessed July 2016.
8 For more on social class, see ‘Is Australia as egalitarian as we think it is?’, October 15 See Dana McCauley & Frank Chung, ‘#YourTaxis Twitter campaign is the social media
2015, <www.abc.net.au/news/2015-10-28/sheppard-is-australia-as-egalitarian-as-we- fail of the year’, news.com.au, 10 November 2015, <www.news.com.au/finance/
think-it-is/6889602>, accessed July 2016; and ‘Social class systems in Australia & the business/travel/yourtaxis-twitter-campaign-is-the-social-media-fail-of-the-year/news-
UK [MEDIA]’, The McCrindle Blog, 8 April 2013, <http://blog.mccrindle.com.au/the- story/bf9634f6ebad12751150a98981b6de65>, accessed July 2016; Mark Ritson,
mccrindle-blog/social_class_systems_in_australia_the_uk_media>, accessed July 2016. ‘How #YourTaxis got it so very, very wrong’, Sydney Morning Herald, 10 November
9780655702412_CH04.indd 136 3/3/20 10:43 AM

2015, <www.smh.com.au/business/media-and-marketing/how-yourtaxis-got-it-so-very- and Matt Granfield, ‘A (very, very slightly) scientific study of brand recall in the average
very-wrong-20151110-gkvp7i.html>, accessed July 2016; and Simon Canning, ‘Annual consumer’, eCBD Blog, 13 January 2009, <www.e-cbd.com/blog/advertising/brand-
2015: Social media fails’, 1 January 2016, <https://mumbrella.com.au/annual-2015- recall/>, accessed August 2016.
social-media-fails-337178>, accessed July 2016. 29 Stuart Rogers, ‘How a publicity blitz created the myth of subliminal advertising’, Public
16 See Carolyn Cummins, ‘Who knew? Men do like to shop’, Sydney Morning Herald, Relations Quarterly, 37(4), 1992, pp. 12–17.
20 July 2016, <www.smh.com.au/business/property/who-knew-men-do-like-to- 30 Bob Garfield, ‘“Subliminal” seduction and other urban myths’, Advertising Age,
shop-20160719-gq8uee.html>, accessed July 2016; and ‘No longer a lady’s chore! 18 September 2000, pp. 4, 105; and Lewis Smith, ‘Subliminal advertising may work,
51% of grocery shoppers are men – and they spend less during a supermarket trip but only if you’re paying attention’, Times, 9 March 2007. For more on subliminal
than women’, Daily Mail Australia, 14 October 2015, <www.dailymail.co.uk/femail/ advertising, see Alastair Goode, ‘The implicit and explicit role of ad memory in ad
article-2791301/no-longer-lady-s-chore-51-grocery-shoppers-men-spend-supermarket- persuasion: Rethinking the hidden persuaders’, International Journal of Marketing
trip-women.html>, accessed July 2016. Research, 49(2), 2007, pp. 95–116; Cynthia Crossen, ‘For a time in the 50s, a huckster
17 See ‘How much influence do teens wield over their parents’ purchase decisions?’, fanned fears of an ad “hypnosis”’, Wall Street Journal, 5 November 2007, p. B1; and
23 June 2015, <www.marketingcharts.com/traditional/how-much-influence-do-teens- Beth Snyder Bulik, ‘This brand makes you more creative’, Advertising Age, 24 March
wield-over-their-parents-purchase-decisions-56068/>, accessed July 2016; ‘Pester 2008, p. 4.
power and household purchasing decisions’, 1 March 2016, <www.roymorgan.com/ 31 See <www.wholeberryfolk.com.au/>; and Sophie Langley, ‘New “home-style” baking
findings/6698-pester-power-purchasing-decisions-201602292247>, accessed July mixes range launched in Australia’, Australian Food News, 27 November 2013,
2016; see also <www.weetbix.com.au/little-kids>, <www.abc.net.au/abcforkids/>, accessed August 2016.
<www.tvnz.co.nz/kidzone> and <www.netflix.com/kids>, accessed July 2016. 32 Max Knoblauch, ‘Millennials trust user-generated content 50% more than other
18 Information from <www.spearshoes.com>, accessed July 2016. media’, 9 April 2014, <http://mashable.com/2014/04/09/millennials-user-generated-
19 ‘10 years of change – but the outstanding value stays the same’, 16 May 2016, <www. media/#4debOP7Jrgqn>, accessed August 2016.
budgetdirect.com.au/about-us/media-releases/2016/canstar-outstanding-value-10- 33 See Leon Festinger, A Theory of Cognitive Dissonance, Stanford University Press:
years.html>, accessed July 2016; and Alex Hayes, ‘Budget Direct ditches aliens and Stanford, CA, 1957; Cynthia Crossen, ‘“Cognitive dissonance” became a milestone in
jingle in first ad campaign from 303Lowe’, 2 January 2015, <https://mumbrella.com. the 1950s psychology’, Wall Street Journal, 12 December 2006, p. B1; and Anupam
au/budget-direct-dithes-aliens-jingle-first-ad-campaign-303lowe-269501>, accessed Bawa & Purva Kansal, ‘Cognitive dissonance and the marketing of services: Some
July 2016. issues’, Journal of Services Research, October 2008–March 2009, p. 31.
20 See Roy Morgan’s website, <www.roymorgan.com/products/values-segments>, 34 The following discussion draws from the work of Everett M Rogers. See his Diffusion of
accessed July 2016. Innovations, 5th edn, Free Press: New York, NY, 2003.
21 For information, see Driza-Bone, <www.drizabone.com.au/journal/journeys-with- 35 Jane Schulze, ‘Viewers slow on digital uptake’, The Australian, 4 May 2009; ‘Digital
driza-bone/>; and Harley Davidson, <www.harley-davidson.com/content/h-d/en_US/ television in Australian homes 2011’, Australian Communications and Media Authority,
company/inside-hd.html>, both accessed July 2016. 2012, <www.acma.gov.au>, accessed August 2016; ‘Digital television: FAQ’, Australian
22 See Jennifer Aaker, ‘Dimensions of measuring brand personality’, Journal of Marketing Communications and Media Authority, 2016, <www.acma.gov.au>, accessed August
Research, August 1997, pp. 347–56; and Vanitha Swaminathan, Karen M Stilley & 2016; ‘Revealed: ABC voted Australia’s most trustworthy broadcaster. But who came
Rohini Ahluwalla, ‘When brand personality matters: The moderating role of attachment in last?’, B&T Magazine, 2016, <www.bandt.com.au/media/revealed-abc-voted-
styles’, Journal of Consumer Research, April 2009, pp. 985–1002. australias-trustworthy-broadcaster-came-last?>; see also ‘US HDTV penetration nears
23 Jennifer L Aaker, ‘The malleable self: The role of self-expression in persuasion’, Journal of 25%’, NielsenWire, 11 December 2008.
Marketing Research, 36(2), 1999, pp. 45–57. 36 This classic categorisation was first introduced in Patrick J Robinson, Charles W Faris
24 Quotes from ‘Air New Zealand: The airline with a sense of fun’, A Dangerous Business: & Yoram Wind, Industrial Buying Behavior and Creative Marketing, Allyn & Bacon:
One Ordinary Girl . . . Life’s Extraordinary Adventures, 31 October 2012, <www. Boston, MA, 1967. Also see James C Anderson & James A Narus, Business Market
dangerous-business.com/2012/10/air-new-zealand-the-airline-with-a-sense-of-fun/>; Management, 2nd edn, Prentice Hall: Upper Saddle River, NJ, 2004, chapter 3; James
and ‘Anna Farris stars in new Air New Zealand in-flight safety video’, 21 July 2016, C Anderson, James A Narus & Wouter van Rossum, ‘Customer value propositions in
<www.perthnow.com.au/travel/news/anna-faris-stars-in-new-air-new-zealand- business markets’, Harvard Business Review, March 2006, pp. 91–9; and Philip Kotler &
inflight-safety-video/news-story/c00a6d3e2bf2fdda1ba6356c6a1e845a>; all Kevin Lane Keller, Marketing Management, 14th edn, Prentice Hall: Upper Saddle River,
accessed July 2016. NJ, 2012, chapter 7.
25 See, for example, Richard Elliott & Bernard Cova, ‘Interpretive consumer research 37 Example adapted from information found at <www.elders.com.au/>, accessed August
as cultural critique’, Consumption Markets and Culture, 11(2), 2008, pp. 71–2; 2016.
and Bernard Cova & Richard Elliott, ‘Everything you always wanted to know about 38 Example adapted from information found at ‘Consumer scams’, Consumer Affairs
interpretive consumer research but were afraid to ask’, Qualitative Marketing Research: Victoria, 2016, <www.consumer.vic.gov.au/resources-and-education/scams/
An International Journal, 11(2), 2008, pp. 121–9. consumer-scams>; <www.youtube.com/user/consumervic?feature=c4-search>; and
26 See Abraham H Maslow, ‘A theory of human motivation’, Psychological Review, at ‘Melbourne agency Taboo launches Stevie’s Scam School campaign for Consumer
50, 1943, pp. 370–96. Also see A Maslow, Motivation and Personality, 3rd edn, Affairs Victoria’, Campaign Brief, 20 March 2012, <www.campaignbrief.com/2012/03/
HarperCollins Publishers: New York, 1987; and Barbara Marx Hubbard, ‘Seeking our version10-starthtml0000000149-194.html>; all accessed August 2016.
future potentials’, Futurist, May 1998, pp. 29–32. 39 See Frederick E Webster, Jr & Yoram Wind, Organizational Buying Behavior,
27 Ellen Moore, ‘Letter to my colleagues: We can do better’, Adweek, 22 December 2010, Prentice-Hall: Englewood Cliffs, NJ, 1972, pp. 33–7.
<www.adweek.com/news/advertising-branding/letter-my-colleagues-we-can-do- 40 Henry Canaday, ‘What recession?’, Selling Power, January–February 2009, pp. 44–9,
better-104084>; and Kelsey Libert & Kristin Tynski, ‘Research: The emotions the make <www.sellingpower.com/content/article/index.php?a=2/what-recession&page=1>,
marketing campaigns go viral’, Harvard Business Review, 24 October 2013, <https:// accessed August 2016.
hbr.org/2013/10/research-the-emotions-that-make-marketing-campaigns-go-viral>; 41 Patrick Robinson, Charles Faris & Yoram Wind, Industrial Buying and Creative Marketing,
both accessed August 2016. Allyn & Bacon: Boston, MA, 1967.
28 See Louise Story, ‘Anywhere the eye can see, it’s now likely to see an ad’, New York 42 See <www.supplierportal.coles.com.au/>, accessed August 2016.
Times, 15 January 2007; Louise Story, ‘Ads everywhere – and it’s going to get worse’, 43 See <www.communityexchange.net.au/> and <www.exostar.com/>, accessed
Sydney Morning Herald, 16 January 2007; Matthew Creamer, ‘Caught in the clutter August 2016.
crossfire: Your brand’, Advertising Age, 1 April 2007, p. 35; Ruth Mortimer, ‘Consumer 44 See <www.watercorporation.com.au/home/suppliers/procurement> and <www.
awareness: Getting the right attention’, Brand Strategy, 10 December 2008, p. 55; gloriajeanscoffees.com.au/Support/FranchisePartners.aspx>, accessed August 2016.
9780655702412_CH04.indd 137 3/3/20 10:43 AM

9780655702412_CH04.indd 138 3/3/20 10:43 AM

SESSION Marketing
3
analytics
• Marketing analytics: Gaining customer insights
9780655702412_CH05.indd 139 3/3/20 10:44 AM

Chapter
5 Marketing analytics: Gaining

customer insights
In this chapter, we continue our exploration of how marketers gain insights into consumers and the
marketplace. We look at how companies develop and manage information about important marketplace
elements: customers, competitors, products and marketing programs. To succeed in today’s marketplace,
companies must know how to turn mountains of marketing information into fresh customer insights that
will help them deliver greater value to customers.
As we will see from the discussion in this chapter, good products and marketing programs begin with
good customer information. Companies also need an abundance of information on competitors, resellers,
and other actors and forces in the marketplace. But more than just gathering information, marketers must
use the information to gain powerful customer and market insights.
Learning Objective 1 Explain the importance of information in gaining insights about the
marketplace and customers.
Learning Marketing information and customer insights pp. 142–6
Objectives Learning Objective 2 Define the marketing information system and discuss its parts.
Assessing marketing information needs pp. 146–7
Developing marketing information pp. 147–9
Learning Objective 3 Outline the steps in the marketing research process.
Marketing research pp. 149–63
Learning Objective 4 Explain how companies use customer databases in direct
and digital marketing.
Customer database use in direct and digital marketing pp. 163–7
Learning Objective 5 Explain how companies analyse and use marketing information.
Analysing and using marketing information pp. 167–9
9780655702412_CH05.indd 140 3/3/20 10:44 AM

Chapter 5 Marketing analytics: Gaining customer insights 141
LO 1 Marketing insights provide

valuable information for
Explain the importance marketing decisions
of information in
gaining insights about
the marketplace
and customers.
MARKETING INFORMATION SYSTEM
Developing needed information
LO 2 Assessing Analysing
Define the marketing Internal Marketing Marketing
information and using
information system needs databases intelligence research information
and discuss its parts.
THE MARKETING RESEARCH PROCESS

LO 3
Outline the steps in Defining the Implementing the Developing the Interpreting and
the marketing problem and research plan: research plan reporting
research process. research collecting and for collecting the findings
objectives analysing the data information
LO 4 Marketing insights must

be used to make better
Explain how companies marketing decisions to
use customer databases realise the value of
in direct anddigital information
marketing.
SPECIAL ISSUES
LO 5 Considering public
Explain how companies Understanding the
Matching the research policy, privacy
analyse and use global context when
plan to available legislation and codes of
planning and conducting
marketing information. resources conduct when
research
conducting research
9780655702412_CH05.indd 141 3/3/20 10:44 AM

142 Session 3 Marketing analytics
Marketing information and customer

insights
To create value for customers and build meaningful relationships with them, marketers must first gain
fresh, deep insights into what customers need and want. Such customer insights come from good marketing
information. Companies use these customer insights to develop a competitive advantage.
For example, when it began in 2010, social media site Pinterest needed to differentiate itself from the
dozens, even hundreds, of existing social networking options.
Pinterest’s research uncovered a key customer insight: Many people want more than just
Twitter- or Facebook-like places to swap messages and pictures. They want a way to collect,
organise, and share things on the Internet related to their interests and passions. So Pinterest
created a social scrapbooking site, where people can create and share digital pinboards – theme-
based image collections on things that inspire them. ‘Pinterest is your own little Internet of only
the things you love,’ says the company.
Thanks to this unique customer insight, Pinterest has been wildly popular. Today, more than
70 million Pinterest users collectively pin more than 5 million articles a day and view more than
2.5 billion Pinterest pages a month. In turn, more than a half-million businesses use Pinterest to
engage and inspire their customer communities.1
Although customer and market insights are important for building customer value and
engagement, these insights can be very difficult to obtain. Customer needs and buying motives are
often anything but obvious – consumers themselves usually cannot tell you exactly what they need
and why they buy. To gain good customer insights, marketers must effectively manage marketing
information from a wide range of sources.
Marketing information and today’s ‘big data’

Key customer insights With the recent explosion of information technologies, companies can now generate and
have helped make social
scrapbooking site Pinterest find marketing information in great quantities. The marketing world is filled to the brim with
wildly successful with its information from innumerable sources. Consumers themselves are now generating vast amounts
70 million users. In turn, more of marketing information. Through their smartphones, microcomputers and tablets, via online
than a half-million brands use
browsing and blogging, apps and social media interactions, texting and video, and geolocation data,
Pinterest to engage and inspire
their customer communities. consumers volunteer a tidal wave of bottom-up information to companies and to each other.
Pinterest Far from lacking information, most marketing managers are overloaded with data and often feel
overwhelmed by it. This problem is summed up in the concept of big data. The term big data
refers to the huge and complex data sets generated by today’s sophisticated information generation,
big data
collection, storage and analysis technologies. Every year, the people and systems of the world generate
The huge and complex
data sets generated by about a trillion gigabytes of information. That is enough data to fill 2.47 trillion good old CD-ROMs, a
today’s sophisticated stack tall enough to go to the moon and back four times. A full 90 per cent of all the data in the world has
information generation, been created in just the past two years.2
collection, storage and
analysis technologies. Big data presents marketers with both big opportunities and big challenges. Companies that tap
this glut of big data effectively can gain rich, timely customer insights. However, accessing and sifting
through so much data is a daunting task. For example, when a large consumer brand, such as Coca-Cola
or Apple, monitors online discussions about its brand in tweets, blogs, social media posts and other
sources, its servers might take in a stunning 6 million public conversations a day, more than 2 billion
a year. That is far more information than any manager can digest. Thus, marketers do not need more
information; they need better information. And they need to make better use of the information they
already have.
9780655702412_CH05.indd 142 3/3/20 10:44 AM

Marketing analytics
Today’s big data can yield big results. But simply collecting and storing huge amounts of data has little value.
Marketers must sift through the mountains of data to mine the gems – the bits that yield customer insights.
As one marketing executive puts it, ‘It’s actually [about getting] big insights from big data. It’s throwing away
99.999 percent of that data to find things that are actionable.’ Says another data expert, ‘right data trumps
big data’.3 That’s the job of marketing analytics.
Marketing analytics involves tools and technologies used in making sound marketing decisions that marketing
lead to effective outcomes and return on marketing investment. This process requires data collection and analytics
Involves tools and
analysis from all channels in the physical and digital arenas, including big data, over a time span.4 Marketers
technologies used in
apply marketing analytics to the large and complex sets of data they collect from their own databases, making sound marketing
marketing research, and web, mobile and social media tracking; customer transactions and engagements; decisions that lead to
and other data sources. For example, Netflix maintains a bulging customer database and uses sophisticated effective outcomes and
return on marketing
marketing analytics to gain insights, which it then uses to fuel recommendations to subscribers, to decide
investment. This process
what programming to offer and even to develop its own exclusive content in the quest to serve its customers requires data collection
better (see Marketing in Action 5.1). and analysis from all
Another good example of marketing analytics, and why it matters, comes from food products giant channels in the physical
and digital arenas,
Kraft, whose classic brands – from Vegemite to Philadelphia Cream Cheese and Planters nuts – are found including big data, over a
in most Australian and New Zealand homes: time span.
Kraft has a treasure trove of marketing data, gathered from years of interactions with customers
customer insights
and from its social media monitoring hub called Looking Glass. Looking Glass tracks consumer Fresh understandings
trends, competitor activities, and more than 100,000 brand-related conversations daily in social of customers and the
media and on blogs. Kraft also reaps data from customer interactions with its Kraft Food & Family marketplace derived
from marketing
magazine, email communications, and the more than 100 Web and social media sites that serve information that
its large brand portfolio. In all, Kraft has 18 years’ worth of customer data across 22,000 different become the basis for
attributes.5 creating customer value
and relationships.
Managing marketing
information
The real value of marketing research and
marketing information lies in how they are used
– in the customer insights they provide.
Based on such thinking, many companies are
now restructuring their marketing research and
information functions. They are creating customer
insights teams, headed by a customer insights
manager and composed of representatives from
all of the firm’s functional areas. For example,
Coca-Cola’s US marketing research group is
headed by a vice president of marketing strategy
and insights. And, at Unilever, marketing
research is done by the Consumer and Market
Insight division, which helps brand teams harness
information and turn it into customer insights. Competitive marketing intelligence: MasterCard’s digital intelligence command
Customer insights groups collect customer centre – called the Conversation Suite – monitors, analyses and responds in
and market information from a wide variety of real-time to millions of brand-related conversations across 56 markets and
27 languages around the world.
sources – ranging from traditional marketing
MasterCard
research studies, to mingling with and observing
9780655702412_CH05.indd 143 3/3/20 10:44 AM

Marketing
in Action Netflix streams success with big data and marketing analytics
5.1
Australians and New Zealanders now watch more movies and television programs Netflix supplements this already-massive database with consumer information
streamed online than they watch on DVDs and Blu-ray discs. And with its rotating purchased from Nielsen, Facebook, Twitter and other sources. Finally, the
library of more than 60 000 titles in its US database, Netflix streams more movie company employs experts to classify each video on hundreds of characteristics,
and program content by far than any other video service. Netflix’s 62 million paid such as talent, action, tone, genre, colour, volume, scenery and many, many
subscribers watch more than 3.3 billion hours of movies and television programs others. Using this rich base of big data, Netflix builds detailed subscriber profiles
every month. During peak hours on any given day, a remarkable one-third of all based on individual viewing habits and preferences. It then uses these profiles to
downloads on the non-mobile internet are devoted to streamed programming personalise each customer’s viewing experience. According to Netflix, there are
from Netflix. 53 million different versions of Netflix, one for each individual subscriber worldwide.
All of this comes as little surprise to avid Netflixers. But members might be For example, Netflix uses data on viewing history to make personalised
startled to learn that while they are busy watching Netflix videos, Netflix is busy recommendations. Wading through 60 000 titles to decide what to watch can be
watching them – watching them very, very closely. Netflix tracks and analyses overwhelming. So when new customers sign up, Netflix asks them to rate their
a great deal of customer data in excruciating detail. Then it uses the big data interest in movie and television genres and to rate specific titles they have already
insights to give customers exactly what they want. Netflix knows in depth what seen. It then cross-references what people like with other similar titles to predict
its audience wants to watch, and it uses this knowledge to fuel recommendations additional movies or programs customers will enjoy.
to subscribers, to decide what programming to offer and even to develop its own But that is just the beginning. As customers watch and rate more and more
exclusive content. video content, and as Netflix studies the details of their viewing behaviour,
Few companies know their customers better than Netflix. The company the predictions become more and more accurate. Netflix often comes to know
has mind-boggling access to real-time data on member viewing behaviour and individual customer viewing preferences better than customers themselves do.
sentiments. Every day, Netflix tracks and parses member data on tens of millions How accurate are Netflix’s recommendations? Seventy-five per cent of viewing
of searches, ratings and ‘plays’. Netflix’s bulging database contains every viewing activity results from these suggestions. That is important. The more subscribers
detail for each individual subscriber – what shows they watch, at what time of watch, the more likely they are to stay with Netflix – viewers who watch at
day, on what devices, at what locations and even when they hit the pause, rewind least 15 hours of content each month are 75 per cent less likely to cancel their
or fast-forward buttons during programs. membership. Accurate recommendations increase average viewing time, keeping
subscribers in the fold.
Increased viewing also depends on offering the right content in the first
place. But adding new programming is expensive – content licensing fees
constitute the lion’s share of Netflix’s cost of goods sold. With so many new
and existing movies and television programs on the market, Netflix must be
very selective in what it adds to its content inventory. Once again, it is big data
and marketing analytics to the rescue. Just as Netflix analyses its database to
come up with subscriber recommendations, it uses the data to assess what
additional titles customers might enjoy and how much each is worth. The goal
is to maximise subscriber ‘happiness-per-dollar-spent’ on new titles. ‘We always
use our in-depth knowledge about what our members love to watch to decide
what’s available on Netflix,’ says a Netflix marketer. ‘If you keep watching, we’ll
keep adding more of what you love.’
To get even more viewers watching even more hours, Netflix uses its extensive
Marketing analytics and big data: While subscribers are busy big data insights to add its own exclusive video content – things you can see only
watching Netflix videos, Netflix is busy watching them. Then it on Netflix. In its own words, Netflix wants ‘to become HBO faster than HBO can
uses the big data insights to give customers exactly what they become Netflix’. For example, Netflix stunned the media industry when it outbid
want. both HBO and AMC by paying a stunning US$100 million for exclusive rights to
Chris Ryan/OJO Images Ltd/PSL Images/Alamy air the first two seasons of House of Cards, a US version of a hit British political
drama produced by Hollywood bigwigs, David Fincher and Kevin Spacey.
9780655702412_CH05.indd 144 3/3/20 10:44 AM

To outsiders, the huge investment in House of Cards seemed highly risky. producing content, have earned Netflix the nickname ‘The Red Menace’ among
However, using its powerful database, Netflix was able to predict accurately competitors.
which and how many existing members would watch House of Cards regularly As more and more high-quality video streams out of Netflix, more success
and how many new members would sign up because of the show. Netflix also streams in. Netflix’s sales have surged 53 per cent during the past two years.
used its viewer knowledge to pinpoint and personalise promotion of the exclusive Last year alone, membership grew by more than 20 per cent. Netflix thrives
new series to just the right members. Before House of Cards premiered, based on using big data and marketing analytics to know and serve its customers.
on their profiles, selected subscribers saw one of 10 different trailers of the show The company excels at helping customers figure out just what they want to watch
aimed at their specific likes and interests. and offering just the right content profitably. Says Netflix’s chief communications
Thanks to Netflix’s big data and marketing analytics prowess, House of officer, ‘Because we have a direct relationship with consumers, we know what
Cards was a smash hit. It brought in 3 million new subscribers in only the people like to watch, and that helps us [immeasurably].’
first three months. These new subscribers alone covered almost all of the
US$100 million investment. More importantly, a Netflix survey revealed that, Sources: Dominic White, ‘Stan is on clear path to profitability’, Australian Financial Review,
12 May 2016, p. 45; Mark Serrels, ‘Netflix just hit 1 million subscribers in Australia’, Kotaku,
for the average House of Cards viewer, 86 per cent were less likely to cancel 20 January 2016, <www.kotaku.com.au/2016/01/netflix-just-hit-1-million-subscribers-
because of the new program. Such success came as no surprise to Netflix. in-australia>; Nicole Laporte, ‘Netflix: The red menace,’ Fast Company, 7 January 2014,
<www.fastcompany.com/3024158/netflix-the-red-menace>; Anders Bylund, ‘Netflix, Inc.
Its data had predicted that the program would be a hit before the director ever is paying huge sums to produce original shows,’ Motley Fool, 6 October 2014, <www.fool.
shouted ‘action’. com/investing/general/2014/10/06/netflix-inc-is-paying-huge-sums-to-produce-origina.
aspx>; David Carr, ‘Giving viewers what they want,’ New York Times, 25 February 2013,
Since then, House of Cards has become Netflix’s hottest program. Based on p. B1; Zach Bulygo, ‘How Netflix uses analytics to select movies, create content, and make
its success, Netflix developed a number of other original series, including Hemlock multimillion dollar decisions’, Kissmetrics, 6 September 2013, <blog.kissmetrics.com/how-
netflix-uses-analytics/>; Craig Smith, ‘By the numbers: 40 amazing Netflix statistics and
Grove, Lillyhammer, Orange Is the New Black, Bad Samaritans, Marco Polo and facts,’ Expanded Ramblings, 24 October 2014, <http://expandedramblings.com/index.
the animated series, BoJack Horseman. For traditional broadcast networks, the php/netflix_statistics-facts/>; Marcus Wohlsen, ‘Netflix is beating HBO in revenue, but it’s
still the underdog,’ Wired, 7 August 2014, <www.wired.com/2014/08/netflix-is-beating-
average success rate for new television shows is 35 per cent. In contrast, Netflix hbo-in-revenue-but-its-still-the-underdog/>; Lisa Richwine, ‘Netflix beats forecasts
is batting almost 70 per cent. To continue the momentum, Netflix has committed with 62 million streaming subscribers,’ Reuters, 15 April 2015, <www.reuters.com/
article/2015/04/15/us-netflix-results-idUSKBN0N62HC20150415>; Catherine Knowles,
US$300 million a year to developing new original content. The digital video giant ‘Competition heats up for Netflix in ANZ’, NetGuide, 21 January 2015, <https://netguide.
now has 12 exclusive or original shows on the air, with another 24 scheduled co.nz/story/competition-heats-up-for-netflix-anz>, and <www.netflix.com>, accessed
September 2015.
for the next two years, including drama series, comedy specials, movies and
documentaries.
Netflix’s success has thrown a scare into competitors, such as leading Questions
US cable-subscription network HBO, and Australasian competitors Foxtel, ❶ What is marketing analytics?
Quickflix, Lightbox, Neon and Stan. Although Netflix still lags HBO in profits, ❷ What is big data?
its US online-only membership has reached 36 million compared with HBO’s ❸ What benefits does a company like Netflix gain from marketing
30 million cable subscribers, and Netflix recently passed HBO in US revenues. analytics? Might this translate into increased customer lifetime value and,
It is no surprise, then, that HBO began selling online-only subscriptions in 2015. if so, why?
By early 2016, Netflix had over 1 million subscribers in Australia, and reached ❹ Based on your research, what strengths and weaknesses does Netflix
nearly 3 million people. Such numbers, along with its unconventional methods for exhibit over the competitors mentioned in the vignette?
consumers, to monitoring consumer online conversations about the company and its products. Then, they
marketing
use this information to develop important customer insights from which the company can create more value information
for its customers. system (MIS)
Thus, companies must design effective marketing information systems that give managers the right People and procedures
dedicated to assessing
information, in the right form, at the right time – and then help them to use this information to create
information needs,
customer value and stronger customer relationships. A marketing information system (MIS) developing the needed
consists of people and procedures dedicated to assessing information needs, developing the needed information and helping
information and helping decision makers use the information to generate and validate actionable decision makers use the
information to generate
customer and market insights.
and validate actionable
Figure 5.1 shows that the MIS begins and ends with information users – marketing managers, customer and market
internal and external partners, and others who need marketing information. First, it interacts with these insights.
9780655702412_CH05.indd 145 3/3/20 10:44 AM

Marketing managers and other information users

Obtaining customer and market insights from marketing information
MARKETING INFORMATION SYSTEM

Developing needed information
Assessing Analysing
Internal Marketing Marketing
information and using
databases intelligence research
needs information
MARKETING ENVIRONMENT
Target Marketing Macroenvironment

Competitors Publics
markets channels forces
Figure 5.1 The marketing information system
information users to assess information needs. Next, it interacts with the marketing environment to develop
needed information through internal company databases, marketing intelligence activities and marketing
research. Finally, the MIS helps users to analyse and use the information to develop customer insights,
make marketing decisions and manage customer relationships.
Assessing marketing information

needs
The marketing information system primarily serves the company’s marketing and other managers.
However, it may also provide information to external partners, such as suppliers, resellers or marketing
services agencies. For example, retailers’ systems often give key suppliers access to information ranging from
customers’ buying patterns and store inventory levels to how many items they have sold in which stores in
the past 24 hours.6
A good MIS balances the information users would like to have against what they really need and
what is feasible to offer. The company begins by interviewing managers to find out what information
they would like. Some managers will ask for whatever information they can get without thinking
carefully about what they really need. Too much information can be as harmful as too little. Other
managers may omit things they ought to know, or they may not know to ask for some types of
information they should have. For example, managers might need to know about surges in favourable
or unfavourable consumer discussions about their brands on blogs or online social networks. Because
they do not know about these discussions, they fail to ask about them. The MIS must monitor the
marketing environment to provide decision makers with information they should have in order to
better understand customers and make key marketing decisions. Table 5.1 lists questions for assessing
marketing information needs.
The costs of obtaining, analysing, storing and delivering information can mount quickly.
The company must decide whether the value of insights gained from additional information is worth the
9780655702412_CH05.indd 146 3/3/20 10:44 AM

Table 5.1 Questions for assessing marketing information needs

1 What types of decisions are you regularly called upon to make?
2 What types of information do you need in order to make these decisions?
3 What types of information do you regularly get?
4 What types of special studies do you periodically request?
5 What types of information would you like to get that you are not now getting?
6 What information would you want daily? Weekly? Monthly? Yearly?
7 What magazine and trade reports would you like to see on a regular basis?
8 What specific topics would you like to be kept informed of?
9 What types of data analysis programs would you like to see made available?
10 What do you think would be the four most helpful improvements that could be made in the present marketing information
system?
costs of providing it, and both value and cost are often difficult to assess. By itself, information has no
worth; its value comes from its use – from the customer insights it provides and their impact on decision
making. Rather, companies should weigh carefully the costs of getting more information against the
benefits resulting from it.
Developing marketing information

Marketers can obtain the needed information from internal data, marketing intelligence and marketing research.
Internal data
Many companies build extensive internal databases – electronic collections of consumer and market internal databases
information obtained from data sources within the company’s network. Information in the database can Electronic collections of
consumer and market
come from many sources. The marketing department furnishes information on customer characteristics,
information obtained
sales transactions and website visits. The customer service department keeps records of customer from data sources within
satisfaction or service problems. The accounting department provides detailed records of sales, costs the company’s network.
and cashflows. Operations reports on production,
shipments and inventories. The salesforce reports on
reseller reactions and competitor activities, and
marketing-channel partners provide data on point-
of-sale transactions. Harnessing such information
can provide powerful customer insights and a
competitive advantage.
Consider this example of the use of internal
information by a typical global pharmaceutical
company. This company uses its internal information
system to analyse daily sales performance. Each day,
via notebooks and smartphones, sales consultants
report their day’s efforts with chemists and doctors,
as well as competitive activity, into head office.
In addition, pharmacy cash registers are connected
to wholesalers, such as Sigma Pharmaceuticals, Internal databases: Access to data when in the field allows salespeople to be
which has a comprehensive logistics system, and sales more effective.
© Mint Images RF/Shutterstock.com
are updated daily.7 Almost the next day, marketing
9780655702412_CH05.indd 147 3/3/20 10:44 AM

managers have a complete report analysing the previous day’s sales through chemists and supermarkets.
The system helps marketing managers make better decisions and makes the salespeople more effective.
Pharmaceutical sales consultants work mostly from home, and the aim is to reduce the number of hours
they spend filling out reports and thereby give them extra time for selling.
Internal databases usually can be accessed more quickly and cheaply than other information sources,
but they also present some problems. Because internal information is often collected for other purposes,
it may be incomplete or in the wrong form for making marketing decisions. Data also age quickly;
keeping the database current requires a major effort. Finally, managing the mountains of information
that a large company produces requires highly sophisticated equipment and techniques.
Competitive marketing intelligence

competitive Competitive marketing intelligence is the systematic monitoring, collection and analysis of
marketing publicly available information about consumers, competitors and developments in the marketplace.
intelligence The goal of competitive marketing intelligence is to improve strategic decision making by understanding
The systematic
monitoring, collection the consumer environment, assessing and tracking competitors’ actions, and providing early warnings of
and analysis of publicly opportunities and threats.
available information Marketing intelligence gathering has grown dramatically as more and more companies are now busily
about consumers,
eavesdropping on the marketplace and snooping on their competitors. Techniques range from observing
competitors and
developments in the consumers first-hand to quizzing the company’s own employees, benchmarking competitors’ products,
marketing environment. conducting online research and monitoring social media buzz.
Good marketing intelligence can help marketers to gain insights into how consumers talk about
and connect with their brands. Many companies send out teams of trained observers to mix and mingle
with customers as they use and talk about the company’s products. Other companies – such as Dell,
PepsiCo, Kraft and MasterCard – have set up sophisticated digital command centres that routinely
monitor brand-related online consumer and marketplace activity. Sentiment analysis might help a digital
reconnaissance team to gather relevant customer data, and may have the potential to automate, augment
and/or reduce the cost of some traditional approaches to customer segmentation, such as qualitative and
quantitative analysis.
Companies also need to actively monitor competitors’ activities. They can monitor competitors’
websites and social media sites. For example, Amazon’s Competitive Intelligence arm routinely purchases
merchandise from competing websites to analyse and compare their product assortment, speed of
delivery and service quality. Companies can use the internet to search specific competitor names, events
or trends and see what turns up.
Firms use competitive marketing intelligence to gain early insights into competitor moves and strategies
and to prepare quick responses. For example, Samsung routinely monitors real-time social media activity
surrounding the introduction of Apple’s latest iPhones to quickly shape marketing responses for its own
Galaxy S smartphones and tablets.8
Competitors often reveal intelligence information through their annual reports, business publications,
trade show exhibits, press releases, advertisements and web pages. The internet is an invaluable source of
competitive intelligence. And tracking consumer conversations about competing brands is often as revealing
as tracking conversations about the company’s own brands. Moreover, most competitors now place volumes
of information on their websites, providing details of interest to customers, partners, suppliers, investors
or franchisees. This can provide a wealth of useful information about competitors’ strategies, markets, new
products, facilities and other happenings.
Intelligence seekers can also pore through any of thousands of online databases. Some are free.
For example, the Australian Securities and Investments Commission’s (ASIC’s) database provides a huge
stockpile of financial information on public competitors, and the AusPat database (managed by IP Australia,
a department of the Australian government) reveals patents competitors have filed. For a fee, companies
9780655702412_CH05.indd 148 3/3/20 10:44 AM

Competitive marketing intelligence: General database services, such as LexisNexis, put an

incredible wealth of information at the fingertips of marketing decision makers.
© Copyright 2015 LexisNexis, a division of Reed Elsevier Inc. All rights reserved. LexisNexis and the Knowledge Burst logo are
registered trademarks of Reed Elsevier Properties Inc. and are used with the permission of LexisNexis.
can also subscribe to any of the more than 3000 online databases and information search services, such as
Hoover’s, LexisNexis and Dun & Bradstreet. Today’s marketers have an almost overwhelming amount of
competitor information only a few keystrokes away.
The intelligence game goes both ways. Facing determined competitive marketing intelligence efforts by
competitors, most companies take steps to protect their own information. One self-admitted corporate spy
advises that companies should try conducting marketing intelligence investigations of themselves, looking
for potentially damaging information leaks. They should start by ‘vacuuming up’ everything they can find in
the public record, including job postings, court records, company advertisements and blogs, web pages, press
releases, online business reports, social media postings by customers and employees, and other information
available to inquisitive competitors.9 The World War II adage ‘Loose lips sink ships!’ is a constant reminder
to personnel in many organisations to be mindful of those wishing to gather marketing intelligence.
The growing use of marketing intelligence raises a number of ethical issues. Although most of the
preceding techniques are legal, and some are considered to be shrewdly competitive, some may involve
questionable ethics. Clearly, companies should take advantage of publicly available information. However,
they should not stoop to snoop. With all the legitimate intelligence sources now available, a company does
not need to break the law or accepted codes of ethics to get good intelligence.
Marketing research
In addition to marketing intelligence information about general consumer, competitor and marketplace
happenings, marketers often need formal studies that provide customer and market insights for specific
marketing situations and decisions. For example, Nike wants to know what appeals will be most effective in
its AFL, NRL and A-League advertising. Google wants to know how web searchers will react to a proposed
redesign of its site. Perhaps Asus, HTC, LG and Samsung want to know what features smartphone and
marketing
tablet users want from internet phones using the Android or the company’s proprietary operating system. research
(See Appendix 2 for more information.) Or LG wants to know how many and what kinds of people will The systematic design,
buy its flat-screen and curved-screen OLED televisions. In such situations, marketing intelligence will not collection, analysis
and reporting of data
provide the detailed information needed. Managers will need marketing research.
relevant to a specific
Marketing research is the systematic design, collection, analysis and reporting of data relevant to a marketing situation
specific marketing situation facing an organisation. Companies use marketing research in a wide variety of facing an organisation.
9780655702412_CH05.indd 149 3/3/20 10:44 AM

Defining the Developing the Implementing the Interpreting and

problem and research plan research plan– reporting
qualitative research for collecting collecting and the findings
research objectives information analysing the data
Studies involving a small
number of individuals,
such as focus groups Figure 5.2 The marketing research process
or in-depth one-to-one
interviews. The primary
tool in qualitative
research is the focus situations. For example, marketing research gives marketers insights into customer motivations, purchase
group, but this includes
modern variations such behaviour and satisfaction. It can help them to assess market potential and market share, or to measure the
as online focus groups effectiveness of pricing, product, distribution and promotion activities.
and teleconferences. In addition, these companies – like their smaller counterparts – frequently hire outside research specialists
One-on-one interviews
to consult with management on specific marketing problems and to conduct marketing research studies.
are used to delve deeply
into the topic. Sometimes, firms simply purchase data collected by outside firms to aid in their decision making. Nevertheless,
almost any organisation can find informal, low-cost alternatives to the formal and complex marketing research
quantitative
techniques used by research experts in large firms, whether they undertake qualitative research with their
research
Studies involving ‘a lot’ main customers, or seek information from online sources. They may also undertake quantitative research
of people. Quantitative across a broad range of consumers, using samples greater than 100 respondents and employing various
research uses statistical statistical techniques in any analyses.
average techniques
The marketing research process has four steps (see Figure 5.2): (1) defining the problem and research
such as mean ratings,
and statistical tools objectives; (2) developing the research plan; (3) implementing the research plan; and (4) interpreting and
such as sampling error reporting the findings.
and standard error, to
analyse data. There is
no stated number of Defining the problem and research objectives
people who must be Marketing managers and researchers must work closely together to define the problem and agree on
interviewed to make a research objectives. The manager best understands the decision for which information is needed; the
study quantitative, but
samples of 100 or more researcher best understands marketing research and how to obtain the information. Defining the problem
are usually considered and research objectives is often the most difficult step in the research process. The manager may know that
quantitative. something is wrong, without knowing the specific causes.
After the problem has been defined carefully, the manager and researcher must set the research
exploratory objectives. A marketing research project might have one of three types of objectives. The objective of
research
Marketing research used
exploratory research is to gather preliminary information that will help define the problem and to
to gather preliminary suggest hypotheses. The objective of descriptive research is to describe things, such as the market
information that will help potential for a product or the demographics and attitudes of consumers who buy the product. The objective
to define problems, and of causal research is to test hypotheses about cause-and-effect relationships. For example, would a
to suggest hypotheses.
10 per cent decrease in tuition fees at a private secondary college result in an enrolment increase sufficient
descriptive to offset the reduced tuition revenue? Managers often start with exploratory research and then follow later
research with descriptive or causal research.
Marketing research The statement of the problem and research objectives guides the entire research process. The manager
used to better describe
marketing problems, and researcher should put the statement in writing to be certain that they agree on the purpose and expected
situations or markets. results of the research.
causal research
Marketing research Developing the research plan
used to test hypotheses Once the research problems and objectives have been defined, researchers must determine the exact
about cause-and-effect information needed, develop a plan for gathering it efficiently and present the plan to management.
relationships.
The research plan outlines sources of existing data and spells out the specific research approaches, contact
methods, sampling plans and instruments that researchers will use to gather new data.
9780655702412_CH05.indd 150 3/3/20 10:44 AM

Research objectives must be translated into specific

information needs. For example, suppose that Nando’s
wants to know how consumers would react to the addition
of drive-through service to its restaurants. In the United
States, fast-food chains generate an estimated 24 per cent
of sales through drive-throughs. However, Nando’s –
home of the legendary butterfly-cut, flame-grilled PERi-
PERi chicken – does not offer drive-through service.
Adding drive-throughs might help Nando’s leverage its
strong brand position and attract new sales. The proposed
research might call for the following specific information:
• The demographic, economic and lifestyle characteristics of

current Nando’s customers. Do current counter-service
customers also use drive-throughs? Are drive-throughs
consistent with their needs and lifestyles? Or would
Nando’s need to target a new segment of consumers? Nando’s marketers would need many types of information to decide
whether to introduce drive-through service and, if so, the best way to do it.
• The characteristics and usage patterns of the broader
Nando’s Australia
population of fast-food and fast-casual diners. What do
they need and expect from such restaurants? Where,
when and how do they use them, and what existing quality, price and service levels do they value? secondary data
The new Nando’s service would require strong, relevant and distinctive positioning in the crowded Information that already
exists somewhere,
fast-food market.
having been collected
• Impact on Nando’s customer experience. Would drive-throughs be consistent with a higher-quality for another purpose.
fast-casual experience, like the one Nando’s offers?
• Nando’s employee reactions to drive-through service. Would restaurant employees support drive-throughs? primary data
Would adding drive-throughs disrupt operations and their ability to deliver high-quality food and Information collected
for the specific purpose
service to inside customers?
at hand.
• Forecasts of both inside and drive-through sales and profits. Would the new drive-through
service create new sales and customers or simply divert sales away from current
operations?
Nando’s marketers would need answers to these questions and many other types of
information in order to decide whether to introduce drive-through service and, if so, the
best way to do it.
The research plan should be presented in a written proposal. A written proposal is
especially important when the research project is large and complex, or when an outside
firm carries it out. The proposal should cover the management problems addressed,
the research objectives, the information to be obtained and how the results will help
management’s decision making. The proposal also should include estimated research costs.
To meet the manager’s information needs, the research plan can call for gathering
secondary data, primary data or both. Secondary data consists of information that
already exists somewhere, having been collected for another purpose. Primary data
consists of information collected for the specific purpose at hand.
Market growth: A decision by Red Bull to

Gathering secondary data add a line of enhanced waters to its already
Researchers usually start by gathering secondary data. The company’s internal database successful mix of energy drinks would call
provides a good starting point. However, the company can also tap into a wide assortment for marketing research that provides a
of external information sources, including commercial data services and government good deal of specific information.
Red Bull GmbH
sources (see Table 5.2).
9780655702412_CH05.indd 151 3/3/20 10:44 AM

Table 5.2 Sources of secondary data

Internal sources
Internal sources include company profit and loss statements, balance sheets, sales figures, sales call reports, invoices, inventory
records and prior research reports. Today, this information is usually stored and manipulated in digital form as part of a firm’s
executive information system (EIS).
Government publications
The Year Book Australia (Cat. No. 1301.0), updated annually, provides summary data on the Australian economy, demography and
society. A catalogue of publications is available from the Australian Bureau of Statistics as well as Australian Government Publishing
Service offices in state capitals. Most of the time, marketers are interested in publications relating to population and population pro-
jections by state and local government area, as well as household income and expenditure. Today, such data can also be accessed
directly via computer links where such a service is subscribed to – for example, 2011 Census: CDATA, available online from <www.
abs.gov.au> and search on CDATA.
Periodicals and books
Business Periodicals Index, published monthly, lists business articles appearing in a wide variety of business publications, from news-
papers to BRW. Marketing journals include Journal of Marketing, Journal of Marketing Research, The International Review of Retail,
Distribution and Consumer Research and Journal of Consumer Research. Useful Australian trade magazines include Retail World,
Foodweek and B&T, while US trade magazines include Advertising Age, Chain Store Age, Progressive Grocer, Sales and Marketing
Management and Stores. Useful general business newspapers and magazines include the Australian Financial Review, Australian
Business Monthly and BRW, which are published in Australia, and New Zealand Business and NZ Marketing in New Zealand. Useful
US publications include BusinessWeek, Fortune, Forbes and Harvard Business Review. There are also many specialist publications
relating to specific industries, such as APC for subscribers interested in microcomputers and tablets, which contain a wealth of
marketing as well as technical information.
Commercial data
Here are just a few of the dozens of commercial research houses selling data to subscribers:
• Nielsen Company provides data on household purchasing (NPD/Nielsen Electronic Household Panel), supermarket scanner data
(Nielsen), data on television audiences (OzTAM, Nielsen and Roy Morgan Research Centre) and others.
• Nielsen produces product movement reports based on warehouse withdrawals data from supermarkets, chemists and mass
merchandisers, and supermarket scanner data.
• The Roy Morgan Research Centre provides annual reports covering television markets, giving values and lifestyles typography and
geodemographic data by sex, income, age and brand preferences (selective markets and media reaching them).
• Specialist researchers, the Federal Chamber of Automotive Industries, provide data on motor vehicle sales in its VFACTS report,
while IDC (International Data Corporation) provides feedback on such industries as information technology.
• Others, such as BIS Shrapnel, undertake syndicated research on the food services industry and the construction industry, as well as
general economic forecasting studies.
• Firms such as Deloitte Access Economics undertake econometric studies of the type that governments and opposition parties use,
for example, to model such inputs/outputs as the effects of a particular policy change (e.g. a goods and services tax) on house-
hold income and expenditure.
Companies can buy secondary data reports from outside suppliers. For example, Nielsen sells
buyer data from a consumer panel of more than 250 000 households in 25 countries worldwide, with
measures of trial and repeat purchasing, brand loyalty and buyer demographics. Experian Australia sells
information on brands in many product categories, including detailed consumer profiles that assess
everything from the products consumers buy and the brands they prefer, to their lifestyles, attitudes
and media preferences. Roy Morgan Single Source is a key offering by Roy Morgan Research and
incorporates the Roy Morgan Readership Survey, Roy Morgan BrandPLANNER, MediaPLANNER,
RadioPLANNER, TVPLANNER and CreativePLANNER. It also offers other decision-science
products for various industries. These and other firms supply high-quality data to suit a wide variety of
commercial
online databases marketing information needs.10
Computerised Using commercial online databases, marketing researchers can conduct their own searches of
collections of secondary data sources. General database services, such as ProQuest and LexisNexis, put an incredible
information available
wealth of information within easy reach of marketing decision makers. Beyond commercial websites
from online commercial
sources or via the offering information for a fee, almost every industry association, government agency, business publication
internet. and news medium offers free information to those tenacious enough to find their websites or apps.
9780655702412_CH05.indd 152 3/3/20 10:44 AM

Internet search engines can also be a big help in locating relevant secondary information sources. However,
they can also be very frustrating and inefficient. For example, a Nando’s marketer googling ‘fast-food drive-
through’ from Australia would come up with more than 1.5 million results. Still, well-structured, well-
designed online searches can be a good starting point to any marketing research project.
Secondary data can usually be obtained more quickly and at a lower cost than primary data. Also, secondary
sources can sometimes provide data an individual company cannot collect on its own – information that
either is not directly available or would be too expensive to collect. For example, it would be too expensive
for Nando’s marketers to conduct a continuing retail store audit to find out about the market shares, prices
and displays of competitors’ brands. But it can buy household panel data and the Panorama service from
Nielsen, which provides information on media habits, lifestyles, attitudes and product consumption at a
local market level, as well as offering an Asia-Pacific level through Nielsen Media Index.
Secondary data can also present problems. The needed information may not exist – researchers can
rarely obtain all the data they need from secondary sources. For example, Nando’s will not find existing
information about consumer reactions to a new drive-through service that it has not yet introduced to the
market. Moreover, when data can be found, the information might not be very usable. In such cases, the
researcher must evaluate secondary information carefully to make certain it is relevant (fits research project
needs), accurate (reliably collected and reported), current (up-to-date enough for current decisions) and
impartial (objectively collected and reported).
Primary data collection

Secondary data provide a good starting point for research and often help to define research problems and
objectives. In most cases, however, the company must also collect primary data. Just as researchers must
carefully evaluate the quality of secondary information, they also must take great care when collecting
primary data. They need to make sure the data will be relevant, accurate, current and unbiased. Table 5.3
shows that designing a plan for primary data collection calls for a number of decisions on research approaches,
contact methods, sampling plan and research instruments.
Research approaches
Research approaches for gathering primary data include observation, surveys and experiments. Here, we
discuss each approach in turn.
Observational research
Observational research involves gathering primary data by observing relevant people, actions and observational
situations. For example, a bank might evaluate possible new branch locations by checking traffic patterns, research
neighbourhood conditions and the location of competing branches. Gathering primary data
by observing relevant
Researchers often observe consumer behaviour to glean customer insights they cannot obtain by simply people, actions and
asking customers questions. For instance, Fisher-Price has set up an observation lab in which it can observe situations.
the reactions of young children to new toys. The Fisher-Price Play Lab is a sunny, toy-strewn space where
lucky kids get to test Fisher-Price prototypes, under the watchful eyes of designers who hope to learn what
will get kids worked up into a new-toy frenzy. Similarly, in its research labs, using high-tech cameras and
other equipment, Gillette observes women shaving and uses the insights to design new razors and shaving
products.
Table 5.3 Planning primary data collection

Research approaches Contact methods Sampling plan Research instruments
Observation Mail Sampling unit Questionnaire
Survey Telephone Sample size Mechanical instruments
Experiment Personal Sampling procedure
Online
9780655702412_CH05.indd 153 3/3/20 10:44 AM

Marketers not only observe what consumers do but also

what they are saying. As discussed earlier, marketers now
routinely listen in on consumer conversations on social
media and feedback provided on websites. Observing such
naturally occurring feedback can provide inputs that simply
cannot be gained through more structured and formal
research approaches.
A wide range of companies now use ethnographic
research. Ethnographic research involves sending
trained observers to watch and interact with consumers in
their ‘natural habitats’.
Global branding firm, Landor, launched Landor
Families, an ongoing ethnographic study that has followed
11 French families intensely for the past seven years. Landor
researchers visit the families twice a year in their homes,
peeking into their refrigerators and diving deeply into their
food-shopping behaviours and opinions. The researchers
also shop with the families at their local supermarkets
and look over their shoulders while they shop online.
The families furnish monthly online reports detailing their
shopping behaviours and opinions. The Landor Families
study provides rich behavioural insights for Landor clients,
Ethnographic research: The Landor Families ongoing ethnographic study such as Danone, Kraft Foods and Procter & Gamble.
has followed 11 French families intensely for the past seven years, diving Today’s big data analytics can provide important insights
deeply into both their refrigerators and their food-shopping behaviours. into the whats, whens and wheres of consumer buying.
Says Landor, ‘There is no better way to understand people than to
observe them in real life.’ The Landor Families program is designed to explore the
Landor whys. According to Landor, ‘There is no better way to
understand people than to observe them in real life.’11
ethnographic Observational and ethnographic research will often yield the kinds of details that are not possible using
research traditional research questionnaires or focus groups. For example, focus groups told the Best Western hotel
A form of observational
chain that it is men who decide when to stop for the night and where to stay; however, videotapes of couples
research that involves
sending trained on cross-country journeys showed it was usually the women who made these decisions.
observers to watch and ‘The beauty of ethnography,’ says a research expert, is that it ‘allows companies to zero in on their
interact with consumers customers’ unarticulated desires.’ Agrees another researcher, ‘Classic market research doesn’t go far enough.
in their ‘natural habitats’.
It can’t grasp what people can’t imagine or articulate.’12 For this reason, Disney sends its executives into the
field at theme parks. Kimberley-Clark even runs a program to give its executives a first-hand experience of
what it is like to be elderly, with poor vision and arthritis – the company puts its executives into retail outlets
wearing vision-blurring glasses, unpopped popcorn in their shoes and bulky rubber gloves. Participants
come back from these experiences bursting with ideas for elderly-friendly store changes, such as bigger
typefaces and more eye-friendly colours on packaging and flyers, new store lighting and clearer signage,
and instant call buttons near heavy merchandise such as bottled water and laundry detergent.13
Survey research
survey research Survey research, the most widely used method for primary data collection, is the approach best suited
Gathering primary for gathering descriptive information. A company that wants to know about people’s knowledge, attitudes,
data by asking people
preferences or buying behaviour can often find out by asking them directly.
questions about their
knowledge, attitudes, The major advantage of survey research is its flexibility – it can be used to obtain many different kinds
preferences and buying of information in many different situations. Surveys addressing almost any marketing question or decision
behaviour. can be conducted by telephone or mail, in person or online.
9780655702412_CH05.indd 154 3/3/20 10:44 AM

However, survey research also presents some problems. Sometimes, people are unable to answer survey
questions because they cannot remember or have never thought about what they do or why. People may
be unwilling to respond to unknown interviewers or about things they consider to be private. Respondents
may answer survey questions even when they do not know the answer in order to appear smarter or more
informed. Or they may try to help the interviewer by giving pleasing answers. Finally, busy people may not
take the time, or they might resent the intrusion into their privacy.
Experimental research
Whereas observation is best suited for exploratory research and surveys best suited for descriptive research,
experimental research is best suited for gathering causal information. Experiments involve selecting experimental
matched groups of subjects, giving them different treatments, controlling unrelated factors and checking for research
differences in group responses. Thus, experimental research tries to explain cause-and-effect relationships. Gathering primary data
by selecting matched
For example, before adding a new sandwich to its menu, McDonald’s might use experiments to test the groups of subjects, giving
effects on sales of two different prices it might charge. It could introduce the new sandwich at one price in them different treatments,
one city and at another price in another city. If the cities are similar, and if all other marketing efforts for the controlling related factors
and checking for differences
sandwich are the same, then differences in sales in the two cities could be related to the price being charged.
in group responses.
Contact methods
Information can be collected by mail, telephone, personal interview or online. Table 5.4 shows the strengths
and weaknesses of each of these contact methods.
Mail, telephone and personal interviewing

Mail questionnaires can be used to collect large amounts of information at a low cost per respondent. Respondents
may give more honest answers to more personal questions on a mail questionnaire than to an unknown
interviewer in person or over the telephone. Also, no interviewer is involved to bias the respondent’s answers.
However, mail questionnaires are not very flexible – all respondents answer the same questions in a
fixed order, or may skip over pertinent questions. Mail surveys usually take longer to complete, and the
response rate – the number of people returning completed questionnaires – is often very low. Finally, the
researcher often has little control over the mail questionnaire sample. Even with a good mailing list, it is
difficult to control who at the mailing address fills out the questionnaire. As a result of these shortcomings,
more and more marketers are now shifting to faster, more flexible and lower-cost online surveys.
Telephone interviewing can be one of the best methods for gathering information quickly, and it
provides greater flexibility than mail questionnaires. Interviewers can explain difficult questions and,
depending on the answers they receive, skip some questions or probe on others. Response rates tend
to be higher than with mail questionnaires, and interviewers can ask to speak to respondents with the
desired characteristics or even by name.
However, with telephone interviewing, the cost per respondent is higher than with mail or online
questionnaires. Also, people may not want to discuss personal questions with an interviewer. The method
introduces interviewer bias – the way interviewers talk, how they ask questions and other differences may
affect respondents’ answers. Finally, in this age of do-not-call lists and promotion-harassed consumers,
Table 5.4 Strengths and weaknesses of contact methods

Mail Telephone Personal Online
Flexibility Poor Good Excellent Good
Quality of data that can be collected Good Fair Excellent Good
Control of interviewer effects Excellent Fair Poor Fair
Control of sample Fair Excellent Good Excellent
Speed of data collection Poor Excellent Good Excellent
Response rate Poor Poor Good Fair
Cost Good Fair Poor Excellent
9780655702412_CH05.indd 155 3/3/20 10:44 AM

potential survey respondents are increasingly hanging up on telephone interviewers rather than talking
with them. This raises the costs as it is necessary to make many calls in order to reach sufficient numbers of
respondents willing to be interviewed, in order to achieve a valid sample size.
Personal interviewing takes two forms – individual interviewing and group interviewing. Individual
interviewing involves talking with people in their homes or offices, on the street or in shopping malls. Such
interviewing is flexible. Trained interviewers can guide interviews, explain difficult questions and explore
issues as the situation requires. They can show subjects actual products, advertisements or packages, and
observe reactions and behaviour. However, individual personal interviews may cost three to four times as
much as telephone interviews.
Group interviewing consists of inviting small groups of people to meet with a trained moderator to
talk about a product, service or organisation. Participants normally are paid a small sum for attending.
The moderator encourages free and easy discussion, hoping that group interactions will bring out actual
focus group feelings and thoughts. At the same time, the moderator ‘focuses’ the discussion – hence the name focus
interviewing group interviewing.
Personal interviewing
Researchers and marketers watch the focus group discussions from behind one-way glass and record
that involves inviting
small groups of people comments in writing or on video for later study. Today, focus group researchers can use videoconferencing
to gather for a few and online technology to connect marketers in distant locations with live focus-group action. Using
hours with a trained cameras and two-way sound systems, marketing executives in a far-off boardroom can look in and listen,
interviewer to talk
using remote controls to zoom in on faces and pan the focus group at will.
about a product, service
or organisation. The Along with observational research, focus group interviewing has become one of the main
interviewer ‘focuses’ qualitative marketing research tools for gaining fresh insights into consumer thoughts and feelings.
the group discussion on However, focus group studies present some challenges. They usually employ small samples to keep
important issues.
time and costs down, and it may be difficult to generalise from the results. Moreover, consumers in
focus groups are not always open and honest about their real feelings, behaviour and intentions in
front of other people.
To overcome these problems, many researchers are tinkering with the focus group design. Some
companies are changing the environments in which they conduct focus groups to help consumers relax
and to elicit more authentic responses. For example, Lexus hosts ‘An Evening with Lexus’ dinners in
customers’ homes with groups of luxury-car buyers to learn up close and personal why they did or did
not buy a Lexus. Other companies use immersion groups – small groups of consumers who interact directly
and informally with product designers without a focus group moderator present. Consider this example:
Volvo equals safety. In focus group after focus group,

participants said the same thing. But to check these
findings, Volvo called in a hypnotist. Members of Volvo
focus groups were asked to test-drive a car. Immediately
afterwards, they were hypnotised and asked their true
feelings about the brand. It was not pretty: Many revealed
that Volvo also equals being middle-aged. That idea ‘for
some people was suffocating,’ says a Volvo researcher.
‘Hypnosis helped get past the clichés. We needed the
conversation taken to a deeper, more emotional place.’14
Individual and focus group interviews can add a personal

Focus groups: These are often conducted in congenial settings touch as opposed to more numbers-oriented, big data research.
so that customers open up and share their experiences with They can provide rich insights into the motivations and feelings
products and communicate any changes they might like made. behind the numbers and analytics. ‘Focus groups are the most
Photos To Go
widely used qualitative research tool,’ says one analyst, ‘and with
9780655702412_CH05.indd 156 3/3/20 10:44 AM

good reason. They foster fruitful discussion and can provide unique insight into customers’ and
potential customers’ needs, wants, thoughts, and feelings.’ Things really come to life when you hear
people say them.15
Online marketing research

The internet has had a dramatic impact on how marketing research is conducted. Increasingly, researchers
are collecting primary data through online marketing research – internet surveys, online panels, online marketing
experiments, content analysis, online focus groups and brand communities. research
Collecting primary data
Online research can take many forms. A company can use the internet or mobile technology as a
online through internet
survey medium. It can include a questionnaire on its website or social media sites or use email or mobile surveys, online panels,
devices to invite people to answer questions. It can create online panels that provide regular feedback or experiments, content
conduct live discussions or online focus groups. Researchers can also conduct online experiments. They analysis, online focus
groups and brand
can experiment with different prices, headlines or product features on different websites or mobile sites communities.
or at different times, to learn the relative effectiveness of their offers. They can set up virtual shopping
environments and use them to test new products and marketing programs. Or a company can learn about
the behaviour of online customers by following their clickstreams as they visit the online site and move
to other sites.
To capture appropriate samples using the web, marketing organisations increasingly find it necessary to
use multiframe surveys involving a combination of computer-assisted telephone interviewing (CATI) and
mobile technologies together with the internet.16
As we have already seen, the things that customers write about in different forms of social media can be
captured and analysed by way of content analysis.17
The internet is especially well suited to quantitative research – conducting marketing surveys and
collecting data. Over three-quarters of all Australian households now have access to the web, making it a
fertile channel for reaching a broad cross-section of consumers.18 As response rates for traditional survey
approaches decline and costs increase, the web is quickly replacing mail and the telephone as the dominant
data collection methodology. The use of online panels has had a marked effect on the marketing research
industry, and online research now accounts for about 50 per cent of all survey research done in the United
States, and probably for a higher percentage in Australia and New Zealand given that some 80 per cent of
the population accesses the internet.19
Internet-based survey research offers some real advantages over traditional telephone and mail
approaches. The most obvious advantages are speed and low costs.20 Using the internet eliminates most
of the postage, telephone, interviewer and data-handling costs associated with the other approaches.
Moreover, sample size and location have little impact on costs. By going online, researchers can
quickly and easily distribute internet surveys to thousands of respondents simultaneously via email or
by posting them on selected websites. Once the questionnaire is set up, there is little difference in cost
between 10 respondents and 10 000 respondents on the internet, or between local or globally distant
respondents.
Responses can be almost instantaneous and, because respondents themselves enter the information,
researchers can tabulate, review and share research data as they arrive. Large organisations, such
as Telstra, employ real-time data for management decision making, using a dashboard approach to
predictive analytics in making best use of customer insights. Customer data is at the heart of predictive predictive
analytics, which differs from forecasting as it offers the ability to generate predictions for each analytics
individual customer or prospect. Commenting on the necessary links between IT and the company’s Extracting information
from data and using it to
one-to-one marketing division in predictive analytics, Telstra’s Director of Research, Insights and generate predictions for
Analytics stated: ‘This helps us move more effectively from insight generation to insight action within each individual customer
our one-to-one marketing team.’21 or prospect.
9780655702412_CH05.indd 157 3/3/20 10:44 AM

Thus, online research is well within the

reach of almost any business, large or small.
In fact, with the internet, practically anybody
can use it for research purposes. Even smaller,
less-sophisticated researchers can use online
survey services, such as Qualtrics (<www.
qualtrics.com>) and SurveyMonkey (<www.
surveymonkey.com>), to create, publish and
distribute their own custom surveys in minutes.
Beyond their speed and cost advantages,
web-based surveys also tend to be more
interactive and engaging, easier to complete and
less intrusive than traditional telephone or mail
Online marketing research: Thanks to survey services such as SurveyMonkey, almost surveys. As a result, they usually garner higher
any business, large or small, can create, publish and distribute its own custom online response rates. The internet can be an excellent
or mobile surveys in minutes.
SurveyMonkey
medium for reaching the hard-to-reach – for
example, the often-elusive teen, single, affluent
or well-educated audiences. It is also good for
reaching working parents and other people who lead busy lives. Such people are well represented online,
and they can respond in their own space and at their own convenience.
Just as marketing researchers have rushed to use the internet for quantitative surveys and data collection,
they are now also adopting qualitative web-based research approaches – such as online depth interviews,
focus groups, blogs and social networks. The internet can provide a fast, low-cost way to gain qualitative
customer insights.
online focus A primary qualitative web-based research approach is online focus groups. Such focus groups offer
groups many advantages over traditional focus groups. Participants can log in from anywhere – all they need is a
Gathering a small group
laptop and a web connection. Thus, the internet works well for bringing together people from different
of people online with a
trained moderator to parts of the country or world, especially those in higher-income groups who cannot spare the time to
chat about a product, travel to a central location. Also, researchers can conduct and monitor online focus groups from just about
service or organisation, anywhere, eliminating travel, lodging and facility costs. Finally, although online focus groups require some
and gain qualitative
advance scheduling, results are almost immediate.
insights about consumer
attitudes and behaviour. Online focus groups can take any of several formats. Most occur in real-time, in the form of online chat-
room discussions in which participants and a moderator sit around a virtual table exchanging comments.
Alternatively, researchers might set up an online message board on which respondents interact over the
course of several days or a few weeks. Participants log in daily and comment on focus group topics.
Although low in cost and easy to administer, online focus groups can lack the real-world dynamics of more
personal approaches. The online world is devoid of the eye contact, body language and direct personal
interactions found in traditional focus group research. And the internet format – running, typed commentary
and online ‘emoticons’ (punctuation marks that express emotion, such as :-) to signify happiness, or :-o to
signify surprise) – greatly restricts respondent expressiveness. The impersonal nature of the internet can
prevent people from interacting with each other in a normal way and getting excited about a concept.
To overcome these shortcomings, some researchers are now adding real-time audio and video to their
online focus groups. For example, online research firms can put the human touch back into online research
by assembling focus group participants in people-friendly ‘virtual interview rooms’. At the appointed time,
participants sign on via their webcam-equipped computer, view live video of other participants and interact
in real-time. Researchers can monitor the focus group from anywhere, seeing and hearing every respondent.
Although the use of online marketing research is growing rapidly, both quantitative and qualitative
web-based research do have some drawbacks. One major problem is controlling who is in the online
9780655702412_CH05.indd 158 3/3/20 10:44 AM

sample. Without seeing respondents, it is difficult to know who they really are. To overcome such sample
and context problems, many online research firms use opt-in communities and respondent panels.
For example, Research Now offers online consumer and business panels profiled on many more attributes.22
Alternatively, many companies are now developing their own custom social networks and using them to
gain customer inputs and insights.
Online behavioural and social tracking and targeting

The internet has become an important tool for conducting research and developing customer insights.
But today’s marketing researchers are going even further – well beyond online surveys, focus groups and
internet communities. Increasingly, they are listening to and watching consumers by actively mining the
rich veins of unsolicited, unstructured, ‘bottom-up’ customer information already coursing around the
internet. Whereas traditional marketing research provides more logical consumer responses to structured
and intrusive research questions, online listening provides the passion and spontaneity of unsolicited
consumer opinions.
Tracking consumers online might be as simple as scanning customer reviews and comments on the
company’s brand site or on shopping sites, such as Amazon.com or productreview.com.au. Or it might
mean using sophisticated online-analysis tools to deeply analyse the mountains of consumer brand-related netnographic
research
comments and messages found in blogs or on social media sites, such as Facebook, Yelp, YouTube, Instagram Like ethnographic
or Twitter. Listening to and engaging customers online can provide valuable insights into what consumers research, which
are saying or feeling about a brand. It can also provide opportunities for building positive brand experiences observes people
and relationships. in natural settings,
netnographic research
Many companies now excel at listening online and responding quickly and appropriately by conducting involves monitoring
what is termed netnographic research, which involves monitoring online communities of interest, online communities
such as Bimmerpost.com, productreview.com.au and Whirlpool.net.au, in order to gain customer insights of interest to gain
customer insights from
from posts to online forums, blogs and social media generally. In these relatively natural environments,
posts to online forums,
customers make frank disclosures about their experiences and attitudes towards brands and companies. blogs and social media
Researchers use such tools as Leximancer to analyse the communications and graphically present their generally.
findings as themes and concepts.23
Observational netnographic research often yields
the kinds of details that do not emerge from traditional
research questionnaires or focus groups. Whereas
traditional quantitative research approaches seek to test
known hypotheses and obtain answers to well-defined
product or strategy questions, observational research
can generate fresh customer and market insights that
people are unwilling or unable to provide. It provides
a window into customers’ unconscious actions and
unexpressed needs and feelings.
However, some things simply cannot be observed,
such as attitudes, motives or private behaviour. Long-
term or infrequent behaviour is also difficult to
observe. Finally, observations can be very difficult to
interpret. Because of these limitations, researchers
often use observation along with other data collection
methods. Netnographic research: To better understand the views of members of
Information about what consumers do while communities of interest, the content of posts, blogs and social media
trolling the vast digital expanse – what searches they generally can be analysed by such specialised software as Leximancer.
Concept Map generated by Leximancer Pty Ltd
make, the online and mobile sites they visit, how
9780655702412_CH05.indd 159 3/3/20 10:44 AM

they shop and what they buy – is pure gold to marketers. And today’s
marketers are busy mining that gold. Then, in a practice called
online behavioural targeting, marketers use the online data to
target ads and offers to specific consumers. For example, if you place
an Apple iPad in your Amazon.com shopping cart but do not buy it,
you might expect to see some ads for that very type of tablet the next
time you visit your favourite sports website to catch up on the latest
sports scores.
The newest wave of web analytics and targeting takes online
eavesdropping even further – from behavioural targeting to social
targeting. Whereas behavioural targeting tracks consumer movements
across online sites, social targeting also mines individual online social
Behavioural targeting: Marketers watch and analyse connections and conversations from social networking sites. Research
what consumers do online, then use the resulting shows that consumers shop a lot like their friends do and are much more
insights to personalise online shopping experiences. Is it likely to respond to ads from brands friends use. So, instead of having
sophisticated online research or ‘just a little creepy’?
a Brooks.com.au ad for running shoes pop up just because you have
Andresr/Shutterstock.com
recently searched online for running shoes (behavioural targeting), an
online ad for a specific pair of running shoes pops up because a friend you are connected to via Twitter bought
behavioural those shoes last week (social targeting).
targeting Online listening, behavioural targeting and social targeting can help marketers to harness the
Using online data to
target ads and offers to massive amounts of consumer information swirling around the internet. However, as marketers get
specific consumers. more adept at trolling blogs, social networks and other internet and mobile domains, many critics
worry about consumer privacy. At what point does sophisticated online research cross the line into
consumer stalking? Proponents claim that behavioural and social targeting benefit more than
abuse consumers by feeding back ads and products that are more relevant to their interests. But to many
consumers and public advocates, following consumers online and stalking them with ads feels more
than just a little creepy.
Regulators and others are stepping in due to consumer concerns. There may soon be a ‘Do Not Track’
system (the online equivalent to the ‘Do Not Call’ registry) – which would let people opt out of having
their actions monitored online. So far, many major internet browsers and social media have heeded the
concerns by adding extended privacy features to their services.24 For example, the Google browser has
this tracking feature turned off by default – other than in iPhones and iPads, where it is not possible for
technical reasons.25
Thus, privacy is an explosive issue facing online researchers. Failure to address such privacy issues could
result in angry, less cooperative consumers and increased government intervention. Despite these concerns,
most industry insiders predict healthy growth for online marketing research.26
Sampling plan
Marketing researchers usually draw conclusions about large groups of consumers by studying a small
sample sample of the total consumer population. A sample is a segment of the population selected for
A segment of the marketing research to represent the population as a whole. Ideally, the sample should be representative
population selected for
marketing research to so that the researcher can make accurate estimates of the thoughts and behaviours of the larger
represent the population population.
as a whole. Designing the sample requires three decisions. First, who is to be studied (what sampling unit)?
The answer to this question is not always obvious. For example, to learn about the decision-making process
for a new family motor-vehicle purchase, should the subject be the husband, wife, other family members,
dealership salespeople or all of these? The researcher must determine what information is needed and who
is most likely to have it.
9780655702412_CH05.indd 160 3/3/20 10:44 AM

Second, how many people should be included (what sample size)? Large samples give more reliable results
than small samples. However, larger samples usually cost more, and it is not necessary to sample the entire
target market or even a large portion to get reliable results. If well chosen, samples of less than 1 per cent
of a population can often give good reliability.
Finally, how should the people in the sample be chosen (what sampling procedure)? Table 5.5 describes
different kinds of samples. Using probability samples, each population member has a known chance
of being included in the sample, and researchers can calculate confidence limits for sampling error.
But when probability sampling costs too much or takes too much time, marketing researchers often take
non-probability samples, even though their sampling error cannot be measured. These varied ways of drawing
samples have different costs and time limitations, as well as different accuracy and statistical properties.
Which method is best depends on the needs of the research project.
Table 5.5 Types of samples

Probability sample
Simple random sample Every member of the population has a known and equal chance of selection.
Stratified random sample The population is divided into mutually exclusive groups (such as age groups) and
random samples are drawn from each group.
Cluster (area) sample The population is divided into mutually exclusive groups (such as blocks) and the
researcher draws a sample of the groups to interview.
Non-probability sample
Convenience sample The researcher selects the easiest population members from which to obtain information.
Judgment sample The researcher uses his or her judgment to select population members who are good
prospects for accurate information.
Quota sample The researcher finds and interviews a prescribed number of people in each of several
categories.
Research instruments
In collecting primary data, marketing researchers have a choice of two main research instruments – the
questionnaire and mechanical devices.
Questionnaires
The questionnaire is by far the most common instrument, whether administered in person, by phone
or online. Questionnaires are very flexible – there are many ways to ask questions. Closed-end questions
include all the possible answers, and subjects make choices among them. Examples include multiple-choice
questions and scale questions. Open-end questions allow respondents to answer in their own words. In a
survey of airline users, an airline might simply ask, ‘What is your opinion of the Qantas–Emirates alliance?’.
Or it might ask people to complete a sentence: ‘When I fly to London, the most important consideration
is . . .’. These and other kinds of open-end questions often reveal more than closed-end questions because
they do not limit respondents’ answers.
Open-end questions are especially useful in exploratory research, when the researcher is trying to find
out what people think but not measuring how many people think in a certain way. The number of sentences
used is one measure of the quality of responses to online surveys. Closed-end questions, on the other hand,
provide answers that are easier to interpret and tabulate.
Researchers should also use care in the wording and ordering of questions. They should use simple, direct,
unbiased wording. Questions should be arranged in a logical order. The first question should create interest, if
possible, and difficult or personal questions should be asked last so that respondents do not become defensive.
Mechanical instruments
Although questionnaires are the most common research instrument, researchers also use mechanical
instruments to monitor consumer behaviour. Nielsen Media Research attaches people meters to television
9780655702412_CH05.indd 161 3/3/20 10:44 AM

sets, cable boxes and satellite systems in selected homes to record

who watches which programs. Retailers use checkout scanners to record
shoppers’ purchases.
Still other researchers are applying ‘neuromarketing’, measuring
brain activity to learn how consumers feel and respond. Marketing
scientists using MRI scans and EEG devices have learned that tracking
brain electrical activity and blood flow can provide companies with
insights into what turns consumers on and off regarding their brands
and marketing.
Companies ranging from PepsiCo and Disney to Google and
Microsoft now hire neuromarketing research companies, such as
Neurons Inc and Nielsen NeuroFocus, to help figure out what people
are really thinking.27 For example, eBay’s PayPal began pitching its
online payment service as ‘fast’ after brain-wave research showed that
speed appeals to consumers more than security and safety, earlier
themes used in eBay ad campaigns.
Although neuromarketing techniques can measure consumer
involvement and emotional responses second by second, such brain
responses can be difficult to interpret. Thus, neuromarketing is
usually used in combination with other research approaches to gain a
more complete picture of what goes on inside consumers’ heads.
Implementing the research plan

The third step in the marketing research process (see Figure 5.2)
is putting the marketing research plan into action. This involves
Mechanical instruments: To find out what ads work and why, collecting, processing and analysing the information. Data collection
Disney researchers have developed an array of devices to can be carried out by the company’s marketing research staff or by
track eye movement, monitor heart rates and measure other
outside firms. Researchers should watch closely to make sure the
physical responses.
Erich Schlegel/Head Press plan is implemented correctly. They must guard against problems
with data collection techniques and technologies, data quality and
timeliness.
Researchers must also process and analyse the collected data to isolate important information and
insight. They need to check data for accuracy and completeness and code it for analysis. The researchers
then tabulate the results and calculate statistical measures.
Interpreting and reporting the findings

As the final step in the marketing research process, the market researcher must now interpret the findings,
draw conclusions and report them to management. The researcher should not try to overwhelm managers
with numbers and fancy statistical techniques. Rather, the researcher should present important findings and
insights that are useful in the major decisions faced by management.
However, interpretation should not be left only to the researchers. Researchers are often experts in
research design and statistics, but the marketing manager knows more about the problem and the decisions
that must be made. The best research means little if the manager blindly accepts faulty interpretations
from the researcher. Similarly, managers may be biased – they might tend to accept research results that
show what they expected and to reject those they did not expect or hope for. In many cases, findings can
be interpreted in different ways, and discussions between researchers and managers will help point to
the best interpretations. Thus, managers and researchers must work together closely when interpreting
research results, and both must share responsibility for the research process and resulting decisions.
9780655702412_CH05.indd 162 3/3/20 10:44 AM


We have covered a lot of territory. Let’s take a breather and see if ● Could you use the marketing research process to analyse your
you can apply the marketing research process you’ve just studied. career opportunities and job possibilities? (Think of yourself
● What specific kinds of research might Nando’s marketing as a ‘product’ and employers as potential ‘customers’.) If so,
management use to learn more about its customers’ what would your research plan look like?
preferences and buying behaviours? Sketch out a brief
research plan for assessing potential reactions to a new
drive-through service.
Customer database use in direct and

digital marketing
Effective direct and digital marketing relies on having a good customer database at the heart of marketing
operations. We begin this section by defining customer databases, before examining their use.
Customer database defined

A customer database is an organised collection of comprehensive data about individual customers or customer
prospects, including geographic, demographic, psychographic and behavioural data. A good customer database
database can be a potent relationship-building tool. The database gives companies a 360-degree view of An organised collection
of comprehensive
their customers and how they behave. A company is no better than what it knows about its customers. data about individual
When using database technology, the intention is to engage in one-to-one dialogue and elicit a desired, customers or prospects,
measurable response in target groups and individuals. Note that a list and a database are not the same thing. including geographic,
A list is simply names, addresses and contact details, and can be hired for direct-mailing purposes. Those demographic,
psychographic and
prospects who, on being contacted, interact, or agree to interact, with the marketing organisation become behavioural data.
part of its database. Lists are often hired from specialist service organisations, such as AMPCoDirect, which
provides medical and health-care data and marketing lists to reach over 70 000 doctors across Australia.28 list
Databases may take one of three forms: (1) hierarchical, (2) network or (3) relational. Hierarchical Direct and digital
marketing entails hiring
databases have been in use the longest; they permit access to customer transaction data using account lists containing names
numbers, but may not allow the easy extraction of data (data mining) relevant to market segmentation and and contact details
the tailoring of offers. Network databases are similar to hierarchical databases, but with multiple access of qualified potential
points to the data held. This makes them more flexible in use, but they are more expensive to maintain and customers.
more complex to use. Relational databases are now more commonly used in marketing, and the data are
often entered via the web and accessed by marketing management via company intranets/extranets. intranet
Data are stored in two-dimensional tables of rows and columns, where each row represents the attribute A secure web service
for employees only or, in
data for each entity (customer) and columns represent the same attribute (first name, last name, address and
the case of a university,
so on) for all records. The tables are linked together by common keys, such as account numbers, and can be for staff only.
easily reconfigured. Most importantly, the tables are easily accessed and manipulated so as to link a single
record in one table with another record in a second table, or to link many records in one table with many
extranet
An online service
in a second table, or to link each record in a table with many in another table, and on and on in a daisy-chain provided to key
fashion. Large firms tend to use third-party software modules from SAP and Oracle, medium-sized firms customers using a
might be using Linux-based database applications such as PostgresSQL or MySQL, while small businesses secure information base
or transacting website
are likely to be using Microsoft Access or another software package. on the public internet.
A database contains attribute information in columns that may relate to individuals or organisations, set
out under the fields grouped under ‘customer data’, ‘item data’ and ‘invoice data’ shown in Figure 5.3.
These fields are a guideline only. The complexity of the databases used, and whether or not they are linked
9780655702412_CH05.indd 163 3/3/20 10:44 AM

CUSTOMER DATA ITEM DATA INVOICE DATA

• Customer ID • Product code • Invoice number
• Surname • Product cost • Items ordered
• First name(s) • Product pricing • etc.
• Mailing address
• Delivery-to address
• Telephone number
• ANZSIC number, if a business
DATABASE
• Media habits
MANAGEMENT
• Local time zone
• Source of inquiry or order
• Date of inquiry or order REPORTS
Figure 5.3 Direct and digital marketing database fields
to external databases, depends on the nature of the product, service and industry. Most importantly, such
relational databases should enable easy monitoring of the aggregated dollar purchases and profitability of
individual customers, so that their customer lifetime value to the business can be monitored.29 It should be
privacy guidelines noted that privacy guidelines indicate that companies must disclose the purposes for which they are
Some countries, gathering customer information, and must be prepared and able to show individuals the information they
including Australia,
hold on them.30 Moreover, marketing organisations must permit individuals to unsubscribe from such
have extended privacy
legislation that applies to databases where they are used for emails.
most profit and not-for-
profit organisations. Database use in direct and digital marketing
While business-to-business marketers are heavy users of direct and digital marketing databases,
consumer-products marketers also use these databases. This is particularly true of service
organisations, such as airlines, financial services organisations (banks) and hotels; and other
organisations, such as sporting organisations and theatre groups, that have a subscriber base. Fast-
moving consumer goods (FMCG) marketers and their retailing intermediaries increasingly use
customer databases for purposes such as loyalty programs. Most large consumer-products companies
are currently using or building such databases. For example, Palace Cinemas maintains a database of
club members who receive discounted tickets to all movies, with the proviso that ‘no free list’ movies
are excluded. It uses the database to send birthday greetings and a free ticket gift to its database
members just before their birthdays. American Express uses its database to tailor offers of different
location-based value to its various cardholders (blue, green, gold, platinum and black), given that the holders of
marketing each class of card represent a different value to the company. It is capable of linking cardholder
Delivering spending with postcode data. If a new restaurant opens in a particular postcode zone, Amex can
targeted marketing offer a special discount to those cardholders who live within walking distance of the restaurant or
communication to
customers in particular who eat out a lot.
locations, through This is but one form of location-based marketing. Many marketing organisations deliver
mobile devices such targeted marketing communication to customers in particular locations, through mobile devices
as smartphones and such as smartphones and tablets, thereby taking advantage of the GPS features of such devices.31
tablets, thereby taking
advantage of the GPS These organisations recognise that Australasia’s smartphone users are using their phones while they
features of such devices. shop, even if they only use QR (quick response) codes placed in shop windows to find out more about
9780655702412_CH05.indd 164 3/3/20 10:44 AM

the products involved. Smartphone and tablet users are checking prices and comparing product
features, and some are even buying online using their phones.32 With reports of huge growth in the
use of mobile devices by shoppers, businesses are beginning to explore how to use the location
features of these devices to tailor their marketing communications even more closely to individual
consumers.
Marketing organisations use their databases in a number of ways: to identify prospects; to decide which
customers should receive a particular offer; to deepen customer loyalty; to reactivate customers’ purchases;
and for data mining. We examine each of these uses in turn.
• Identifying prospects. Many companies generate sales leads by advertising their products or offers.
Ads generally have a response feature, such as a business reply card, toll-free phone number or
web-form site. The database is built from these responses. The company sorts through the database
to identify the best prospects, then reaches them by mail, phone or personal call in an attempt to
convert them into customers or perhaps to get them to opt-in to receive further information.
• Deciding which customers should receive a particular offer. Companies identify the profile of an ideal
customer for an offer. They then search their databases for individuals most closely resembling the
ideal type. By tracking individual responses, the company can improve its targeting precision over
time. Following a sale, it can set up an automatic sequence of activities: one week later, send a thank-
you note; five weeks later, send a new offer; 10 weeks later (if the customer has not responded), phone
the customer and offer a special discount.
• Deepening customer loyalty. Companies can build customers’ interest and enthusiasm by remembering
their preferences and sending appropriate information, gifts or other materials. For example,
Mars (Uncle Ben’s), a market leader in pet food as well as in chocolate confectionery, maintains an
exhaustive pet database. In Germany, the company has collected the names of virtually every family
that owns a cat. It obtained these names by offering the public a free booklet entitled How to Take Care
of Your Cat. People who request the booklet fill out a questionnaire, providing their cat’s name, age,
birthday and other information. Mars then sends a birthday card to each cat in Germany each year,
along with a new cat-food sample and money-saving coupons for Mars brands. The result is a lasting
relationship with the cat’s owner.
• Reactivating customers’ purchases. The database can help a company to make attractive offers of product
replacements, upgrades or complementary products just when customers might be ready to act.
Appliance marketers usually maintain a customer database containing each customer’s demographic
and psychographic characteristics along with an appliance purchase history. Using this database, the
appliance marketer can assess how long customers have owned their current appliances and which
past customers might be ready to purchase again. They can determine which customers need a new
PVR, stereo receiver or something else to go with other recently purchased electronics products.
Or they can identify the best past customers and send them gift certificates or other promotions
to apply against their next purchase. A rich customer database allows the appliance marketer to
build profitable new business by locating good prospects, anticipating customer needs, cross-selling
products and services, and rewarding loyal customers.
• Data mining. Companies maintain many databases in what today are large data warehouses. Data data mining
mining entails checking databases for patterns and trends that are hypothesised to exist, or to find Checking databases
for patterns and trends
new connections between data items. Modern software enables open-ended queries that involve
that might exist, or to
systematic searches for relationships and patterns within and between databases. Four types of find new connections
relationships might be searched for: (1) associations – for example, the association between sales of between data items.
two product categories; (2) classes – for example, if males aged 25–39 buy beer and disposable
nappies, examination of gender (as a class) might mean that the connection between data in
different fields can be more easily made; (3) clusters – for example, the examination of demographics
9780655702412_CH05.indd 165 3/3/20 10:44 AM

and supermarket location would be undertaken because this is a logical relationship; mining this data
cluster would identify market segments, among other things; and (4) sequences – for example, in
anticipation of finding patterns and trends, a supermarket might predict the incidence of cooked
chicken being purchased based on purchases of snack foods.33
Databases are repositories for any type of data a computer can store – text, numeric data, images
and sounds – and they can all be mined. There are many analytical tools, but their explanation is beyond
our scope. Suffice it to say that the main analytical tools involve such familiar statistical techniques
as regression, correlation and factor analysis, in addition to more elementary visual presentation and
analysis of data using such tools as the Australian-designed Leximancer software. It should not be
forgotten that marketing organisations use their customer databases to maintain customer intimacy,
at times to cross-sell related products and, ultimately, to ensure a repeat purchase of the same brand of
the major product. At all times, these organisations are intent on ensuring they are marketing to the
most profitable customers rather than to all customers, many of whom they can neither satisfy nor make
money from.
Figure 5.4 is a graphical depiction of an attempt by a rugby league sporting magazine to gain new
subscribers as well as have existing customers renew their subscription, using an integrated direct and
digital marketing approach. The company is using interactive subscriber-TV – or pay-TV, as users call it –
to communicate with potential and existing subscribers. Existing subscribers might be made a ‘relationship
offer’ of a free subscription to a movie channel for one week if they take up a two-year subscription to the
magazine ‘on the spot’ using the red button selector provided with their interactive television set. Potential
subscribers might be approached with a different offer via interactive pay-TV to subscribe for a trial period
at no cost, once again on the proviso that they act immediately. As the trial period comes to a close, the
marketing organisation would make a further subscription offer to those who had not renewed, as well as
approach those who trialled the magazine to take up a subscription. Those who did not renew or subscribe
on the first offer might receive a second approach via direct selling.
The key to success in direct and digital marketing is quite often the use of a mailing list in the first
instance, or possibly a database developed from use of such a list. Many firms, such as American Express
International, build up their own databases, but others simply hire a privacy guidelines-compliant list
compiled by other firms. Executives can be sorted by industry, title, geographical location and other fields.
Dun & Bradstreet, The List Group and other service firms hire out such lists.
Subscriber
renewal Offer 1:
EMAIL and
WEBSITE
Interactive New subscriber
Interactive Database
pay-TV/ movie channel
pay-TV maintenance
inbound ‘free subscription’
commercial and evaluation
telemarketing offer
Subscriber
renewal Offer 2:
OUTBOUND
TELEMARKETING
Figure 5.4 An integrated direct and digital marketing approach
9780655702412_CH05.indd 166 3/3/20 10:44 AM


At this point, let’s think about how online, social media and mobile marketing, or is it more of an unwelcome intrusion? In what
marketing affect your brand-buying behaviour and preferences. ways?
● How much of your product research, shopping and actual ● Do you engage directly with any brands or brand communities
buying take place online? How much of that is conducted on through online sites, social media or phone apps? Do your
a mobile device? How, and how much, do your digital and in- online, social media or mobile interactions influence your
store buying activities interact? brand preferences and buying? Discuss.
● How much and what kinds of online, social media and mobile
marketing do you encounter? Do you benefit from such
Analysing and using marketing

information
Information gathered in internal databases and through competitive marketing intelligence and
marketing research usually requires additional analysis. Managers may need help applying the
information to gain customer and market insights that will improve their marketing decisions. This
help may include advanced statistical analysis to learn more about the relationships within a set of data.
Information analysis might also involve the application of analytical models that will help marketers
make more-informed decisions.
Once the information has been processed and analysed, it must be made available to the right decision
makers at the right time. In the following sections, we take a closer look at analysing and using marketing
information.
Customer relationship management

The question of how best to analyse and use individual customer data presents special problems. Most
companies are awash in information about their customers, particularly due to the advent of big data. In fact,
smart companies capture information at every possible customer touch point. These touch points include
customer purchases, salesforce contacts, service and support calls, website and social media site visits,
satisfaction surveys, credit and payment interactions, market research studies – every contact between the
customer and the company.
Unfortunately, this information is usually scattered widely across the organisation. It is buried deep in
the separate databases and records of different company departments. To overcome such problems, many
companies are now turning to customer relationship management (CRM) to manage detailed customer
information about individual customers and carefully manage customer touch points in order to maximise relationship
customer loyalty. management
(CRM)
CRM consists of sophisticated software and analytical tools from such companies as Oracle, Microsoft, Managing detailed
Salesforce.com and SAS that integrate customer information from all sources, analyse it in depth and information about
apply the results to build stronger customer relationships. CRM integrates everything that a company’s individual customers
sales, service and marketing teams know about individual customers, providing a 360-degree view of the and carefully managing
customer touch points
customer relationship. in order to maximise
CRM analysts develop data warehouses and use sophisticated data mining techniques to unearth customer loyalty.
the riches hidden in customer data. A data warehouse is a company-wide electronic database of
finely detailed customer information that needs to be sifted through for gems. The purpose of a data
warehouse is not just to gather information, but to pull it together into a central, accessible location.
Then, once the data warehouse brings the data together, the company uses high-powered data mining
techniques to sift through the mounds of data and dig out interesting findings about customers.
9780655702412_CH05.indd 167 3/3/20 10:44 AM

These findings often lead to marketing opportunities, as company databases,

particularly retailer databases, provide deep insights for marketing decisions.
For example, FlyBuys is Australia’s largest shopping rewards program, involving
Coles Supermarkets and other major retailers. The program enables participating
stores to dig deeply into data obtained from customer loyalty cards. It uses the
customer insights gained for everything from targeting coupons to locating and
stocking its stores. 34
Thus, a marketing organisation is able to integrate information from Roy
Morgan Single Source with their own customer database information and use this
for modelling and predictive purposes.35 By using CRM to understand customers
better, organisations can provide higher levels of customer service and develop
deeper customer relationships. They can use CRM to pinpoint high-value
customers, target them more effectively, cross-sell the company’s products and
create offers tailored to specific customer requirements.
Distributing and using marketing

information
Marketing information has no value until it is used to gain customer insights
and make better marketing decisions. Thus, the marketing information
Roy Morgan Single Source: Through detailed system must make the information readily available to the managers and
evaluation and correlation across hundreds others who need it. In some cases, this means providing managers with
of measures, Single Source helps marketers
regular performance reports, intelligence updates and reports on the results
understand individual consumers, target markets
and populations. of research studies.
Roy Morgan Research But marketing managers may also need non-routine information for special
situations and on-the-spot decisions. For example, a sales manager having
trouble with a large customer may want a summary of the account’s sales and
profitability over the past year. Perhaps a retail store manager who has run out of a best-selling product
may want to know the current inventory levels in the chain’s other stores. Or a brand manager may want
to get a sense of the amount of the social media buzz surrounding the recent launch of a new product.
These days, therefore, information distribution involves entering information into databases and making
it available in a timely, user-friendly way.
Many firms use a company intranet and internal CRM systems to facilitate this process. The intranet
provides ready access to research information, reports, shared work documents, contact information for
employees and other stakeholders, and more. For example, catalogue and web retailers integrate incoming
customer service calls with up-to-date database information about customers’ web purchases and email
inquiries. By accessing this information on the intranet while speaking with the customer, the companies’
service representatives can get a well-rounded picture of each customer’s purchasing history and previous
contacts with the company.
In addition, companies are increasingly allowing key customers and value-network members to access
account, product and other data on demand through extranets. Suppliers, customers, resellers and select
other network members may access a company’s extranet to update their accounts, arrange purchases and
check orders against inventories to improve customer service.36
Thanks to modern technology, today’s marketing managers can gain direct access to a company’s
information system at any time and from virtually anywhere. They can tap into the system from a home
office, hotel room or the local Starbucks – any place they can connect on a laptop, smartphone or tablet.
Such systems allow managers to get the information they need directly and quickly, and tailor it to their
own needs.
9780655702412_CH05.indd 168 3/3/20 10:44 AM


Let’s stop here, think back and be certain you have the ‘big picture’ ● Apply the MIS framework to Converse (a Nike company).
concerning marketing information systems. How might Converse go about assessing marketing
● What is the overall goal of a marketing information system? managers’ information needs, developing the needed
How are the individual components linked, and what does information and helping managers to analyse and use
each contribute? Take another look at Figure 5.1 – it provides the information to gain actionable customer and market
a good organising framework for the entire chapter. insights?
9780655702412_CH05.indd 169 3/3/20 10:44 AM

Student Learning Objective 3. Outline the steps in the

marketing research process.
Learning The first step in the marketing research process involves defining the problem and
Centre setting the research objectives, which may be exploratory, descriptive or causal
research. The second step consists of developing a research plan for collecting
data from primary and secondary sources. The third step calls for implementing
the marketing research plan by gathering, processing and analysing the
Reviewing the learning objectives information. The fourth step consists of interpreting and reporting the findings.
To create value for customers and build meaningful relationships with them,
Additional information analysis helps marketing managers apply the information
marketers must first gain fresh, deep insights into what customers need and
and provides them with sophisticated statistical procedures and models from
want. Such insights come from good marketing information. As a result of the
which to develop more rigorous findings.
recent explosion of ‘big data’ and marketing technology, companies can now
Both internal and external secondary data sources often provide information
obtain great quantities of information, sometimes even too much. Consumers
more quickly and at a lower cost than primary data sources, and they can
themselves are now generating a tidal wave of bottom-up information through
sometimes yield information that a company cannot collect by itself. However,
their smartphones, computers and tablets via online browsing and blogging,
needed information might not exist in secondary sources. Researchers must also
apps and social media interactions, and texting and video. The challenge is to
evaluate secondary information to ensure that it is relevant, accurate, current
transform today’s vast volume of consumer information into actionable customer
and impartial.
and market insights.
Primary research must also be evaluated for these features. Each primary
Learning Objective 1. Explain the importance data collection method – observational, survey and experimental – has its own
of information in gaining insights about the advantages and disadvantages. Similarly, each of the various research contact
methods – mail, telephone, personal interview and online – also has its own
marketplace and customers.
advantages and drawbacks.
The marketing process starts with a complete understanding of the marketplace
and consumer needs and wants. Thus, the company needs sound information Learning Objective 4. Explain how companies use
in order to produce superior value and satisfaction for customers. The company customer databases in direct and digital marketing.
also requires information on competitors, resellers, and other actors and forces
A customer database is an organised collection of comprehensive data
in the marketplace. Increasingly, marketers are viewing information not only as
about individual customers or prospects, including geographic, demographic,
an input for making better decisions but also as an important strategic asset and
psychographic and behavioural data. Marketing organisations use their databases
marketing tool.
in a number of ways: identifying prospects; deciding which customers should
Learning Objective 2. Define the marketing receive a particular offer; deepening customer loyalty; reactivating customers’
purchases; and data mining.
information system and discuss its parts.
Many companies generate sales leads by advertising their products or
The marketing information system (MIS) consists of people and procedures for
offers. Ads generally have a response feature, such as a business reply card,
assessing information needs, developing the needed information and helping
toll-free phone number or web-form site. The database is built from these
decision makers to use the information to generate and validate actionable
responses. Companies identify the profile of an ideal customer for an offer. They
customer and market insights. A well-designed information system begins and
then search their databases for individuals most closely resembling the ideal
ends with users.
type. By tracking individual responses, the company can improve its targeting
The MIS first assesses information needs. The marketing information system
precision over time.
primarily serves the company’s marketing and other managers, but it may also
Companies can build customers’ interest and enthusiasm by remembering
provide information to external partners. Then, the MIS develops information
their preferences and sending appropriate information, gifts or other materials.
from internal databases, marketing intelligence activities and marketing research.
Customer database use can help a company to make attractive offers of product
Internal databases provide information on the company’s own operations and
replacements, upgrades or complementary products just when customers might
departments. Such data can be obtained quickly and cheaply but often needs to
be ready to act. A rich customer database allows the marketer to build profitable
be adapted for marketing decisions.
new business by locating good prospects, anticipating customer needs, cross-
Marketing intelligence activities supply everyday information about
selling products and services, and rewarding loyal customers.
developments in the external marketing environment. Market research consists
Organisations maintain many databases in what today are large data
of collecting information relevant to a specific marketing problem faced by the
warehouses. Data mining entails checking databases for patterns and trends
company. Lastly, the MIS helps users in their marketing analytics whereby they
that are hypothesised to exist, or to find new connections between data items.
analyse and use the information to develop customer insights, make marketing
Modern software enables open-ended queries that involve systematic searches
decisions and manage customer relationships.
for relationships and patterns within and between databases.
9780655702412_CH05.indd 170 3/3/20 10:44 AM

The database also lies at the heart of digital marketing in that personalised ❹ The internet in marketing analytics. What impact has the internet had on
websites are built for visitors who have subscribed to a company’s services. how marketing analytics are conducted? What advantages does the internet
provide over traditional marketing data collection and analytical methods?
Learning Objective 5. Explain how companies (Learning Objective 2) (AACSB: Communication; Reflective Thinking)
analyse and use marketing information.
Information gathered in internal databases and through marketing intelligence Critical thinking exercises
and marketing research usually requires more analysis. This may include advanced ❶ In a small group, identify a problem faced by a local business or not-for-
statistical analysis or the application of analytical models that will help marketers profit organisation and propose a research project addressing that problem.
make better decisions. To analyse individual customer data, many companies Develop a research proposal that implements each step of the marketing
have now acquired or developed special software and analysis techniques – research process. Discuss how the research results will help the business
called customer relationship management (CRM) – that integrate, analyse and or not-for-profit organisation. (Learning Objectives 1, 2 and 5) (AACSB:
apply the mountains of individual customer data contained in their databases. Communication; Analytical Thinking; Reflective Thinking)
Marketing information has no value until it is used to make better marketing ❷ Want to earn a little extra cash? Businesses use focus groups and surveys to
decisions. Thus, the marketing information system must make the information make better marketing decisions, and they might pay for your participation.
available to the managers and others who make marketing decisions or deal Visit <www.PaidFocusGroups.com.au> and <www.myopinions.com.au>,
with customers. In some cases, this means providing regular reports and then review the opportunities available for research participation. Find
updates; in other cases, it means making non-routine information available for two more websites that recruit research participants. Write a brief
special situations and on-the-spot decisions. Many firms use company intranets report of what you found, and discuss the implications for companies
and extranets to facilitate this process. Thanks to modern technology, today’s conducting marketing research when researchers recruit participants this
marketing managers can gain direct access to the information system at any time way. (Learning Objectives 2 and 3) (AACSB: Communication; Use of IT;
and from virtually any location. Reflective Thinking)
❷ Go to the Strategic Business Insights (SBI) website and take the VALS survey
Discussion questions (<www.strategicbusinessinsights.com/vals/presurvey.shtml>). What type
❶ Marketing analytics. Why are marketing analytics important? Are marketing of research is being conducted – exploratory, descriptive or causal? How
analytics only applicable in the case of big data or does the term apply can marketers use this information? (Learning Objectives 2 and 3) (AACSB:
to all marketing data? Justify your answer. (Learning Objective 1) (AACSB: Communication; Use of IT; Reflective Thinking)
Communication; Reflective Thinking)
❷ Marketing information system. What is a marketing information system?
What characteristics should it possess? (Learning Objectives 1, 2 and 3)
(AACSB: Communication)
❸ Netnographic research. What might be the advantages and/or disadvantages
of netnographic research over traditional survey research? (Learning
Objectives 3 and 5) (AACSB: Communication)
Mini cases
5.1 Gathering data
Measuring marketing communication impact
The Nielsen Company has expanded globally with its marketing home-based barcode-scanning unit that uploads home purchase data
research services. In Australia, the company uses its Nielsen Television weekly to Nielsen. Nielsen refers to this consumer panel service as
Audience Measurement (Nielsen TAM) to monitor free-to-air (FTA) and Homescan. Such information can be supplemented with psychographic
subscriber television viewing on behalf of OzTAM (currently owned data by using depth interviews and focus groups when necessary.
by commercial networks Nine, Seven and Ten). Through a separate The latter probing would involve consumers with the same demographic
service and using a separate panel, household composition and profile as those in the Homescan panel, but would not involve the same
geodemographic and behavioural information can be obtained via a respondents.
9780655702412_CH05.indd 171 3/3/20 10:44 AM

Using point-of-sale store scan data, Nielsen is able to provide a Other companies, such as Roy Morgan, also offer single-source data
good picture of sales and market share by unit and dollar volumes research.37
for packaged goods using this retailer-supplied ScanTrack service. ❶ Visit Nielsen Australia at <nielsen.com/au/en.html#1> to learn more
Fresh produce and chilled meats from the butchery and deli sections about its customer insight services and the types of analyses performed
are not tracked via scan data unless individual retailers provide this by this company. Investigate and list the services on offer to clients, giving
information. A separate retail audit service involving butchers and a short explanation for each. Conduct a similar investigation by visiting
supermarket butchery and deli departments is available to obtain this Roy Morgan Research at <roymorgan.com.au>. (Learning Objectives 1
information. and 2) (AACSB: Communication; Analytical Thinking; Use of IT)
Nielsen also provides syndicated single-source research that allows ❷ What is syndicated single-source research as the term is used by Nielsen
detailed analysis of market segments and sub-segments. Nielsen has Research and Roy Morgan Research? Do these companies refer to
invested heavily in client services executives whose job is to analyse data the same thing? Explain your answer. (Learning Objective 2) (AACSB:
and make recommendations to their clients. Communication; Analytical Thinking; Reflective Thinking)
© OzTAM
Television audience measurement: OzTAM is the official source of television
audience measurement, covering the five city metropolitan areas and nationally
for subscription TV (pay-TV).
5.2 Customer insights

Online, mobile and social media marketing: Social data
People have been using Twitter’s social media platform to tweet short bursts at the bottom of the foothills in terms of the kind of global demand for social
of information in 140 characters or less since 2006 and now average 500 data.’ In 2014, Twitter alone earned more than US$70 million from licensing
million tweets a day. The full stream of tweets is referred to as Twitter’s fire its data.38 Clearly there is gold in such data mining.
hose. Various firms analyse data from the fire hose and sell the information ❶ Discuss the value of social data for marketers. (Learning Objectives 1
gleaned from that analysis to other companies. Twitter recently purchased and 2) (AACSB: Communication; Reflective Thinking)
Gnip, the world’s largest social data provider and one of the few companies ❷ A ‘dark social channel’ refers to a private channel or a channel difficult
that had access to the fire hose. Gnip also mines public data from Facebook, to match with other digital channels. An example of a dark channel is
Google+, Tumblr and other social media platforms. Analysing social data has email. However, Google routinely mines its roughly half-billion Gmail
become a big business because companies such as PepsiCo, Warner Brothers users’ emails. Research how Google scans email data and the fallout
and General Motors pay to learn about consumers’ sentiments toward them. from those actions, then summarise your findings. (Learning Objectives
According to the CEO of social media analysis company BrandWatch, ‘We’re 1, 4 and 5) (AACSB: Communication; Use of IT; Reflective Thinking)

The value of information
Conducting research is costly, and the costs must be weighed against the value reduce price in order to maintain market share, or should the company
of the information gathered. Consider a hypothetical company – QuickParts maintain its current price? The company has conducted some preliminary
Online – faced with a competitor’s price reduction on a three-month parts research showing the financial outcomes of each decision under two
supply contract to motor repair customer groups. Should QuickParts also competitor responses: the competition maintains its price or the competition
9780655702412_CH05.indd 172 3/3/20 10:44 AM


lowers its price further. The company feels pretty confident that the competitor acquiring it? One way to assess the value of additional information is to
cannot lower its price further and assigns that outcome a probability (p) of determine the expected value of perfect information (EMVPI), calculated
0.7, which means the other outcome would have only a 30 per cent chance of using the following equation:
occurring (1 − p = 0.3). These outcomes are shown in the table below:
EMVPI = EMVcertainty − EMVbest alternative
Competitive response where
Maintain price Reduce price EMVcertainty = ( p) (highest financial outcomep)

QuickParts action p • 0.7 (1 • p) • 0.3 + (1 − p) (highest financial outcome(1 − p))
Reduce price $160 000 $120 000
If the value of perfect information is more than the cost of
Maintain price $180 000 $100 000 conducting the research, then the research should be undertaken (that
is, EMVPI > cost of research). However, if the value of the additional
For example, if QuickParts reduces its price and the competitor maintains
information is less than the cost of obtaining more information, the
its price, the company would realise $160 000 and so on. From this
research should not be conducted.
information, the expected monetary value (EMV) of each company action
(reduce price or maintain price) can be determined using the following ❶ Calculate the expected monetary value (EMV) of both company actions.
equation: Which action should QuickParts take? (Learning Objectives 1 to 5)
EMV = ( p) (financial outcomep) (AACSB: Communication; Analytical Reasoning)
+ (1 − p) (financial outcome(1 − p)) ❷ What is the expected value of perfect information (EMVPI)? Should
The company would select the action expected to deliver the greatest QuickParts conduct the research? (Learning Objectives 1 to 5) (AACSB:
EMV. More information might be desirable, but is it worth the cost of Communication; Analytical Reasoning)

Might SMS promotions break the law?
The makers of DeepBlueIce soft drink, DBICorp (DBIC), have used use the mobile phone numbers to send bulk SMS messages promoting the
advertising to build membership of the DeepBlueIce Dance Club. dance club events and offering incentives so that people will interact with
The marketing manager, Spike Torn, convinced the company’s directors that the company via SMS, including forwarding the SMS to their friends.
the dance club strategy would enable DBIC to penetrate the youth market Take on the role of a member of Spike Torn’s marketing management
using a one-to-one communication strategy. The company plans to sponsor team. Do you agree with Spike Torn’s plans for the use of the data gathered
DJs, such as Dirty South, at events where it will run competitions in which in the proposed marketing research? If so, why is this an appropriate plan?
consumers will suggest mixer drinks based on DeepBlueIce. It plans to build If not, what alternatives might the company consider, and why? Might
the membership base and gather such information as email addresses, Spike Torn’s planned approach breach the Australian Spam Act 2003 (Cth)
mobile phone numbers and other demographic details under the guise and/or the Do Not Call Register Act 2006 (Cth), or are there steps that the
of conducting marketing research at these events. The company plans to marketers can take to comply with such legislation?
References
1 See Craig Smith, ‘By the numbers: 175 amazing Pinterest statistics’, Digital Marketing 4 For more discussion, see Elizabeth A Sullivan, ‘Analytics in action’, Marketing News,
Ramblings, 2 January 2015, <http://expandedramblings.com/index.php/pinterest- December 2014, pp. 24–33; and Jayson DeMers, ‘2014 is the year of digital marketing
stats/>; and Kerry Flynn, ‘Get ready to see more ads on Pinterest in 2015’, Huffington analytics: What it means for your company’, Forbes, 2 February 2014, <www.forbes.com/
Post, 29 December 2014, <www.huffingtonpost.com/2014/12/29/pinterest- sites/jaysondemers/2014/02/10/2014-is-the-year-of-digital-marketing-analytics-what-it-
ads_n_6390662.html>. means-for-your-company/>. Also see ‘Marketing analytics: What it is and why it matters’,
2 See ‘Big data’, Wikipedia, <http://en.wikipedia.org/wiki/Big_data>, accessed February SAS, <sas.com/en_ph/insights/marketing/marketing-analytics.html>, accessed May 2016.
2015; and Michael Lev-Ram, ‘What’s the next big thing in big data? Bigger data’, 5 Avi Dan, ‘How data nourishes agile marketing at Kraft’, Forbes, 26 October 2014,
Fortune, 16 June 2014, pp. 233–40. <www.forbes.com/sites/avidan/2014/10/26/how-data-nourishes-agile-marketing-at-
3 Andrew Nusca, ‘Despite high tech, the future of marketing is exactly the same: Focus kraft-foods/>; and Jack Neff, ‘Kraft says content delivers four times better ROI than
on customers’, Fortune, 15 July 2014, <http://fortune.com/2014/07/15/big-data-future- ads’, Advertising Age, 15 September 2014, p. 8.
marketing-customer-focus/>; and Phani Nagarjuna, ‘Seven steps to understanding your 6 See ‘Retail Link 2.0’, 8th & Walton, <http://blog.8thandwalton.com/2014/08/retail-
business and monetizing analytics’, Sales & Marketing Management, 9 January 2015, link-2-0/>, accessed September 2015.
<http://salesandmarketing.com/content/seven-steps-understanding-your-business-and- 7 See Sigma Pharmaceuticals and the retail banner groups involved at <www.sigmaco.
monetizing-analytics>. com.au>, accessed May 2016.
9780655702412_CH05.indd 173 3/3/20 10:44 AM

8 Example based on information from Michal Lev-Ram, ‘Samsung’s road to mobile 2010, <info.netbase.com/rs/netbase/images/Netnography_WP.pdf>, accessed February
domination’, Fortune, 4 February 2013, pp. 99–101; Jason Gilbert, ‘Samsung mocks 2013; and Michael Osofsky, ‘Turning online discussions into insight’, December 2010,
iPhone 5, Apple fanboys again in new Galaxy S3 commercial’, Huffington Post, <netbase.com/blog/turning-online-discussions-into-insight>.
1 September 2012, <www.huffingtonpost.com/2012/09/20/samsung-mocks-iphone- 24 For more discussion, see the US ‘Do-Not-Track Online Act of 2013’, <www.congress.
5-commercial_n_1898443.html>; Suzanne Vranica, ‘Tweets spawn ad campaigns’, gov/bill/113th-congress/senate-bill/418>; Fred B Campbell, Jr., ‘The slow death of
Wall Street Journal, 22 October 2012, p. B5; and Luke Villapaz, ‘Samsung mocks Apple “Do Not Track”’, New York Times, 27 December 2014, p. A17; and ‘Do Not Track
iPhone 6 and Apple Watch in new series of ads’, International Business Times, legislation’, <http://en.wikipedia.org/wiki/Do_Not_Track_legislation>, accessed
11 September 2014, <www.ibtimes.com/samsung-mocks-apple-iphone-6-apple-watch- September 2015.
new-series-ads-video-1685612>. 25 For more, see <https://support.google.com/chrome/answer/2790761?hl=en>, accessed
9 George Chidi, ‘Confessions of a corporate spy’, Inc., February 2013, pp. 72–7. May 2016.
10 For more on research firms that supply marketing information, see Laurence N 26 See the Australian Privacy Commissioner website, <www.privacy.gov.au>, accessed
Gold, ‘The 2015 AMA gold global top 50 report’, Marketing News, August 2015. May 2016.
Other information from <www.nielsen.com/us/en/solutions/measurement/retail- 27 See Adam L Penenberg, ‘NeuroFocus uses neuromarketing to hack your brain’,
measurement.html> and <http://thefuturescompany.com/what-we-do/us-yankelovich- Fast Company, 8 August 2011, <www.fastcompany.com/magazine/158/
monitor>, accessed May 2016. neuromarketing-intel-paypal>; and Carmen Nobel, ‘Neuromarketing: Tapping into
11 See Christine Birkner, ‘C’est la vie’, Marketing News, <www.ama.org/publications/ the “pleasure center” of consumers’, Forbes, 2 February 2013, <www.forbes.com/
MarketingNews/Pages/cest-la-vie.aspx>, accessed November 2016; and ‘Landor sites/hbsworkingknowledge/2013/02/01/neuromarketing-tapping-into-the-pleasure-
Families’, <landor.com/thinking/landor-families>, accessed May 2016. center-of-consumers/>. For other examples and discussion, see Roger Dooley, ‘Is
12 Spencer E Ante, ‘The science of desire’, BusinessWeek, 5 June 2006, p. 100; Rhys Starbucks coffee too cheap?’, Forbes, 14 October 2013, <www.forbes.com/sites/
Blakely, ‘You know when it feels like somebody’s watching you . . .’, The Times, 14 May rogerdooley/2013/10/14/is-starbucks-coffee-too-cheap/>; and Thomas Zoega
2007, p. 46; and Jack Neff, ‘Marketing execs: Researchers could use a softer touch’, Ramsey, Neuromarketing & Consumer Neuroscience, Neurons Inc: Rorvig,
Advertising Age, 27 January 2009. Denmark, 2014.
13 See Brooks Barnes, ‘Disney expert uses science to draw boy viewers’, New York Times, 28 See AMPCo, Australasian Medical Publishing Company, <ampco.com.au/>, accessed
14 April 2009, p. A1; Linda Tischler, ‘Every move you make’, Fast Company, April 2004, October 2016.
pp. 73–5; Ellen Byron, ‘Seeing store shelves through senior eyes’, Wall Street Journal, 29 See Ken Magill, ‘E-mail ROI still stunning, still slipping: DMA,’ Direct Magazine,
14 September 2009, p. B1; and Natasha Singer, ‘The fountain of old age’, New York 20 October 2009; ‘E-mail’, Advertising Age’s digital marketing facts 2010 section,
Times, 6 February 2011, p. BU1. 22 February 2010; and ‘Think e-mail marketing is dying? Think again,’ PR Newswire,
14 Adapted from information in Kenneth Hein, ‘Hypnosis brings groups into focus’, 3 May 2011.
Brandweek, 23 May 2008, p. 4. Also see G Svensson, G Wood & M D Callaghan, 30 See the Office of the Australian Information Commissioner’s website, <oaic.gov.au/
‘Masochistic marketing: Volvo Australia’s “so safe” strategy’, Journal of Consumer privacy-law/privacy-act/australian-privacy-principles>, accessed October 2016.
Marketing, 23(7), 2006, pp. 438–44. 31 Michael Jones, ‘3 ways location-based marketing is shaping retail in 2016’, Forbes,
15 Molly Soat, ‘Everything in moderation’, Marketing News, April 2014, pp. 36–46, at p. 38. 3 March 2016, <forbes.com/sites/michaeljones/2016/03/03/location-based-
16 See Roy Morgan Research, ‘Telephone interviewing’, <www.roymorgan.com/services/ marketing/#4f91cdf6196b>, accessed October 2016.
telephone-interviewing>, accessed May 2016. 32 ‘5 genius examples of QR codes in marketing’, Kissmetrics Blog, <blog.kissmetrics.com/
17 For more on content analysis in marketing research, see Harold H Kassarjian, ‘Content genius-qr-codes>, accessed October 2016.
analysis in consumer research’, Journal of Consumer Research, 4(1), 1977, pp. 8–18; 33 For more on the application of data mining in marketing, see Michael J Shaw,
and Christina Goulding, ‘Grounded theory, ethnography and phenomenology: A Chandrasekar Subramaniam, Gek Woo Tan & Michael E Welge, ‘Knowledge
comparative analysis of three qualitative strategies for marketing research’, European management and data mining for marketing’, Knowledge Management Support of
Journal of Marketing, 39(3/4), 2005, pp. 294–308. Decision Making, 31(1), 2001, pp. 127–37.
18 See ‘Pew research internet project’, Pew Internet, 27 February 2014, 34 For more on Flybuys, see <www.flybuys.com.au/about#/>, accessed May 2016.
<www.pewinternet.org/2014/02/27/part-1-how-the-internet-has-woven-itself-into- 35 For more on Roy Morgan Single Source, and how the data are collected and processed,
american-life>. see ‘How we collect and process Single Source data in Australia’, <www.roymorgan.
19 See ‘Internet world stats’, <www.internetworldstats.com/stats.htm>, accessed May com/~/media/files/fact-sheets/ozfactbrowebupdatedaugust2014.pdf?la=en>, accessed
2016. May 2016.
20 See Heath McDonald & Stewart Adam, ‘A comparison of online and postal data collection 36 See Daryl Travis, ‘The best omni-channel brands look more like a cause than a
methods in marketing research’, Marketing Intelligence and Planning, 21(2), 2003, business’, The Hub, August 2014, <www.hubmagazine.com/the-hub-magazine/zappos-
pp. 85–95; and Stewart Adam & Robin N Shaw, ‘Small business perceptions of online omnivalues-082014>.
marketing research’, Australasian Journal of Market Research, 12(1), 2004, pp. 22–32. 37 Joanne Lipman, ‘Single-source ad research heralds detailed look at household habits’,
21 Nadia Cameron, ‘How Telstra is applying data and analytics to customer experience’, Wall Street Journal, 16 February 1988, p. 39; Joe Schwartz, ‘Back to the source’,
CMO, 5 May 2016, <cmo.com.au/article/574112/how-telstra-applying-data- American Demographics, January 1989, pp. 22–6; Thomas Exter, ‘Advertising and
analytics-customer-service>, accessed May 2016; also see Chris Riddell, ‘The top 3 promotion: The one-two punch’, American Demographics, March 1990, pp. 18–21;
directions predictive analytics will take in 2015’, CMO, 10 February 2015, cmo.com.au/ and Magid M Abraham & Leonard M Lodish, ‘Getting the most out of advertising and
article/565924/top-3-directions-predictive-analytics-will-take-2015, accessed May 2016. promotion’, Harvard Business Review, May–June 1990, pp. 50–60. See also OzTAM,
22 For examples, see Australia Online Research, <www.australiaonlineresearch.com/ <www.oztam.com.au>, and ACNielsen Australia, <www.nielsen.com/au/en.html#1>,
content/panels.aspx>, accessed May 2016. accessed May 2016; and Roy Morgan, <roymorgan.com/products/single-source>,
23 For more on netnography, see Robert Kozinets, ‘The field behind the screen: Using accessed May 2016.
netnography for marketing research in online communities’, Journal of Marketing 38 Juliette Garside, ‘Twitter puts trillions of tweets up for sale to data miners’, The Guardian,
Research, 39(1), February 2002, pp. 61–72; Pradeep K Tyagi, ‘Webnography: A new tool 19 March 2015, <theguardian.com/technology/2015/mar/18/twitter-puts-trillions-
to conduct marketing research’, Journal of American Academy of Business, March 2010, tweets-for-sale-data-miners>, accessed November 2016.
pp. 262–8; Robert V Kozinets, ‘Netnography: The marketer’s secret weapon’, March
9780655702412_CH05.indd 174 3/3/20 10:44 AM

SESSION Products and
4
services
• Customer-driven marketing strategy: Creating
value for target customers
• Products, Services and brands: Offering
customer value
• New products: Developing and managing
innovation
9780655702412_CH06.indd 175 3/3/20 10:52 AM

Chapter
6 Customer-driven marketing
strategy: Creating value for target
customers
So far, you have learned what marketing involves and the importance of gaining insights into consumers
and the marketplace environment. With that as background, you are now ready to delve deeper into
marketing strategy and tactics. This chapter takes us further into key customer-driven marketing strategy
decisions – the bases upon which markets are broken up into meaningful customer groups (segmentation),
how we choose which customer groups to serve (targeting), create market offerings that best serve targeted
customers (differentiation) and position the offerings in the minds of consumers (positioning). The chapters
that follow explore the tactical marketing tools – the extended marketing mix – by which marketers bring
these strategies to life.
Learning Objective 1 Define the main steps in designing a customer-driven marketing

strategy: market segmentation, targeting, differentiation and
Learning positioning.
Objectives Customer-driven marketing strategy p. 178
Learning Objective 2 List and discuss the main bases for segmenting consumer and business
markets.
Market segmentation pp. 179–86
Learning Objective 3 Explain how companies identify attractive market segments and
choose a market-targeting strategy.
Market targeting pp. 186–91
Learning Objective 4 Discuss how companies differentiate and position their products for
maximum competitive advantage.
Differentiation and positioning pp. 192–98
9780655702412_CH06.indd 176 3/3/20 10:52 AM

Chapter 6 Customer-driven marketing strategy: Creating value for target customers 177
stomers to ser ve
Select cu
LO 1
ON TAR
ATI rket into
Differ
creat tiate t GE
Define the main steps in designing a en
T
customer-driven marketing strategy:
M ENtal ma ents per ma IN
e su he T
market segmentation, targeting, G he to r segm ior rke G
cu t
FOR TARGETED C
t sto of
Div SE
e
differentiation and positioning. all UE m
UST
ide
VAL
fe valu
sm
rin e
OM
er
ATE
gt
E
RE
ma
Sel et segm
RS
C
rk
ect
targe ents
t
SEGMENTATION
BASES FOR
LO 2
List and discuss the main
bases for segmenting Geographical Demographic Psychographic Behavioural
consumer and business
markets.
STRATEGIES
TARGETING
LO 3
Undifferentiated Differentiated Concentrated Micromarketing
Explain how companies
(mass) (segmented) (niche) (local or individual
identify attractive market
marketing marketing marketing marketing)
segments and choose a
market targeting strategy.
ntage
adva t
itive e righ
pet ing th
com hoos
C
DI
FE
ES
RE ID E N G
F
LUE ANTA
fo e sa tion
r t p os N
Us
N T I F V A
o IO
CE Y E
e
S A N P O S S I B L I V E A DV
LO 4
ing
S
PO
IA
rl m
i
ce ITI
T
N T pr o
De
co
Discuss how companies O D I T

es
C O E T E
n
P
cid go
p N M
h
tua
differentiate and position g IN G E R lue e f e
in
DIFF va mor sam s

w
od hic l pos
their products for maximum dif h i ti a • es
fer differ oning ding ore the h l
competitive advantage. en e
tia nces
map
s Decire for m less • r muc
tors are • mo ore for ss fo
•m • le
Decide o
n value proposition
9780655702412_CH06.indd 177 3/3/20 10:52 AM

178 Session 4 Products and services
Customer-driven marketing strategy

Companies today recognise that they cannot appeal to all buyers in the marketplace, or at least not to
market
all buyers in the same way. Buyers are too numerous, too widely scattered and too varied in their needs
segmentation
Analysing how a market and buying practices. Moreover, the companies themselves vary widely in their ability to serve different
is naturally broken into segments of the market. Instead, like any sound marketer, a company must identify the parts of the market
distinct groups of buyers that it can serve best and most profitably. It must design customer-driven marketing strategies that build
who have different
needs, characteristics the right relationships with the right customers.
or behaviours, and who Thus, most companies have moved away from mass marketing and towards target marketing –
might require tailored identifying market segments, selecting one or more of them and developing products and marketing
products or marketing programs tailored to each. Instead of scattering their marketing efforts (the ‘shotgun’ approach), firms
programs
focus on the buyers who have greater interest in the values that the firms create and can serve best (the
market targeting
‘rifle’ approach).
(targeting)
The process of Figure 6.1 shows the four main steps in designing a customer-driven marketing strategy. In the
evaluating each market first two steps, the company selects the customers that it will serve. Market segmentation involves
segment’s attractiveness analysing a market with the aim of directing marketing focus towards smaller segments of buyers
and selecting one or
with distinct characteristics or behaviours that might require tailored marketing strategies or mixes.
more segments to enter.
The company identifies different ways to segment the market and develops profiles of the resulting
differentiation
Differentiating the market segments. Market targeting (or targeting) consists of evaluating each market segment’s
company’s market attractiveness and selecting one or more market segments to enter.
offering from that In the final two steps, the company decides on a value proposition – on how it will create value for target
offered by competitors,
customers. Differentiation involves differentiating the firm’s market offering from that offered by
to create superior
customer value. competitors, to create superior customer value. Positioning consists of arranging for a market offering to
positioning occupy a clear, distinctive and desirable place in the minds of target consumers relative to competing
Arranging for a market products. We discuss each of these steps in turn.
offering to occupy a
clear, distinctive and
desirable place in
the minds of target
consumers relative to
competing products.
SELECT CUSTOMERS TO SERVE DECIDE ON VALUE PROPOSITION
Segmentation Differentiation
Divide the total market into Differentiate the market offering
smaller segments to create superior customer value
CREATE VALUE
FOR TARGETED
CUSTOMERS
Targeting Positioning
Select the segment or Position the market offering in
segments to enter the minds of target customers
Figure 6.1 Designing a customer-driven marketing strategy
9780655702412_CH06.indd 178 3/3/20 10:52 AM

Market segmentation
Buyers in any market differ in their wants, resources, locations, buying attitudes and buying practices.
Through market segmentation, companies divide large, heterogeneous markets into smaller segments that
can be reached more efficiently and effectively with products and services that match their unique needs.
In this section, we discuss four important segmentation topics: (1) segmenting consumer markets, (2) segmenting
business markets, (3) segmenting international markets and (4) requirements for effective segmentation.
Segmenting consumer markets

There is no single way to segment a market. A marketer has to try different segmentation variables, alone
and in combination, to find the best way to view the market structure. Table 6.1 outlines the main variables
Table 6.1 Bases for identifying and analysing consumer market segments
Variable Typical breakdowns
Geographical
Region Far North Queensland, South-Eastern Queensland, Far North Coast of NSW, NSW Tablelands,
Western NSW, Lakes District – Victoria
City size (population) Under 5000; 5000–20 000; 20 000–50 000; 50 000–100 000; 100 000–250 000;
250 000–500 000; 500 000–1 000 000; 1 000 000–2 000 000; 2 000 000 and over
Density Urban, suburban, rural
Climate Northern, Eastern seaboard, Southern and Western
Demographic
Age (years) Under 6, 7–11, 12–19, 20–34, 35–49, 50–64, 65+
Sex Male, female
Family size (members) 1–2, 3–4, 5+
Family life cycle Young, single; young, married, no children; young, married, youngest child under 6 years; young,
married, youngest child 6 or over; older, married, with children; older, married, no children under
18; older, single; other
Income (annual) Under $10 000; $10 000–$14 999; $15 000–$19 999; $20 000–$29 999; $30 000–$49 999;
$50 000–$99 999; $100 000 and over
Occupation Professional and technical; managers, officials and proprietors; clerical, sales; craftspeople,
supervisors; operatives; farmers; retired; students; homemakers; unemployed
Education Primary school or less; some high school; high school graduate, some TAFE college; TAFE college
graduate; some university; university graduate
Religion Catholic, Protestant, Orthodox, Jewish, Muslim, other
Nationality Australian, British, New Zealander, American, Chinese, French, German, Scandinavian, Italian,
Greek, Middle Eastern, Japanese, Taiwanese, Vietnamese, South African, other
Psychographic
Socioeconomic Quintiles: AB, C, D, E, FG
Status Where education, income and occupation levels are used in combination to indicate status
Values, attitudes and lifestyle Visible Achievement, Something Better, Young Optimists, Socially Aware, Look at Me, A Fairer Deal,
groupings Basic Needs, Real Conservatism, Traditional Family Life, Conventional Family Life
Personality Compulsive, gregarious, authoritarian, ambitious
Behavioural
Purchase occasion Regular occasion, special occasion
Benefits sought Quality, service, economy
User status Non-user, ex-user, potential user, first-time user, regular user
Usage rate Light user, medium user, heavy user
Loyalty status None, medium, strong, absolute
Readiness stage Unaware, aware, informed, interested, desirous, intending to buy
Attitude towards product Enthusiastic, positive, indifferent, negative, hostile
9780655702412_CH06.indd 179 3/3/20 10:52 AM

that might be used in segmenting consumer markets. Here, we look at the main geographic, demographic,
psychographic and behavioural variables.
Geographic segmentation
geographic Geographic segmentation calls for dividing the market into different geographical units, such as
segmentation nations, regions, states, local government areas, cities or even neighbourhoods. A company may decide to
Dividing a market into operate in one or a few geographical areas, or to operate in all areas but pay attention to geographical
different geographical
units, such as nations, differences in needs and wants.
regions, states, local Many companies today are localising their products, advertising, promotion and sales efforts to fit
government areas, cities the needs of individual regions, cities and even neighbourhoods. For example, retailers such as Coles and
or neighbourhoods.
Woolworths operate virtually everywhere but sometimes stock specialised products for specific types of
geographic locations. For example, a shopper in the Sydney suburb of Double Bay would find smoked
eel in the deli cabinet, whereas this product might not be stocked in Melbourne’s Caroline Springs.
Demographic segmentation
demographic Demographic segmentation divides the market into segments based on variables such as age, gender,
segmentation family size, family life cycle, income, occupation, education, religion, race, generation and nationality.
Dividing the market
Demographic factors are the most popular bases for segmenting customer groups. One reason is that
into segments based
on variables such as consumer needs, wants and usage rates often vary closely with demographic variables. Another is that
age, gender, family size, demographic variables are easier to measure than most other types of variables. Even when marketers
family life cycle, income, first define segments using other bases, such as benefits sought or behaviour, they must know segment
occupation, education,
demographic characteristics in order to assess the size of the target market and to reach it efficiently.
religion, race, generation
and nationality.
age and life-cycle Consumer needs and wants change with age. Some companies use age and life-cycle segmentation,
segmentation offering different products or using different marketing approaches for different age and life-cycle
Analysing a market with groups. Some companies focus on a specific age of life-stage groups. For example, Scienceworks offers
the aim of directing
young children with inquisitive minds an opportunity to see how various mechanical and scientific
marketing focus based
on different age and life- apparatus work, including an insight into the workings of the universe through a visit to the planetarium.
cycle groups. Marketers must be careful to guard against stereotypes when using age and life-cycle segmentation.
Although some 80-year-olds fit the doddering stereotypes, others play tennis. Similarly, whereas some
40-year-old couples are sending their children off to university, others are just beginning new families.
Age and life-cycle segmentation: Victoria’s Scienceworks museum and planetarium target those
with enquiring young minds.
https://museumvictoria.com.au/scienceworks/visiting/lightning-room/. Copyright Museum Victoria. Photographer: James Geer.
9780655702412_CH06.indd 180 3/3/20 10:52 AM

Thus, age is often a poor predictor of a person’s life-cycle, health, work or family status, needs and
buying power. Companies marketing to consumers in a family unit usually employ images and appeals
to stress the value and benefits of the market offering, rather than the age of the consumer themselves.
An example of such segmented advertising is an ad for funeral insurance, where the focus is on
unburdening the remaining family members, regardless of age.
Gender
Gender segmentation has long been used as a segmentation variable by clothing, cosmetics, gender
toiletries and magazines marketers. More recently, many mostly women’s cosmetics makers have begun segmentation
marketing men’s lines. For example, Unilever’s Lynx brand of body washes and deodorant sprays targets Dividing a market into
different segments based
men, with product names such as Anarchy, Adrenaline and Africa to denote its various fragrances. Nivea on gender.
markets the Nivea Men range, which includes moisturisers, shaving and shower gels, post-shave balms
and more. Crabtree & Evelyn has evolved from a small, family-run business specialising in soap to an
international marketer of fragrances, toiletries and more, in a range that includes many products for
men, such as fragrances, soaps, body wash and shaving products.
An underdeveloped gender segment can offer new opportunities in markets ranging from consumer
electronics to motorcycles. For example, Harley-Davidson has traditionally targeted men aged
between 35 and 55, but women are now among its fastest-growing customer segments. Female buyers
now account for 12 per cent of new Harley-Davidson purchases, up from only 2 per cent in 1995.
In response, the company is boosting its appeal to women buyers – through such initiatives as Harley
Davidson riding gear designed specifically for women, creating women-based communities through
social media, and more. It recently introduced the SuperLow, a lower-to-the-ground, lighter model
geared towards women. And it hired Victoria’s Secret and Sports Illustrated swimsuit edition model,
Marisa Miller, as a spokesperson. Her riding exploits can be seen in videos on the Harley-Davidson
website and on YouTube. ‘It says, look, this is real stuff,’ says Harley-Davidson CEO, Keith Wandell.
‘A lot of women ride bikes, and here’s a Victoria’s Secret supermodel riding bikes and doing burnouts.’1
Income income
The marketers of products and services – such as cars, clothing, cosmetics, financial services and segmentation
Dividing a market
travel – have long used income segmentation. Many companies target affluent consumers with into different income
luxury goods and convenience services. For example, for a price, luxury hotels provide amenities to segments.
attract specific groups of affluent travellers, such as families,
expectant mums and even pet owners. The 196-metre ship
The World ‘is the largest privately owned residential yacht
on the planet’ and enables its affluent residents to sleep on
deck Balinese-style and ‘wake up in a new destination every
few days’.2
However, not all companies that use income segmentation
target the affluent. For example, many retailers – such as
Best & Less and Harris Scarfe – successfully target low- and
middle-income groups. The core market for such stores is
lower-income families.
While the Global Financial Crisis affected Australia
less severely than it did most countries at the time, more
recently, consumers at all income levels – including affluent
consumers – have cut back on their spending and sought
Income segmentation: The World successfully markets itself as ‘the
greater value from their purchases. In many cases, luxury largest privately owned yacht on the planet’.
marketers targeting high-income consumers have been the The World
hardest hit (see Marketing in Action 6.1).3
9780655702412_CH06.indd 181 3/3/20 10:52 AM

Marketing
in Action ALDI: Offering a ‘same-for-less’ value proposition
6.1
Whether selling fresh food, clothing, personal computers or mobile phones, to (if you could find one) and carry it to your car. This heroic effort was rewarded by
be successful in the marketplace, organisations need to understand and then substantial price savings. But you had earned it!
satisfy their customers. Some players in the Australian retail arena have been Franklins found it had created an offer that did not appeal to the market.
able to leverage segmentation, targeting and positioning concepts to support It had become confused in its segmentation strategy and, as a result, the brand
their market entry strategies. became incorrectly positioned in the minds of its core segments. In 2001,
For many years, the large retail chains Coles and Woolworths have dominated Franklins was broken up and the parts were sold to other companies, including
the Australian supermarket industry, with the latter considered the market leader. Coles, Woolworths and a newcomer, ALDI.
These companies were able to segment the marketplace successfully in the
knowledge that Australian consumers could be divided into three broad groups ALDI spots the gap down under
– premium, convenience and discount buyers. Armed with this segmentation
information, each player in the market was able to position itself based on its Franklins’ inability to reposition itself successfully in the marketplace provided a
ability to appeal to specific customer segments. perfect opportunity for the large German retail conglomerate, ALDI, to enter the
At one time, a third retailer, Franklins, competed with Coles and Woolworths market. ALDI – the secret grocer in this story – could see that one part of the
but at the price-conscious end of the market. In the early 1990s, Franklins’ senior Australian retail market (formerly serviced by Franklins), the discount segment,
executives decided they wanted to reposition the business by copying the fresh- was now not serviced by any of the large retail players.
food-retailing positioning concept that Coles and Woolworths were successfully Established in the town of Essen in Germany’s Ruhr Valley, with the
applying, but to offer it at a discount price. It was thought that this new target first foundation stone laid in 1913, the privately owned ALDI operates more
segment for the business would grow the company’s market share and its than 10 000 stores in 18 countries across Europe, the United States and
profitability. Australia. The company operates as two separate groups: ALDI North and
Franklins launched a series of fresh-food stores and added fresh-food ALDI South. ALDI North comprises the northern region of Germany, Belgium,
departments to many of its existing stores. While this strategy seemed a Denmark, France, Luxembourg and the Netherlands. ALDI South comprises
positive move, problems soon arose. The company could not match the buying southern Germany, Austria, the United Kingdom, Ireland, the United States
power of its rivals, and management was not effective in containing the higher and Australia. The company has an annual sales turnover of more than
costs (and therefore the resulting selling prices) associated with fresh-food 50 billion euros (approximately A$72 billion, depending on exchange rates).
retailing. In early 2001, Franklins lost market share in the four states in which It differs from local retailers by offering a limited range of about 1300 of the
it operated (Queensland, New South Wales, Victoria and South Australia). In its most popular products, mainly under its private label, ‘ALDI’. By comparison,
key NSW market, its share fell from 25.6 per cent to 24.2 per cent. In the retail Coles Supermarkets and Woolworths offer up to 20 000 items, largely national
market, where profits are based on large-volume sales and very small margins brands, but with increasing numbers of products carried under retailer brands.
per item sold, the loss of one percentage point in market share equates to a From the outset, ALDI was successful in gaining consumer acceptance of
substantial profit reduction, or even financial disaster. Additionally, Franklins’ private-label brands.
fresh-food concept was too highly priced relative to its stated positioning, While the overall market share of private-label brands stood at about
and so the price-sensitive core segment became alienated. At the same time, 28 per cent in the United Kingdom in 2006, in Australia it was much lower until
neither potential nor existing shoppers accepted that Franklins could sell recent times. Private-label market share in Australia has risen to some 20 per cent
fresh food. As a consequence, the retailer failed to gain the anticipated new of supermarket brands according to IBISWORLD market research, and is expected
customers while, at the same time, it was also losing its loyal core of discount- to grow to 35 per cent within five years. A consumer survey by Canstar Blue
sensitive buyers. showed that ‘the proportion of Australian shoppers buying private labels increased
Franklins became a victim of its ambition to emulate Woolworths and Coles, from 44% to 65% in just six months’.
revealing its poor understanding of the requirements of repositioning a strongly ALDI’s stores are situated mainly in areas where the price-conscious
entrenched brand and retailing concept. One of the original appeals of Franklins congregate, such as adjacent to the direct factory outlets at Moorabbin airport
to price-conscious consumers was the way in which you had to ‘fight’ your way in Melbourne; in other words, in the heartland of its selected target market.
through the narrow aisles, strain your back to reach items high on the shelves, However, ALDI also locates in shopping centres when the opportunity presents
line up and wait at checkouts and, finally, pack your own groceries into a carton itself.
9780655702412_CH06.indd 182 3/3/20 10:52 AM

aldi.com.au, 16 February 2017

Given its experience and timing, ALDI was able to enter the Australian market private-label brands, and may portend the arrival of international giants, such as
in 2001 with ease since the needs and wants of a large group of consumers were Tesco and Walmart, if they conquer the more populous markets of China, India
not being met by the existing retailers. If Franklins had been able to continue to and Russia.
service its natural market segment, ALDI’s penetration of the Australian market Sources: See ‘Aldi history’ at <corporate.aldi.com.au/en/about-aldi/aldi-history/>,
would have been much slower and its potential more limited. accessed November 2016. Also see Neil Shoebridge, ‘A new brand spanking’, BRW,
6 May 2010; Eli Greenblat, ‘Costco gets another $110 million from US parent for
So, too, did the Coles Group’s loss of focus and confused supermarket Australian expansion’, Sydney Morning Herald, 30 December 2013; Jeffrey Hutton,
positioning help ALDI to grow in 2006/07. The Coles Group made the decision ‘Corbett’s fresh idea for rival’, BRW, 18–22 August 2007, p. 9; Jason Baker, GM
IBISWorld, ‘Brand in the house’, BRW – ‘Economy Watch’, 19 April 2007; Adelle
to switch nearly all its Bi-Lo stores to the perceived more-upmarket Coles
Ferguson, ‘Envy’, BRW, 14 January 2002; Neil Shoebridge, ‘Franklins’ chief has a job
Supermarkets brands and, in so doing, vacated the price-conscious end of ahead’, BRW, 1 February 1999; Michelle Hannen, ‘Patient ALDI is buying carefully’,
BRW, 27 September 2001; Graham Ruddick, ‘Five numbers that show how Aldi has
the market. Partway through this change, the Coles Group was purchased by
revolutionised grocery shopping’, The Telegraph, 29 September 2014; Frank Chung,
Wesfarmers – owners of the highly successful ‘big box’ hardware retailer, ‘Supermarket monsters: How Coles and Woolworths suffocate us’, 18 June 2015,
Bunnings – bringing to a halt what would prove to be a poor marketing decision <www.news.com.au/finance/business/retail/supermarket-monsters-how-coles-
and-woolworths-suffocate-us/news-story/c901feb4f6c255d3a6b613140cbea30c>,
owing to the loss of brand asset value involved. accessed November 2016; Catie Low, ‘Supermarket chains Woolworths and Coles struggle
The lesson for marketers is that market segmentation is essential. But, just as with private label brands against Aldi’, Sydney Morning Herald, 11 June 2016; ALDI
International website, <www.aldi.com>, accessed November 2016. Quoted private-label
importantly, organisations need to assess critically their capabilities to satisfy a shares reported in Ronelle Richards, ‘Aldi winning the private label race as Aussie shoppers
selected market segment and determine whether there is a competitive advantage increasingly shun big name grocery brands: Research’, smartcompany, <smartcompany.
com.au/marketing/sales/49578-aldi-winning-the-private-label-race-as-aussie-shoppers-
that will enable them to fend off potential new entrants. While ALDI has stuck increasing-shun-big-name-grocery-brands-research>, accessed November 2016.
closely to its position as a discounter of packaged food items, it also features
Wednesday and Saturday themed product sales, known as ‘Special Buys’, that Questions
include lawn mowers, televisions and camping gear among many other lines, and ❶ Do you think that shoppers at ALDI see the brands offered there as retailer
has used these to develop and maintain its competitive advantage against its rivals. (private-label) brands or as ‘regular’ brands?
Although ALDI has made consumers more price conscious, it does not appear to ❷ How is ALDI positioned relative to its competitors in the minds of people
have any intention of competing at the upmarket end of Australian grocery retailing. you know?
The company recognises that a move into that arena would lead it into the same ❸ How do the various grocery-market segments perceive private-label brands
trap that Franklins fell into and, in all likelihood, provoke the local chains to retaliate. in your country? Is there room for growth?
ALDI may not face its traditional market segments with everything going ❹ What are the reasons behind your answer to Question 3? Do these reasons
its way forever. Costco’s arrival in Australia has continued the move towards apply equally to all market segments? Explain your answer.
9780655702412_CH06.indd 183 3/3/20 10:52 AM

Psychographic segmentation
Psychographic segmentation divides buyers
into different segments based on social class,
lifestyle or personality characteristics. People
in the same demographic group can have very
different psychographic profiles.
In Chapter 4, we discussed how the products
people buy reflect their lifestyles. As a result,
marketers often segment their markets by consumer
lifestyles and base their marketing strategies on
lifestyle appeals. For example, although both
Gloria Jean’s and Starbucks are coffee shops, they
offer very different product assortments and store
atmospheres. Yet each succeeds because it creates
just the right value proposition for its unique mix
of customer lifestyles. Starbucks targets more
‘high-brow’ young professionals, whereas Gloria
Jean’s targets the ‘average person’.
Personality variables: True North offers enhanced levels of comfort and luxury
to those wanting to experience luxury adventure cruises in a style akin to one of We see lifestyle differences emerging in
the world’s most exclusive hotels. attitudes to car ownership as city-dwelling
North Star Cruises professionals turn to sharing cars and bicycles.
These are not rental activities in the usual sense
as they involve hourly rentals, with pickup and
psychographic drop-off points scattered around cities. Businesses such as GreenShareCar, GoGet and FlexiCar
segmentation offer many benefits to private car users, while Melbourne Bike Share caters to those wanting to
Dividing a market into
make short city trips. In both cases, Australian lifestyles differ from European and North American
different segments
based on social class, lifestyles in this regard.4
lifestyle or personality Marketers also use personality variables to segment markets. For example, cruises to the Kimberley
characteristics. region or to West Papua and Papua New Guinea target adventure seekers. While some cruises to the
Kimberley region appeal to high-energy couples and families, with their many outdoor activities, True
North is designed to allow discerning adventurers to experience the wilderness in surroundings more
akin to one of the world’s most exclusive hotels. By contrast, P&O Cruises are varied and the six ships in
the fleet offer choices for adventurers, cultural tourists, wilderness and wildlife seekers, beach lovers and
sporty types, as well as catering for families both young and old, young couples and active older people,
behavioural
depending on their needs.5
segmentation
Dividing a market into
segments based on
consumer knowledge, Behavioural segmentation
attitudes, uses or Behavioural segmentation divides buyers into segments based on their knowledge, attitudes, uses
responses to a product. or responses to a product. Many marketers believe that behaviour variables are the best starting point
occasion for building market segments.
segmentation
Dividing the market Occasions
into segments according Buyers can be grouped according to occasions when they get the idea to buy, actually make their
to occasions when purchase or use the purchased item. Occasion segmentation can help firms build up product
buyers get the idea to
usage. For example, most consumers of fruit juice drink it in the morning, but marketers such as
buy, actually make their
purchase or use the Boost Juice want juices to be seen as a part of a healthy lifestyle and to be consumed throughout
purchased item. the day.
9780655702412_CH06.indd 184 3/3/20 10:52 AM

Some holidays, such as Mother’s Day and Father’s Day, were originally promoted partly to increase
the sale of chocolates and sweets, flowers, cards and other gifts. And many marketers prepare special
offers and ads for holiday occasions. For example, chocolate marketers with impulse lines such as Cherry
Ripe, Mars bars and Violet Crumble bars, and specialty lines such as Lindt, make up special Easter egg
look-alike products to take advantage of the Easter selling period.
Benefits sought
A powerful form of segmentation is to group buyers according to the different benefits they seek from the
product. Benefit segmentation requires finding the main benefits people look for in the product benefit
class, the kinds of people who look for each benefit and the main brands that deliver each benefit. segmentation
Analysing a market with
The Athlete’s Foot markets its product lines in Australia and New Zealand according to benefits that
the aim of directing
different consumers seek from their sporting, leisure and comfort footwear, and must target the benefit marketing focus based
segment or segments that it can serve best and most profitably, using appeals that match each segment’s on the different benefits
benefit preferences. that consumers seek
from the product.
User status
Markets can be segmented into non-users, ex-users, potential users, first-time users and regular users
of a product. Marketers want to reinforce and retain regular users, attract targeted non-users and
reinvigorate relationships with ex-users.
Included in the potential user group are consumers facing life-stage changes – such as newlyweds
and new parents – who can be turned into heavy users. For example, Bounty Bags are distributed to
Australian mothers-to-be and new mothers by hospital staff or at antenatal classes. The bags contain
product samples the new mother may not have used before, such as nappies and baby wipes, as well as
parenting magazines and local area health-care information booklets.6
Usage rate
Markets can also be segmented into light, medium and heavy product users. Heavy users are often a
small percentage of the market but account for a high percentage of total consumption. For example,
smartphone users who access the internet may be classified as heavy users based on their use of high-
bandwidth services such as peer-to-peer file
sharing, or on the amount of time they spend in
social media communication. Heavy users may
require more expensive data plans compared to
those required by light users of these services.
Either way, the telecommunications companies
(telcos) target heavy users, as they provide a
higher return on investment.
Loyalty status
A market can also be segmented by consumer
loyalty. Consumers can be loyal to brands
(ColdPower), stores (Target) and companies
(Toyota). Buyers can be divided into groups
according to their degree of loyalty.
Some consumers are completely loyal – they
Consumer loyalty: Attendees view new MacBook Pro laptop computers on display
buy one brand all the time. For example, as we during an event at Apple Inc.’s California headquarters in 2016. Apple introduced
discussed in Chapter 4, Apple has an almost the first overhaul of its MacBook Pro laptop in more than four years, demonstrating
cult-like following of loyal users. Sony Play dedication to a product that represents a small percentage of revenue.
David Paul Morris/Bloomberg via Getty Images
Station users can be almost as fanatical, judging
9780655702412_CH06.indd 185 3/3/20 10:52 AM

by the fact that some 1 million PS4s were sold in

the first 24 hours following the product’s release in
November 2013, and over 40 million units were sold
worldwide in the three years that followed.7 Other
consumers are somewhat loyal – they are loyal to
two or three brands of a given product, or favour
one brand while sometimes buying others. Still other
buyers show no loyalty to any brand. Either they
want something different each time they buy, or they
buy whatever is a price special.
A company can learn a lot by analysing loyalty
patterns in its market. It should start by studying its
own loyal customers. For example, by studying PS3
and PS4 fanatics, Sony can better pinpoint its target
market and develop marketing appeals. Highly loyal
customers can be a valuable asset. They often promote
the brand and the company through personal word
of mouth and via social media. By studying its less-
Behavioural segmentation extended: Using multiple segmentation bases,
Roy Morgan Values Segments assist marketing organisations to find out what loyal buyers, the company can detect which brands
segments think, feel and aspire to, and how they act. are most competitive with its own. By looking at
Source: Roy Morgan. customers who are shifting away from its brand, the
Devised by Michele Levine of Roy Morgan Research and Colin Benjamin of the Horizons Network
company can learn about its marketing weaknesses
and take action to correct them.
Market targeting
Market segmentation reveals the firm’s market segment opportunities. The firm now has to evaluate
the various segments and decide how many and which segments it can serve best. We now look at how
companies evaluate and select target segments.
Evaluating market segments

In evaluating different market segments, a firm must look at three factors: (1) segment size and growth,
(2) segment structural attractiveness, and (3) company objectives and resources. The company must first
collect and analyse data on current segment sales, growth rates and expected profitability for various
segments. It will be interested in segments that have the right size and growth characteristics. But ‘right
size and growth’ is a relative matter. The largest, fastest-growing segments are not always the most
attractive ones for every company. Smaller companies may lack the skills and resources needed to serve
the larger segments. Or they may find these segments too competitive. Such companies may target
segments that are smaller and less attractive, in an absolute sense, but that are potentially more profitable
for them.
The company also needs to examine major structural factors that affect long-run segment
attractiveness.8 For example, a segment is less attractive if it already contains many strong and aggressive
competitors. The existence of many actual or potential substitute products may limit prices and the profits
that can be earned in a segment. The relative power of buyers also affects segment attractiveness. Buyers
with strong bargaining power relative to sellers will try to force prices down, demand more services and
set competitors against one another – all at the expense of seller profitability. Finally, a segment may be
less attractive if it contains powerful suppliers who can control prices or reduce the quality or quantity of
ordered goods and services.
9780655702412_CH06.indd 186 3/3/20 10:52 AM

Even if a segment has the right size and growth and is structurally attractive, the company must
consider its own objectives and resources. Some attractive segments can be dismissed quickly because
they do not align with the company’s long-run objectives. Or the company may lack the skills and
resources needed to succeed in an attractive segment. For example, given current economic and
resource conditions, the economy segment of the motor vehicle market is large and growing. Even
so, given its company objectives and resources, it would make little sense for luxury-performance
car maker BMW to enter this segment and compete head-on with the likes of Hyundai and Proton.
A company should enter only those segments in which it can create superior customer value and gain
advantages over competitors.
Selecting target market segments

After evaluating different segments, the company must decide which and how many segments it will
target. A target market consists of a set of buyers who share common needs or characteristics that target market
the company decides to serve. Market targeting can be carried out at several different levels. Figure 6.2 A set of buyers sharing
common needs or
shows that companies can target very broadly (undifferentiated marketing), very narrowly
characteristics that the
(micromarketing) or somewhere in between (differentiated or concentrated marketing). company decides to
serve.
Undifferentiated marketing
Using an undifferentiated marketing (or mass marketing) strategy, a firm might decide to ignore undifferentiated
market segment differences and target the whole market with one offer. This mass-marketing strategy (mass) marketing
A market-coverage
focuses on what is common in the needs of consumers, rather than on what is different. The company
strategy in which a firm
designs a product and a marketing program that will appeal to the largest number of buyers. decides to ignore market
As noted earlier in the chapter, most modern marketers have strong doubts about this strategy. segment differences
Difficulties arise in developing a product or brand that will satisfy all consumers. Moreover, mass and go after the whole
market with one offer.
marketers often have trouble competing with more-focused firms that do a better job of satisfying the
needs of specific segments and niches.
Differentiated marketing
Using a differentiated marketing (or segmented marketing) strategy, a firm decides to target differentiated
several market segments and designs separate offers for each. Toyota Corporation produces several (segmented)
brands of cars – from Toyota (Corolla, Camry and Aurion) and Lexus (IS, GS and LS models) – each marketing
A market-coverage
targeting its own segments of car buyers. Procter & Gamble markets various household-care brands, not strategy in which a firm
to mention such beauty and grooming brands as Head & Shoulders, Olay, Pantene and Wella, which decides to target several
compete with each other and with competitor Unilever’s brands on supermarket shelves. Unilever’s market segments and
designs separate offers
personal-care brands include Dove, Impulse, Lifebuoy, Lux, Lynx, Pears, Rexona, Sunsilk and Vaseline.
for each.
Multibrand distributor Unilever uses differential marketing to offer a range of personal-care brands that
tap into consumer lifestyles and aspirations; check out its website at <www.unilever.com.au/brands/>.
By offering product and marketing variations to segments, companies such as Toyota, P&G and
Unilever, among others, hope for higher sales and a stronger position within each market segment.
Undifferentiated Differentiated Concentrated Micromarketing

(mass) (segmented) (niche) (local or individual
marketing marketing marketing marketing)
TARGETING TARGETING
BROADLY NARROWLY
Figure 6.2 Market targeting strategies
9780655702412_CH06.indd 187 3/3/20 10:52 AM

Developing a stronger position within several segments creates more total sales than does undifferentiated
marketing across all segments.
But differentiated marketing also increases the costs of doing business. A firm usually finds it more
expensive to develop and produce, say, 10 units of 10 different products rather than 100 units of one
product. Developing separate marketing plans for the separate segments requires extra marketing
research, forecasting, sales analysis, promotion planning and channel management. And trying to reach
different market segments with different advertising campaigns increases promotion costs. Thus, the
company must weigh increased sales against increased costs when deciding on a differentiated marketing
strategy.
Concentrated marketing
concentrated Using a concentrated marketing (or niche marketing) strategy, instead of going after a small
(niche) marketing share of a large market, the firm goes after a large share of one or a few smaller segments or niches. For
A market-coverage example, NightOwl’s vision is ‘more choice, more value’.9 It has been in business for over 40 years and has
strategy in which a
firm goes after a large stores in Queensland, New South Wales and Victoria. The segment the firm targets is buyers of grocery
share of one or a few and convenience demand products, who may buy at any time in the 24 hours that most stores are open.
segments or niches. Through concentrated marketing, the firm achieves a strong market position because of its
greater knowledge of consumer needs in the niches it serves and the special reputation it acquires. It
can market more effectively by fine-tuning its products, prices and programs to the needs of carefully
defined segments. It can also market more efficiently, targeting its products or services, channels and
communications programs towards only consumers that it can
serve best and most profitably.
Whereas segments are fairly large and normally attract
several competitors, niches are smaller and may attract only one
or a few competitors. Niching lets smaller companies focus their
limited resources on serving niches that may be unimportant
to or overlooked by larger competitors. Many companies start
as nichers to get a foothold against larger, more-resourceful
competitors and then grow into broader competitors.
In contrast, as markets change, some megamarketers
develop niche products to create sales growth. For example, in
recent years, as consumers have grown more health conscious,
the demand for carbonated soft drinks has declined while the
Concentrated marketing: NightOwl’s franchise stores serve market for energy drinks and juices has grown. To meet this
the market segment seeking grocery and convenience products
24 hours a day. shifting demand, mainstream cola marketers PepsiCo and
© LADO/Shutterstock.com Coca-Cola have both developed or acquired their own niche
products, ranging from low-kilojoule carbonated soft drinks
(CSDs) to enhanced waters, energy drinks and juices.10
Today, the low cost of setting up shop on the internet makes it even more profitable to serve seemingly
minuscule niches. Small businesses, in particular, are realising riches from serving small niches on the
web. Consider Etsy:
Etsy is ‘the world’s handmade marketplace’ – selling everything from handmade soaps to vintage
fedoras, and even Vampire hunting kits. Sometimes referred to as eBay’s funky little sister, the Etsy
online crafts-fair website is a far cry from the old-fashioned street-corner flea market. Thanks to the
reach and power of the web, Etsy now counts 1.6 million active sellers, more than 26 million active
buyers and over 35 million listings in nearly every country in the world. It reported a 33 per cent
revenue growth in the third quarter of 2016, with annual gross merchandise sales of over US$2.4
billion. Etsy’s vibrant marketplace is more than an e-business site; it is a thriving community.
9780655702412_CH06.indd 188 3/3/20 10:52 AM

For example, it sponsors actual and virtual meet-ups organised by location (from Syracuse to
Saskatchewan and Singapore), medium (papier-mâché, mosaic), and interest area (Chainmailers
Guild, Lizards and Lollipops). Etsy’s mission is ‘to reimagine commerce in ways that build a more
fulfilling and lasting world’. It aims to build a platform where ‘creative entrepreneurs can find
meaningful work selling their goods in both global and local markets, where thoughtful consumers
can discover those goods and build relationships with the people who make and sell them’.11
Concentrated marketing can be highly profitable. At the same time, it involves higher-than-normal
risks. Companies that rely on one or a few segments for all of their business will suffer greatly if the
segment turns sour. Or larger competitors may decide to enter the same segment with greater resources.
For these reasons, many companies prefer to diversify in several market segments.
Micromarketing
Differentiated and concentrated marketers tailor their offers and marketing programs to meet the needs
of various market segments and niches. At the same time, however, they do not customise their offers to
each individual customer. Micromarketing is the practice of tailoring products and marketing micromarketing
programs to suit the tastes of specific individuals and locations. Rather than seeing a customer in every The practice of tailoring
products and marketing
individual, micromarketers see the individual in every customer. Micromarketing includes local marketing
programs to the needs
and individual marketing. and wants of specific
individuals and local
Local marketing customer segments –
Local marketing involves tailoring brands and promotions to the needs and wants of local customer includes local marketing
and individual marketing
groups – cities, neighbourhoods and even specific stores. For example, large retailers customise their
merchandise on a regional basis to meet the needs of local shoppers.
local marketing
Advances in communications technology have given rise to a new high-tech version of location- Tailoring brands and
based marketing. By coupling mobile phone services with GPS devices, many marketers are now promotions to the
targeting customers wherever they are with what they want. For example, Starbucks’ Mobile Order and needs and wants of local
customer segments –
Pay feature on a mobile app uses a customer’s proximity to a store to enable the customer to order ahead,
cities, neighbourhoods
then just walk in and collect their purchase.12 and even specific stores.
Local marketing has some drawbacks, particularly in relatively small markets such as Australia and
New Zealand. It can drive up manufacturing and marketing costs by reducing economies of scale. It can
also create logistics problems as companies try to meet the varied requirements of different regional
and local markets. Further, a brand’s overall image might be diluted if the product and message vary too
much in different localities.
Still, as companies face increasingly fragmented markets, and as new supporting technologies develop,
the advantages of local marketing often outweigh the drawbacks. Local marketing helps a company to
market more effectively in the face of pronounced regional and local differences in demographics and
lifestyles. It also meets the needs of the company’s first-line customers – retailers – who prefer more
finely tuned product assortments for their neighbourhoods.
Individual marketing individual

In the extreme, micromarketing becomes individual marketing – tailoring products and marketing marketing
programs to the needs and preferences of individual customers. Individual marketing has also been Tailoring products and
marketing programs
labelled one-to-one marketing, mass customisation and markets-of-one marketing. to the needs and
The widespread use of mass marketing has obscured the fact that, for centuries, consumers were preferences of individual
served as individuals: the tailor custom-made a suit, the cobbler designed shoes for an individual, customers – also
labelled ‘one-to-one
the cabinetmaker made furniture to order. Today, however, new technologies are permitting many
marketing’, ‘customised
companies to return to customised marketing. More-detailed databases, robotic production and marketing’ and ‘markets-
flexible manufacturing, and interactive communication media, such as smartphones and the internet, of-one marketing’.
9780655702412_CH06.indd 189 3/3/20 10:52 AM

have all combined to foster ‘mass customisation’. Mass customisation is the process through which
firms interact one-to-one with masses of customers to design products and services tailor-made to
individual needs.
Dell creates custom-configured computers. Visitors to Nike’s NikeID website can personalise their
sneakers by choosing from hundreds of colours and putting an embroidered word or phrase on the
tongue. Marketers are also finding new ways to personalise promotional messages. For example, in
overseas markets, plasma screens placed in shopping malls can now analyse shoppers’ faces and place ads
based on an individual shopper’s gender, age or ethnicity:
Watch an advertisement on a video screen in a mall, health club or grocery store and there is a
growing chance that the ad is watching you too. Small cameras can now be embedded in or around
the screen, tracking who looks at the screen and for how long. With surprising accuracy, the system
can determine the viewer’s gender, approximate age range and, in some cases, ethnicity – and change
the ads accordingly. That could mean razor ads for men, cosmetics ads for women and videogame
ads for teens. Or a video screen might show a motorcycle ad for a group of men, but switch to a
minivan ad when women and children join them. ‘This is proactive merchandising,’ says a media
executive. ‘You’re targeting people with smart ads.’13
Business-to-business marketers are also finding new ways to customise their offerings. For example,
John Deere manufactures seeding equipment that can be configured in more than 2 million versions to
individual customer specifications. The seeders are produced one at a time, in any sequence, on a single
production line. Mass customisation provides a way to stand out against competitors.
Unlike mass production, which eliminates the need for human interaction, one-to-one marketing
has made relationships with customers more important than ever. Just as mass production was the
marketing principle of the past century, interactive marketing is becoming a marketing principle for the
21st century. The world appears to be coming full circle – from the good old days when customers were
treated as individuals, to mass marketing when nobody knew your name, and back again.
Choosing a targeting strategy

Companies need to consider many factors when choosing a market-targeting strategy. Which
strategy is best depends on company resources. When the firm’s resources are limited, concentrated
marketing makes the most sense. The best strategy also depends on the degree of product variability.
Undifferentiated marketing is more suited to uniform products, such as grapefruit or steel. Products
that can vary in design, such as cameras and cars, are more suited to differentiation or concentration.
The product’s life-cycle stage also must be considered. When a firm introduces a new product, it may be
practical to launch only one version, and undifferentiated marketing or concentrated marketing may
make the most sense. In the mature stage of the product life cycle, however, differentiated marketing
often makes more sense.
Another factor is market variability. If most buyers have the same tastes, buy the same amounts and
react the same way to marketing efforts, undifferentiated marketing is appropriate. Finally, competitors’
marketing strategies are important. When competitors use differentiated or concentrated marketing,
undifferentiated marketing can be a high-risk strategy. Conversely, when competitors use undifferentiated
marketing, a firm can gain an advantage by using differentiated or concentrated marketing, focusing on
the needs of buyers in specific segments.
Socially responsible target marketing

Smart targeting helps companies to be more efficient and effective by focusing on the segments that
they can satisfy best and most profitably. Targeting also benefits consumers – companies serve specific
9780655702412_CH06.indd 190 3/3/20 10:52 AM

groups of consumers with offers carefully tailored to their needs. However, target marketing sometimes
generates controversy and concern. The biggest issues usually involve the targeting of vulnerable or
disadvantaged consumers with controversial or potentially harmful products.
For example, over the years, marketers in a wide range of industries – from cereal and toys to fast
food and fashion – have been heavily criticised for their marketing efforts directed towards children.
Critics worry that premium offers and high-powered advertising appeals presented through the mouths
of lovable animated characters will overwhelm children’s defences.
Various state and Commonwealth consumer affairs departments and citizen action groups have
accused tobacco and beer companies of targeting underage smokers and drinkers. One US study found
that more than a third of alcohol radio ads are more likely to be heard by underage listeners than by
adults on a per capita basis.14 To encourage responsible advertising, the Australian Association of National
Advertisers (AANA) publishes the industry Code of Ethics as the cornerstone of the self-regulatory
system. This is supplemented by the Code of Advertising and Marketing to Children; Food and Beverages
Code; Environmental Claims Code; and Wagering Advertising & Marketing Communication Code – to
which all accredited agencies are expected to adhere.15 In effect, they have published extensive children’s
advertising guidelines that recognise the special needs of child audiences. Still, critics believe that more
should be done. Some have even called for a complete ban on advertising to children. Cigarette, beer,
carbonated soft-drink and fast-food marketers have also generated controversy in recent years by their
attempts to target low-income minority consumers, who are more likely than others to be heavy consumers.
The growth of the internet and other carefully targeted direct media has raised fresh concerns about
potential targeting abuses. The internet allows increased pinpointing of audiences and, in turn, more precise
targeting. This might help makers of questionable products or deceptive advertisers to more readily victimise
the most vulnerable audiences. Unscrupulous marketers may send tailor-made deceptive messages directly
to the computers of millions of unsuspecting consumers despite spam filters and government legislation.
Not all attempts to target children, minorities or other special segments draw such criticism. In fact,
most provide benefits to targeted consumers. A Melbourne-based technology start-up company, Kisa,
markets the KisaPhone directly to seniors who need a simpler mobile phone that has larger personalised
tactile buttons, a dedicated SOS button for emergency services and a louder ringtone.16 And Colgate
makes a large selection of toothbrush shapes and toothpaste flavours for children. Such products help
make tooth brushing more fun and get children to brush for longer and more often.
Thus, in target marketing, the issue is not really who is targeted but, rather, how and for what.
Controversies arise when marketers attempt to profit at the expense of targeted segments – when
they unfairly target vulnerable segments or target them with questionable products or tactics. Socially
responsible marketing calls for segmentation and targeting that serve not just the interests of the
company but also the interests of those targeted.

It is time to pause and review. focuses on only one or a few segments. How does each
● At the last ‘Linking the concepts’, you segmented the Australian company that you chose differentiate its market offering
footwear market. Refer to Figure 6.2 (Market targeting and image? How effectively has each company established
strategies) and select two companies that serve the footwear this differentiation in the minds of targeted consumers?
market. Describe their segmentation and targeting strategies. The final section in this chapter deals with such positioning
● Identify two companies serving the footwear market, one issues.
that targets many different segments and another that
9780655702412_CH06.indd 191 3/3/20 10:52 AM

Differentiation and positioning

Beyond deciding which segments of the market it will target, the company must decide on a value
proposition – or how it will create differentiated value for targeted segments and what positions it
wants to occupy in those segments. A product’s position is the way the product is defined by consumers
on important attributes – that is, the place the product occupies in consumers’ minds relative to
competing products. ‘Products are created in the factory, but brands are created in the mind,’ says a
positioning expert.17
In the motor vehicle market, the Nissan Micra and Suzuki Swift are positioned on economy, Lexus
and Mercedes-Benz on luxury, and Audi, BMW and Porsche on performance. Volvo positions powerfully
on safety. And Toyota positions its fuel-efficient hybrid Camry and Prius models as a high-tech solution
to the energy shortage.
Consumers are overloaded with information about products and services. They cannot re-evaluate
products every time they make a buying decision. To simplify the buying process, consumers organise
product position products, services and companies into categories and ‘position’ them in their minds. A product’s
The complex set of position is the complex set of perceptions, impressions and feelings that consumers have for the
perceptions, impressions
product compared with competing products. Essentially, it is the way the product is defined by
and feelings that
consumers have for the consumers on important attributes: the place the product occupies in consumers’ minds relative to
product compared with competing products.
competing products. Consumers position products with or without the help of marketers. But marketers do not want
to leave their products’ positions to chance. They must plan positions that will give their products the
greatest advantage in selected target markets, and they must design marketing mixes to create these
planned positions.
Positioning maps
In planning their differentiation and positioning strategies, marketers often prepare perceptual positioning
maps, which show consumer perceptions of their brands versus competing products on important buying
dimensions. Figure 6.3 shows a hypothetical positioning map for carbonated beverages in the 15- to
18-year-old segment. The position of each circle on the map indicates the brand’s perceived positioning
on two dimensions – social acceptability with peers, and sweetness. The size of each circle indicates the
brand’s relative market share.
Thus, this age group perceives Coca-Cola as being the carbonated beverage to be seen consuming
when drinking with friends. Pepsi is seen as being sweeter and less socially acceptable by this age group,
while Solo is seen as low on sweetness and less socially acceptable. The perception of the Solo brand is
perhaps understandable given its positioning in advertising with an older age group. Given the larger
market share achieved by Coke, as shown by the size of the circle, we could conclude that among this
age group, Coke is closest to the ideal brand.
Choosing a differentiation and positioning strategy

Some firms find it easy to choose a differentiation and positioning strategy. For example, a firm
well known for quality in certain segments will go for this position in a new segment if there
are enough buyers seeking quality. But in many cases, two or more firms will go after the same
position. Then, each will have to find other ways to set itself apart. Each firm must differentiate
its offer by building a unique bundle of benefits that appeals to a substantial group within the
segment. Above all else, a brand’s positioning must serve the needs and preferences of well-defined
target markets.
The differentiation and positioning task consists of three steps: (1) identifying a set of differentiating
competitive advantages upon which to build a position; (2) choosing the right competitive advantages;
9780655702412_CH06.indd 192 3/3/20 10:52 AM

High
Coca-Cola
Social acceptability
Pepsi
Solo
Low Sweetness High
Figure 6.3 Positioning map: Carbonated beverages (15- to 18-year-olds)
and (3) selecting an overall positioning strategy. The company must then effectively communicate and
deliver the chosen position to the market.
Identifying possible value differences and competitive advantages

To build profitable relationships with target customers, marketers must understand customer needs better
than competitors do and deliver more customer value. To the extent that a company can differentiate
and position itself as providing superior customer value, it gains competitive advantage. competitive
But solid positions cannot be built on empty promises. If a company positions its product as offering advantage
An advantage over
the best quality and service, it must actually differentiate the product so that it delivers the promised
competitors gained
quality and service. Companies must do much more than simply shout out their positions in ad slogans by offering greater
and taglines. They must first live the slogan. For example, if a department store conducts research and customer value, either
finds that customers place high value on an easier shopping experience, then it should ensure that the through lower prices
or by providing more
stores do indeed offer this experience. It would be wise to remake the stores to actually deliver the
benefits that justify
promised positioning – even if this meant a long delay to get it right.18 higher prices.
To find points of differentiation, marketers must think through the customer’s entire experience
with the company’s product or service. An alert company can find ways to differentiate itself at every
customer contact point. In what specific ways can a company differentiate itself or its market offer?
It can differentiate along the lines of product, services, channels, people or image.
Through product differentiation brands can be differentiated on features, performance, or style and
design. Thus, Bose positions its speakers on their striking design and sound characteristics. By using the
Heart Foundation’s Heart Smart tick, retailers differentiate different cuts of meat as being a healthy food
choice. And so do brands such as McCain with their Potato Cubes, among other products.
Beyond differentiating its physical product, a firm can also differentiate the services that
accompany the product. Some companies gain services differentiation through speedy, convenient
9780655702412_CH06.indd 193 3/3/20 10:52 AM

or careful delivery. For example, Lexus makes fine cars but

is perhaps even better known for the quality service that
creates outstanding ownership experiences for Lexus owners.
In an age where customer satisfaction with airline service
is in constant decline, Singapore Airlines sets itself apart
through extraordinary customer care and the grace of its
flight attendants. ‘When you’re able to meet the expectations
of your customers, that’s normal service. However, if there’s
an opportunity that arises to go beyond the expectation of a
customer . . . to anticipate what a customer wants . . . To me,
that’s good service,’ says a crewmember of the international
airline. ‘I treat the aircraft as my home and every passenger
Commonwealth Bank logo: One of Australia’s most widely that walks in through that door is my guest that I welcome into
recognised brands is a rendition of the Southern Cross my home,’ says another.19
constellation. Firms that practise channel differentiation gain competitive
Commonwealth Bank
advantage through the way they design their channel’s
coverage, expertise and performance. Amazon.com sets itself
apart with its smooth-functioning direct channel. Companies can also gain a strong competitive
advantage through people differentiation – hiring and training better people than their competitors
do. Singapore Airlines enjoys an excellent reputation, largely because of its flight attendants.
People differentiation requires that a company selects its customer-contact people carefully and
trains them well. For example, Disney trains its theme-park people thoroughly to ensure they are
competent, courteous and friendly – from the hotel check-in agents, to the monorail drivers, to the
ride attendants, to the people who sweep Main Street, USA. Each employee is carefully trained to
understand customers and to ‘make people happy’.
Even when competing offers look the same, buyers may perceive a difference based on company
or brand image differentiation. A company or brand image should convey the product’s distinctive
benefits and positioning. Developing a strong and distinctive image calls for creativity and hard work.
A company cannot develop an image in the public’s mind overnight using only a few advertisements.
If Sofitel means quality, this image must be supported by everything the company says and does in its
luxury hotels.
Symbols – such as McDonald’s’ golden arches, the Nike swoosh, the Commonwealth Bank’s
yellow-and-black rendition of the Southern Cross constellation or Google’s colourful logo – can
provide strong company or brand recognition and image differentiation. The company might
build a brand around a famous person, as Nike did with its Air Jordan basketball shoes and Tiger
Woods golfing products. Some companies even become associated with colours, such as IBM (blue),
Cadbury (purple) or Coca-Cola (red). The chosen symbols, characters and other image elements
must be communicated through advertising that conveys the company’s or brand’s personality.
Choosing the right competitive advantages

Suppose a company is fortunate enough to discover several potential differentiations that provide
competitive advantages. It now must choose the ones on which it will build its positioning strategy.
It must decide how many differences to promote and which ones.
How many differences to promote

Many marketers think that companies should aggressively promote only one benefit to the target
market. Advertising executive Rosser Reeves, for example, believes a company should develop a unique
selling proposition (USP) for each brand and stick to it. Each brand should pick an attribute and tout itself
9780655702412_CH06.indd 194 3/3/20 10:52 AM

as ‘number one’ on that attribute. Buyers tend to remember

number one better, especially in our society where we receive
so many communications each day.20 Thus, Big W promotes
its everyday savings and Commonwealth Bank promotes its
positive power for customers with its ‘can’ campaign.
Other marketers think that companies should position
themselves on more than one differentiator. This may be
necessary if two or more firms are claiming to be best on
the same attribute. Today, in a time when the mass market
is fragmenting into many small segments, companies are
trying to broaden their positioning strategies to appeal to
more segments. For example, Microsoft recently introduced
a campaign for its Windows 10 PC, featuring ‘Meet the bug
Less-for-much less: Accor revolutionised the budget hotel sector by
chicks’ (see <www.youtube.com/watch?v=k6SVsf0k2i0>). launching the standardised HotelF1 product, emphasising value and
The ad shows how two entomologists can use the new PC, consistency.
which features a touch screen that one of the actors is jealous Nik Wheeler/Corbis
of because ‘I don’t have a touch screen on my Mac’. Clearly,

many buyers want these multiple benefits. The challenge will be for Microsoft to convince consumers
that their one brand can do it all. However, as companies increase the number of claims for their brands,
they risk disbelief and a loss of clear positioning.
Which differences to promote

Not all brand differences are meaningful or worthwhile; not every difference makes a good differentiator.
Each difference has the potential to create company costs as well as customer benefits. A difference is
worth establishing to the extent that it satisfies the following criteria:
• Important: The difference delivers a highly valued benefit to target buyers.
• Distinctive: Competitors do not offer the difference, or the company can offer it in a more distinctive
way.
• Superior: The difference is superior to other ways in which customers might obtain the same
benefit.
• Communicable: The difference is communicable and visible to buyers.
• Pre-emptive: Competitors cannot easily copy the difference.
• Affordable: Buyers can afford to pay for the difference.
• Profitable: The company can introduce the difference profitably.
Many companies have introduced differentiations that failed one or more of these tests. When
the Westin Stamford Hotel in Singapore once advertised that it was the world’s tallest hotel, it was a
distinction that was not important to most tourists – in fact, it turned many off. Polaroid’s Polarvision,
which produced instantly developed home movies failed too. Although Polarvision was distinctive
and even pre-emptive, it was inferior to another way of capturing motion – namely, camcorders.
Thus, choosing competitive advantages upon which to position a product or service can be difficult,
yet such choices may be crucial to the brand’s success. Choosing the right differentiators can help a
brand to stand out from the pack of competitors, as the example of Accor Group’s HotelF1, which offers
a ‘less-for-much-less’ value strategy, illustrates (see Mini case 6.2).
value proposition
The full positioning of a
Selecting an overall positioning strategy brand – the full mix of
The full positioning of a brand is called the brand’s value proposition – the full mix of benefits upon benefits upon which it is
which the brand is differentiated and positioned. It is the answer to the customer’s question, ‘Why positioned.
9780655702412_CH06.indd 195 3/3/20 10:52 AM

should I buy your brand?’. Volvo’s value proposition hinges on safety but also includes reliability,
roominess and styling, all for a price that is higher than average but seems fair for this mix of benefits.
Figure 6.4 shows possible value propositions upon which a company might position its products.
In the figure, the five green cells represent winning value propositions – differentiation and positioning
that give the company competitive advantage. The blue cells, however, represent losing value
propositions. The centre yellow cell represents, at best, a marginal proposition.
In the following sections, we discuss the five winning value propositions upon which companies can
position their products: (1) more for more, (2) more for the same, (3) the same for less, (4) less for much
less and (5) more for less.
More for more

‘More-for-more’ positioning involves providing the most prestigious product or service and charging
a higher price to cover the higher costs. Sofitel Luxury Hotels, Mont Blanc writing instruments,
Mercedes-Benz motor vehicles, Miele cooking appliances – each claims superior quality, craftsmanship,
durability, performance or style, and charges a price to match. The market offering not only is high in
quality, but also gives prestige to the buyer. It symbolises status and a loftier lifestyle. Often, the price
difference exceeds the actual increment in quality.
Sellers offering ‘only the best’ can be found in every product and service category, from hotels,
restaurants, food and fashion, to cars and household appliances. Consumers are sometimes surprised,
even delighted, when a new competitor enters a category with an unusually high-priced brand. When
Apple premiered its iPhone, it offered higher-quality user features than a traditional mobile phone, with
a hefty price tag to match.
In general, companies should be on the lookout for opportunities to introduce a ‘more-for-more’
brand in any underdeveloped product or service category. Yet, ‘more-for-more’ brands can be vulnerable.
They often invite imitators who claim the same quality but at a lower price. For example, in the eyes
of many users, smartphones, such as the Google Pixel and Samsung Galaxy S7 Edge, offer even more
desirable features than the iPhone does. Also, luxury goods that sell well during good times may be at
risk during economic downturns, when buyers become more cautious in their spending. The gloomy
economy of recent years hit premium brands, such as Starbucks, the hardest.
PRICE
More The same Less
More More More

More for for the for
more same less
BENEFITS
The same
The same
for less
Less for
Less much
less
Figure 6.4 Possible value propositions
9780655702412_CH06.indd 196 3/3/20 10:52 AM

More for the same

Companies can attack a competitor’s more-for-more positioning by introducing a brand offering
comparable quality but at a lower price. For example, Toyota introduced its Lexus line with a ‘more-
for-the-same’ value proposition versus Mercedes-Benz and BMW. Its first North American ad headline
read: ‘Perhaps the first time in history that trading a $72,000 car for a $36,000 car could be considered
trading up.’ It communicated the high quality of its new Lexus through rave reviews in car magazines and
through a widely distributed video that showed side-by-side comparisons of Lexus and Mercedes-Benz
automobiles. It published surveys showing that Lexus dealers were providing customers with better sales
and service experiences than Mercedes-Benz dealerships were. Many Mercedes-Benz owners switched
to Lexus, and the Lexus repurchase rate rose to 60 per cent, twice the industry average. More recently,
by introducing more advanced technologies and architecture, Lexus is targeting those who might seek
greater performance, design and fun and who might otherwise have become an Audi or BMW customer.
The same for less

Offering ‘the same for less’ can be a powerful value proposition – everyone likes a good deal. Discount
stores such as Big W, and ‘category killers’ such as Bunnings, use this positioning. They do not claim
to offer different or better products. Instead, they offer many of the same brands as department stores
and specialty stores do but at deep discounts based on superior purchasing power and lower-cost
operations. Other companies develop imitative but lower-priced brands in an effort to lure customers
away from the market leader. For example, AMD makes less-expensive versions of Intel’s market-leading
microprocessor chips.
Less for much less

A market almost always exists for products that offer less and therefore cost less. Few people need, want
or can afford ‘the very best’ in everything they buy. In many cases, consumers will gladly settle for less-
than-optimal performance or give up some product features in exchange for a lower price. For example,
many travellers seeking lodgings prefer not to pay for what they consider unnecessary extras, such as a
pool, attached restaurant or mints on the pillow. Hotel chain Accor suspends some of these amenities in
its HotelF1 hotels and charges less accordingly (see Mini case 6.2).
‘Less-for-much-less’ positioning involves meeting consumers’ lower performance or quality
requirements at a much lower price. For example, Two Dollar shops offer more affordable goods at
very low prices. The Reject Shop and Costco warehouse stores offer less merchandise selection and
consistency and much lower levels of service; as a result, they charge rock-bottom prices. Tigerair and
Jetstar also practise less-for-much-less positioning.
More for less

Of course, the winning value proposition would be to offer ‘more for less’. Many companies claim to do
this. And, in the short run, some companies can actually achieve such lofty positions.
Yet, in the long run, companies will find it very difficult to sustain such best-of-both positioning.
Offering more usually costs more, making it difficult to deliver on the ‘for-less’ promise. Companies that
try to deliver both may lose out to more-focused competitors.
When all is said and done, each brand must adopt a positioning strategy designed to serve the needs
and wants of its target markets. ‘More for more’ will draw one target market, ‘less for much less’ will
draw another, and so on. Thus, in any market, there is usually room for many different companies, each
successfully occupying different positions. The important thing is that each company must develop its
own winning positioning strategy, one that makes it special to its target consumers.
9780655702412_CH06.indd 197 3/3/20 10:52 AM

Developing a positioning statement

positioning Company and brand positioning should be summed up in a positioning statement. The statement
statement should follow the form: To (target segment and need) our (brand) is (concept) that (point of difference).21
A statement that
For example: ‘For every athlete, Nike’s experience and expertise ensures that you have the perfect shoe for your sport.’
summarises company
or brand positioning Note that the positioning first states the product’s membership in a category (athletics, sport) and
– it takes this form: then shows its point of difference from other members of the category (experience, expertise, perfection).
To (target segment and Placing a brand in a specific category suggests similarities that it might share with other products in the
need) our (brand) is
category – but the case for the brand’s superiority is made on its points of difference.
(concept) that (point of
difference).
Communicating and delivering the chosen position
Once it has chosen a position, the company must take strong steps to deliver and communicate the
desired position to target consumers. All the company’s marketing mix efforts must support the
positioning strategy.
Positioning the company calls for concrete action, not just talk. If the company decides to build a
position on better quality and service, it must first deliver that position. Designing the marketing mix
involves working out the tactical details of the positioning strategy. Thus, a firm that seizes on a more-
for-more position knows that it must produce high-quality products, charge a high price, distribute
through high-quality dealers and advertise in high-quality media. It must hire and train more service
people, find retailers who have a good reputation for service, and develop sales and advertising messages
that broadcast its superior service. This is the only way to build a consistent and believable more-for-
more position.
Companies often find it easier to come up with a good positioning strategy than to implement it.
Establishing or changing a position usually takes a long time. In contrast, positions that have taken years
to build can quickly be lost. Once a company has built the desired position, it must take care to maintain
it through consistent performance and communication. It must closely monitor and adapt the position
over time to match changes in consumer needs and competitors’ strategies. However, the company
should avoid abrupt changes that might confuse consumers. Instead, a product’s position should evolve
gradually as it adapts to the ever-changing marketing environment.
9780655702412_CH06.indd 198 3/3/20 10:52 AM

Student approaches, situational factors and personal characteristics. The effectiveness

of segmentation analysis depends on finding segments that are measurable,
Learning accessible, substantial, differentiable and actionable.
Centre Learning Objective 3. Explain how companies

identify attractive market segments and choose a
market-targeting strategy.
Reviewing the learning objectives To target the best market segments, the company first evaluates each segment’s
In this chapter, you have learned about the main elements of a customer-driven size and growth characteristics, structural attractiveness, and compatibility with
marketing strategy: segmentation, targeting, differentiation and positioning. company objectives and resources. It then chooses one of four market-targeting
Marketers know that they cannot appeal to all buyers in their markets, or at strategies – ranging from very broad to very narrow targeting. The seller can
least not to all buyers in the same way. Therefore, most companies today practise ignore segment differences and target broadly using undifferentiated (or mass)
target marketing – identifying market segments, selecting one or more of them, marketing. This involves mass-producing, mass-distributing and mass-promoting
and developing products and marketing mixes tailored to each. the same product in much the same way to all consumers. Or the seller can
adopt differentiated marketing – developing different market offers for several
Learning Objective 1. Define the main steps in segments. Concentrated (or niche) marketing involves focusing on only one or a
designing a customer-driven marketing strategy: few market segments. Finally, micromarketing is the practice of tailoring products
market segmentation, targeting, differentiation and and marketing programs to suit the tastes of specific individuals and locations.
positioning. Micromarketing includes local marketing and individual marketing. Which
targeting strategy is best depends on company resources, product variability,
Customer-driven marketing strategy begins with selecting which customers
product life-cycle stage, market variability and competitive marketing strategies.
to serve and deciding on a value proposition that best serves the targeted
customers. It consists of four steps. Market segmentation is the act of analysing
Learning Objective 4. Discuss how companies
the bases upon which it might be best to divide a market into distinct segments
differentiate and position their products for
of buyers with different needs, characteristics or behaviours who might require
maximum competitive advantage.
separate products or marketing mixes. Once the groups have been identified,
market targeting evaluates each market segment’s attractiveness and selects one Once a company has decided which segments to enter, it must decide on its
or more segments to serve. Market targeting consists of designing strategies to differentiation and positioning strategy. The differentiation and positioning task
build the right relationships with the right customers. Differentiation involves consists of three steps: (1) identifying a set of possible differentiations that create
actually differentiating the market offering to create superior customer value. competitive advantage; (2) choosing advantages upon which to build a position;
Positioning consists of positioning the market offering in the minds of target and (3) selecting an overall positioning strategy.
customers. The brand’s full positioning is called its value proposition – the full mix of
benefits upon which the brand is positioned. In general, companies can choose
Learning Objective 2. List and discuss the main from one of five winning value propositions upon which to position their
bases for segmenting consumer and business products: more for more, more for the same, the same for less, less for much less,
markets. or more for less. Company and brand positioning are summarised in positioning
statements that state the target segment and need, positioning concept and
There is no single way to segment a market. Therefore, the marketer tries different
specific points of difference. The company must then effectively communicate and
variables to see which provide the best segmentation opportunities. For consumer
deliver the chosen position to the market.
marketing, the main segmentation variables are geographic, demographic,
psychographic and behavioural. In geographic segmentation, the market is
divided into different geographical units, such as nations, regions, states, local Discussion questions
government areas, cities or neighbourhoods. In demographic segmentation, the ❶ Market segmentation and market targeting. How does market
market is divided into groups based on demographic variables, including age, segmentation differ from market targeting? (Learning Objective 1) (AACSB:
gender, family size, family life cycle, income, occupation, education, religion, race, Communication; Reflective Thinking)
generation and nationality. In psychographic segmentation, the market is divided ❷ Marketers do not segment markets … they are already segmented. Do you
into different groups based on social class, lifestyle or personality characteristics. agree with this statement? Explain your reasoning. (Learning Objective 1)
In behavioural segmentation, the market is divided into groups based on (AACSB: Communication; Reflective Thinking)
consumers’ knowledge, attitudes, uses or responses to a product. ❸ Demographic and psychographic segmentation. Compare and contrast
Business marketers use many of the same variables to segment their demographic segmentation and psychographic segmentation. Which is
markets. But business markets also can be segmented by business consumer more useful to marketers? Justify your answer. (Learning Objective 2)
demographics (industry, company size), operating characteristics, purchasing (AACSB: Communication; Reflective Thinking)
9780655702412_CH06.indd 199 3/3/20 10:52 AM

❹ Positioning strategies. Some managers say that positioning is far more appears to be using. Summarise the segmentation and targeting strategy
important than segmentation or targeting. What is your view of this for this brand. Identify other brands with a similar positioning strategy(ies).
statement? (Learning Objectives 1, 2, 3 and 4) (AACSB: Communication; (Learning Objective 1) (AACSB: Communication; Reflective Thinking)
Reflective Thinking) ❷ Various companies, such as Toyota, Nissan and BMW, are introducing
❺ Market targeting levels. Name and describe the levels at which market hybrid technology-powered cars to suit the needs of various target markets.
targeting can be carried out. Give an example of a company using In a small group, identify the various models of hybrid cars offered in your
each. (Learning Objective 3) (AACSB: Communication; Reflective marketplace. Discuss the likely profiles of the target markets for these
Thinking) vehicles. For example, do you think that BMW’s i8 is targeting a different
❺ Target market of one. The argument some put forward is that by using the target market from Mitsubishi Motor’s MiEV electric car? Justify your answer.
internet and the web, every customer can be treated as an individual and (Learning Objective 2) (AACSB: Communication; Analytical Thinking;
receive a custom-made product. Do you agree or disagree? Justify your Reflective Thinking)
answer. (Learning Objectives 2, 3 and 4) (AACSB: Communication; Use of IT; ❸ Hydrographics presents an idea for a new business in Australia and New
Reflective Thinking) Zealand. First, research hydrographics at <www.hydroconcepts.com.au/
indexnew.htm>. Using the steps described in the chapter, identify relevant
target markets, then develop a customer-driven marketing strategy. Describe
Critical thinking exercises your strategy and conclude with a positioning statement for this business.
❶ Visit a supermarket and examine the brands of breakfast cereal on
(Learning Objectives 3 and 4) (AACSB: Communication; Use of IT; Analytical
offer. Using the bases for segmenting consumer markets, identify the
Thinking; Reflective Thinking)
segmentation variables a specific brand, such as Uncle Toby’s Calcium Plus,
Mini cases
6.1 Target marketing
Targeting markets of one to make many
Australia’s population really is much more homogeneous than
the populations of many other countries, even the United States.
Yes, there are conclaves of various cultural groups in both urban and
regional areas. For example, Griffith, in regional New South Wales,
has a large Italian population, which explains the focus on such
agricultural pursuits as vineyards and wine production. However,
there are so many cultural groups in Australia that there is more of
a blending than occurs in the United States, where one might find
even Walmart – the world’s largest chain – offering particular formats
tailored to specific types of geographic locations. Australian retailers
do follow some US practices, such as offering smaller Woolworths
stores and even smaller Coles Express stores where full-size stores
would not be sustainable due to the size and composition of the
local market.
US department stores also allow customisation to suit local markets.
For example, Macy’s – the second-largest US department-store chain
– permits its 1600 distant managers around the country to meet local
needs with specialised assortments. In one Christmas trading period,
Macy’s in Memphis stocked Elvis Presley Christmas ornaments, as it
David Grossman/Alamy
seems the locals still cannot get enough of their hometown King of Rock
’n’ Roll.
Today, though, many organisations practise mass customisation – using
technology to tailor offers made to a mass market. If you visit the website
of Macy’s Memphis from a country such as Australia or New Zealand, you
9780655702412_CH06.indd 200 3/3/20 10:52 AM

will find that their web servers use the IP lookup services to identify where experiences in places they have stayed, eaten and played. So, when you
you are located and offer you flat-fee shipping on a Christmas present next buy an ebook, visit a restaurant or engage in some other activity and
purchase. leave a review, remember that you are helping others as well as yourself,
Catering to markets of one is a similar value-adding marketing and turning markets of one into many.22
strategy, as Amazon.com’s marketing exemplifies. If you buy Kindle ❶ Do you agree with the authors’ contention that Australia’s population
ebooks on a regular basis, you will no doubt develop a list of favourite is much more homogeneous than that of the United States? (Hint:
authors and favourite genres. Let us take the example of a digital-book See <www.nationmaster.com/index.php>.) (Learning Objectives 1, 2
reader who is hooked on books set in the Florida Keys – Key West, in and 3) (AACSB: Analytical Thinking; Reflective Thinking; Diverse and
particular – and the surrounding Caribbean islands. Having read one of Multicultural Environments)
the Matt Royal series by H. Terrell Griffin, the reader will find that Amazon ❷ Can you provide other examples of mass customisation? If so, what
uses collaborative filtering technology to generate a list of recommended is/are the basis(es) for identifying segments that are targeted by the
books by various authors, and then uses this information to recommend marketing organisations concerned? (Learning Objectives 1, 2 and 3)
similar books to other readers of any books set in the Keys and the (AACSB: Analytical Thinking; Reflective Thinking)
Caribbean. Amazon will even advise the reader when a new book is to ❸ Have you experienced ‘target markets of one’, either as a marketer or
be published, thus allowing pre-orders. In this way, target markets of one as a consumer? In what ways are these ‘target markets of one’ similar
add up to become many. to or different from the examples provided in this mini case study?
This form of consumer-to-consumer advocacy is also practised by (Learning Objectives 1, 2 and 3) (AACSB: Communication; Analytical
Tripadvisor.com, when travellers advise of their positive and negative Thinking; Reflective Thinking)
6.2 Differentiation
Ibis Budget offers a ‘less-for-much-less’ value proposition
Not everyone can afford to stay at three- to five-star hotels. What are the new concept, first in France (its home base), specifically targeted and
alternatives – caravan parks, motels, pubs or bed and breakfast places? positioned for this market segment. The HotelF1 concept (as it is branded
As good as these can be, we can never foresee the standard of the next in France), which culminated in the opening of Ibis Budget branded hotels
accommodation as we travel from place to place. The market segmentation in Australia, Belgium, the United Kingdom, Spain, India and more than
and positioning studies of key hotel chains have indicated a series of 17 other countries, is based on providing a highly affordable and standardised
distinctive segments in the marketplace – for example, the luxury segment, product in key commercial areas, close to major transport arteries.
the business-traveller segment, the value-for-money segment, the segment The brand has been called the ‘McDonald’s of hotel accommodation’,
that values leisure activities, and those who value proximity to main city with most rooms identical (offering a queen-size bed and bunk beds plus
landmarks and attractions. Are there other segments? Yes! en suite bathroom with extra-large showers), including an all-you-can-
The Accor Group realised some years ago that the need for budget eat breakfast and with a daily tariff displayed in front of the hotel’s entry.
accommodation was not successfully serviced by any of the large hotel The Ibis Budget offer is based on price per room. Each room can sleep up to
groups. And, as the tourism market expanded with low airfares, an ever- three (sometimes four) people, and the tariff in Australia is usually between
growing number of travellers were those with young children on a shoestring $69 and $109 per night, depending on the location. The main objective
budget. France-based Accor is one of the world’s largest hotel groups, with behind developing this new concept was to be able to extend into the
over 4000 hotels in 100 countries, including over 700 hotels in the Asia- previously underserviced market of budget travellers. It focuses on individuals,
Pacific under the brands of Raffles, Fairmont, Sofitel, onefinestay, Pullman, couples and families travelling to a destination and needing to stop over
MGallery, Swissotel, Grand Mercure, Sebel, Novotel, Mercure, Mama Shelter, for the night, particularly along major transport routes. Standard hotel rates
adagio, Ibis and HotelF1. would preclude them from booking overnight accommodation or perhaps
While Accor is unique among hotel groups in that it covers the full from planning a holiday trip at all.23
spectrum of the market, the group has, in particular, been a pioneer in the ❶ Identify the target markets that might find Ibis Budget Hotels appealing.
mid-market, economy and budget sectors. After identifying a significant gap (Learning Objectives 2, 3 and 4) (AACSB: Analytical Thinking; Reflective
and opportunity in the budget travel segment, Accor developed a brand- Thinking; Diverse and Multicultural Environments)
9780655702412_CH06.indd 201 3/3/20 10:52 AM

6.2 Differentiation continued

❷ How does Accor differentiate its Ibis Budget Hotels offering from other Accor group (do visit their website), might the positioning of the Ibis
offerings in its portfolio? (Learning Objectives 2, 3 and 4) (AACSB: Budget Hotel chain cannibalise sales from other chains managed by
Communication; Analytical Thinking; Reflective Thinking) this group? Why, or why not? (Learning Objectives 2, 3 and 4) (AACSB:
❸ Looking at the range of accommodation options provided by the Communication; Analytical Thinking; Reflective Thinking)

Defence Health
Defence Health (<www.defencehealth.com.au>) was established in 1953 July 2016 saw Defence Health attract their 120 000th member.
to support members of the Australian Defence Forces (ADF) and the wider According to the Australian Department of Defence, there are currently
defence community in their private health-insurance needs. The members about 60 000 active ADF personnel, with approximately 45 000 reservists
they serve include members of the ADF, their partners, children and extended standing by. As of December 2015, there were 170 000 registered returned
families, as well as returned servicemen and servicewomen, and those who servicemen and servicewomen. There are also 18 000 staff who work in the
have supported ADF serving personnel, such as past and present staff of the Department of Defence to support the ADF.24
Department of Defence and other Defence-related departments. They pride ❶ Assuming the annual cost of private health insurance is $900 and
themselves on understanding the extra needs their members have – for that potential customers purchase one policy per year, use the chain
example, when one parent is deployed overseas and on the move, there ratio method described in Appendix 3, Analytic measure 6.2 (‘Demand
can be long periods when there is only one parent in the home. Defence estimates’), to calculate the market potential for private health insurance
Health provide tailor-made private health-insurance packages to meet in the ADF market. (Learning Objective 3) (AACSB: Analytical Thinking)
their members’ particular needs. The many industry and consumer awards ❷ Discuss the factors used to evaluate the attractiveness of the ADF and
they have won indicate their members are quite satisfied by their market community segment described here. (Learning Objectives 2, 3) (AACSB:
offerings. Communication, Analytical Thinking; Reflective Thinking)

Targeting very young consumers
You would never know that consumers are more frugal these days if you a T-shirt, jeans, a belt with the trademark double-G, a raincoat and boots
looked at the new children’s lines from fashion houses such as Fendi, will set Mum and Dad back about $1500. A Burberry tailored coat for
Versace and Gucci. Toddler high fashion is not new, but designers are a baby runs at $710, a bargain compared to Mum’s matching $2895
taking it to new levels and extending it beyond special-occasion clothing coat. The CEO of the Young Versace brand sees growth in this market and
to everyday wear. In the past, some of the little girls marching down anticipates this brand making up 10 per cent of the company’s global
fashion runways carried dolls with matching outfits. But this year, many sales in only a few years.
of the children’s fashions are geared around matching their parents’ What (if any) ethical issues are relevant to this type of target marketing?
clothing. Jennifer Lopez and her little ones helped Gucci launch a line How do you feel about this type of target marketing from a personal point
for babies and children aged 2 to 8 years. A Gucci children’s outfit with of view?
9780655702412_CH06.indd 202 3/3/20 10:52 AM

References
1 Mark Clothier, ‘Why Harley is showing its feminine side’, Bloomberg Businessweek, marketing/#4cc07dd0196b>; and <www.starbucks.com/coffeehouse/mobile-order>;
4–10 October 2010, pp. 25–6; <www.harley-davidson.com/en_US/Content/ accessed November 2016.
Pages/2010c/ss/start-something.html>; <www.harley-davidson.com/wcm/Content/ 13 Adapted from information found in ‘When you watch these ads, the ads check you out’,
Pages/women_riders/landing.jsp>; <www.harley-davidson.com/content/h-d/ New York Times, 31 January 2009. See also <www.tru-media.com/solutions/shopping-
en_US/home/community/women-riders/the-right-bike.html>; and <www.harley- mall-solutions/>, accessed November 2016.
davidson.com/content/h-d/en_US/home/community/women-riders.html>; all accessed 14 Katy Bachman, ‘Study: Radio alcohol ads reaching young ears’, Mediaweek,
November 2016. 18 September 2007.
2 Quotes from ‘The World: Residences at sea’ website. See <aboardtheworld.com/ 15 See the Australian Association of National Advertisers codes concerning standards
our_story>, accessed November 2016. under self-regulation which complement government regulations, <http://aana.com.au/
3 John Waggoner, ‘Even the wealthy feel tapped out’, USA Today, 2 February 2009, p. B1. self-regulation/codes/>, accessed November 2016.
4 GreenShareCar, <www.greensharecar.com.au/>; FlexiCar, <www.flexicar.com.au/>; 16 See <www.kisaphone.com.au/index.aspx>, accessed November 2016.
GoGet, <www.goget.com.au/>; Melbourne Bike Share, <www.melbournebikeshare. 17 Jack Trout, ‘Branding can’t exist without positioning’, Advertising Age, 14 March 2005,
com.au/>; all accessed November 2016; also see Emily Stewart, ‘Bike sharing … why p. 28.
Europe is streets ahead of Australia’, ABC News, 7 August 2013. 18 Based on information found in Michael Myser, ‘Marketing made easy’, Business 2.0
5 Information from P&O Cruises, <www.pocruises.com.au/experiences/ Magazine, 7 June 2006, pp. 43–4.
search#?c=&sort=pra&page=1>, accessed November 2016. 19 Quotes from Singapore Airlines, ‘Understanding your needs’, <http://thelengthswegoto.
6 See Bounty Bags, <www.bountybags.com.au>, accessed November 2016. com/understanding-your-needs/#!service>, accessed November 2016.
7 See James Vincent, ‘PS4 sales top one million in most successful console launch 20 Also see Andrew S C Ehrenberg, Gerald J Goodhardt & T Patrick Barwise, ‘Double
ever’, Belfast Telegraph, 19 November 2013; Julia Alexander, ‘Sony has sold more jeopardy revisited’, Journal of Marketing, 54, July 1990, pp. 82–91.
than 40 million PlayStation 4 units worldwide’, 26 May 2016, <www.polygon. 21 See Bobby J Calder & Steven J Reagan, ‘Brand design’, in Dawn Iacobucci (ed.), Kellogg
com/2016/5/26/11783776/sony-playstation-40-million-units>, accessed on Marketing, John Wiley & Sons: New York, NY, 2001, p. 61. For more discussion,
November 2016. see Philip Kotler & Kevin Lane Keller, Marketing Management, 14th edn, Prentice Hall:
8 See Michael Porter, Competitive Advantage, Free Press: New York, 1985, pp. 4–8, Upper Saddle River, NJ, 2012, chapter 10.
234–6. For more recent discussions, see Kenneth Sawka & Bill Fiora, ‘The four analytical 22 See Macy’s Memphis website at <www1.macys.com/index.ognc />; also see ‘Islands’
techniques every analyst must know: 2. Porter’s five forces analysis’, Competitive at <www.islands.com/tags/key-west >, accessed November 2016.
Intelligence Magazine, May–June 2003, p. 57; and Philip Kotler & Kevin Lane Keller, 23 ‘Accor launches its first Formule 1 hotel in India, plans to open 10 more by the end
Marketing Management, 14th edn, Prentice Hall: Upper Saddle River, NJ, 2012, p. 232. of 2013’, India Hospitality Review, 2 April 2013; see also Accor Hotels at <www.
9 See NightOwl at <www.nightowl.com.au/about/>, accessed November 2016. accorhotels-group.com/en.html>, HotelF1 at <www.accorhotels-group.com/en/brands/
10 For the full range of Coca-Cola Amatil’s drink brands, see <www.ccamatil.com/en/our- brand-portfolio/hotelf1.html>, Ibis Budget Hotels at <www.accorhotels-group.com/en/
businesses-and-brands/our-brands >; for the full range of PepsiCo’s drink brands, see brands/brand-portfolio/ibis-budget.html>, and Ibis Budget Australia at <www.ibis.com/
<www.pepsico.com.au/brands/pepsico/>; both accessed November 2016. gb/australia/discovering-ibis-budget-hotel/index.shtml>; all accessed November 2016.
11 Adapted from information found in Linda Tischler, ‘The fast company 50 – 2009: Etsy’, 24 See The Australian Government Department of Defence, Defence Portfolio Budget
Fast Company, 11 February 2009; Max Chafkin, ‘Rob’s world’, Inc., April 2011, Statements 2015–16, Commonwealth of Australia: Canberra, 2015, <www.defence.
pp. 56–64; and <www.etsy.com/au/about/?ref=ftr>, <http://investors.etsy.com/phoenix. gov.au/budget/15-16/2015-16_Defence_PBS_Complete.pdf>; and Returned Services
zhtml?c=253952&p=irol-newsArticle&ID=2218142>, accessed November 2016. League of Australia, National Annual Report 2015, <http://rslnational.org/wp-
12 See Michael Jones, ‘3 ways location-based marketing is shaping retail in 2016’, Forbes, content/uploads/2015/12/2015-RSL-National-Annual-Report.pdf>; both accessed
3 May 2016, <www.forbes.com/sites/michaeljones/2016/03/03/location-based- November 2016.
9780655702412_CH06.indd 203 3/3/20 10:52 AM

Chapter
7 Products, services and brands:

Offering customer value
In their quest to create customer relationships, marketers must build and manage products and brands
that connect with customers. This chapter begins with a deceptively simple question: What is a product?
After addressing this question, we look at ways to classify products in consumer and business markets.
We then discuss the important decisions that marketers make regarding individual products, product lines
and product mixes. Next, we examine the characteristics and marketing requirements of a special form of
product – services. Finally, we look into the critical issue of how marketers build and manage brands.
Learning Objective 1 Define product and the main classifications of products and services.
What is a product? pp. 206–11
Learning Learning Objective 2 Describe the decisions companies make regarding their individual
Objectives products and services, product lines and product mixes.
Product and service decisions pp. 211–19
Learning Objective 3 Identify the four characteristics that affect the marketing of a service
and the additional marketing considerations that services require.
Services marketing pp. 219–23
9780655702412_CH07.indd 204 3/3/20 10:53 AM

Chapter 7 Products, services and brands: Offering customer value 205
e product classi
nding th cat
xte ion
E
ds Ser vic
Goo es
ies
xp
LO 1 Augmented product
dit
eri
mo
product and the main
en
ces
Com
and services. Delivery Actual product After-sale
and service
credit Brand
INTANGIBLE
Features
TANGIBLE
name CORE
CUSTOMER
Quality VALUE Design
LO 2 level
Describe the decisions
companies make regarding Packaging
Pro ib ute
Product
pp t
a ttr
su odu c
their individual products and Warranty
or t
du s
support
services, product lines and
ct
Pr
product mixes.
Bra g
ndi
ng e lli n
Lab
Pr Packaging
ns
od
uct si o
li n e a e ci
n d pro d u ct m ix d
LO 3
SERVICES Peris
Identify the four characteristics ility hability
Intangib
that affect the marketing of a
service and the additional
Ins
ility
marketing considerations that

epar
iab
services require.
abi
Var
tyli
9780655702412_CH07.indd 205 3/3/20 10:53 AM

What is a product?
product We define a product as anything that can be offered to a market for attention, acquisition, use or
Anything that can be consumption that might satisfy a want or need. Products include more than just tangible objects, such
offered to a market for
as cars, computers or mobile phones. Broadly defined, ‘products’ also include services, events, persons,
attention, acquisition,
use or consumption that places, organisations and ideas, or mixes of these. Throughout this book, we use the term product
might satisfy a want or broadly to include any or all of these entities. Thus, an Apple iPhone, a Volkswagen Golf, a caffé latte
need. at Gloria Jean’s, a trip to Auckland, your Pinterest page and a check-up from your family doctor are
all products.
service Because of their importance in the world economy, we give special attention to services. Services
An activity, benefit or are a form of product that consists of activities, benefits or satisfactions offered for sale that are
satisfaction offered for
essentially intangible and do not result in the ownership of anything. Examples are banking, hotel,
sale that is essentially
intangible and does not airline, retail, wireless communication and home-repair services. We look at services more closely later
result in the ownership in this chapter.
of anything.
Products, services and experiences
Product is a key element in the overall market offering. Marketing-mix planning begins with building an
offering that brings value to target customers. This offering becomes the basis upon which the company
builds profitable customer relationships.
A company’s market offering often includes both tangible goods and services. At one extreme, the
offer may consist of a pure tangible good, such as soap, toothpaste or salt – little or no services accompany
the product. At the other extreme are pure services, for which the offer consists primarily of a service.
Examples include a doctor’s consultation or financial services. Between these two extremes, however, many
combinations of goods and services are possible.
Today, as products and services become more commoditised, many companies are moving to a
new level in creating value for their customers. To differentiate their offers, beyond simply making
products and delivering services, they are creating and managing customer experiences with their
brands or company.
Experiences have always been an important part of marketing for some companies. Disney has long
manufactured dreams and memories through its movies and theme parks. And Nike has long declared,
‘It’s not so much the shoes but where they take you.’ Today, however, all kinds of firms are recasting
their traditional goods and services to create experiences.
For example, a visit to Bunnings Warehouse involves a lot more
than just picking up paint or garden equipment. Homemakers
roam through the store pushing shopping carts big enough
to carry an armchair and sipping a coffee purchased from the
in-store barista while their children are happily engaged at the
in-store playground. The store offers over 45 000 hardware,
homemaking and garden goods, along with services ranging
from colour consultations for decorators to courtesy trailer
hire, gas bottle refills and key cutting. Not unexpectedly, the
store also provides a full range of DIY brochures and in-store
DIY training sessions. But who would have thought they
would hold a workshop with the local police to engrave tools
Creating experiences: Bunnings Warehouse creates customer and advise tradespeople how to reduce theft? On its website,
experiences by offering everything from paint and hardware to Bunnings claims that ‘Lowest prices are just the beginning . . .’
entertainment for children. and that it aims to provide the ‘best service’ to ‘earn the right to
Simon Kenny/AAP
serve our customers tomorrow and into the future’.1
9780655702412_CH07.indd 206 3/3/20 10:53 AM

Companies that market experiences realise that customers are really buying much more than just
products and services. They are buying what those offers will do for them. ‘A brand, product, or service
is more than just a physical thing. Humans that connect with the brand add meaning and value to it,’
says one marketing executive. ‘Successfully managing the customer experience is the ultimate goal,’
adds another.2
Levels of products and services

Product planners need to think about products and services on three levels (see Figure 7.1). Each level
adds more customer value. The most basic level is the core customer value, which addresses the question:
What is the buyer really buying? When designing products, marketers must first define the core,
problem-solving benefits or services that consumers seek. A woman buying lipstick buys more than lip
colour. Charles Revson of Revlon saw this early: ‘In the factory, we make cosmetics; in the store, we
sell hope.’ And people who buy a Samsung Galaxy S7 Edge smartphone are buying more than a mobile
phone, email device or camera. They are buying freedom and on-the-go connectivity to information,
people and communities.
At the second level, product planners must turn the core benefit into an actual product. They need to
develop product and service features, design, a quality level, a brand name and packaging. For example,
the Samsung Galaxy S7 Edge is an actual product. Its name, parts, styling, features, packaging and other
attributes have all been combined carefully to deliver the core customer value of staying connected.
Finally, product planners must build an augmented product around the core benefit and actual product
by offering additional consumer services and benefits. The Galaxy S7 Edge offers more than just a
communications device. It provides consumers with a complete solution to mobile connectivity problems.
Thus, when consumers buy a Galaxy S7 Edge, the company and its dealers also might give buyers a warranty
on parts and workmanship, instructions on how to use the device, quick repair services when needed, and a
toll-free telephone number and website to use if they have problems or questions.
Consumers see products as complex bundles of benefits that satisfy their needs. When developing
products, marketers first must identify the core customer value that consumers seek from the product. They
must then design the actual product and find ways to augment it in order to create this customer value and
the most-satisfying customer experience.
Augmented product
Delivery After-sale
Actual product
and service
credit Brand
Features
name CORE
CUSTOMER
Quality
VALUE
Design
level
Packaging
Product
Warranty
support
Figure 7.1 Three levels of products
9780655702412_CH07.indd 207 3/3/20 10:53 AM

Product and service

classifications
Products and services fall into two broad classes based on
the types of consumers that use them – consumer products and
industrial products. Broadly defined, products also include other
marketable entities such as experiences, organisations, persons,
places and ideas.
Consumer products
Consumer products are products and services bought by
final consumers for personal consumption. Marketers usually
classify these products and services further based on how
Core, actual and augmented product: People who buy a Samsung consumers go about buying them. Consumer products include
Galaxy S7 Edge smartphone are buying more than a mobile convenience products, shopping products, specialty products and unsought
phone, email device or camera. Owners are invited to ‘enjoy products. These products differ in the ways consumers buy them
more freedom to explore, stay connected, and capture the
and, therefore, in how they are marketed (see Table 7.1).
adventure’.
Bloomberg/Contributor/Getty
Convenience products are consumer products and services
that customers usually buy frequently, immediately, and with a
minimum of comparison and buying effort. Examples include
consumer product laundry detergent, sweets, magazines and fast food. Convenience products are usually low priced, and
A product bought by marketers place them in many locations to make them readily available when customers need them.
final consumers for
personal consumption. Shopping products are less-frequently purchased consumer products and services that customers compare
carefully on suitability, quality, price and style. When buying shopping products and services, consumers spend
much time and effort in gathering information and making comparisons. Examples include furniture, clothing,
used cars, major appliances, and hotel and airline services. Shopping products marketers usually distribute their
products through fewer outlets, but provide deeper sales support to help customers in their comparison efforts.
Specialty products are consumer products and services with unique characteristics or brand identification
for which a significant group of buyers is willing to make a special purchase effort. Examples include
specific brands of cars, high-priced photographic equipment, designer clothes, and the services of medical
Table 7.1 Marketing considerations for consumer products

Type of consumer product
Marketing
considerations Convenience Shopping Specialty Unsought
Customer Frequent purchase, Less frequent purchase, Strong brand preference Little product awareness,
buying little planning, little much planning and and loyalty, special knowledge (or, if aware,
behaviour comparison or shopping shopping effort, purchase effort, little little or even negative
effort, low customer comparison of brands comparison of brands, interest)
involvement on price, quality, style low price sensitivity
Price Low price Higher price High price Varies
Distribution Widespread distribution, Selective distribution in Exclusive distribution in Varies

convenient locations fewer outlets only one or a few outlets
per market area
Promotion Mass promotion by the Advertising and personal More carefully targeted Aggressive advertising
producer selling by both producer promotion by both and personal selling by
and resellers producer and resellers producer and resellers
Examples Toothpaste, magazines, Major appliances, Luxury goods, such as Life insurance, Red Cross
laundry detergent televisions, furniture, Rolex watches or fine blood donations
clothing crystal
9780655702412_CH07.indd 208 3/3/20 10:53 AM

or legal specialists. A Lamborghini car, for example, is a specialty product because buyers are usually willing
to travel great distances to buy one. Buyers normally do not compare specialty products. They invest only
the time needed to reach dealers carrying the wanted products.
Unsought products are consumer products that the consumer either does not know about or knows about
but does not normally think of buying. Most major new innovations are unsought until the consumer
becomes aware of them through advertising. Classic examples of known but unsought products and services
are life insurance, pre-planned funeral services and blood donations to the Red Cross. By their very nature,
unsought products require a lot of advertising, personal selling and other marketing efforts (see Marketing
in Action 7.1 later in this chapter).
Industrial products
Industrial products are those purchased for further processing or for use in conducting a business. industrial product
Thus, the distinction between a consumer product and an industrial product is based on the purpose for A product bought
by individuals and
which the product is bought. If a consumer buys a lawn mower for use around the home, the lawn mower organisations for further
is a consumer product. If the same consumer buys the same lawn mower for use in a landscaping business, processing or for use in
the lawn mower is an industrial product. conducting a business.
The three groups of industrial products and services include materials and parts, capital items, and
supplies and services. Materials and parts include raw materials and manufactured materials and parts.
Raw materials consist of farm products (wheat, cotton, livestock, fruits, vegetables) and natural products
(fish, timber, crude petroleum, iron ore). Manufactured materials and parts consist of component materials
(iron, yarn, cement, wires) and component parts (small motors, tyres, castings). Most manufactured materials
and parts are sold directly to industrial users. Price and service are the main marketing factors; branding and
advertising tend to be less important.
Capital items are industrial products that aid in the buyer’s production or operations, including installations
and accessory equipment. Installations consist of major purchases such as buildings (factories, offices) and
fixed equipment (generators, drill presses, large computer systems, elevators). Accessory equipment includes
portable factory equipment and tools (hand tools, fork lifts) and office equipment (computers, printers, desks).
They have a shorter life than installations and simply aid in the production process.
The final group of industrial products is supplies and services. Supplies include operating supplies
(lubricants, coal, paper, pencils) and repair and maintenance items (paint, nails, brooms). Supplies are the
convenience products of the industrial field because
they are usually purchased with a minimum of
effort or comparison. Business services include
maintenance and repair services (window cleaning,
computer repair) and business advisory services
(legal, management consulting, advertising). Such
services are usually supplied under contract.
Organisations, persons, places,

events and ideas
In addition to tangible products and services,
marketers have broadened the concept of a
product to include other market offerings –
organisations, persons, places, events and ideas.
Organisations often carry out activities to
‘sell’ the organisation itself. Organisation marketing Corporate image advertising: BOQ styles itself as a lovable bank, using humour
consists of activities undertaken to create, maintain and cartoons, and by explaining that ‘we’ve learned that love has to be earned’.
Bank of Queensland
or change the attitudes and behaviour of target
9780655702412_CH07.indd 209 3/3/20 10:53 AM

consumers towards an organisation. Both profit and not-for-

profit organisations practise organisation marketing; business
firms sponsor public relations or corporate image advertising
campaigns to market themselves and polish their images.
For example, banker BOQ tackles ‘bank hate’ head-on, using
humour and cartoons that ask: ‘Is it possible to love a bank?’
In their corporate image campaign, they reply: ‘We’ve learned
love has to be earned.’ Similarly, not-for-profit organisations,
such as churches, universities, charities, museums and performing
arts groups, market their organisations in order to raise funds
and attract members or patrons.3
People can also be thought of as products. Person marketing
consists of activities undertaken to create, maintain or change
Person marketing: Amaysim invited customers to ‘go hassle free’ attitudes or behaviour towards particular people. People such
with TV actor David Hasselhoff, who changed his name to David as politicians, entertainers and sports figures, and professionals
Hoff, explaining he wanted less hassle in his life. Amaysim used the such as doctors, lawyers and architects, use person marketing
well-known actor to share its commitment to hassle-free mobile
phone plans with the tag-line: ‘less hassle, more hoff ’. to build their reputations. And businesses, charities and other
Craig Greenhill/Newspix organisations use well-known personalities to help sell their
products or causes. For example, Amaysim used American
actor David Hasselhoff to invite mobile phone users to remove
one hassle from their life. The actor nicknamed ‘the Hoff’ announced he was officially changing his
name to David Hoff amid much media speculation. Amaysim later revealed the social media campaign
as the focus for its commitment to deliver hassle-free phone experiences to its customers: ‘less hassle,
more hoff’.4
The skilful use of marketing can turn a person’s name into a powerhouse brand. Consider the TV
chefs who have achieved the status almost of rock stars for their many ardent fans. These days, it is
hard to shop for kitchen products without encountering goods endorsed by these culinary all-stars.
For example, celebrity chef Donna Hay endorses a kitchen cupboard filled with jams and bake-at-home
cakes. A quick tour of her online store reveals that her product endorsements extend to an assortment
of kitchen tools and bakeware, and on into the dining room and laundry with fine china and fabric
conditioner.5
Place marketing involves activities undertaken to create, maintain or change attitudes or behaviour
towards particular places. Cities, states, regions and even entire nations compete to attract tourists, new
residents, conventions, company offices and factories. Tourism New Zealand advertises the country as
‘100% pure New Zealand’, and Destination NSW invites visitors to ‘Love every second in Sydney’. Vivid
Sydney is one of the very successful ‘seconds in time’ that form part of Destination NSW’s place marketing
campaign. Attracting visitors from all over the world, the Vivid Sydney website provides information about
spectacular light shows, as well as music and ideas events. Information is also available on accommodation
and travel to Vivid events. Visitors are encouraged to download a smartphone app to help them ‘experience
everything Vivid Sydney has to offer’.6
Ideas can also be marketed. In one sense, all marketing is the marketing of an idea, whether it is the
social marketing
The use of commercial general idea of brushing your teeth or the specific idea that Colgate Total toothpaste offers superior
marketing concepts protection because it ‘fights plaque bacteria for up to 12 hours’. Political marketing is also a type of
and tools to influence idea marketing. Political parties use mass media, social media such as YouTube, Twitter and Facebook,
behaviours that
and direct marketing approaches to get their message across to the converted and unconverted alike.
benefit individuals and
communities for the Here, however, we narrow our focus to the marketing of social ideas. This area has been called social
greater social good. marketing, defined by the Australian Association of Social Marketing as the use of commercial
9780655702412_CH07.indd 210 3/3/20 10:53 AM

Place marketing: Destination NSW’s Vivid Sydney event includes an app so visitors can manage
the experience and so that they can ‘Love every second in Sydney’.
Provided courtesy of Destination NSW
marketing concepts and tools to ‘influence behaviours that benefit individuals and communities for the
greater social good’.7
Social marketing programs include public health campaigns to reduce smoking, drug abuse and obesity.
Other social marketing efforts include environmental campaigns to promote wilderness protection, clean
air and conservation. Still others address issues such as family planning, human rights and racial equality.
But social marketing involves much more than just advertising; it uses every other element of the marketing
mix to achieve its social change objectives.
Product and service decisions

Marketers make product and service decisions at three levels: individual product decisions, product line
decisions and product mix decisions. We discuss each of these in turn.
Individual product and service decisions

Figure 7.2 shows the important decisions in the development and marketing of individual products and
services, including product and service attributes, branding, packaging, labelling and product support services.
Product and service attributes

Developing a product or service involves defining the benefits that it will offer. These benefits are
communicated and delivered by product attributes such as quality, features and style and design.
Product quality
Product quality is one of the marketer’s main positioning tools. Quality has a direct impact on product product quality
or service performance; thus, it is closely linked to customer value and satisfaction. In the narrowest The characteristics of a
product or service that
sense, quality can be defined as ‘freedom from defects’. But most customer-centred companies go beyond
bear on its ability to
this narrow definition. Instead, they define quality in terms of creating customer value and satisfaction. satisfy stated or implied
The American Society for Quality defines quality as the characteristics of a product or service that bear on its customer needs.
Product Product support

Branding Packaging Labelling
attributes services
Figure 7.2 Individual product decisions
9780655702412_CH07.indd 211 3/3/20 10:53 AM

Marketing
Headspace and the unsought product
in Action
7.1
Let’s face it, some goods and services are not at the top of our shopping list. both online and in the real world. Headspace ‘built’ a stigma! Actually, they built
Life insurance or a will, smoke detectors and security alarms, a gravestone, a an enormous panelled dome at a railway station in Melbourne. For five days,
thermometer or survival gear – these are all examples of goods and services we travellers were invited to ‘take away’ the stigma by removing a panel. Each panel
just don’t want to think about needing. They are unsought products. Even though had a message about mental health and how to get help. Following the outdoor
we do not really want these products they are often needed. For example, every event, the campaign launched online, with a digital ‘stigma’ to break down.
home should have a smoke detector (and, often, more than one) – it’s the law! The opportunity to break down the digital stigma not only encourages visitors to
But many home owners do not think about installing a smoke detector until their access the website but also provides those visitors with a story and information
real estate agent reminds them they cannot sell their home without one. So local about youth mental health. The campaign was promoted via television, radio,
governments and smoke-detector manufacturers and distributors can spend a social and digital media, and flyers. Comedian Dave Hughes, who experienced
great deal of time and money reminding us to install smoke detectors and to mental health issues at the age of 21, also supported the campaign.
check regularly that they are working. Smoke detectors are just one of many The Big Stigma campaign aimed to change the way people think about
unsought products that marketers play a big role in bringing to our attention. mental wellbeing and to encourage young people to get information and help
Headspace aims both to help young people with mental health matters and to when needed. In marketing terms, the goal was to shift the services and support
improve the ‘wellbeing of young Australians’. Each year, many young people face provided by Headspace from unsought to a service actively sought out by young
health and wellbeing issues that compromise their mental wellness, and many people. Let’s take a closer look at how they did this.
face these problems alone – they don’t seek help. Sometimes this is because Headspace is a service – a service that is not only unsought but also intangible.
they do not realise they need help but, more often than not, it is because they It is difficult for young people to understand what the service will provide.
are embarrassed or because of a perceived stigma. For young people, support for The Big Stigma campaign brings the issue of youth mental health into the open,
mental wellbeing is an unsought service. and makes it more real. Each panel removed from the Big Stigma represents
Recently, Headspace launched a campaign to tackle this issue head on. another person who has heard the message and who understands the
The campaign aimed to break down the stigma by creating an engaging experience, issues a bit better. With more people talking about youth mental health,
Unsought products: Many young people do not reach out to get the help they need with their
mental wellbeing. Headspace’s Big Stigma campaign aimed to change attitudes and to encourage
young people to get the help they need.
Headspace
9780655702412_CH07.indd 212 3/3/20 10:53 AM

getting help becomes a real possibility for more young people. When they arrive news-c/experiential-campaign-combats-stigma-around-youth-mental-health/>;
‘CHE Proximity and Headspace launch campaign to remove mental health stigma’,
at Headspace, either online or in person, they learn they can get help with B&T, 17 June 2016, <www.bandt.com.au/marketing/che-proximity-headspace-
everything from applying for jobs or managing stress and anxiety, to accessing launch-campaign-remove-mental-health-stigma>; see also Headspace websites at
<http://thebigstigma.com.au/> and <http://headspace.org.au/>, accessed June 2016.
support for dealing with alcohol and/or drug problems, relationship issues,
bullying and violence. The online site and drop-in centres are friendly, open
Questions
spaces with lots of easy-to-access information. The website also shares stories
from Headspace users to show how getting help makes a difference. These stories ❶ Go to the website for Headspace, <http://headspace.org.au/>. What
create links and, importantly, they show the young person that others just like features do you see on the website that make the service something young
them have been, or perhaps still are, on a similar journey to their own. people might want to use?
❷ Marketing an unsought product requires attention to changing attitudes
Sources: In Australia, people aged 12–25 seeking help for a mental health
problem should contact Headspace at <www.headspace.org.au> and, in New
and increasing awareness. What differences (if any) are there between
Zealand, the Mental Health Foundation provides support for people of all ages marketing an unsought good and marketing an unsought service? What
at <www.mentalhealth.org.nz/get-help/>; Debra J Rickwood, Kelly R Mazzer
needs to be considered when marketing an unsought product that is
& Nic R Telford, ‘Social influences on seeking help from mental health services,
in-person and online, during adolescence and young adulthood’, BMC entirely new – like Stan (the entertainment service) was a few years ago?
Psychiatry, 15(40), 2015, <http://bmcpsychiatry.biomedcentral.com/articles/10.1186/
How do you think the role of the marketer changes when marketing an
s12888-015-0429>; ‘Experiential campaign combats stigma around youth mental
health’, Marketing Magazine, 20 June 2016, <www.marketingmag.com.au/ unsought product?
ability to satisfy stated or implied customer needs. Similarly, Siemens defines quality this way: ‘Quality is
when our customers come back and our products don’t.’8
Total quality management (TQM ) is an approach in which all the company’s people are involved in
constantly improving the quality of products, services and business processes. For most top companies,
customer-driven quality has become a way of doing business. Today, companies are taking a ‘return on
quality’ approach, viewing quality as an investment and holding quality efforts accountable for bottom-line
results.
Product quality has two dimensions – level and consistency. In developing a product, the marketer
must first choose a quality level that will support the product’s positioning. Here, product quality means
performance quality – the ability of a product to perform its functions. For example, a Rolls-Royce provides
higher performance quality than a Holden: it has a smoother ride, provides more ‘creature comforts’ and
lasts longer. Companies rarely try to offer the highest possible performance-quality level – few customers
want or can afford the high levels of quality offered in products such as a Rolls-Royce automobile, B&W
Nautilus speakers or a Rolex watch. Instead, companies choose a quality level that matches target market
needs and the quality levels of competing products.
Beyond quality level, high quality also can mean high levels of quality consistency. Here, product
quality means conformance quality – freedom from defects and consistency in delivering a targeted level of
performance. All companies should strive for high levels of conformance quality. In this sense, a Holden
can have just as much quality as a Rolls-Royce. Although a Holden does not perform at the same level as a
Rolls-Royce, it can deliver just as consistently the quality that customers pay for and expect.
Product features
A product can be offered with varying features. A stripped-down model, one without any extras, is the
starting point. The company can create higher-level models by adding more features. Features are a
competitive tool for differentiating the company’s product from competitors’ products. Being the first
producer to introduce a valued new feature is one of the most effective ways to compete.
How can a company identify new features and decide which ones to add to its product? The company
should periodically survey buyers who have used the product and ask these questions: How do you like the
product? Which specific features of the product do you like most? Which features could we add to improve
the product? The answers provide the company with a rich list of feature ideas. The company can then
9780655702412_CH07.indd 213 3/3/20 10:53 AM

assess each feature’s value to customers versus its cost to the

company. Features that customers value highly in relation to
costs should be added.
Product style and design

Another way to add customer value is through distinctive product
style and design. Design is a larger concept than style. Style simply
describes the appearance of a product. Styles can be eye-catching
or yawn-producing. A sensational style may grab attention and
produce pleasing aesthetics, but it does not necessarily make
the product perform better. Unlike style, design is more than
skin deep – it goes to the very heart of a product. Good design
contributes to a product’s usefulness as well as to its looks.
Good design does not start with brainstorming new
ideas and making prototypes. Design begins with observing
customers and developing a deep understanding of their
Product design: Sonos created a wireless, internet-enabled speaker needs. More than simply creating product or service attributes,
system that is stylish and easy to use and fills a whole house with it involves shaping the customer’s product-use experience.
great sound.
Product designers should think less about product attributes
T3 Magazine/Contributor/Getty Images
and technical specifications and more about how customers
will use and benefit from the product.
Sonos created a wireless, internet-enabled speaker system that is easy to use and fills a whole house
with great sound. In the past, setting up a whole-house entertainment or sound system required routing
wires through walls, floors and ceilings, creating a big mess and lots of expense. And if you moved, you
could not take the system with you. Using smart design based on consumer needs, Sonos created a wireless
speaker system that is not just stylish but also easy to set up, easy to use and easy to move to meet changing
needs. Smart design has paid off handsomely for Sonos. Founded in 2002, over just the past two years the
company’s sales have nearly tripled to an estimated US$1 billion a year.9
Branding
Perhaps the most distinctive skill of professional marketers is their ability to build and manage brands.
brand A brand is a name, term, sign, symbol or design, or a combination of these, that identifies the maker or
A name, term, sign,
seller of a product or service. Consumers view a brand as an important part of a product, and branding can
symbol or design, or a
combination of these, add value to a product. Customers attach meanings to brands and develop brand relationships. Brands have
that identifies the meaning well beyond a product’s physical attributes. For example, consider Coca-Cola.
products or services of In one interesting taste test of Coca-Cola versus Pepsi, 67 subjects were hooked up to brain-wave-
one seller or group of
sellers and differentiates
monitoring machines while they consumed both products. When the soft drinks were unmarked, consumer
them from those of preferences were split down the middle. But when the brands were identified, subjects choose Coke over
competitors. Pepsi by a margin of 75 per cent to 25 per cent. When drinking the identified Coke brand, the brain areas
that lit up most were those associated with cognitive control and memory – a place where culture concepts
are stored. That did not happen as much when drinking Pepsi. Why? According to one brand strategist, it is
because of Coca-Cola’s long-established brand imagery – the almost 100-year-old contour bottle and cursive
font, and its association with iconic images ranging from the Polar Bears to Santa Claus. Pepsi’s imagery is
not quite as deeply rooted. The conclusion: consumer preference is not based on taste alone. Coke’s iconic
brand appears to make a difference.10
Branding has become so strong that, today, hardly anything goes unbranded. Salt is packaged in
branded containers, common nuts and bolts are packaged with a distributor’s label, and automobile parts –
spark plugs, tyres, filters – bear brand names that differ from those of the car makers. Even fruits,
9780655702412_CH07.indd 214 3/3/20 10:53 AM

vegetables, dairy products and poultry are branded – Sweet

Cheeks mangos, Super Tom tomatoes, Perfection milk and
Steggles chickens.
Branding helps buyers in many ways. Brand names help
consumers identify products that might benefit them. Brands
also say something about product quality and consistency –
buyers who always buy the same brand know they will get the
same features, benefits and quality each time they buy. Branding
also gives the seller several advantages. The brand name becomes
the basis on which a whole story can be built about a product’s
special qualities. The seller’s brand name and trademark provide
legal protection for unique product features that otherwise
might be copied by competitors. And branding helps the seller to
segment markets. For example, Toyota Motor Corporation can
offer the major Lexus and Toyota brands, each with numerous
Branding: Turners & Growers – marketers of fresh produce –
sub-brands – such as Camry, Corolla, Prius and Yaris – not just
distribute a number of premium brands, from Bonita bananas to
one general product for all consumers. Beekist tomatoes.
Building and managing brands are perhaps the marketer’s Image provided by Turners & Growers Ltd
most important tasks.
Packaging
Packaging involves designing and producing the container or wrapper for a product. Traditionally, the packaging
primary function of the package was to hold and protect the product. In recent times, however, numerous The activities of
designing and producing
factors have made packaging an important marketing tool as well. Increased competition and clutter on the container or
retail store shelves means that packages must now perform many sales tasks – from attracting attention, to wrapper for a product.
describing the product, to making the sale.
Companies are realising the power of good packaging to create immediate consumer recognition of a
brand. For example, an average supermarket stocks about 44 000 items The typical shopper makes three
out of four purchase decisions in stores and passes by some 300 items per minute. In this highly competitive
environment, the package may be the seller’s last and best chance to influence buyers. Thus, for many
companies, the package itself has become an important promotional medium.11
Poorly designed packages can cause headaches for consumers and lost sales for the company. Think
about all those hard-to-open packages, such as DVD cases sealed with impossibly sticky labels, packaging
with finger-splitting wire twisties or sealed plastic clamshell containers that cause ‘wrap rage’ and send
thousands of people to the hospital each year with lacerations and puncture wounds. Another packaging
issue is overpackaging – such as when a tiny USB flash drive in an oversized cardboard and plastic display
package is delivered in a giant corrugated shipping carton. Overpackaging creates an incredible amount of
waste, frustrating those who care about the environment.
Amazon now offers Frustration-Free Packaging to alleviate both wrap rage and overpackaging.
The online retailer works with more than 2000 companies, such as Fisher-Price, Mattel, Unilever, Microsoft
and others, to create smaller, easy-to-open, recyclable packages that use less packaging material and no
frustrating plastic clamshells or wire ties. It currently offers more than 200 000 such items and to date has
shipped more than 75 million of them to 175 countries. In the process, the initiative has eliminated nearly
6 square kilometres of cardboard and over 11 000 tonnes of packaging waste.12 Innovative packaging can
give a company an advantage over competitors and boost sales. Distinctive packaging may even become
an important part of a brand’s identity. For example, an otherwise plain brown carton imprinted with
the familiar curved arrow from the Amazon.com logo – variously interpreted as ‘a to z’ or even a smiley
face – leaves no doubt as to who shipped the package sitting at your doorstep. And Tiffany’s distinctive
9780655702412_CH07.indd 215 3/3/20 10:53 AM

blue boxes have come to embody the exclusive jewellery retailer’s

premium legacy and positioning. As the company puts it, ‘Glimpsed on
a busy street or resting in the palm of a hand, Tiffany Blue Boxes make
hearts beat faster and epitomize Tiffany’s great heritage of elegance,
exclusivity, and flawless craftsmanship.’13
In recent years, product safety has also become a major packaging
concern. We have all learned to deal with hard-to-open ‘childproof’
packaging. And after the rash of product-tampering scares during
the 1980s, most drug producers and food makers now put their
products in tamper-resistant packages. In making packaging decisions,
the company also must heed growing environmental concerns.
Fortunately, many companies have gone ‘green’ by reducing their
packaging and using environmentally responsible packaging materials.
Labelling
Labels range from simple tags attached to products to complex
graphics that are part of the package. They perform several functions.
Packaging: Distinctive packaging may become an important
part of a brand’s identity. An otherwise plain brown carton At the very least, the label identifies the product or brand, such as the
imprinted with only the familiar curved arrow from the name ‘Bonita’ stuck on bananas. The label might also describe several
Amazon.com logo – variously interpreted as ‘a to z’ or things about the product – who made it, where it was made, when
even a smiley face – leaves no doubt as to who shipped the
it was made, its contents, how it is to be used and how to use it
package sitting at your doorstep.
Lux Igitur/Alamy
safely. Finally, the label might help to promote the brand, support its
positioning and connect with customers. For many companies, labels
have become an important element in broader marketing campaigns.
Labels and brand logos can support the brand’s positioning and add personality to the brand. In fact,
brand labels and logos can become a crucial element in the brand–customer connection. Customers
often become strongly attached to logos as symbols of the brands they represent. Consider the feelings
evoked by the logos of companies such as Coca-Cola, Google, Twitter, Apple and Nike.
Logos must be redesigned from time to time. For example, Optus has redesigned their brand and
company logos to make them more approachable, upbeat and engaging. An Optus company representative
explains: ‘[It] isn’t so much about the new logo; it’s about the entire brand experiences our customers have
with us.’ The new brand representation, featuring a bubbly font and a friendly new brand character, is
designed to connect more closely with the customer. It is a big contrast to the old logo, which was more
‘formal, structured and quite cold’. Underpinning the new brand position is the ‘declaration of Yes’ – a
promise about what Optus does to be better for its customers.14
Along with the positives, labelling also raises concerns. There has been a long history of legal concerns
about packaging and labels. Labels can mislead customers, fail to describe important ingredients or fail to
include needed safety warnings. As a result, several federal and state laws regulate labelling. These laws set
mandatory labelling requirements, encourage voluntary industry packaging standards and allow federal
agencies to set packaging regulations in specific industries. For example, the Food Standards Australia New
Zealand Act 1991 establishes the Australia New Zealand Food Standards Code, which sets out labelling and
packaging requirements for a wide range of foods.
Labelling has been affected in recent times by unit pricing (stating the price per unit of standard
measure), open dating (stating the expected shelf life of the product) and nutritional labelling (stating the
nutritional values in the product). Legislation requires sellers to provide detailed nutritional information
on food products, and regulates the use of health-related terms, such as low fat, light and high fibre. Sellers
must ensure that their labels contain all the required information.
9780655702412_CH07.indd 216 3/3/20 10:53 AM

Product support services

Customer service is another element of product strategy. A company’s offer usually includes some support
services, which can be a minor or a major part of the total offering. Later in the chapter, we discuss services
as products in themselves. Here, we discuss services that augment actual products.
Support services are an important part of the customer’s overall brand experience. For example,
Crumpler makes a range of quality, street-smart bags. But the company knows that good marketing
does not stop with making the sale. Keeping customers happy after the sale is the key to building lasting
relationships. They do this in a relaxed and fun-filled way, offering customers a reassuring order follow-up
service, and explaining that ‘sometimes stuff happens’. They even offer customers a ‘Til Death Do Us
Part’ warranty! They ‘repair or replace the parts in question – no questions asked’. ‘Second thoughts? No
dramas’ for Crumpler customers with their exchange service. So, Crumpler goes to great lengths to make
great bags and to provide outstanding after-sale service.15
The first step in designing support services is to survey customers periodically to assess the value of
current services and to obtain ideas for new ones. Once the company has assessed the quality of various
support services to customers, it can take steps to fix problems and add new services that will both delight
customers and yield profits to the company.
Many companies now use a sophisticated mix of phone, email, fax, internet and interactive voice and
data technologies to provide support services that were not possible previously. For example, Bosch Australia
offers a complete set of sales and after-sale services. It promises ‘We are here to help’. Customers can click on
to the Bosch customer care portal for a range of online resources for their products, including service videos
and instruction manuals, as well as service bookings and even recipes, all of which can be accessed 24/7.16
Product line decisions

Beyond decisions about individual products and services, product strategy also calls for building a product
line. A product line is a group of products that are closely related because they function in a similar product line
manner, are sold to the same customer groups, are marketed through the same types of outlets or fall within A group of products
that are closely related
given price ranges. For example, Nike produces several lines of athletic shoes and apparel, and Marriott
because they function
offers several lines of hotels. in a similar manner,
The main product line decision involves product line length – the number of items in the product line. are sold to the same
The line is too short if the manager can increase profits by adding items; the line is too long if the manager can customer groups, are
marketed through the
increase profits by dropping items. Managers need to analyse their product lines periodically to assess each same types of outlets
product item’s sales and profits and to understand how each item contributes to the line’s overall performance. or fall within given price
A company can expand its product line in two ways: by line filling or by line stretching. Product line filling ranges.
involves adding more items within the present range of the line. There are several reasons for product line
filling: reaching for extra profits, satisfying dealers, using excess capacity, being the leading full-line company
and plugging holes to keep out competitors. However, line filling is overdone if it results in cannibalisation and
customer confusion. The company should ensure that new items are noticeably different from existing ones.
Product line stretching occurs when a company lengthens its product line beyond its current range. As shown
in Figure 7.3, the company can stretch its line downward, upward or both ways. Companies located at the
upper end of the market can stretch their lines downward. A company may stretch downward to plug a market
hole that otherwise would attract a new competitor or to respond to a competitor’s attack on the upper end. Or
it may add low-end products because it finds faster growth taking place in the low-end segments. Companies
can also stretch their product lines upward. Sometimes, companies stretch upward in order to add prestige to
their current products. Or they may be attracted by a faster growth rate or higher margins at the higher end.
Over the past few years, Samsung has both stretched and filled its Galaxy line of premium smartphone
and tablet mobile devices. Samsung started the Galaxy line with a 4-inch smartphone, and then quickly
added a 10.1-inch tablet. It now offers a bulging Galaxy line that includes a size for any need or preference.
9780655702412_CH07.indd 217 3/3/20 10:53 AM

New
High High High products
Present New Present

products products products
Price
Price
Price
New Present New
products products products
Low Low Low

Low High Low High Low High
Quality Quality Quality
Stretching downward Stretching upward Stretching both ways
Figure 7.3 Product line stretching decisions
To top things off, Samsung offers the Gear VR, a headset that combines with a smartphone to provide a
virtual reality experience for gamers, and the Gear Fit2, a wearable activity-tracking device. The Galaxy line
still caters heavily to the top end of its markets. But to address the fastest-growing smartphone segment –
phones that sell for less than $300 – Samsung has introduced the lower-priced Galaxy J1 models. As a result,
through artful stretching and filling, Samsung’s successful Galaxy line has broadened its appeal, improved
its competitive position and boosted growth.17
Product mix decisions

product mix An organisation with several product lines has a product mix. A product mix (or product portfolio)
(product consists of all the product lines and items that a particular seller offers for sale. Some companies manage
portfolio) very complex product portfolios. For example, Sony’s diverse portfolio consists of a number of product
The set of all product
lines and items that a businesses worldwide: Sony Electronics, Sony Computer Entertainment (games), Sony Pictures
particular seller offers Entertainment (movies, television shows), Sony Music Entertainment (music, DVDs) and Sony Financial
for sale. Services (life insurance, banking and other offerings).
Each main Sony business consists of several product lines. For example, Sony Electronics includes
cameras and camcorders, computers, televisions and home entertainment products, mobile electronics
and others. In turn, each of these lines contains many individual items. Sony’s television and home
entertainment line includes televisions, DVD players, home audio components, digital home products and
more. Altogether, Sony’s product mix includes a diverse collection of hundreds of products.
A company’s product mix has four important dimensions: width, length, depth and consistency. Product
mix width refers to the number of different product lines the company carries. Sony markets a wide range
of consumer and industrial products around the world, from televisions and PlayStation consoles to
semiconductors. Product mix length refers to the total number of items the company carries within its
product lines. Sony typically carries many products within each line. The personal audio line, for instance,
includes the expected digital media players, headphones and wireless speakers, as well as digital voice
recorders and radios, along with a wide range of accessories.18
Product mix depth refers to the number of versions offered of each product in the line. Sony has a very
deep product mix. For example, it makes and markets just about any kind of television you would ever want
to buy – LED, LCD, High Definition, Android TV, 2D or 3D – each in almost any imaginable size. Finally,
the consistency of the product mix refers to how closely related the various product lines are in terms of end
use, production requirements, distribution channels or some other way. Within each major business, Sony’s
9780655702412_CH07.indd 218 3/3/20 10:53 AM

product lines are fairly consistent in that they perform similar functions for buyers and go through the same
distribution channels. Company-wide, however, Sony markets a very diverse mix of products. Managing
such a broad and diverse product portfolio requires skill.
These product mix dimensions are the basis of the company’s product strategy. The company can
increase its business in four ways. (1) It can add new product lines, widening its product mix. In this way, its
new lines build on the company’s reputation in its other lines. (2) The company can lengthen its existing
product lines to become a more full-line company. (3) The company can add more versions of each product
and thus deepen its product mix. (4) Finally, the company can pursue more product line consistency – or
less – depending on whether it wants to have a strong reputation in a single field or in several fields.
From time to time, a company may also have to streamline its product mix to pare out marginally
performing lines and to regain its focus. As consumers rethink their brand preferences and priorities,
marketers must do the same. They need to align their product mixes with changing customer needs and
profitably create better value for customers.

To get a better sense of how large and complex a company’s product lines and individual products. What surprises you
product offering can become, investigate Procter & Gamble’s about this list of products?
(P&G’s) product mix. ● Is P&G’s product mix consistent? What products has P&G
● Using P&G’s website <www.pg.com/en_ANZ/>, its annual dropped or sold recently? What overall strategy or logic
report or other sources, develop a list of all the company’s appears to have guided the shaping of this product mix?
Services marketing
Services have grown dramatically in recent years. Services now account for nearly 70 per cent of GDP
in Australia and New Zealand. Three in every four people are employed in the sector, and that number
is growing.19
Service industries vary greatly. Governments offer services through courts, employment services, hospitals,
military services, police and fire departments, the postal service and schools. Private not-for-profit organisations
offer services through museums, charities, churches, universities, foundations and hospitals. A large number
of business organisations offer services – airlines, banks, hotels, insurance companies, consulting firms, medical
and legal practices, entertainment and telecommunications companies, real-estate firms, retailers and others.
Nature and characteristics of a service

A company must consider four special service characteristics when designing marketing programs:
(1) intangibility, (2) inseparability, (3) variability and (4) perishability (see Figure 7.4).
Service intangibility means that services cannot be seen, tasted, felt, heard or smelled before they are service
bought. For example, people undergoing cosmetic surgery cannot see the result before the purchase. Airline intangibility
A major characteristic of
passengers have nothing but a ticket and the promise that they and their luggage will arrive safely at the intended
services – they cannot
destination, hopefully at the same time. To reduce uncertainty, buyers look for ‘signals’ of service quality. They be seen, tasted, felt,
draw conclusions about quality from the place, people, price, equipment and communications that they can see. heard or smelled before
Therefore, the service provider’s task is to make the service tangible in one or more ways and to send they are bought.
the right signals about quality. One analyst calls this evidence management, in which the service organisation
presents its customers with organised, honest evidence of its capabilities. NRMA Insurance practises good
evidence management. No one really wants to buy insurance; it is difficult to work out what you need and it
is difficult to compare alternative offerings. To make it easy for customers, NRMA provides plain-English
policy booklets, a phone helpline to explain benefits, free iPhone apps, a broad range of safety and security
information, and, of course, user-friendly quotes, payments and claims systems.20
9780655702412_CH07.indd 219 3/3/20 10:53 AM

Intangibility Inseparability
Services cannot be seen, Services cannot be separated
tasted, felt, heard or smelled from their providers
before purchase
SERVICES
Variability Perishability
Quality of services depends on Services cannot be stored
who provides them and when, for later sale or use
where and how
Figure 7.4 Four service characteristics
service
inseparability Physical goods are produced, then stored, later sold and, still later, consumed. In contrast, services are
A major characteristic first sold, then produced and consumed at the same time. In services marketing, the service provider is the
of services – they are product. Service inseparability means that services cannot be separated from their providers, whether the
produced and consumed
at the same time and providers are people or machines. If a service employee provides the service, then the employee becomes a
cannot be separated part of the service. Because the customer is also present as the service is produced, provider–customer interaction
from their providers. is a special feature of services marketing. Both the provider and the customer affect the service outcome.
service variability Service variability means that the quality of services depends on who provides them, as well as
A major characteristic when, where and how they are provided. For example, some hotels – say, Sofitel – have reputations for
of services – their
providing better service than others. Still, within a given hotel, one registration-counter employee may be
quality may vary greatly,
depending on who cheerful and efficient, whereas another standing just a metre or so away may be unpleasant and slow. Even
provides them and the quality of a single Sofitel employee’s service varies according to his or her energy and frame of mind at
when, where and how. the time of each customer encounter.
service Service perishability means that services cannot be stored for later sale or use. Some doctors
perishability charge patients for missed appointments because the service value existed only at that point and
A major characteristic
of services – they disappeared when the patient did not show up. The perishability of services is not a problem when
cannot be stored for demand is steady. However, when demand fluctuates, service firms often experience problems. For
later sale or use. example, because of rush-hour demand, public
transportation companies have to own much
more equipment than they would if demand were
spread evenly throughout the day. Thus, service
firms often design strategies for producing a
better match between demand and supply. Hotels
and resorts charge lower prices in the off-season
to attract more guests. And restaurants hire part-
time employees to serve during peak periods.
Marketing strategies for

service firms
Just like manufacturing businesses, good service
Service perishability: Service providers in the hospitality sector offer off-season firms use marketing to position themselves
and last-minute rates to manage demand. strongly in chosen target markets. AAMI reminds
Courtesy Helloworld Ltd its policy holders, ‘Lucky you’re with AAMI’; Uber
9780655702412_CH07.indd 220 3/3/20 10:53 AM

promises to ‘Get there’ and to ‘Move Sydney’; and the Cancer Council Australia explains that they ‘Fund
breakthrough cancer research, not your tax bill’. These and other service firms establish their positions
through traditional marketing mix activities. However, because services differ from tangible products, they
often require additional marketing approaches.21
The service–profit chain

In a service business, the customer and frontline service employee interact to create the service. Effective
interaction, in turn, depends on the skills of frontline service employees and on the support processes
backing these employees. Thus, successful service companies focus their attention on both their customers
and their employees. They understand the service–profit chain, which links service firm profits with service–profit
employee and customer satisfaction. This chain consists of five links:22 chain
The chain that links
• Internal service quality: superior employee selection and training, a quality work environment and
service firm profits with
strong support for those dealing with customers, which results in . . . employee and customer
• Satisfied and productive service employees: more satisfied, loyal and hardworking employees, which satisfaction.
results in . . .
• Greater service value: more effective and efficient customer value creation and service delivery, which
results in . . .
• Satisfied and loyal customers: satisfied customers who remain loyal, repeat purchase and refer other
customers, which results in . . .
• Healthy service profits and growth: superior service firm performance.
Therefore, reaching service profits and growth goals begins with taking care of those who take care of
customers. The management team at Kent Relocation Services understands this. The global removal and
relocations company is based in Australia and aims to offer ‘best practice solutions’ to its global clients.
With over 40 000 removals each year, this service provider maintains a 95 per cent satisfaction record
because of its outstanding service. The management team ensures the highest standard of work by paying
their staff well – some 15–20 per cent above the industry average – and by providing a range of benefits
designed to ensure its people are happy. 23
Thus, service marketing requires more than just traditional external marketing using the four
Ps. Figure 7.5 shows that service marketing also requires internal marketing and interactive marketing.
Company
ng
Ex
eti
ter
ark
nal
lm
ma
rna
rke
e
tin
Int
Employees Customers
Interactive marketing
Figure 7.5 Three types of service marketing
9780655702412_CH07.indd 221 3/3/20 10:53 AM

internal Internal marketing means that the service firm must orient and motivate its customer-contact employees
marketing and supporting service people to work as a team to provide customer satisfaction. Marketers must get everyone
Orienting and
in the organisation to be customer-centred. In fact, internal marketing must precede external marketing.
motivating customer-
contact employees For example, Coles Supermarkets starts by hiring the right people and carefully orienting and inspiring
and supporting service them to give unparalleled customer service.
people to work as Interactive marketing means that service quality depends heavily on the quality of the buyer–seller
a team to provide
interaction during the service encounter. In product marketing, product quality often depends little on how
customer satisfaction.
the product is obtained. But in services marketing, service quality depends on both the service deliverer
and the quality of the delivery. Therefore, service marketers have to master interactive marketing skills.
interactive
Thus, Coles explains its services values to all job applicants and provides comprehensive customer-service
marketing
Interacting with training options to staff.
customers and others in In today’s marketplace, companies must know how to deliver interactions that are not only ‘high-touch’ but
the marketing channel also ‘high-tech’. For example, customers can log on to the Coles website and shop online. They can also follow
on a one-to-one basis in
person or remotely via Coles on Twitter, pin to Pinterest, like on Facebook and check out recipes and product reviews on the website.
digital technologies. Customers seeking more personal interactions can contact service representatives by phone or visit a local
Coles store. Thus, Coles has mastered interactive marketing at all three levels – calls, clicks and personal visits.
Today, as competition and costs increase, and as productivity and quality decrease, more service
marketing sophistication is needed. Service companies face three main marketing tasks: They want to
increase their service differentiation, service quality and service productivity. We discuss each of these below.
Managing service differentiation

In these days of intense price competition, service marketers often complain about the difficulty of
differentiating their services from those of competitors. To the extent that customers view the services of
different providers as similar, they care less about the provider than the price.
The solution to price competition is to develop a differentiated offer, delivery and image. The offer can
include innovative features that set one company’s offer apart from competitors’ offers. Some hotels offer no-
wait kiosk registration; car-rental, banking and business-centre services in their lobbies; and free high-speed
internet connections in their rooms. Some retailers differentiate themselves by offerings that take you well
beyond the products they stock. For example, Kellyville Pets is not your average pet shop – it is a destination,
with in-store events and entertainment, a café and training for both pets and pet owners, making it your one-
stop shop for all your pet’s needs.
Service companies can differentiate their service delivery
by having more able and reliable customer-contact people, by
developing a superior physical environment in which the service
product is delivered, or by designing a superior delivery process.
For example, many grocery chains now offer online shopping
and home delivery as a better way for their customers to shop
rather than having to drive, park, wait in line and carry groceries
home. And banks allow you to access your account information
from almost anywhere – from the ATM to your mobile phone.
Finally, service companies also can work on differentiating
their images through symbols and branding. Camp Quality
adopted ‘the face of giggle’ as its symbol in its advertising. The
smiling face represents their brand by reminding the community
of Camp Quality’s programs, which help build optimism and
Managing service differentiation: Kellyville Pets is not your average resilience for children living with cancer and their families.24
pet shop – it is a destination – with in-store events, a café and
training for both pets and pet owners. Other well-known service symbols include Qantas’s flying
Courtesy of Kellyville Pets, 1-15 Millcroft Way, Beaumont Hills, NSW 2155 kangaroo, MGM’s lion, McDonald’s’ golden arches and Weta
Workshop’s weta (insect) symbol.
9780655702412_CH07.indd 222 3/3/20 10:53 AM

Managing service quality

A service firm can differentiate itself by delivering consistently higher quality than its competitors provide.
Like manufacturers before them, most service industries have now joined the customer-driven quality
movement. And like product marketers, service providers need to identify what target customers expect in
regards to service quality.
Unfortunately, service quality is more difficult to define and judge than product quality. For instance, it
is harder to agree on the quality of a haircut than on the quality of a hair straightener. Customer retention
is perhaps the best measure of quality – a service firm’s ability to hang on to its customers depends on how
consistently it delivers value to them.
Top service companies set high service-quality standards. They watch service performance closely, both
their own and that of competitors. They do not settle for merely good service; they set targets that they
aim to meet each year. Australia Post commits to provide over 10 000 street posting boxes (they have nearly
16 000), to deliver 94 per cent of domestic letters on time (they deliver over 94.8 per cent on time) and to
maintain at least 2500 postal outlets in rural areas (and they do this, too).25
Unlike product manufacturers who can adjust their machinery and inputs until everything is perfect,
service quality will always vary, depending on the interactions between employees and customers. As hard
as they try, even the best companies will have an occasional late delivery, burned steak or grumpy employee.
However, good service recovery can turn angry customers into loyal ones. In fact, good recovery can win
more customer purchasing and loyalty than if things had gone well in the first place. The following story,
which was posted online, illustrates just how important service recovery is. After many years of great service
from their local KwikKopy printer, a management consultant collected a print job needed for the next
day. Opening the package at 6 o’clock that night the consultant was dismayed to find the job had been
very poorly done. A call to the printer produced instant action. The printer collected the faulty work and
returned to the consultant’s home later that evening with the printing completed to the high quality the
consultant had come to expect. The quick action of the printer meant that the online story was filled with
praise for the standard of service, rather than frustration with the initial outcome.26
These days, social media, such as Facebook and Twitter, can help companies remedy or remove
customer dissatisfaction with service. As discussed in Chapter 5, many companies now monitor the digital
space to identify customer issues quickly and respond in real-time. A quick and thoughtful response can
turn a dissatisfied customer into a brand advocate.27
Managing service productivity

With their costs rising rapidly, service firms are under great pressure to increase service productivity. They
can do so in several ways. They can train current employees to work more effectively or hire new ones
who will work harder or more skilfully. Or they can increase the quantity of their service by giving up
some quality. The provider can ‘streamline the service’ by standardising production, as in McDonald’s’
assembly-line approach to fast-food retailing. Finally, the service provider can harness the power of
technology. Although we often think of technology’s power to save time and costs in manufacturing
companies, it also has great – and often untapped – potential to make service workers more productive.
However, companies must avoid pushing productivity to the point that doing so reduces quality.
Attempts to streamline a service or to cut costs can make a service company more efficient in the short run.
But such changes can also reduce its longer-term ability to innovate, maintain service quality or respond
to consumer needs and desires. For example, some airlines have learned this lesson the hard way as they
attempt to economise in the face of rising costs. They stopped offering even the little things for free – such
as in-flight snacks – and began charging extra for everything. The result is an aircraft full of dissatisfied
customers who avoid the airline whenever they can. In their attempts to improve productivity, these airlines
mangled customer service.
Thus, in attempting to improve service productivity, companies must be mindful of how they create and
deliver customer value. In short, they should be careful not to take the ‘service’ out of service.
9780655702412_CH07.indd 223 3/3/20 10:53 AM

Student a particular seller make up the product mix. The mix can be described by four
dimensions: width, length, depth and consistency. These dimensions are the tools
Learning for developing the company’s product strategy.
Centre Learning Objective 3. Identify the four characteristics

that affect the marketing of a service and the
additional marketing considerations that services
Reviewing the learning objectives require.
A product is more than a simple set of tangible features. Each product or service Services are characterised by four key characteristics: they are intangible,
offered to customers can be viewed on three levels. The core customer value inseparable, variable and perishable. Each characteristic poses problems and
consists of the core problem-solving benefits that consumers seek when they marketing requirements. Marketers work to find ways to make the service
buy a product. The actual product exists around the core and includes the quality more tangible, to increase the productivity of providers who are inseparable
level, features, design, brand name and packaging. The augmented product is the from their products, to standardise the quality in the face of variability, and
actual product plus the various services and benefits offered with it, such as a to improve demand movements and supply capacities in the face of service
warranty, free delivery, installation and maintenance. perishability.
Good service companies focus attention on both customers and employees.
Learning Objective 1. Define product and the main
They understand the service–profit chain, which links service firm profits with
classifications of products and services.
employee and customer satisfaction. Services marketing strategy calls not only
Broadly defined, a product is anything that can be offered to a market for for external marketing but also for internal marketing to motivate employees and
attention, acquisition, use or consumption that might satisfy a want or need. interactive marketing to create service delivery skills among service providers.
Products include physical objects, but also services, events, persons, places, To succeed, service marketers must create competitive differentiation, offer high
organisations, ideas or mixes of these entities. Services are products that service quality and find ways to increase service productivity.
consist of activities, benefits or satisfactions offered for sale that are essentially
intangible, such as banking, hotel, tax-preparation and home-repair services.
Discussion questions
Products and services fall into two broad classes based on the types of
❶ Services and experiences. The distinction made between goods, services
consumers that use them. Consumer products – those bought by final consumers
and experiences is an interesting view of the progression that has occurred
– are usually classified according to consumer shopping habits (convenience
over time, as organisations have become more sophisticated in developing
products, shopping products, specialty products and unsought products).
offerings for the marketplace. In truth, most services are experiential.
Industrial products – purchased for further processing or for use in conducting a
The key point to experiential offerings is the staging of the events that keep
business – include materials and parts, capital items, and supplies and services.
the customer coming back. It is necessary to consider the management
Other marketable entities – such as organisations, persons, places and ideas –
of service organisations separately from manufacturing organisations, and
can also be thought of as products.
the other classifications mentioned should also be considered for their
similarities as well as their differences. How would you distinguish between
Learning Objective 2. Describe the decisions
services and experiences? (Learning Objective 1) (AACSB: Reflective
companies make regarding their individual products
Thinking)
and services, product lines and product mixes.
❷ Relationships with consumers. Evert Gummesson defines relationship
Individual product decisions involve product attributes, branding, packaging, marketing as ‘marketing seen as relationships, networks, and interaction’.
labelling and product support services. Product attribute decisions involve He cites Grönroos’s definition of marketing with a relationship focus:
product quality, features, and style and design. Branding decisions include ‘Marketing is to establish, maintain, and enhance relationships with
selecting a brand name and developing a brand strategy. Packaging provides customers and other partners, at a profit, so that the objectives of the
many key benefits, such as protection, economy, convenience and promotion. parties are met. This is achieved by mutual exchange and fulfilment of
Package decisions often include designing labels, which identify, describe promises.’28 It is understandable that business users form relationships with
and possibly promote the product. Companies also develop product support the firms they buy from, since they are dependent on their suppliers and
services that enhance customer service and satisfaction and safeguard against buy directly from them.29 Consumers deal with self-service intermediaries,
competitors. such as Coles Supermarkets, where they have contact with few people
Most companies produce a product line rather than a single product. other than at the checkout. What part might relationships play in the
A product line is a group of products that are related in function, customer- marketing of branded products, given the differences between the process
purchase needs or distribution channels. Line stretching involves extending a line of marketing business-to-business products compared with marketing of
downward, upward or in both directions to occupy a gap that might otherwise consumer products? Do you think consumers might form relationships
be filled by a competitor. In contrast, line filling involves adding items within the with the brands themselves? Explain your answer. (Learning Objective 2)
present range of the line. All product lines and items offered to customers by (AACSB: Reflective Thinking)
9780655702412_CH07.indd 224 3/3/20 10:53 AM

❸ Private labels. For the last decade, the two main supermarket retailers in in measuring service quality for an ‘almost pure’ service? Considering all
Australia have been competing aggressively with their range of services, of the above, are service characteristics really so different from branded
their private-label (store) brands and price. During this time, there has been goods? Justify your answer. (Learning Objective 3) (AACSB: Reflective
significant growth in private labels, with European supermarket chain, ALDI, Thinking)
entering the market, as well as growth in other sectors (see the case study
‘Supermarket wars’ in Appendix 1). Do you think retailers are committed to Critical thinking exercises
their own private labels? Explain your answer. What evidence do you see ❶ Branding is not just for products and services; destinations are getting in on
that retailers recognise the need to use advertising to build brand equity the action, too. In a small group, come up with a brand identity proposal for
in these private-label brands? (Learning Objective 2) (AACSB: Reflective your town, city or state. Present your idea to the rest of the class and explain
Thinking) the meaning you are trying to convey. (Learning Objective 1) (AACSB:
❹ Service characteristics. This issue makes for interesting class debates. Communication; Application of Knowledge)
Here, we consider several points that force us to think deeply about the ❷ Choose one product category (such as chocolate chip cookies), and then
nature of a product. The characteristics of services include intangibility, identify at least the brands in that category, including national brands
inseparability (they are personal in nature), variability and perishability. and private-label brands. For each brand, compare the product attributes,
What is the significance of these points at a practical level? For example, including price and quality; product features; and its style and design
a concept such as ‘being ethical in business’, which might be marketed (appearance). Record these comparisons in a table and compare your
within an organisation, is intangible, yet it is not a service. What is views with those of your classmates. What might be the reason for you
it? What could be more personal and involving than buying a house? and your classmates to have different opinions? Which brands might have
Yet, a house is not a service. Some people use fluoride toothpaste for 10 or higher brand equity? Justify your answer. (Learning Objective 2) (AACSB:
15 years and still get tooth decay – surely this is an example of variability Communication, Reflective Thinking)
in the outcomes from using a physical product? So, what makes service ❸ Search online to find five examples of service-provider attempts to reduce
encounters more variable than this? If I buy a GPS navigator and after service intangibility. Present one of your examples to the rest of the class and
a year I need to update my maps, surely it must be perishable? Are not justify your views. (Learning Objective 3) (AACSB: Communication; Use of IT)
the measures similar to, and in some cases, the same as, those employed
Mini cases
7.1 Industrial products
Opening doors with Grifco
Grifco makes industrial door openers – those gadgets that make a also offers after-sales support for installers and customers, both online and
door open and close – and they have been doing so for over 50 years. in person.
The first openers were mechanical, and today Grifco make some of the best ❶ What type of industrial good are Grifco’s door openers? What factors
electronic door-opening systems in the world. Think for a moment about all did you consider in classifying this good? (Learning Objective 1)
the different places industrial businesses might need door openers: from (AACSB: Communication; Application of Knowledge)
manufacturing plants to shop fronts, warehouses and fire stations. Some ❷ An industrial product is a complex bundle of benefits in much the same
door openers need to be fire-proof, others need to be ignition-proof and way as a consumer product is. Marketers must identify the core customer
still others need to be able to handle very heavy use. Grifco sell them all. value, create an actual product and choose how to augment that
They also promise their customers personalised sales service, reliable and product. Identify the core value, as well as the actual and augmented
efficient products of exceptional quality, and a huge array of spare parts product, for Grifco door openers (see <www.grifco.com.au/>). (Learning
and accessories. The service does not stop with the sale – the company Objective 1) (AACSB: Communication; Application of Knowledge)
7.2 Packaging
Vote 1 for ‘The Original’
Farmers Union Iced Coffee brand was launched in 1977. It is one of Coffee brand customers to join them in redesigning the packaging for the
the largest-selling brands in the category and Australia’s only national market-leading brand. Brand devotees have been asked to vote for their
iced-coffee brand. Brand owner Lion Pty Limited has asked its loyal Iced favourite package design – choosing between ‘The Original’, ‘The Real
9780655702412_CH07.indd 225 3/3/20 10:53 AM

7.2 Packaging continued

McCoy’, ‘The Straight-Shooter’ and ‘The Wild Card’ – with the design varying disadvantages of involving customers in package design decisions?
progressively from the original. In branding and packaging, consistency (Learning Objective 2) (AACSB: Communication; Application of
is crucial so each of the package alternatives is the same shape and size, Knowledge; Analytical Thinking)
uses the same colours (teal and brown) and retains the same Farmers ❷ Iced coffee is a convenience good. Customers purchase such items
Union trademark. After voting for their favourite package design on a often and may have well-established preferences so they do not need to
custom-made website, customers can follow progress of the vote on the expend a great deal of effort when choosing a brand. Customers often
brand’s Facebook page. Changing packaging, its layout and design is not use the package design to quickly locate their favourite brand in the
something a brand manager does lightly. This is because the package is confusion of products on a supermarket shelf. Industrial goods also have
often the last and best chance to attract a buyer’s attention.30 packaging. Do you think industrial buyers are influenced in the same
❶ Involving loyal customers in packaging decisions seems like a good way by a product’s packaging? Explain your answer. What might be the
idea, but it could also be a problem for the brand manager if there considerations in designing packaging for industrial buyers? (Learning
is no clear favourite package design. What are the advantages and Objectives 1 and 2) (AACSB: Communication; Application of Knowledge)

Champagne from Australia?
Scotch Whiskey, Champagne Sparkling Wine, Parmesan Cheese, Dijon protect its US$4 billion industry from imitators who label their whiskey as
Mustard – what do all of these have in common? They are not brand names Scotch. True Scotch must be aged in oak casks in Scotland for at least three
but, rather, geographical indicators (GIs) of the origins of these foodstuffs. years. All of these products come with a higher price tag for consumers.
Europe has a long history of gastronomical delicacies that the European ❶ Do you think products with geographic indicators are actually superior
Union has been eager to protect for economic reasons. For example, not to other similar ones not originating from that geographical region?
just any sparkling wine can be labelled champagne because only sparkling Give some examples to support your answer. (Learning Objective 2)
wine produced in the Champagne region of France can use that on the label. (AACSB: Application of Knowledge)
The British government is launching a registry of Scottish whiskey makers to
References
1 Based on Bunnings Warehouse website, <www.bunnings.com.au>, accessed 10 Alok Jha, ‘Coke or Pepsi? It’s all in the head’, The Guardian, <www.theguardian.com/
April 2015; see also ‘Tradies crime prevention event’, <mypolice.qld.gov.au/ world/2004/jul/29/science.research>, accessed June 2016.
logan/2016/02/15/tradies-crime-prevention-event-wednesday-february-17/>, accessed 11 See ‘3 in 4 grocery purchase decisions being made in-store’, MarketingCharts, 15 May
April 2016. 2012, <www.marketingcharts.com/direct/3-in-4-grocery-purchase-decisions-being-
2 R K Krishna Kumar, ‘Effective marketing must begin with customer engagement’, made-in-store-22094>; ‘FMI – Supermarket facts’, <www.fmi.org/research-resources/
Marketing News, 15 April 2009, p. 15; and Lawrence A Crosby & Brian S Lunde, ‘The supermarket-facts>, accessed June 2016.
brand scorecard’, Marketing Management, May/June 2008, pp. 12–13. 12 See Mary Mazzoni, ‘Amazon continues its battle against “wrap rage”’, Triple Pundit,
3 For the BOQ campaign summary, see ‘Bank of Queensland launches new “It’s possible 9 December 2013, <www.triplepundit.com/2013/12/amazon-continues-battle-against-
to love a bank” rebranding campaign via BWM’, Campaign Brief, 31 May 2013; see wrap-rage/>; and <www.amazon.com/b/?&node55521637011>, accessed June 2016.
also <www.boq.com.au/love.htm>, accessed April 2016. 13 See <www.tiffany.com/WorldOfTiffany/TiffanyStory/Legacy/BlueBox.aspx>, accessed
4 For the Amaysim campaign summary, see ‘Special group convinces David Hasselhoff to June 2016.
change his name to launch Amaysim campaign’, Campaign Brief, 14 November 2015; 14 Quotes from Leigh Stark, ‘Optus moves on: New plans, new logo, and a walking lemon
see also <www.amaysim.com.au/meet-david-hoff>, accessed May 2016. named Ollie’, Gadget Guy, 26 June 2013; Katarina Matic, ‘The new face of Optus:
5 Information from <www.donnahay.com.au>, accessed June 2016. New branding and new plans’, 29 June 2013, <www.comparebroadband.com.au/
6 Information from <www.newzealand.com>, <www.destinationnsw.com.au>, article_1777_The-new-face-of-Optus-New-branding-and-new-plans.htm>, accessed
<www.visitvictoria.com> and <www.vividsydney.com>, accessed June 2016. June 2016; Lisa, ‘Optus – Yes or no?’, Daley Blog, 25 June 2013, <http://daleycreative.
7 Colgate Total advertising, <www.colgate.com.au/app/ColgateTotal/AU/benefits.cwsp>; com.au/optus-yes-or-no/>, accessed June 2016; and <www.optus.com.au>, accessed
social marketing information, <www.aasm.org.au/about-us/>, accessed June 2016. June 2016.
8 Quotes and definitions from Philip Kotler, Marketing Insights from A to Z, Wiley: 15 See <www.crumpler.com/AU/FAQs.html#crumpler>, accessed June 2016.
Hoboken, NJ, 2003, p. 148; and <www.asq.org/glossary/q.html>, accessed June 2016. 16 See Bosch Australia Customer Care at <www.bosch-home.com.au/customer-care.
9 See Nathaniel Wice, ‘Sonos: The best wireless speakers’, Barrons, 3 January 2015, html>, accessed June 2016.
<http://online.barrons.com/articles/sonos-the-best-wireless-speakers-1420260626>; 17 See Samsung website, <www.samsung.com/au/home/>, accessed June 2016.
Tim Bradshaw, ‘Speaker maker Sonos raises $140m’, Financial Times, 3 December 18 See Sony Australia website, <www.sony.com.au/section/product>, accessed June 2016.
2014, <www.ft.com/cms/s/0/bcf5add4-7ab0-11e4-8646-00144feabdc0. 19 See CIA, The World Factbook, <www.cia.gov/library/publications/resources/the-world-
html#axzz3QhVK6ky0>; and <www.sonos.com>, accessed June 2016. factbook/geos/nz.html> and <www.cia.gov/library/publications/resources/the-world
9780655702412_CH07.indd 226 3/3/20 10:53 AM

-factbook/geos/as.html>, accessed June 2015; ‘Trade in services Australia’, <http:// 25 See Australia Post, Annual Report 2015, <http://auspost.com.au/annualreport2015/
dfat.gov.au/about-us/publications/Pages/trade-in-services-australia.aspx>, accessed docs/australia-post-annual-report-2015.pdf>, p. 107, accessed June 2016.
June 2016. 26 This story and others from <www.anecdote.com/2010/02/its-how-you-recover-when-
20 Information from <www.nrma.com.au/>, accessed June 2016. things-fail-that-counts/>, accessed June 2016.
21 See websites <www.aami.com.au/>, <www.uber.com>, <www.uber.com/cities/ 27 See Micah Solomon, ‘5 social media customer service best practices to handle (or
sydney/> and <www.cancer.org.au/>; accessed June 2016. prevent) customer complaints’, Forbes, 28 January 2015, <www.forbes.com/sites/
22 See James L Heskett, W Earl Sasser, Jr & Leonard A Schlesinger, The Service Profit Chain: micahsolomon/2015/01/28/5-best-practices-for-social-media-customer-service-how-to-
How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value, Free handle-and-avoid-customer-complaints>.
Press: New York, NY, 1997; and James L Heskett, W Earl Sasser & Leonard A Schlesinger, 28 Evert Gummesson, ‘Making relationship marketing operational’, International Journal
The Value Profit Chain: Treat Employees Like Customers and Customers Like Employees, of Service Industry Management, 5(5), 1994, pp. 5, 7.
Free Press: New York, NY, 2003. Also see John Marshall & Dave Mayer, ‘Activate a brand 29 David L Blenkhorn & Hugh F MacKenzie, ‘Interdependence in relationship marketing’,
internally’, Marketing Management, Winter 2012, pp. 37–44. Asia-Australia Marketing Journal, 4(1), 1996, pp. 25–30.
23 See Kent Relocation Group, <www.businessawards.com.au/winners/2015/Service- 30 See Ben Ice, ‘Farmers Union Iced Coffee declares new packaging election’, Marketing
Excellence/Kent-Relocation-Group.php> and <www.kentrelocationservices.com.au/>; Magazine, 7 June 2016, <www.marketingmag.com.au/news-c/farmers-union-iced-
accessed June 2016. coffee-declares-new-packaging-election/>; and also <farmersunion.com.au/>, <www.
24 For information about Camp Quality, its history and philosophy, see facebook.com/farmersunion> and <lionco.com/our-brands/milk-beverages/iced-
<www.campquality.org.au>, accessed June 2016. coffee>, accessed June 2016.
9780655702412_CH07.indd 227 3/3/20 10:53 AM

Chapter
8 New products: Developing and

managing innovation
In Chapter 7, you learned how marketers manage and develop products and brands. In this chapter, we
examine two additional product topics: developing new products and managing products through their life
cycles. New products are the lifeblood of an organisation. However, new-product development is risky, and
many new products fail. So, the first part of this chapter lays out a process for developing and introducing
successful new products. Marketers want new products to enjoy long and successful lives. In the second part
of the chapter, we show that every product passes through several life-cycle stages and that each stage poses
new challenges requiring different marketing strategies and tactics. We wrap up our product discussion
by looking at two additional considerations: social responsibility in product decisions, and international
product and services marketing.
Learning Objective 1 Explain how companies find and develop new-product ideas.
New-product development strategy p. 230
Learning Learning Objective 2 List and define the steps in the new-product development process,
Objectives and describe the main considerations in managing this process.
The new-product development process pp. 230–37
Managing new-product development pp. 237–39
Learning Objective 3 Describe the stages of the product life cycle and how marketing
strategies change during the product life cycle.
Product life-cycle strategies pp. 239–45
9780655702412_CH08.indd 228 3/3/20 10:57 AM

Chapter 8 New products: Developing and managing innovation 229
LO 1 NEW-PRODUCT IDEAS ACQUISITION

find and develop
new-product ideas.
NEW-PRODUCT DEVELOPMENT PROCESS
Customer-centered • Team based • Systematic
Idea Idea Concept Marketing

LO 2 development strategy
List and define the generation screening
and testing development
steps in the new-product
development process,
and describe the main
considerations in Test Product Business
managing this process. Commercialisation marketing development analysis
PRODUCT LIFE CYCLE CHANGES

Shaped by ethical and international market considerations
LO 3 INTRODUCTION GROWTH MATURITY DECLINE

Describe the stages of the
product life cycle and •Innovators •Early adopters •Middle majority •Laggards
how marketing strategies •Few competitors •Growing competition •Stable competition •Declining competition
change during the •Low sales •Rapidly rising sales •Peak sales •Declining sales
product life cycle. •Negative profit •Rising profit •High profit •Declining profit
Basic product Product extensions Diversity brand Phase out

Cost–plus pricing Penetration pricing Price to match Cut price
Selective distribution Intensive distribution competition Selective distribution
Build awareness Build awareness Intensive distribution Reduce advertising
Sales promotion to and interest Stress brand differences Reduces sales
entice trial Leverage high demand Encourage brandswitching promotion
9780655702412_CH08.indd 229 3/3/20 10:57 AM

New-product development
strategy
A business can obtain new products in two ways. One is through acquisition – by buying a whole company,
new-product a patent or a licence to produce someone else’s product. The other is through the firm’s own new-product
development development efforts. By new products we mean original products, product improvements, product
The development
modifications and new brands that the business develops through its own research and development (R&D)
of original products,
product improvements, efforts. In this chapter, we concentrate on new-product development.
product modifications New products are important – to both customers and the marketers who serve them. For
and new brands customers, new products bring new solutions and variety to their lives, and they are a key source
through the company’s
of growth for companies. Yet, innovation can be very expensive and risky. New products face tough
own research and
development (R&D) odds. For example, by one estimate, 60 per cent of all new consumer packaged products introduced
efforts. by established companies fail; two-thirds of new-product concepts are never even launched.1 Why do
so many new products fail? There are several reasons. Although an idea may be good, the company
may overestimate the size of the market. The actual product may be poorly designed. Or it might be
incorrectly positioned, launched at the wrong time, priced too high or poorly advertised. A high-level
executive might push a favourite idea despite poor marketing research findings. Sometimes, the costs of
product development are higher than expected, and sometimes competitors fight back more vigorously
than expected.
So, companies face a problem: they must develop new products, but the odds weigh heavily against
success. To create successful new products, a company must understand its consumers, markets and
competitors, and develop products that deliver superior value to customers.
The new-product development

process
Rather than leaving new products to chance, a company must carry out strong new-product planning and
set up a systematic, customer-driven new-product development process for finding and growing new products.
Figure 8.1 shows the eight major steps in this process.
Idea generation
idea generation New-product development starts with idea generation – the systematic search for new-product ideas.
The systematic search A company typically generates hundreds, or even thousands, of ideas in order to find a few good ones.
for new-product ideas.
Major sources of new-product ideas include both internal sources, and external sources such as customers,
competitors, distributors and suppliers, and others.
Idea Idea Concept Marketing

generation screening development strategy
and testing development
Test Product Business

Commercialisation marketing development analysis
Figure 8.1 The main steps in the new-product development process
9780655702412_CH08.indd 230 3/3/20 10:57 AM

Internal idea sources

Using internal sources, the company can find new ideas through formal R&D. For example, Kraft Foods
has a state-of-the-art innovation facility with over 100 food scientists developing new products for the
Australian and Asian markets. The facility features everything from chocolate-development equipment to
a test kitchen to a customer insights facility. However, a survey of 750 global CEOs reported that only
14 per cent of their innovation ideas came from traditional R&D. Instead, 41 per cent came from
employees and 36 per cent from customers.2
So, companies pick the brains of employees – from executives to scientists, engineers, manufacturing
staff and salespeople. Many companies have developed successful internal social networks and
intrapreneurial programs that encourage employees to develop new-product ideas. For example, Google’s
Innovation Time-Off program has resulted in blockbuster product ideas, ranging from Gmail and Ad
Sense to Google News. A similar program at 3M has long encouraged employees to spend 15 per cent of
their working time on their own projects, resulting in Post-it® Notes and many other successful Post-it®
Brand products.3
Tech companies, such as Facebook and Twitter, sponsor periodic ‘hackathons’, in which employees take
a day or a week away from their day-to-day work to develop new ideas. Professional social media network,
LinkedIn, which has over 460 million members, holds ‘hackdays’, a Friday each month when it encourages
employees to work on whatever they want that will benefit the company. LinkedIn takes the process a
step further with its InCubator program, under which employees can form teams each quarter that pitch
innovative new ideas to LinkedIn executives. If approved, the team gets up to 90 days away from its regular
work to develop the idea into reality.4
External idea sources

Companies can also obtain good new-product ideas from any of a number of external sources. For example,
distributors and suppliers can contribute ideas. Distributors are close to the market and can pass along
information about consumer problems and new-product possibilities. Suppliers can tell the company about
new concepts, techniques and materials that can be used to develop new products. Competitors are another
important source of new-product ideas. Companies watch competitors’ ads to get clues about their new
products. They buy competing new products, take them apart to see how they work, analyse their sales
and decide whether they should bring out a new product of their own. Other idea sources include trade
magazines, shows and seminars; government agencies; advertising agencies; marketing research firms;
university and commercial laboratories; and inventors.
Some companies seek the help of external new-product consultancies and design firms, such as Proen
Design, for new-product ideas and designs. For example, new-product development was a key part
of Sabco’s marketing campaign to reconfirm its leadership position in the market. Proen Design
worked with Sabco to develop the Staxx Storage System, which is used by major retailers throughout
Australia.5
Perhaps the most important source of new-product ideas is customers themselves. The company can
analyse customer feedback to find new products that better solve consumer problems. For example,
New Zealand manufacturer, Imake Ltd, used customer insights when it developed its new product, ‘The
Grainfather’, a home-brewing system. Customer feedback revealed that home-brewers like to add features
and personalise their brewing system – so Imake developed upgrades and additional features so that
customers could build their perfect system. Customers can even turn their micro-brewery into a distillery
by adding a condenser and dome.6 Or, the company can invite customers to share suggestions and ideas.
For example, The LEGO Group, maker of the classic LEGO® plastic bricks that have been fixtures in
homes around the world for more than 60 years, systematically taps users for new-product ideas and input
via the LEGO® Ideas website. The website invites customers to submit their ideas and to evaluate and
9780655702412_CH08.indd 231 3/3/20 10:57 AM

vote on the ideas of others. Ideas supported by 10 000 votes

head to the LEGO® Review Board for an internal review by
various departments, including marketing and design. Ideas
passing the review are made into official LEGO® products.
Customers whose ideas reach production earn 1 per cent of
total net sales of the product and receive credit as the LEGO®
Ideas set creator inside every set sold. So far, LEGO® Ideas
has resulted in 10 major new products, including the likes
of LEGO® Minecraft, LEGO® Maze, LEGO® Wall-E and
LEGO® Doctor Who.7
Crowdsourcing
More broadly, many companies are now developing
crowdsourcing or open-innovation new-product idea
programs. Crowdsourcing throws the innovation doors
wide open, inviting broad communities of people – customers,
employees, independent scientists and researchers, and
even the public at large – into the new-product innovation
Product ideas: The LEGO® Ideas website invites customers to submit process. Tapping into a breadth of sources – both inside
and vote on new-product ideas. So far, LEGO® Ideas has resulted in
10 major new products. and outside the company – can produce unexpected and
LEGO and the LEGO logo are trademarks of The LEGO Group, used here by permission. powerful new ideas.
© 2016 The LEGO Group, all rights reserved. Companies large and small, across all industries, are
crowdsourcing product innovation ideas rather than relying
crowdsourcing only on their own R&D labs. For example, Samsung
Inviting broad recently launched an Open Innovation Program, which breaks down the walls surrounding Samsung’s
communities of people own innovation process and opens the doors to fresh new-product and technology ideas from outside the
– customers, employees,
independent scientists company. Through the program, Samsung creates alliances with top industry and university researchers
and researchers, and around the world, participates actively in industry-wide forums, works with suppliers on innovation and
even the public at large seeks out and invests in promising start-up companies. ‘In the 21st century, no company can do all the
– into the new-product research alone,’ says a Samsung executive, ‘and we see it as critically important to partner with [others]
innovation process.
across the world to build and strengthen a vibrant research community.’8
Rather than creating and managing their own crowdsourcing platforms, companies can use
third-party crowdsourcing networks, such as InnoCentive, Kaggle and jovoto. For example, Australian
start-up, Kaggle, brings together businesses with big data and a global network of over half a million
data scientists (Kagglers) to solve problems. In the highly competitive telecommunications market,
understanding if a service fault is just a glitch or a total outage helps ensure a positive customer experience.
So, in a recent competition, Telstra invited Kagglers to help predict the severity of service faults on its
network. The winner, a self-taught data scientist from Brazil, is a competition grandmaster on Kaggle
with two top-ranked solutions in the last year.9
Truly innovative companies do not rely only on one source or another for new-product ideas. Instead,
they develop extensive innovation networks that capture ideas and inspiration from every possible source,
from employees and customers to outside innovators and multiple points beyond.
idea screening Idea screening

Screening new-product The purpose of idea generation is to create a large number of ideas. The purpose of the succeeding stages
ideas in order to identify
is to reduce that number. The first idea-reducing stage is idea screening, which helps identify good ideas
good ideas and discard
poor ones as soon as and discard poor ones as soon as possible. Product-development costs rise greatly in later stages, so the
possible. company wants to proceed only with the product ideas that will turn into profitable products.
9780655702412_CH08.indd 232 3/3/20 10:57 AM

Many companies require their executives to write up new-product ideas in a standard format that can
be reviewed by a new-product committee. The write-up describes the product or service, the proposed
customer value proposition, the target market and the competition. It includes rough estimates of market
size, product price, development time and costs, manufacturing costs and rate of return. The committee
then evaluates the idea against a set of general criteria.
One marketing expert proposes an R-W-W (‘real, win, worth it’) new-product screening framework
that asks three questions: (1) Is it real? Is there a real need and desire for the product, and will customers
buy it? Is there a clear product concept and will the product satisfy the market? (2) Can we win? Does the
product offer a sustainable competitive advantage? Does the company have the resources to make the
product a success? (3) Is it worth doing? Does the product fit the company’s overall growth strategy? Does it
offer sufficient profit potential? The company should be able to answer ‘yes’ to all three R-W-W questions
before developing the new-product idea further.10
Concept development and testing

An attractive idea must be developed into a product concept. It is important to distinguish between product concept
a product idea, a product concept and a product image. A product idea is an idea for a possible product A detailed version of
the new-product idea,
that the company can see itself offering to the market. A product concept is a detailed version of the idea,
stated in meaningful
stated in meaningful consumer terms. A product image is the way consumers perceive an actual or consumer terms.
potential product.
Concept development
Suppose a car manufacturer has developed a practical battery-powered all-electric car. Its initial prototype
is a sleek, sporty convertible that sells for about $100 000.11 However, in the near future, the manufacturer
plans to introduce more-affordable, mass-market versions that will compete with recently introduced concept testing
hybrid-electric or all-electric cars, such as the Nissan Leaf, Holden Volt and Mitsubishi’s i-MiEV. Testing new-product
This 100 per cent electric car will accelerate from 0 to 100 kilometres per hour in 3.0 seconds, and will concepts with a group
of target consumers
travel nearly 400 kilometres on a single charge.
to determine if the
Looking ahead, the marketer’s task is to develop this new product into alternative product concepts, concepts have strong
determine how attractive each concept is to customers and choose the best one. It might create the consumer appeal.
following product concepts for the electric car:
• Concept 1: An affordably priced mid-size car designed as a second family car to be used around town
for running errands and visiting friends.
• Concept 2: A mid-priced sporty compact appealing to young singles
and couples.
• Concept 3: A ‘green’ car appealing to environmentally conscious
people who want practical, low-polluting transportation.
• Concept 4: A high-end, mid-size, all-wheel-drive vehicle appealing
to those who love the space that SUVs provide but do not like
their high levels of fuel consumption.
Concept testing
Concept testing calls for testing new-product concepts with
groups of target consumers. The concepts may be presented to
consumers symbolically or physically. Here, in words, is the electric
car, concept 3:
Concept development: Tesla’s Model S is available in
An efficient, fun-to-drive, battery-powered compact car that Australia. The company plans to introduce a more-affordable
mass-market model by 2018.
seats four. This 100 per cent electric wonder provides practical
Justin Pritchard/AP/AAP
and reliable transportation with no pollution. It goes nearly
9780655702412_CH08.indd 233 3/3/20 10:57 AM

350 kilometres on a single charge and costs just a few cents per kilometre to operate. It’s a sensible,
environmentally responsible alternative to today’s pollution-producing gas-guzzlers. It’s priced,
fully equipped, at $40 000.
Many firms routinely test new-product concepts with consumers before attempting to turn them into
actual new products. For some concept tests, a word or picture description might be sufficient. However, a
more concrete and physical presentation of the concept will increase the reliability of the concept test. After
being exposed to the concept, consumers then may be asked to react to it by answering questions, such as
those presented in Table 8.1.
The answers to such questions will help the company decide which concept has the strongest appeal.
For example, the last question asks about the consumer’s intention to buy. Suppose that 2 per cent of
consumers say they ‘definitely’ would buy, and another 5 per cent say ‘probably’. The company could
project these figures to the full population in this target group to estimate sales volume. Even then, the
estimate is uncertain because people do not always carry out their stated intentions.
Table 8.1 Questions for battery-powered electric car concept test

1. Do you understand the concept of a battery-powered electric car?
2. Do you believe the claims about the car’s performance?
3. What are the main benefits of the battery-powered electric car compared with a conventional car?
4. What are the advantages of the battery-powered electric car compared with a petrol–electric hybrid car?
5. What improvements in the car’s features would you suggest?
6. For what uses would you prefer a battery-powered electric car to a conventional car?
7. What would be a reasonable price to charge for the car?
8. Who would be involved in your decision to buy such a car? Who would drive it?
9. Would you buy such a car (definitely, probably, probably not, definitely not)?
Marketing strategy development

marketing Suppose the car maker finds that concept 3 for the electric car tests best. The next step is marketing
strategy strategy development – that is, designing an initial marketing strategy for introducing this car to the
development market.
Designing an initial
marketing strategy for a The marketing strategy statement consists of three parts. The first part describes the target market; the
new product based on planned value proposition; and the sales, market share and profit goals for the first few years. Thus:
the product concept.
The target market is younger, well-educated, moderate- to high-income individuals, couples or small
families seeking practical, environmentally responsible transportation. The car will be positioned as
being more fun to drive and less polluting than today’s internal combustion engine or hybrid cars.
The company will aim to sell 50 000 cars in the first year, at a loss of not more than $15 million.
In the second year, the company will aim for sales of 90 000 cars and a profit of $25 million.
The second part of the marketing strategy statement outlines the product’s planned price, distribution
and marketing budget for the first year:
The battery-powered electric car will be offered in three colours – red, white and blue – and will
have a full set of accessories as standard features. It will sell at a retail price of $40 000 – with
15 per cent off the list price to dealers. Dealers who sell more than 10 cars per month will get an
additional discount of 5 per cent on each car sold that month. A marketing budget of $3 million
will be split 40–30–30 among a national media campaign, online and social media marketing, and
local event marketing. Advertising, the website and mobile sites, and various social media content
will emphasise the car’s fun spirit and low emissions. During the first year, $100 000 will be spent on
marketing research to establish who is buying the car and their satisfaction levels.
9780655702412_CH08.indd 234 3/3/20 10:57 AM

The third part of the marketing strategy statement describes the planned long-run sales, profit goals
and marketing mix strategy:
We intend to capture a 3 per cent long-run share of the total car market and realise an after-tax
return on investment of 15 per cent. To achieve this, product quality will start high and be improved
over time. Price will be raised in the second and third years if competition permits. The total
marketing budget will be raised each year by about 10 per cent. Marketing research will be reduced
to $60 000 per year after the first year.
Business analysis
Once management has decided on its product concept and marketing strategy, it can evaluate the business
attractiveness of the proposal. Business analysis involves a review of the sales, costs and profit projections business analysis
for a new product to determine whether they satisfy the company’s objectives. If they do, the product can A review of the
sales, costs and profit
move to the product-development stage.
projections for a new
To estimate sales, the company might look at the sales history of similar products and conduct market product to determine
surveys. It can then estimate minimum and maximum sales to assess the range of risk. After preparing whether these factors
the sales forecast, management can estimate the expected costs and profits for the product, including satisfy the company’s
objectives.
marketing, R&D, operations, accounting and finance costs. The company then uses the sales and costs
figures to analyse the new product’s financial attractiveness.
Product development
For many new-product concepts, the product may have existed only as a word description, a drawing or
perhaps a crude mock-up. If the product concept passes the business test, it moves into product product
development. Here, R&D or engineering develops the product concept into a physical product. development
A strategy for promoting
The product-development step, however, now calls for a large jump in investment. It will establish whether
company growth by
the product idea can be turned into a workable product. offering modified or
The R&D department will develop and test one or more physical versions of the product concept. new products to current
R&D hopes to design a prototype that will satisfy and excite consumers, and that can be produced quickly market segments;
developing the product
and at budgeted costs. Developing a successful prototype can take days, weeks, months or even years,
concept into a physical
depending on the product and prototype methods. product to ensure that
Often, products undergo rigorous tests to ensure they perform safely and effectively, or that consumers the product idea can be
will find value in them. Companies can do their own product testing or outsource testing to other firms turned into a workable
product.
that specialise in testing. Marketers often involve actual customers in product testing. For example, ALDI
signs up customers for one year to sample and rate its products
throughout the year. Every three months, members of the ‘ALDI
Testers Club’ receive a hamper of 10 ALDI products. Members
test and rate the products and ALDI uses the feedback to shape
product development and the selection of products on the store
shelves. The product-testing program gives ALDI important
customer insights and helps the company ‘remain nimble and
responsive to the changing behaviour of customers’.12
A new product must have the required functional features
and also convey the intended psychological characteristics.
The all-electric car, for example, should strike consumers as being
well built, comfortable and safe. Management must learn what
Product testing: ALDI invites customers to join the ALDI Testers
makes consumers decide that a car is well built. To some consumers,
Club whose members are ‘entrusted with quality control and
this means the car has ‘solid-sounding’ doors. To others, it monitoring the supermarkets wares’. Club members provide
means the car is able to withstand heavy impact in crash tests. feedback that shapes product development and the selections of
Consumer tests are conducted in which consumers test-drive products available in stores.
ALDI Stores Australia
the car and rate its attributes.
9780655702412_CH08.indd 235 3/3/20 10:57 AM

Test marketing
test marketing If the product passes concept and product tests, the next step is test marketing, the stage at which
The stage of new- the product and the associated marketing program are introduced into realistic market settings. Test
product development in
marketing gives the marketer experience with marketing the product before going to the great
which the product and
the associated marketing expense of full introduction. It lets the company test the product and its entire marketing program –
program are introduced targeting and positioning strategy, advertising, distribution, pricing, branding and packaging, and
into more realistic budget levels.
market settings.
The amount of test marketing needed varies with each new product. Test marketing costs can be high,
and the process takes time that may allow market opportunities to slip by or competitors to gain advantages.
When the costs of developing and introducing the product are low, or when management is already
confident about the new product, the company may do little or no test marketing. In fact, test marketing by
consumer-goods firms has been declining in recent years. Companies often do not test-market simple line
extensions or copies of successful competitor products.
However, when introducing a new product requires a significant investment, when the risks are high
or when management is unsure of the product or marketing program, a company may do a lot of test
marketing. For instance, Pernod Ricard, distributors of the Jameson Irish Whiskey brand, worked with
brand owners Irish Distillers to test a new Jameson pre-mix range in Australia. The range sees the iconic
whiskey sold pre-mixed with cola, ginger beer or apple. Australia and New Zealand are ideal global test sites
because they are relatively small, Western-like markets. Test marketing allows new-product marketers to
limit access to new products while they identify and fix any problems with the product.13
Although test-marketing costs can be high, they are often small when compared with the costs of
making a major mistake. And many marketers are now using simulated marketing technologies to reduce
the costs of test marketing and to speed up the process. Simulated test marketing uses a range of research
and computer-modelling approaches to evaluate consumer reactions to new products before they go on the
market. For example, Australian company Play Market Research uses virtual-reality shopping environments
to help supermarkets and brand owners test different configurations of their products on supermarket
shelves. These types of simulations can be used to estimate sales and to work out the most likely impact of
different marketing-mix options.14
Commercialisation
Test marketing gives management the information needed to make a final decision about whether to launch
commercialisation the new product. If the company goes ahead with commercialisation – introducing the new product
Introducing a new into the market – it will face high costs. The company may need to build or rent a manufacturing facility.
product into the market.
And, in the case of a major new consumer packaged good, the company may spend hundreds of millions of
dollars for advertising, sales promotion and other marketing efforts in the first year. Samantha Wills’s
pathway from selling her jewellery at local markets to becoming a global jewellery tycoon was not an easy
one. It took time, hard work and money to achieve global recognition. Launching the successful Australian
jewellery brand in the United States required 18 months of planning and research before the first order was
received. The brand finally took off when actress Eva Mendes was snapped on the ‘red carpet’ wearing the
Samantha Wills signature Bohemian Bardot Ring. Today, that signature ring is made in 150 different
colours and Samantha Wills jewellery is sold in 80 countries. The brand is now a global success – but it took
a long time and a lot of money to get there.15
A company launching a new product must first decide on introduction timing. If the new product might
damage the sales of a company’s existing products, its introduction may be delayed. On the other hand, changes
in the marketing environment or competitor activity may prompt a company to launch a new product sooner.
Next, the company must decide where to launch the new product – in a single location, a region, the
national market or the international market. Few companies have the confidence, capital and capacity to
launch new products into full national or international distribution right away. Instead, they develop a
9780655702412_CH08.indd 236 3/3/20 10:57 AM

planned market rollout over time. Some companies, however, may quickly introduce new models into the full
national market. Companies with international distribution systems may introduce new products through
swift global rollouts. For example, Apple launched its iPhone 6 and iPhone 6 Plus phones in its fastest-ever
global rollout, making them available in 115 countries within less than three months of initial introduction.16
Managing new-product
development
The new-product development process shown earlier in Figure 8.1 highlights the important activities
needed to find, develop and introduce new products. However, new-product development involves more
than just going through a set of steps. Companies must take a holistic approach to managing this process.
Successful new-product development requires a customer-centred, team-based and systematic effort.
Customer-centred new-product development

Above all else, new-product development must be customer-centred. When looking for and developing new
products, companies often rely too heavily on technical research in their R&D labs. But, like everything
else in marketing, successful new-product development begins with a thorough understanding of what
consumers need and value. Customer-centred new-product development focuses on finding new customer-centred
ways to solve customers’ problems and create more customer-satisfying experiences. new-product
One study found that the most successful new products are those that are differentiated, solve major development
Focuses on finding
customer problems and offer a compelling customer-value proposition. Another study showed that new ways to solve
companies that directly engage their customers in the new-product innovation process had twice the return customers’ problems
on assets and triple the growth in operating income compared with firms that do not. Thus, customer and create more
customer-satisfying
involvement has a positive effect on the new-product development process and product success.17
experiences.
Intuit – maker of financial software such as QuickBooks and Quicken – is a strong proponent of customer-
driven new-product development. Intuit follows a ‘Design for
Delight’ (D4D) development philosophy that says products
should delight customers by providing experiences that go beyond
their expectations. Design for Delight starts with customer
empathy – knowing customers better than they know themselves.
So, each year, Intuit conducts 10 000 hours of what it calls ‘follow-
me-homes’, in which design employees observe first-hand how
customers use its products at home and at work. Based on customer
observations, the next D4D step is to ‘go broad, go narrow’ –
developing many customer-driven product ideas, then narrowing
them down to one or a few great ideas for products that will solve
customer problems. The final D4D step involves turning the
great ideas into actual products and services that create customer
delight, collecting customer feedback steadily throughout the
development process. Thanks to customer-centred new-product
development, Intuit’s revenues have grown to US$4.5 billion
annually, a 45 per cent increase in just five years.18
For products ranging from consumer packaged goods to
financial services, today’s innovative companies get out of the Customer-centred new-product development: Financial-software
research lab and connect with customers in search of fresh maker Intuit follows a ‘Design for Delight’ development philosophy
ways to meet customer needs. Customer-centred new-product that says products should delight customers by providing
development begins and ends with understanding customers experiences that go beyond expectations.
Reprinted with permission. © Intuit Inc. All rights reserved.
and involving them in the process.
9780655702412_CH08.indd 237 3/3/20 10:57 AM

Team-based new-product development

Good new-product development also requires a total-company, cross-functional effort. Some companies
organise their new-product development process into the orderly sequence of steps shown in Figure 8.1,
sequential starting with idea generation and ending with commercialisation. Under this sequential product
product development approach, one company department works individually to complete its stage of the process
development before passing the new product along to the next department and stage. This orderly, step-by-step process
A new-product
development approach can help bring control to complex and risky projects. But it can also be dangerously slow. In fast-changing,
in which one company highly competitive markets, such slow-but-sure product development can result in product failures, lost
department works sales and profits, and crumbling market positions.
individually to complete
In order to get their new products to market more quickly, many companies use a team-based
its stage of the process
before passing the new new-product development approach. Under this approach, company departments work closely
product along to the together in cross-functional teams, overlapping the steps in the product-development process to both save
next department and time and increase effectiveness. Instead of passing the new product from department to department, the
stage.
company assembles a team of people from various departments that stays with the new product from start
team-based to finish. Such teams usually include people from the marketing, finance, design, manufacturing and legal
new-product departments, and even supplier and customer companies. In the sequential process, a bottleneck at one phase
development can seriously slow the entire project. In the team-based approach, if one area of the product’s development
An approach in which
hits problems, some members of the team work to resolve them while the rest of the team continues on.
company departments
work together in The team-based approach does have some limitations. For example, it sometimes creates more
cross-functional organisational tension and confusion than the more orderly sequential approach. However, in rapidly
teams, overlapping the changing industries that are facing increasingly shorter product life cycles, the rewards of fast and flexible
steps in the product-
development process product development far exceed the risks. Companies that combine a customer-centred approach with
to both save time and team-based new-product development gain a big competitive edge by getting the right new products to
increase effectiveness. market more quickly.
Systematic new-product development

Finally, the new-product development process should be holistic and systematic, rather than
compartmentalised and haphazard. Otherwise, few new ideas will surface, and many good ideas will sputter
and die. To avoid these problems, a company can install an innovation management system to collect, review,
evaluate and manage new-product ideas.
The company can appoint a respected senior person to be its innovation manager. It can set up
web-based idea-management software and encourage all company stakeholders – employees, suppliers,
distributors and dealers – to become involved in finding and developing new products. It can assign a cross-
functional innovation management committee to evaluate proposed new-product ideas and help bring
good ideas to market. It can create recognition programs to reward those who contribute the best ideas.
The innovation management system approach yields two favourable outcomes. First, it helps create an
innovation-oriented company culture. It shows that top management supports, encourages and rewards
innovation. Second, it will yield a larger number of new-product ideas, among which will be found
some especially good ones. The good new ideas will be more systematically developed, producing more
new-product successes. No longer will good ideas wither for the lack of a sounding board or a senior
product advocate.
Thus, new-product success requires more than simply thinking up a few good ideas, turning them into
products and finding customers for them. It requires a holistic approach for finding new ways to create
valued customer experiences, from generating and screening new-product ideas to creating and rolling-out
want-satisfying products to customers.
More than this, successful new-product development requires a whole-company commitment.
At companies known for their new-product prowess – such as Google, Apple, IDEO, 3M, Procter &
Gamble and General Electric – the entire culture encourages, supports and rewards innovation.
9780655702412_CH08.indd 238 3/3/20 10:57 AM


Take a break. Think about new products and how companies find ● Applying the new-product development process you have
and develop them. just studied in this section, develop an idea for an innovative
● Suppose you are on a panel to nominate the ‘best new new snack-food product and outline a brief plan to bring the
products of the year’. What products would you nominate, and product to market.
why? Considering one of these new products, what can you
learn about the new-product development process?
Product life-cycle strategies

After launching a new product, management wants the product to enjoy a long and successful life. Although
it does not expect the product to sell forever, the company wants to earn a decent profit to cover all the
effort and risk that went into launching it. Management is aware that each product will have a life cycle,
although its exact shape and length is not known in advance.
Figure 8.2 shows a typical product life cycle (PLC), the course that a product’s sales and profits take product life cycle
over its lifetime. The product life cycle has five distinct stages: The course of a
product’s sales and
1. Product development begins when the company finds and develops a new-product idea. During product profits during its
development, sales are zero and the company’s investment costs mount. lifetime. It involves
five distinct stages:
2. Introduction is a period of slow sales growth as the product is introduced in the market. Profits are product development,
non-existent in this stage because of the heavy expenses of product introduction. introduction, growth,
3. Growth is a period of rapid market acceptance and increasing profits. maturity and decline.
4. Maturity is a period of slowdown in sales growth because the product has achieved acceptance by
most potential buyers. Profits level off or decline because of increased marketing outlays to defend
the product against competition.
5. Decline is the period when sales fall off and profits drop.
Not all products follow this product life cycle. Some products are introduced and die quickly; others
stay in the mature stage for a very long time. Some enter the decline stage and are then cycled back into the
growth stage through strong promotion or repositioning. It seems that a well-managed brand could live
forever. Such venerable brands as Coca-Cola (beverages), Gillette (shaving), ANZ (banking), Canterbury
(sportswear), Arnott’s (baked goods) and David Jones (department store), for instance, are still going strong
after more than 100 years.
Sales and
profits ($)
Sales
Profits
0 Time
Product
development Introduction Growth Maturity Decline
Losses/
investment ($)
Figure 8.2 Sales and profits over the product life cycle, from inception to decline
9780655702412_CH08.indd 239 3/3/20 10:57 AM

Marketing
in Action Mattel: Managing the fun and games
8.1
Mattel has ruled the toy industry for generations, with classic brands such as
Barbie, Hot Wheels, Fisher-Price and a host of others. Recently, however, Mattel’s
sales have fallen off as its core brands have matured. Venerable Barbie, now in her
mid-50s, has experienced double-digit sales dips in each of the past two years.
Sagging Fisher-Price sales suggest that today’s toy buyers are less e namoured
with those storied brands than previous generations were. And Mattel’s Hot
Wheels brand, while holding its own, now seems coveted more by nostalgic dads
than by their children.
Mattel could blame its slump on broader toy industry trends – declining
birthrates, rising costs, unfavourable economic conditions and the boom in
digital technologies that make many traditional toys now seem like relics from
the past. The global toy industry has stagnated in recent years, with market
leaders, such as Mattel and Hasbro, taking the biggest hits. Yet none of that has
slowed Mattel’s hottest competitor, The LEGO Group. In the past 10 years, despite
the toy industry’s doldrums, LEGO® revenues have quadrupled, up 25 per cent Product life-cycle management: Like many other Mattel
last year alone. LEGO® recently surged past Mattel and Hasbro to become the brands, Barbie is showing her age. Beyond revitalising its
world’s largest toy maker. classic brands, Mattel must create a steady stream of exciting
LEGO®’s success suggests that Mattel’s problems go beyond just industry ups new brands that stay ahead of changing consumer trends and
tastes.
and downs. Rather, the company appears to have a product life-cycle problem
Mike Blake/Reuters
– lots of good old products but too few good new ones. In an industry facing a
barrage of hot new playthings, Mattel has lagged in product development and
failed to adapt to rapidly changing toy trends and tastes.
Wars Hot Wheels cars, and it has partnered with Warner Bros. Entertainment on
Consider Barbie, Mattel’s biggest and oldest brand. Born in 1959, Barbie
a number of films based on DC Comics characters. However, although profitable,
quickly became a must-have for young girls everywhere. For more than five
such licensed products cannot compensate for Mattel’s inability to revitalise its
decades, Barbie has remained Mattel’s number-one moneymaker, accounting for
own brands and develop new ones. For example, Mattel recently lost its Disney
as much as 30 per cent of its revenues. But during the past few years, Barbie’s
character rights to rival Hasbro, leaving a huge revenue hole to fill.
popularity has spiralled downward. Although still one of the world’s largest toy
Thus, to regain its prowess in today’s turbulent, fast-changing toy market,
brands, Barbie’s current annual revenues of US$1 billion are little more than
Mattel must develop a faster, more nimble, more customer-focused process for
half of what they were at her peak. Barbie sales dropped a stomach-churning
developing relevant new products and guiding them profitably through their
16 per cent in 2014, and another 14 per cent in 2015, prompting one analyst to
product life cycles. Beyond reinvigorating its classic brands, Mattel must create
suggest that ‘it might be time for Mattel to roll out Retirement Barbie’.
a steady stream of exciting new brands that stay ahead of changing consumer
This will not happen anytime soon. But, like many other Mattel brands, Barbie
trends and tastes. For Mattel, mastering the product life cycle is more than just
is showing her age. Designers work tirelessly on new Barbie models and features.
fun and games. It is a matter of growth, prosperity and even long-run survival.
An example is Entrepreneur Barbie, the first Barbie with her own smartphone
and LinkedIn profile. Still, Barbie continues to lose relevance alongside trendier Sources: Jens Hansegard, ‘Oh, snap! Lego pushes ahead of Mattel in sales’, Wall Street Journal,
toy-aisle juggernauts, such as Disney’s Frozen line of toys and play sets. 5 September 2014, p. B5; John Kell, ‘Lego says 2015 was its “best year ever”, with huge sales
jump’, Fortune, 1 March 2016, <http://fortune.com/2016/03/01/lego-sales-toys-2015/>; Paul
Mattel has also misfired in some of its marketing attempts to modernise Ziobro, ‘Floundering Mattel tries to make things fun again’, Wall Street Journal, 23 December
Barbie, and many of its other lines are now maturing and experiencing sales 2014, p. A1; Alexandra Petri, ‘The end of (doll) history’, Washington Post, 4 May 2013,
p. A13; Maria Armental, ‘Barbie’s decline hurts Mattel profit’, Market Watch, 20 April 2016,
declines. Critics blame Mattel’s uninspired designs, conservative innovation <www.marketwatch.com/story/barbies-decline-hurts-mattel-profit-2016-04-20>; Shan Li,
mindset and inability to keep the brands fresh and relevant to the times. ‘Mattel’s CEO resigns as toy maker struggles’, Los Angeles Times, 27 January 2015, p. A1;
John Kell, ‘Mattel’s Barbie sales down for third consecutive year’, Fortune, 30 January 2015,
As its own core brands have aged, Mattel has injected new life into its <http://fortune.com/2015/01/30/mattels-barbie-sales-drop-third-year/>; ‘Shake-up at Mattel
product lines by licensing characters from popular movies, television shows as Barbie loses her appeal’, New York Times, 27 January 2015, p. B1; Laura Stampler, ‘Bye,
bye Barbie: 2015 is the year we abandon unrealistic beauty ideals’, Time, 30 January 2015,
and comic books. Specifically, Mattel has made a small fortune with licensed <http://time.com/3667580/mattel-barbie-earnings-plus-size-body-image/>; and <www.
Disney Princess and Frozen dolls and toys. It recently launched a line of Star barbie.com> and <http://corporate.mattel.com>, accessed August 2016.
9780655702412_CH08.indd 240 3/3/20 10:57 AM

Questions ❷ In mid-2016, Niantic launched Pokémon Go and, in doing so, reached

out to loyal, older Pokémon players as well as attracting a new, younger
❶ Discuss the options for Mattel in the face of intense competition and
market. How could Mattel use the same strategy to rejuvenate its brands?
declining sales for its key brands (see Figure 8.2 for hints).
The product life-cycle (PLC) concept can describe a product class (petrol-powered automobiles), a
product form (SUVs) or a brand (the Toyota Landcruiser). The PLC concept applies differently in each case.
Product classes have the longest life cycles – the sales of many product classes stay in the mature stage for
a long time. Product forms, in contrast, tend to have the standard PLC shape. Product forms such as dial
telephones and VHS tapes passed through a regular history of introduction, rapid growth, maturity and
decline.
A specific brand’s life cycle can change quickly because of changing competitive attacks and responses.
For example, although laundry soaps (product class) and powdered detergents (product form) have enjoyed
fairly long life cycles, the life cycles of specific brands have tended to be much shorter.
The PLC concept also can be applied to what are known as styles, fashions and fads. Their special life
cycles are shown in Figure 8.3.
A style is a basic and distinctive mode of expression. For example, styles appear in homes (colonial, style
ranch, transitional), clothing (formal, casual) and art (realist, surrealist, abstract). Once a style is invented, it A basic and distinctive
mode of expression.
may last for generations, passing in and out of vogue. A style has a cycle showing several periods of renewed
interest. A fashion is a currently accepted or popular style in a given field. For example, the more formal fashion
‘business attire’ look of corporate dress of the 1980s and 1990s gave way to the ‘business casual’ look of A currently accepted or
popular style in a given
today. Fashions tend to grow slowly, remain popular for a while and then decline slowly. field.
Fads are temporary periods of unusually high sales driven by consumer enthusiasm and immediate
product or brand popularity.19 A fad may be part of an otherwise normal life cycle, as in the case of fad
A fashion that enters
recent surges in the sales of poker chips and accessories. Or the fad may comprise a brand’s or product’s quickly, is adopted with
entire life cycle. The ‘Pet Rock’ is a classic example. Upon hearing his friends complain about how great zeal, peaks early
expensive it was to care for their dogs, advertising copywriter Gary Dahl joked about his pet rock. and declines quickly.
He soon wrote a spoof of a dog-training manual for it, titled The Care and Training of Your Pet Rock. Soon,
Dahl was selling some 1.5 million ordinary beach pebbles at $4 a pop. Yet the fad, which broke one
October, had sunk like a stone by the next February. Dahl’s advice to those who want to succeed with a
fad: ‘Enjoy it while it lasts.’ Who could forget such fads as ‘Keep Calm’ posters, mugs and tea-towels or
the ‘Ice Bucket Challenge’?20
Style Fashion Fad

Sales
Sales
Sales
Time Time Time
Figure 8.3 Styles, fashions and fads
9780655702412_CH08.indd 241 3/3/20 10:57 AM

Marketers can apply the product life-cycle concept as a useful framework for
describing how products and markets work. And when used carefully, the PLC
concept can help in developing good marketing strategies for different stages
of the product life cycle. But using the PLC concept for forecasting product
performance or for developing marketing strategies presents some practical
problems. For example, in practice, it is difficult to forecast the sales level at each
PLC stage, the duration of each stage and the shape of the PLC curve. Using
the PLC concept to develop marketing strategy can also be difficult because
strategy is both a cause and a result of the product’s life cycle. The product’s
current PLC position suggests the best marketing strategies, and the resulting
marketing strategies affect product performance in later life-cycle stages.
Moreover, marketers should not blindly push products through the traditional
stages of the product life cycle. Instead, marketers often defy the ‘rules’ of the life
cycle and position or reposition their products in unexpected ways. By doing this,
they can rescue mature or declining products and return them to the growth phase
of the life cycle. Or they can leapfrog obstacles to slow consumer acceptance and
propel new products forward into the growth phase.
Product life cycle: Although some products have The moral of the product life cycle is that companies must continually
been around for decades, others, like pillows innovate or they risk extinction. No matter how successful its current product
decorated with the ‘Keep Calm’ meme, might be
line-up, for future success, a company must skilfully manage the life cycles of
regarded as a fad.
© POJCHEE/Shutterstock.com
existing products. And to grow, the company must develop a steady stream of
new products that bring new value to customers. Mattel is learning this lesson
the hard way. It has long dominated the world toy industry with such classic
brands as Barbie, Hot Wheels and Fisher-Price. In recent years, however, as its core brands have matured,
Mattel’s sales have stagnated at the hands of nimbler, more innovative competitors (see Marketing in
Action 8.1).21
Having looked at the product-development stage of the product life cycle in the first part of the chapter, we
now turn to consider strategies for each of the other life-cycle stages.
Introduction stage
introduction stage The introduction stage starts when the new product is first launched. Introduction takes time, and sales
The stage in the product growth is apt to be slow. Well-known products such as frozen foods and HDTVs lingered for many years
life cycle when the
before they entered a stage of more rapid growth.
new product is first
distributed and made In this stage, as compared to other stages, profits are negative or low due to the combination of low
available for purchase. sales and high distribution and promotion expenses. Much money is needed to attract distributors and build
their inventories. Promotion spending is relatively high to inform consumers of the new product and get
them to try it. Because the market is not generally ready for product refinements at this stage, the company
and its few competitors produce basic versions of the product. These firms focus their selling on those
buyers who are the most ready to buy.
A company, especially the market pioneer, must choose a launch strategy that is consistent with the
intended product positioning. It should realise that the initial strategy is just the first step in a grander
marketing plan for the product’s entire life cycle. If the market pioneer chooses its launch strategy to make a
‘killing’, it may be sacrificing long-run revenue for the sake of short-run gain. As the market pioneer moves
through later stages of the life cycle, it must continuously formulate new pricing, promotion and other
marketing strategies. It has the best chance of building and retaining market leadership if it chooses and
implements the appropriate launch strategy correctly from the start.
9780655702412_CH08.indd 242 3/3/20 10:57 AM

Growth stage
If the new product satisfies the market, it will enter a growth stage, in which sales will start climbing quickly. growth stage
The early adopters will continue to buy, and later buyers will start following their lead, especially if they hear The stage in the
product life cycle when
favourable word of mouth. Attracted by the opportunities for profit, new competitors will enter the market.
a product’s sales start
They will introduce new product features, and the market will expand. The increase in competitors leads to an climbing quickly.
increase in the number of distribution outlets, and sales jump just to build reseller inventories. Prices remain
where they are or fall only slightly. Companies keep their promotion spending at the same or a slightly higher
level. Educating the market remains a goal, but now the company must also meet the competition.
Profits increase during the growth stage as promotion costs are spread over a large volume and as
unit manufacturing costs fall. The firm uses several strategies to sustain rapid market growth for as long
as possible. It improves product quality and adds new product features and models. It enters new market
segments and new distribution channels. It shifts some advertising from building product awareness to
building product conviction and purchase, and it lowers prices at the right time to attract more buyers.
In the growth stage, the firm faces a trade-off between high market share and high current profit.
By investing in product improvement, promotion and distribution, the company can capture a dominant
position. In doing so, however, it gives up maximum current profit, which it hopes to make up in the
next stage.
Maturity stage
At some point, a product’s sales growth will slow down, and the product will enter a maturity stage. maturity stage
This maturity stage normally lasts longer than each of the previous stages, and it poses strong challenges The stage in the product
life cycle when sales
to marketing management. Most products are in the maturity stage of the life cycle, and therefore most of
growth slows or levels
marketing management deals with the mature product. off.
The slowdown in sales growth results in many producers with many products to sell. In turn, this
overcapacity leads to greater competition. Competitors begin marking down prices, increasing their
advertising and sales promotions, and increasing their product-development budgets to find better
versions of the product. These steps lead to a drop in profit. Some of the weaker competitors start exiting
the marketplace, and the industry eventually contains only well-established competitors.
Although many products in the mature stage appear to
remain unchanged for long periods, most successful ones
are actually evolving to meet changing consumer needs.
Product managers should do more than simply oversee or
defend their mature products – they should maintain an
active product-management role, and consider modifying
the market, product and marketing mix.
In modifying the market, the company tries to increase
consumption by finding new users and new market segments
for its brands. For example, Lite n’ Easy is now reaching out
to the elusive male market. Meal plans include larger portion
sizes for male customers and marketing communication shows
both men and women enjoying the convenience of Lite n’ Easy
meals. And the strategy is working: the Queensland brand is the
fastest-growing brand in the Australian weight-loss sector. 22
The product manager may also look for ways to increase Modifying the market: 3M encourages its customers to ‘discover the
usage among present customers. 3M encourages users to solutions and Post-it® products to unlock something amazing’. These
creative options encourage greater use.
‘check out creative ways to use Post-it products’ on the
®
3M
Solutions page on its website, and the Collaborate page
9780655702412_CH08.indd 243 3/3/20 10:57 AM

shows Post-it® Brand products being used in logic trees, SWOT analyses and mind mapping, among a
myriad of other uses. Huggies encourages customers to share experiences and ideas, to post photos of
children’s rooms and birthday cakes, and offers expert advice and comfort.23
The company might also try modifying the product – changing product characteristics, such as
quality, features, style or packaging, to attract new users and to inspire more usage. The company can
improve the product’s styling and attractiveness. Or it might improve its quality and performance – its
durability, reliability, speed or taste. Thus, makers of consumer food and household products introduce
new flavours, colours, scents, ingredients or packages to enhance performance and revitalise consumer
buying. For example, Red Bull released a summer edition kiwi–apple energy drink. The new flavour
follows the successful summer launch of a tropical flavour that produced a 167 per cent increase in sales
over the previous summer, with nearly one-third coming from new customers. Red Bull understands that
‘innovation in flavoured energy drinks is important for future category growth’.24
Finally, the company can try modifying the marketing mix – improving sales by changing one or more of
the marketing mix elements. The company can offer new or improved services to buyers. It can cut prices
to attract new users and competitors’ customers. It can launch a more-effective advertising campaign or
use aggressive sales promotions – trade deals, cents-off, premiums and contests. In addition to pricing and
promotion, the company can also move into new marketing channels to help serve new users.
Decline stage
The sales of most product forms and brands eventually decrease. The decline may be slow, as in the cases
of postage stamps and oatmeal cereal, or rapid, as for CDs when digital music came of age with the iPod.
Sales may plunge to zero, or they may drop to a low level where they continue for many years. This is the
decline stage decline stage.
The stage in the product Sales decline for many reasons, including technological advances, shifts in consumer tastes and increased
life cycle when a
competition. As sales and profits decline, some firms withdraw from the market. Those remaining may
product’s sales decline.
prune their product offerings. They may drop smaller market segments and marginal trade channels, or
they may cut the promotion budget and reduce their prices further.
Carrying a weak product can be very costly to a firm, and not just in profit terms. There are many
hidden costs. A weak product may take up too much of management’s time. It often requires frequent
price and inventory adjustments. It requires advertising and salesforce attention that could be otherwise
deployed to make ‘healthy’ products more profitable. A product’s failing reputation can cause customer
concerns about the company and its other products. The biggest cost may well lie in the future. Keeping
weak products delays the search for replacements, creates a lopsided product mix, hurts current profits and
weakens the company’s foothold on the future.
For these reasons, companies must identify products in the decline stage by regularly reviewing sales,
market share, costs and profit trends. Then, management must decide whether to maintain, harvest or drop
these declining products.
Management may decide to maintain its brand, repositioning or reinvigorating it in hopes of moving
it back into the growth stage of the product life cycle. P&G has done this with Old Spice. Over the past
decade, P&G has retargeted, repositioned, revitalised and extended this old brand, taking it from near
extinction to billion-dollar-brand status.25
Management may decide to harvest the product, which means reducing various costs (plant and
equipment, maintenance, R&D, advertising, salesforce) and hoping that sales hold up. If successful,
harvesting will increase the company’s profits in the short run. Or management may decide to drop the
product from the line. It can sell it to another firm or simply liquidate the product at salvage value. If the
company plans to find a buyer, it will not want to run down the product through harvesting.
Table 8.2 summarises the key characteristics of each stage of the product life cycle. The table also lists
the marketing objectives and strategies for each stage.26
9780655702412_CH08.indd 244 3/3/20 10:57 AM

Table 8.2 Summary of product life-cycle characteristics, objectives and strategies

Characteristics Introduction Growth Maturity Decline
Sales Low sales Rapidly rising sales Peak sales Declining sales
Costs High cost per customer Average cost per Low cost per customer Low cost per customer
customer
Profits Negative Rising profits High profits Declining profits
Customers Innovators Early adopters Middle majority Laggards
Competitors Few Growing number Stable number beginning Declining number
to decline
Marketing objectives
Create product Maximise market Maximise profit while Reduce expenditure
awareness and trial share defending market share and ‘milk’ the brand
Strategies
Product Offer a basic product Offer product extensions, Diversify brand and Phase out weak items
service, warranty models
Price Use cost-plus Price to penetrate market Price to match or beat Cut price
competitors’
Distribution Build selective Build intensive Build more intensive Go selective: Phase
distribution distribution distribution out unprofitable
outlets
Advertising Build product awareness Build awareness and Stress brand differences Reduce to level
among early adopters interest in the mass and benefits needed to retain
and dealers market hard-core loyals
Sales promotion Use heavy sales Reduce to take Increase to encourage Reduce to minimal
promotion to entice advantage of heavy brand switching level
trial consumer demand
Sources: Chester R Wasson, Dynamic Competitive Strategy and Product Life Cycles, Austin Press: Austin, TX, 1978; John A Weber, ‘Planning corporate
growth with inverted product life cycles’, Long Range Planning, October 1976, pp. 12–29; Peter Doyle, ‘The realities of the product life cycle’, Quarterly
Review of Marketing, Summer 1976.
9780655702412_CH08.indd 245 3/3/20 10:57 AM

Student Learning Objective 3. Describe the stages of the

product life cycle and how marketing strategies
Learning change during the product life cycle.
Centre Each product has a life cycle marked by a changing set of problems and
opportunities. The product life cycle (PLC) has five distinct stages. The cycle begins
with the product-development stage in which the company finds and develops
a new-product idea. The introduction stage is marked by slow growth and low
Reviewing the learning objectives profits as the product is distributed to the market. If successful, the product enters
A company’s current products face limited lifespans and must be replaced by newer
a growth stage, which offers rapid sales growth and increasing profits. Next
products. But new products can fail – the risks of innovation are as great as the
comes a maturity stage in which sales growth slows down and profits stabilise.
rewards. The key to successful innovation lies in a customer focus, total-company
Finally, the product enters a decline stage in which sales and profits dwindle.
effort, strong planning and a systematic new-product development process.
The company’s task during this stage is to recognise the decline and to decide
Learning Objective 1. Explain how companies find whether it should maintain, harvest or drop the product.
and develop new-product ideas. The different stages of the PLC require different marketing strategies and
tactics. In the introduction stage, the company must choose a launch strategy
Companies find and develop new-product ideas from a variety of sources. Many
consistent with its intended product positioning. Much money is needed to
new-product ideas stem from internal sources. Companies conduct formal
attract distributors and build their inventories, and to inform consumers of the
research and development, pick the brains of their employees and brainstorm
new product and achieve trial. In the growth stage, companies continue to
at executive meetings. Other ideas come from external sources. Companies track
educate potential consumers and distributors. In addition, the company works to
competitors’ offerings and obtain ideas from distributors and suppliers who are
stay ahead of the competition and to sustain rapid market growth by improving
close to the market and can pass along information about consumer problems
product quality, adding new product features and models, entering new market
and new-product possibilities.
segments and distribution channels, shifting advertising focus from building
Perhaps the most important source of new-product ideas is customers
product awareness to building product conviction and purchase, and lowering
themselves. Companies observe customers, invite them to submit their ideas
prices at the right time to attract new buyers.
and suggestions, or even involve customers in the new-product development
In the maturity stage, companies continue to invest in maturing products
process. Many companies are now developing crowdsourcing or open-innovation
and consider modifying the market, the product and the marketing mix. When
new-product idea programs, which invite broad communities of people –
modifying the market, the company attempts to increase the consumption of the
customers, employees, independent scientists and researchers, and even the
current product. When modifying the product, the company changes some of the
general public – into the new-product innovation process. Truly innovative
product’s characteristics – such as quality, features or style – to attract new users
companies do not rely only on one source for new-product ideas.
or inspire more usage. When modifying the marketing mix, the company works to
Learning Objective 2. List and define the steps in improve sales by changing one or more of the marketing mix elements. Once the
the new-product development process, and describe company recognises that a product has entered the decline stage, management
the main considerations in managing this process. must decide whether to maintain the brand without change, hoping that
The new-product development process consists of eight sequential stages. competitors will drop out of the market; harvest the product, reducing costs
The process starts with idea generation. Next comes idea screening, which reduces the and trying to maintain sales; or drop the product, selling it to another firm or
number of ideas based on the company’s own criteria. Ideas that pass the screening liquidating it at salvage value.
stage continue through product concept development, in which a detailed version
of the new-product idea is stated in meaningful consumer terms. In the next stage, Discussion questions
concept testing, new-product concepts are tested with a group of target consumers ❶ Crowdsourcing seems great but what about confidentiality? Crowdsourcing
to determine whether the concepts have strong consumer appeal. Strong concepts innovation is risky business; ideas can fall into competitors’ hands and,
proceed to marketing strategy development, in which an initial marketing strategy for even with non-disclosure agreements, businesses must sometimes keep key
the new product is developed from the product concept. In the business-analysis stage, information confidential. This reduces the effectiveness of crowdsourcing.
a review of the sales, costs and profit projections for a new product is conducted to However, there is a great deal of evidence confirming the effectiveness
determine whether the new product is likely to satisfy the company’s objectives. With of crowdsourcing for innovation. When would crowdsourcing be a bad
positive results here, the ideas become more concrete through product development idea? Explain when the benefits of crowdsourcing outweigh its problems.
and test marketing and, finally, are launched during commercialisation. (Learning Objective 1) (AACSB: Communication; Reflective Thinking)
New-product development involves more than just going through a set of ❷ Innovation – ahead of its time? Innovation involves new ideas, concepts
steps. Companies must take a systematic, holistic approach to managing this and products whose benefits are not initially apparent to customers –
process. Successful new-product development requires a customer-centred, the first computer and the first microwave oven are examples. And if the
team-based, systematic effort. product does not provide value, consumers will not buy it. Is it the case,
9780655702412_CH08.indd 246 3/3/20 10:57 AM

then, that customers do not know what they want when it comes to new
products because they do not understand what is possible? Does this mean Critical thinking exercises
that consumers cannot provide any input to new-product development? ❶ It appears that the sky is the limit regarding ideas for smartphone/tablet
How do we reconcile this apparent contradiction? What should companies apps. In a small group, create an idea for a new app. Develop a marketing-
do to overcome this dilemma? (Learning Objective 2) (AACSB: Reflective strategy statement and describe how you would conduct a business analysis
Thinking) for the new app. (Learning Objective 2) (AACSB: Teamwork; Communication;
❸ The product life cycle is a good conceptual tool but is not useful in practice. Analytical Thinking; Application of Knowledge)
Studies show that most marketers have heard of the product life-cycle ❷ Choose an example of a company that launched a new consumer product
concept but do not use it. Why do you think this is the case? Many times, within the past five years. Develop a presentation showing how the company
products seem to skip stages and the classic life-cycle pattern does not implemented the 4Ps in launching the product and report on the product’s
apply. Does this mean that the product life cycle has no practical application? success since the launch. (Learning Objective 3) (AACSB: Communication;
Could the product life cycle be misrepresentative, or is it a good guideline for Application of Knowledge)
a marketing strategy? Justify your answer. (Learning Objective 3) (AACSB: ❸ Visit the Accelerating Commercialisation Australia website (<www.
Reflective Thinking) business.gov.au/assistance/accelerating-commercialisation>) to learn about
❹ Decline or possible decline stage? When marketers discuss the notion of a this government program. Review the funding and resources available to
product life cycle, they often speak as if the decline stage is inevitable. support businesses. How would these programs make a difference to a
Is such a perspective a self-fulfilling prophecy? Would it make more sense to company producing a new product during the introduction phase of the
call it the ‘possible decline stage’? Justify your answer. (Learning Objective 3) product life cycle? (Learning Objective 3) (AACSB: Communication; Use of
(AACSB: Reflective Thinking) IT; Application of Knowledge)
Mini cases
8.1 Innovation
IHearYou
Over four million Australians have a hearing impairment. For some, a hearing developed Incus, a device that allows the user to program their hearing
aid is a welcome support – but finding a suitable aid is not straightforward. aid using a smartphone. The IHearYou system allows people to take control
The best-quality hearing aids perform well in a wide range of situations. of their hearing, completely changing the way customers access hearing
But good-quality hearing aids are expensive! It is not unusual for a hearing solutions.27
aid and fitting to cost more than $10 000. So it is not surprising that many ❶ What stage of the product life cycle is each of the three products in
people with a hearing impairment go without support or leave the hearing the IHearYou system currently in? (Learning Objective 3) (AACSB:
aid in a drawer because it just does not work for them. Communication; Application of Knowledge)
Enter Blamey and Saunders, Australian audiologists and inventors. They ❷ Discuss the factors Blamey, Saunders and Planet Innovation should
wanted to redesign not just the hearing aid but the entire fitting process. consider when conducting business analysis for a product such as
First, they developed a new ‘bionic’ hearing aid that could be bought online the IHearYou hearing system. How will business analysis add value
for just $1500. Next, they developed an online hearing test that anyone can for customers? (Learning Objective 2) (AACSB: Communication;
take – for fee! Then, working with Planet Innovation, Blamey and Saunders Application of Knowledge)
8.2 New-product development

Telemedicine
With the majority of health-care costs being spent for the treatment of ❶ Research the telemedicine industry and describe two companies offering
chronic diseases and the reason for most emergency-room visits being services. What are the pros and cons of offering medical services this
non-emergencies, the time is ripe for telemedicine. Patients are tapping their way, and what (if any) governmental or industry guidance is in place
phones, tablets and keyboards instead of making an office visit or trip to the for this industry? (Learning Objective 1) (AACSB: Communications;
emergency room. Technology makes it possible for doctors to consult with Reflective Thinking)
patients through Skype or FaceTime on smartphones, access medical tests via ❷ In what stage of the product life cycle is telemedicine? What role has
electronic medical records and send a prescription to a patient’s local pharmacy mobile technology played in the evolution of this industry? Explain your
– all from kilometres away. The telemedicine industry is still in its infancy, but answer. (Learning Objective 3) (AACSB: Communication; Reflective
it is predicted to increase to a multi-million dollar industry in just a few years. Thinking)
9780655702412_CH08.indd 247 3/3/20 10:57 AM


Dental house calls
With the population ageing and patients who often dread sitting in a sterile determine the amount of sales necessary to break even on this increase
dental office, dentists are finding an opportunity in dental house calls. Mobile in fixed costs to offer this additional service. (Learning Objective 2)
Dental Services has taken its clinic on the road in Sydney and Melbourne, (AACSB: Communication; Analytical Thinking)
performing everything from routine exams and cleanings to root canals. Clients ❷ What other factors must a dentist consider before offering this service
are elderly residents of care facilities who cannot get out to the dentist’s office. in addition to his or her in-office service? (Learning Objectives 2 and 3)
Re-creating a dental office in a vehicle requires additional equipment, such as (AACSB: Communication; Reflective Thinking)
a portable X-ray machine, sterile water tanks, a dental drill, lights and a laptop. ❸ Estimate total market demand for this new service, using Australian
A portable X-ray machine alone costs $8000. Refer to Appendix 3 ‘Marketing Bureau of Statistics (ABS) data to estimate the number of elderly in
Analytics Spotlights’ to answer the following questions.28 residential care. Assume that each person will have at least one dental
❶ What types of fixed costs are associated with this service? Assuming visit per year for a routine examination and clean, at an average price
that adding a mobile service will increase the business’s fixed costs by of $180. (Learning Objective 2) (AACSB: Communication; Use of IT,
$20 000 and that there is a desired contribution margin of 40 per cent, Analytical Thinking)

Brainstimulator
For years, electrical current has been used to treat brain disorders, such as The buyer should beware, however, because these devices have been neither
depression, Parkinson’s disease and epilepsy. Traditional electrical-treatment reviewed nor approved for this use in Australia.29
methods are invasive and require sending large electrical currents through, ❶ Discuss the ethical issues surrounding this type of product. What research
or implanting devices in, patients’ brains to achieve positive results. Recent can you find to support the claims and safety of these new products?
studies have shown, however, that sending non-invasive low-dose electrical (AACSB: Communication; Ethical Reasoning)
current powered by a 9-volt battery through the brains of adults and ❷ The Therapeutic Goods Administration (TGA), which is part of
children helps them with learning mathematics and languages. For a few the Department of Health, regulates the use of these types of
hundred dollars, you can purchase your own transcranial direct-current devices and other products, such as herbal supplements, that are
stimulation (tDCS) device to get better grades in school. The Brain Stimulator marketed as cognitive enhancers. What approach does the TGA
tDCS Basic Kit allows users to select between four different current levels take in regulating these types of goods? (AACSB: Communication;
and provides a headband or cap to hold the electrodes next to your skull. Reflective Thinking)
References
1 David Meer, Edward C Landry & Samrat Sharma, ‘Creating what consumers want’, 7 See Jonathan Ringen, ‘How Lego became the Apple of toys’, Fast Company,
Forbes, 26 January 2015, <www.forbes.com/sites/strategyand/2015/01/26/creating- 8 January 2015, <www.fastcompany.com/3040223/when-it-clicks-it-clicks>; and
what-consumers-want/>, accessed June 2016. <https://ideas.lego.com>, accessed July 2016.
2 ‘Kraft Foods opens Australia’s largest R&D facility’, Food & Drink, 13 February 2013, 8 ‘Samsung is fueling its future with open innovation’, InnoCentive, 23 October 2013,
<www.foodanddrinkbusiness.com.au/news/kraft-opens-australia-s-largest-randd- <http://blog.innocentive.com/2013/10/23/samsung-is-fueling-its-future-with-
facility#7T70ZSShyKSe1tUG.99>, accessed June 2016; and survey data from John open-innovation>; see also <www.samsung.com/semiconductor/about-us/open-
Peppers & Martha Rogers, ‘The buzz on customer-driven innovation’, Sales & Marketing innovation/>, accessed July 2016.
Management, June 2007, p. 13. 9 See Kaggle Team, ‘Telstra network disruption, winner’s interview: 1st place, Mario
3 For these and other examples, see Dan Schawbel, ‘Why companies want you to Filho’, No Free Hunch, 23 March 2016, <http://blog.kaggle.com/2016/03/23/telstra-
become an intrapreneur’, Forbes, 9 September 2013, <www.forbes.com/sites/ network-disruption-winners-interview-1st-place-mario-filho/>; see also <www.kaggle.
danschawbel/2013/09/09/why-companies-want-you-to-become-an-intrapreneur>; and com/c/telstra-recruiting-network> and <www.kaggle.com/mariofilho/competitions>,
Kaomi Goetz, ‘How 3M gave everyone days off and created an innovation dynamo’, accessed July 2016.
<www.fastcodesign.com/1663137/how-3m-gave-everyone-days-off-and-created-an- 10 See George S Day, ‘Is it real? Can we win? Is it worth doing?’, Harvard Business
innovation-dynamo>, accessed June 2016. Review, December 2007, pp. 110–20.
4 Kevin Scott, ‘The LinkedIn [in]cubator’, 7 December 2012, <http://blog.linkedin. 11 This example is based on Tesla Motors and information obtained from <www.
com/2012/12/07/linkedin-incubator>, accessed June 2016; and for LinkedIn teslamotors.com/en_AU>, accessed July 2016; and Daniel Cooper, ‘Tesla’s long-delayed
membership, see <www.statista.com/statistics/274050/quarterly-numbers-of-linkedin- Model X SUV is testing in California’, engadget, 13 January 2015, <www.engadget.
members/>, accessed December 2016. com/2015/01/30/tesla-model-x-footage/>. Also see Ryan Bradley, ‘Full charge
5 Example from <www.proen.com.au/gallery/case6_5.shtml>, accessed July 2016. ahead’, Fortune, 4 February 2013, pp. 10–13; Leah Hunter, ‘How Tesla protects the
6 Example from <www.betterbydesign.org.nz/case-studies/imake/> and <imake.pro/ romance of driving while disrupting the industry’, Co.Design, 7 November 2013,
products/the-grainfather>; see also <www.grainfather.co.nz>, accessed July 2016. <www.fastcodesign.com/3021312>; Campbell Simpson, ‘Tesla Model S officially on
9780655702412_CH08.indd 248 3/3/20 10:57 AM

sale in Australia, here’s the price’, Gizmodo, 29 May 2014, <www.gizmodo.com. Segmenting the fad-buyer market’, Journal of Consumer Marketing, 20(3), 2003,
au/2014/05/the-tesla-model-s-is-officially-on-sale-in-australia-heres-how-much-it- pp. 252–65.
costs/>; ‘EV revolution: 100+ years of the electric car’, Motoring, 9 July 2016, accessed 20 See Katya Kazakina & Robert Johnson, ‘A fad’s father seeks a sequel’, New York Times,
July 2016; and ‘Electric car’, Wikipedia, <http://en.wikipedia.org/wiki/Electric_car>, 30 May 2004, <www.nytimes.com>; John Schwartz, ‘The joy of silly’, New York Times,
accessed July 2016. 20 January 2008, p. 5. For examples of fads see also <www.keepcalmandposters.
12 Quotations from ‘Shoppers get free groceries as members of the ALDI Testers Club’, com/>, accessed August 2016; <www.crazyfads.com/>, accessed August 2016;
news.com.au, 27 October 2015, <www.news.com.au/finance/business/retail/shoppers- James Surowiecki, ‘What happened to the ice bucket challenge?’, The New Yorker,
get-free-groceries-as-members-of-the-ALDI-testers-club/news-story/4e18b3e3fbddd27e9 25 July 2016, <www.newyorker.com/magazine/2016/07/25/als-and-the-ice-bucket-
88cb25351bbcfd7>, accessed July 2016; see also <www.ALDItestersclub.com.au/> and challenge>, accessed August 2016.
<www.ALDItestersclub.com.au/What-is-the-ALDI-Testers-Club>, accessed July 2016. 21 Shan Li, ‘Mattel’s CEO resigns as toy maker struggles’, Los Angeles Times, 27 January
13 ‘Jameson Irish Whiskey pushes recently launched pre-mix range in a new campaign 2015, p. A1; John Kell, ‘Mattel’s Barbie sales down for third consecutive year’, Fortune,
via TBWA’, Campaign Brief, 20 December 2013, <www.campaignbrief.com/2013/12/ 30 January 2015, <http://fortune.com/2015/01/30/mattels-barbie-sales-drop-third-
jameson-irish-whiskey-pushes-r.html>, accessed July 2016. year/>; ‘Shake-up at Mattel as Barbie loses her appeal’, New York Times, 27 January
14 See <www.nielsen.com/au/en/solutions.html#innovation-launch> and <www.playmr. 2015, p. B1.
com.au/casestudies> for examples of different types of new product research, accessed 22 Catie Low, ‘Weight Watchers Australia hopes for Oprah boost’, Sydney Morning Herald,
July 2016; see also Chris Thomas, ‘Speed and freedom – the future is now for FMCG 31 January 2016, <www.smh.com.au/business/retail/weight-watchers-australia-hopes-
testing’, Marketing, 19 January 2016, <www.marketingmag.com.au/hubs-c/speed- for-oprah-boost-20160129-gmgueb.html>, accessed August 2016.
freedom-future-now-fmcg-testing/>, accessed July 2016. 23 3M, <www.post-it.com.au>, accessed August 2016; Huggies, <www.huggies.com.
15 Bhakthi Puvanenthiran, ‘Samantha Wills: Jewellery designer took 12 years to become au>, accessed August 2016.
an overnight success’, Sydney Morning Herald, 20 June 2016, <www.smh.com.au/ 24 For quotes, see ‘Red Bull releases kiwi–apple energy drink’, Australian Food News,
small-business/entrepreneur/samantha-wills-jewellery-designer-took-12-years-to- 13 August 2016, <http://ausfoodnews.com.au/2016/08/01/red-bull-releases-kiwi-
become-an-overnight-success-20160616-gpktj3.html>, accessed July 2016; Eloise apple-energy-drink.html>, accessed August 2016.
Keating, ‘From 3am market starts and $80,000 in credit card debt: How Samantha Wills 25 Simon Pitman, ‘The Old Spice brand portfolio gets a make-over’, Cosmetics Design,
created a multimillion-dollar jewellery empire’, 23 June 2016, <www.smartcompany. 7 January 2016, <www.cosmeticsdesign.com/Brand-Innovation/The-Old-Spice-brand-
com.au/entrepreneurs/70836-from-3am-market-starts-and-80000-in-credit-card-debt- portfolio-gets-a-make-over>, accessed August 2016.
how-samantha-wills-created-a-multimillion-dollar-jewellery-empire/>, accessed July 2016; 26 For a more comprehensive discussion of marketing strategies over the course of the
Kate Racovolis, ‘How this millennial made her first million’, Forbes, 27 June 2016, PLC, see Philip Kotler & Kevin Lane Keller, Marketing Management, 15th edn, Pearson
<www.forbes.com/sites/kateracovolis/2016/06/27/how-this-millennial-made-her-first- Education: Upper Saddle River, NJ, 2016, pp. 358ff.
million/#1dc35d3a1384>, accessed July 2016. 27 For information, see <www.blameysaunders.com.au> and <https://planetinnovation.
16 ‘iPhone 6 & iPhone 6 Plus arrive in 36 more countries and territories this month’, Apple com.au/>, accessed August 2016; as well as ‘From the bionic ear to the “audiologist
press information, 13 October 2014, <www.apple.com/pr/library/2014/10/13iPhone-6- in your pocket”’, Science in Public, 8 April 2015, <www.scienceinpublic.com.au/
iPhone-6-Plus-Arrive-in-36-More-Countries-and-Territories-This-Month.html>, accessed media-releases/incus-launch>, accessed August 2016; and ‘50 most innovative
July 2016. companies 2015’, AFR Weekend, 3 March 2016, <www.afr.com/leadership/brw-lists/
17 See Robert G Cooper, ‘Formula for success’, Marketing Management, March–April most-innovative-companies/50-most-innovative-companies-2015-20160303-gn9ea7>,
2006, pp. 19–23; Christoph Fuchs & Martin Schreier, ‘Customer empowerment in accessed August 2016.
new product development’, Product Innovation Management, January 2011, 28 See <http://mobiledentalservices.com.au/>, accessed August 2016.
pp. 17–32; and Robert Safien, ‘The lessons of innovation’, Fast Company, 29 Ursula Malone, ‘Concerns over DIY brain stimulation kits that promise to improve
March 2012, p. 18. school results’, ABC News, 5 April 2015, <www.abc.net.au/news/2015-04-05/experts-
18 See Chris O’Brien, ‘How Intuit became a pioneer of “delight”’, Los Angeles Times, concerned-about-diy-brain-zapping-for-school-marks/6368998>, accessed August
10 May 2013; Brad Smith, ‘Intuit’s CEO on building a design-driven company’, Harvard 2016; and Amy Corderoy, ‘Change my brain: Could these stimulation techniques treat
Business Review, January–February 2015, pp. 35–8; and </investors.intuit.com/ depression and make us smarter?’, Sydney Morning Herald, 30 May 2015, <www.smh.
financial-information/annual-reports/default.aspx> and <www.intuitlabs.com/>, com.au/nsw/change-my-brain-could-these-stimulation-techniques-treat-depression-
accessed July 2016. and-make-us-smarter-20150528-ghbjqz.html>, accessed August 2016; see also
19 This definition is based on one found in Bryan Lilly & Tammy R Nelson, ‘Fads: <www.tga.gov.au>, accessed August 2016.
9780655702412_CH08.indd 249 3/3/20 10:57 AM

9780655702412_CH08.indd 250 3/3/20 10:57 AM

SESSION Price and
5
placement
• Pricing: Capturing customer value
• Placment: Custom value fulfilment
9780655702412_CH09.indd 251 3/3/20 10:58 AM

Chapter
9 Pricing: Capturing customer value

Companies today face a fierce and fast-changing pricing environment. Value-seeking customers have put
increased pricing pressure on many companies. Thanks to the weak global economy, the pricing power of
internet vendors such as Amazon – the world’s largest online merchant – and value-driven retailers such
as ALDI, Costco, Coles Supermarkets and Woolworths, consumers seem to have become bargain-hunters
more than ever before. In response, it appears that almost every company is looking for ways to slash prices.
Yet, cutting prices is often not the best answer. Reducing prices unnecessarily can lead to lost profits and
damaging price wars. It can cheapen a brand by signalling to customers that the price is more important than
the customer value a brand delivers. Instead, no matter what the state of the economy, companies should sell
value, not price. In some cases, that means selling lesser products at rock-bottom prices. But in most cases,
it means persuading customers that paying a higher price for the company’s brand is justified by the greater
value they gain. The challenge is to find the price that will let the company make a fair profit by getting
paid for the customer value it creates. After all, most of us will happily pay for products that deliver value.1
Learning Objective 1 Identify the three main pricing strategies, and discuss the importance
of understanding customer-value perceptions, company costs and
Learning competitor strategies when setting prices.
Objectives What is a price? p. 254
Major pricing strategies pp. 254–60
Learning Objective 2 Describe the main strategies for pricing new products.
New-product pricing strategies pp. 260–61
Learning Objective 3 Explain how companies determine a set of prices that maximises the
profits from the total product mix.
Product-mix pricing strategies pp. 261–63
Learning Objective 4 Discuss how companies adjust their prices to take into account
different types of customers and situations.
Price-adjustment strategies pp. 263–71
9780655702412_CH09.indd 252 3/3/20 10:58 AM

Chapter 9 Pricing: Capturing customer value 253
Value-based pricing
to Determin
LO 1 t price r
targe me that ca e costs
Identify the three main pricing Set tch custo alue n
ma ceived v incurre be
strategies, and discuss the d
per
importance of understanding r d D
esi er de get pr
perc and tome
customer-value perceptions, eption of co
eli at ta
’s perc
ion e
gn sire ice
v r
mpe
ept valu
mer
pro d va
company costs and competitor titi
nee ess cu
o
s
st on
duc lue
strategies when setting prices. Cu
t to
ds
Ass
Competition-based pricing
Product costs
Price ceiling
Price floor
perceptions
Customer
of value
LO 2
Describe the main Competition-based pricing
strategies for pricing
new products.
C o n ro d u c t
vinc ’s v
p
As eg
uct
dp na
y
ses rat
e b al u
ro d
oo e s i g
sm e s st
uye
so nt of com p e tit o r ’
D
f
r
e g
Pr
S et in e
od
base price D ete r m c osts
s
ge
uc
d on c c t
produ
an
o st
t-m
ch
ix
ric ic
e
Pr
p
C o st- b a g
s e d p rici n
i ng
Ne
w-p ts
rod t m en
uct p dju s
ricing Price a s
ance
Mar
ket-s un ts / allow ing
kimm • Disco ted pric
Mar ing prici n g ing
ket-p ng • Segme cal pricin al pric
enetr o g i hi c
• Psycho
l rap ing
ation p
ricing in g • Geog nal pric
nal pric natio
• Promotio ricing • Inter
i c p
• Dynam
LO 3 LO 4
Explain how companies Discuss how companies
determine a set of prices that adjust their prices to take
maximises the profits from into account different types
the total product mix. of customers and situations.
9780655702412_CH09.indd 253 3/3/20 10:58 AM

254 Session 5 Price and placement
What is a price?
price In the narrowest sense, price is the amount of money charged for a product or service. More broadly,
The amount of money price is the sum of all the values that customers give up in order to gain the benefits of having or using
charged for a product
a product or service. Historically, price has been the main factor affecting buyer choice. In recent
or service, or the sum
of the values consumers decades, non-price factors have gained increasing importance. Nevertheless, price still remains one of
exchange for the the most important elements determining a firm’s market share and profitability.
benefits of having or Price is the only element in the marketing mix that produces revenue; all other elements represent
using the product or
service. costs. Price is also one of the most flexible marketing mix elements. Unlike product features and
channel commitments, prices can be changed quickly. At the same time, pricing is the number-
one problem facing many marketing executives, and many companies do not handle pricing well.
Some managers view pricing as a big headache, preferring instead to focus on other marketing mix
elements.
However, smart managers treat pricing as a key strategic tool for creating and capturing customer
value. Prices have a direct impact on a firm’s bottom line. A small percentage improvement in price
can generate a large percentage increase in profitability. More importantly, as part of a company’s
overall value proposition, price plays a key role in creating customer value and building customer
relationships. So, instead of shying away from pricing, smart marketers are embracing it as an
important competitive asset.2
Major pricing strategies

The price the company charges will fall somewhere between one that is too high to produce any
demand and one that is too low to produce a profit. Figure 9.1 summarises the main considerations
in setting price. Customer perceptions of the product’s value set the ceiling for prices. If customers
perceive that the price is greater than the product’s value, they will not buy the product. Product costs
set the floor for prices. If the company prices the product below its costs, company profits will suffer.
In setting its price between these two extremes, the company must consider a number of other internal
and external factors, including competitors’ strategies and prices, the company’s overall marketing
strategy and mix, and the nature of the market and demand.
The figure suggests three main pricing strategies: (1) customer value-based pricing, (2) cost-based pricing
and (3) competition-based pricing. We discuss each of these below.
Customer Other internal and

external considerations Product
perceptions
costs
of value Marketing strategy,
objectives and mix
Nature of the market
Price ceiling and demand Price floor
No demand above Competitors’ strategies No profits below
this price and prices this price
Figure 9.1 Considerations in setting price
9780655702412_CH09.indd 254 3/3/20 10:58 AM

Customer value-based pricing

In the end, the customer will decide whether a product’s price is right. Pricing decisions, like other
marketing mix decisions, must start with customer value. When customers buy a product, they exchange
something of value (the price) in order to get something of value (the benefits of having or using the
product). Effective, customer-oriented pricing involves understanding how much value consumers
place on the benefits they receive from the product and setting a price that captures that value.
Customer value-based pricing uses buyers’ perceptions of value, not the seller’s cost, as the key to customer value-
pricing. Value-based pricing means that the marketer cannot design a product and marketing program and then based pricing
Setting the price based
set the price. Price is considered along with the other marketing mix variables before the marketing program is set.
on buyers’ perceptions
Figure 9.2 compares value-based pricing with cost-based pricing. Although costs are an important of value, rather than on
consideration in setting prices, cost-based pricing is often product-driven. The company designs what it the seller’s cost.
considers to be a good product, adds up the costs of making the product and sets a price that covers costs
plus a target profit. Marketing must then convince buyers that the product’s value at that price justifies
its purchase. If the price turns out to be too high, the company must settle for lower markups or lower
sales, both resulting in disappointing profits.
Value-based pricing reverses this process. The company first assesses customer needs and value
perceptions. It then sets its target price based on customer perceptions of value. The targeted value and price
drive decisions about what costs can be incurred and the resulting product design. As a result, pricing begins
with analysing consumer needs and value perceptions, and price is set to match consumers’ perceived value.
It is important to remember that ‘good value’ is not the same as ‘low price’. For example, some
owners consider a luxurious Patek Philippe watch a real bargain, even at eye-popping prices ranging
from US$20 000 to US$500 000.3
A company using value-based pricing must determine what value buyers assign to different competitive
offers. However, companies often find it difficult to measure the value customers will attach to its product.
For example, calculating the cost of ingredients in a meal at a top-end restaurant is relatively easy.
But assigning a value to other satisfactions, such as taste, environment, relaxation, conversation and
status, is very difficult. These values are subjective – they vary both for different consumers and different
situations.
Still, consumers will use these perceived values to evaluate a product’s price, so the company must
work to measure them. Sometimes, companies ask consumers how much they would pay for a basic
VALUE-BASED PRICING
Design product
Assess customer Set target price to Determine costs
to deliver desired
needs and value match customer- that can be
value at target
perceptions perceived value incurred
price
COST-BASED PRICING
Convince buyers
Design a Determine Set price based
of product’s
good product product costs on cost
value
Figure 9.2 Value-based pricing versus cost-based pricing
9780655702412_CH09.indd 255 3/3/20 10:58 AM

product and for each benefit added to the offer. Or a company might conduct experiments to test the
perceived value of different product offers. According to an old Russian proverb, there are two fools in
every market – one who asks too much and one who asks too little. If the seller charges more than the
buyers’ perceived value, the company’s sales will suffer. If the seller charges less, its products sell very well.
But they produce less revenue than they would if the products were priced at the level of perceived value.
We now examine two types of value-based pricing: good-value pricing and value-added pricing.
Good-value pricing
Recent economic events have caused a fundamental shift in consumer attitudes towards price and
quality. In response, many companies have changed their pricing approaches to bring them into line
with changing economic conditions and consumer price perceptions. More and more, marketers have
good-value pricing adopted good-value pricing strategies – offering just the right combination of quality and good
Offering just the right service at a fair price.
combination of quality
In many cases, good-value pricing has involved introducing less-expensive versions of established,
and good service that
customers want at a fair brand name products. To meet the tougher economic times and more frugal consumer spending habits,
price. fast-food restaurants, such as Hungry Jack’s and McDonald’s, offer value meals and dollar menu items.
Mercedes-Benz offers its A-Class, entry-level models, such as the A180 with a starting price at just over
$40 000. From its sleek lines to its 90kW turbo inline-4 engine, A-Class gives customers ‘The best or
nothing’ at a realistic price.4
In other cases, good-value pricing has involved redesigning existing brands to offer more quality for a
given price or the same quality for less. Some companies even succeed by offering less value but at rock-
bottom prices. For example, passengers flying Ireland’s low-cost airline, Ryanair, Europe’s most profitable
airline, will not get much in the way of free amenities – even having to pay for toilet use – but they will like
the airline’s unbelievably low prices. Ryanair and other ultra low-cost airlines appear to have found a radical
pricing solution in these tough air-travel times: Make flying free!
Ryanair entered the low-cost air travel market in 1991 with promises that more than half of its
passengers would pay nothing for their tickets. Remarkably, even during the global recession of 2008, the
airline continued to offer virtually free fares to many of its customers. What is its secret? Ryanair’s frugal
cost structure makes even the most cost-conscious competitor look like a reckless spender. In addition,
however, the airline charges for virtually everything except the seat itself, from baggage check-in to seat-back
advertising space. In fact, over one-fifth of its revenue comes from these ancillary sales. Despite Ryanair’s
sometimes pushy efforts to extract more revenue from each traveller, customers are not complaining. Most
of the additional purchases are discretionary, and those outrageously low prices just cannot be beaten.
Recession-weary businesses are opting for low costs over luxury and Ryanair responded to this new market
by offering reserved seats, flexible tickets and corporate booking agents – at a fee of course.5
An important type of good-value pricing at the retail level is everyday low pricing (EDLP). EDLP involves
charging a constant, everyday low price with few or no temporary price discounts. Retailers such as Costco,
Coles and Woolworths practise EDLP. The global king of EDLP is Walmart, which practically defined the
concept and from whom Australian and New Zealand retailers adopted the practice. In contrast, high–low
value-added pricing involves charging higher prices on an everyday basis but running frequent promotions to lower
pricing
Rather than cutting prices temporarily on selected items. Department stores often practise high–low pricing by having frequent
prices to match sales days, early-bird savings and bonus earnings for store credit-card holders.6
competitors’ prices,
marketers adopting this Value-added pricing
strategy attach value- Value-based pricing does not mean simply charging what customers want to pay or setting low prices
added features and
to meet the competition. Instead, many companies adopt value-added pricing strategies. Rather
services to differentiate
their offerings, and this than cutting prices to match competitors’ prices, companies attach value-added features and services to
supports higher prices. differentiate their offers and thus support higher prices. Consider this example:
9780655702412_CH09.indd 256 3/3/20 10:58 AM

The monsoon season in Mumbai, India, is three months of

near-nonstop rain. For over 150 years, most Mumbaikars
protected themselves with a Stag umbrella from venerable
Ebrahim Currim & Sons. Like Ford’s Model T, the basic
Stag was sturdy, affordable, and of any colour, as long as
it was black. By the end of the 20th century, however, the
Stag was threatened by cheaper imports from China. Stag
responded by dropping prices and scrimping on quality.
It was a bad move; for the first time since the 1940s, the
brand began losing money.
Finally, however, Stag came to its senses. It abandoned
the price war and started innovating. It launched designer
umbrellas in funky designs and cool colours. Teenagers and
Value-added pricing: Stag umbrellas offer value beyond protection
young adults lapped them up. It also launched umbrellas from rain, with a model to suit different moods, clothing and
with a built-in high-power flashlight for those who walk personalities.
unlit roads at night, and models with pre-recorded tunes for Raghu Rai/Magnum Photos/Trunk Archive
music lovers and impressionist art for art lovers. There is

even a Stag’s Bodyguard model, armed with glare lights, emergency blinkers, and an alarm. Customers
willingly pay up to a 100 per cent premium for the new products. Under the new value-added strategy,
the Stag brand has now returned to profitability. Come the monsoon in June, the grand old black
Stags still reappear on the streets of Mumbai – but now priced 15 per cent higher than the imports.7
The Stag example illustrates once again that customers are motivated not by price, but by what they
get for what they pay.
Cost-based pricing
Whereas customer-value perceptions set the price ceiling, costs set the floor for the price the company
can charge. Cost-based pricing involves setting prices based on the costs for producing, distributing cost-based pricing
and selling the product, plus a fair rate of return for the company’s effort and risk. A company’s costs Setting prices based on
the costs for producing,
may be an important element in its pricing strategy. distributing and selling
Some companies, such as Ryanair, Tigerair, Woolworths and Dell, work to become the ‘low-cost the product, plus a fair
producers’ in their industries. Companies with lower costs can set lower prices that result in smaller rate of return for the
margins but greater sales and profits. However, other companies – such as Apple, BMW and Steinway – company’s effort and
risk.
intentionally pay higher costs so that they can add value and claim higher prices and margins. For example,
it costs more to make a ‘handcrafted’ Steinway piano than it does to make a Yamaha production model.
But the higher costs result in higher quality, justifying an average $80 000+ price tag. To those who buy a
Steinway, price is nothing; the Steinway experience is everything. The key is to manage the spread between fixed costs
(overhead)
costs and prices – how much the company makes for the customer value it delivers. Costs that do not vary
with production or sales
Types of costs level.
A company’s costs take two forms: fixed and variable. Fixed costs (also known as overhead) are
costs that do not vary with production or sales level. For example, a company must pay each month’s variable costs
Costs that vary directly
bills for rent, heat, interest and executive salaries, whatever the company’s output. Variable costs
with the level of
vary directly with the level of production. Each personal computer produced by Hewlett-Packard production.
involves a cost of computer chips, wires, plastic, packaging and other inputs. These costs tend to be
the same for each unit produced. They are called ‘variable’ because their total varies with the number total costs
The sum of the fixed
of units produced. Total costs are the sum of the fixed costs and variable costs for any given level costs and variable costs
of production. Management wants to charge a price that will at least cover the total production costs for any given level of
at a given level of production. production.
9780655702412_CH09.indd 257 3/3/20 10:58 AM

The company must manage its costs carefully. If it costs the company more than it does its competitors
to produce and sell a similar product, the company will need to charge a higher price or make less profit,
putting it at a competitive disadvantage.
Cost-plus pricing
cost-plus pricing The simplest pricing method is cost-plus pricing (or markup pricing) – adding a standard
(markup pricing) markup to the cost of the product. For example, an electronics retailer might pay a manufacturer $20
Adding a standard
for a 64Gb flash drive and mark it up to sell at $30, a 50 per cent markup on cost. The retailer’s gross
markup to the cost of
the product. profit is $10, meaning a 33.33 per cent gross profit margin. If the store’s operating costs amount to
$8 per flash drive sold, the retailer’s net (of costs) profit will be $2.
The manufacturer that made the flash drive probably used cost-plus pricing, too. If the manufacturer’s
standard cost of producing the flash drive was $16, it might have added a 25 per cent markup, setting the
price to the retailers at $20. Similarly, construction companies submit job bids by estimating the total project
cost and adding a standard markup for profit. Lawyers, accountants, architects and other professionals
typically price by adding a standard markup to their costs. Some sellers tell their customers they will charge
cost plus a specified markup; for example, aerospace companies price this way to the government.
Does using standard markups to set prices make sense? Generally, no. Any pricing method that ignores
consumer demand and competitor prices is not likely to lead to the best price. Still, markup pricing remains
popular for many reasons. First, sellers are more certain about costs than about demand. By tying the price
to cost, sellers simplify pricing – they do not need to make frequent adjustments as demand changes. Second,
when all firms in the industry use this pricing method, prices tend to be similar and price competition is thus
minimised. Third, many people feel that cost-plus pricing is fairer to both buyers and sellers. Sellers earn a
fair return on their investment but do not take advantage of buyers when buyers’ demand becomes great.
Breakeven pricing
breakeven pricing Another cost-oriented pricing approach is breakeven pricing, or a variation called target-return
(target-return pricing. The firm tries to determine the price at which it will break even or make the target return
pricing) it is seeking. Target-return pricing uses the concept of a breakeven chart, which shows the total cost
Setting the price to
break even on the costs and total revenue expected at different sales-volume levels. Figure 9.3 shows a breakeven chart for the
of making and marketing flash-drive manufacturer discussed previously. Fixed costs are $6 million regardless of sales volume,
a product, or to make and variable costs are $5 per unit. Variable costs are added to fixed costs to form total costs, which rise
the desired profit.
Total revenue
12 Target return ($2 million)
Total cost
10
Dollars (millions)
6 Fixed cost
0
200 400 600 800
Sales volume in units (thousands)
Figure 9.3 Breakeven chart for determining target-return price and breakeven volume
9780655702412_CH09.indd 258 3/3/20 10:58 AM

with volume. The slope of the total revenue curve reflects the price. Here, the price is $15 (e.g. the
company’s revenue is $12 million on 800 000 units, or $15 per unit).
At the $15 price, the manufacturer must sell at least 600 000 units to break even (breakeven
volume = fixed costs ÷ (price − variable costs) = $6 000 000 ÷ ($15 − $5) = 600 000). That is, at this level,
total revenues will equal total costs of $9 million, producing no profit. If the flash-drive manufacturer
wants a target return of $2 million, it must sell at least 800 000 units to obtain the $12 million of total
revenue needed to cover the total cost of $10 million plus the $2 million of target profits. In contrast,
if the company charges a higher price, say $20, it will not need to sell as many units to break even or to
achieve its target profit. In fact, the higher the price, the lower the manufacturer’s breakeven point will be.
The main problem with this analysis, however, is that it fails to consider customer value and the
relationship between price and demand. As the price increases, demand decreases, and the market may not
buy even the lower volume needed to break even at the higher price. For example, suppose the flash-drive
manufacturer calculates that, given its current fixed and variable costs, it must charge a price of $30 for the
product in order to earn its desired target profit. But marketing research shows that few consumers will pay
more than $25. In this case, the company must trim its costs in order to lower the breakeven point so that
it can charge the lower price consumers expect.
Thus, although breakeven analysis and target-return pricing can help the company to determine minimum
prices needed to cover expected costs and profits, they do not take the price–demand relationship into account.
When using this method, the company must also consider the impact of price on sales volume needed to
realise target profits and the likelihood that the needed volume will be achieved at each possible price.
Competition-based pricing
Competition-based pricing involves setting prices based on competitors’ strategies, costs, prices competition-
and market offerings. Consumers will base their judgments of a product’s value on the prices that based pricing
competitors charge for similar products. Setting prices based on
competitors’ strategies,
In assessing competitors’ pricing strategies, the company should ask several questions. First, how does the costs, prices and market
company’s market offering compare with competitors’ offerings in terms of customer value? If consumers offerings.
perceive that the company’s product or service provides
greater value, the company can charge a higher price.
If consumers perceive less value relative to competing
products, the company must either charge a lower price
or change customer perceptions to justify a higher price.
Next, how strong are current competitors, and what
are their current pricing strategies? If the company faces a
host of smaller competitors charging high prices relative
to the value they deliver, it might charge lower prices to
drive weaker competitors from the market. If the market is
dominated by larger, lower-price competitors, a company
may decide to target unserved market niches by offering
value-added products and services at higher prices.
Importantly, the goal is not to match or beat
competitors’ prices. Rather, the goal is to set prices
according to the relative value created versus
competitors. If a company creates greater value for
customers, higher prices are justified. For example, Competition-based pricing: The Athlete’s Foot utilises training and its
Caterpillar makes high-quality, heavy-duty construction advanced shoe-selection system rather than adopting competition-based
and mining equipment. It dominates its industry pricing.
The Athlete’s Foot
despite charging higher prices than competitors such
9780655702412_CH09.indd 259 3/3/20 10:58 AM

as Komatsu. When a commercial customer once asked a Caterpillar dealer why it should pay $500 000
for a big Caterpillar bulldozer when it could get an ‘equivalent’ Komatsu bulldozer for $420 000, the
Caterpillar dealer famously provided an analysis similar to the following:
$420 000 the Caterpillar’s price if equivalent to the competitor’s bulldozer
$50 000 the value added by Caterpillar’s superior reliability and durability
$40 000 the value added by Caterpillar’s lower lifetime-operating costs
$40 000 the value added by Caterpillar’s superior service
$20 000 the value added by Caterpillar’s longer parts warranty
$570 000 the total value-added price for Caterpillar’s bulldozer
−$70 000 discount
$500 000 final price
Thus, although the customer pays an $80 000 price premium for the Caterpillar bulldozer, it is actually
getting $150 000 in added value over the product’s lifetime. The customer chose the Caterpillar bulldozer.
What principle should guide decisions about what price to charge relative to those of competitors?
The answer is simple in concept but often difficult in practice: no matter what price you charge – high, low or
in-between – be certain to give customers superior value for that price.
New-product pricing strategies

Pricing strategies usually change as the product passes through its life cycle. The introductory stage
is especially challenging. Companies bringing out a new product face the challenge of setting prices
for the first time. They can choose between two broad strategies: (1) market-skimming pricing and
(2) market-penetration pricing.
Market-skimming pricing
Many companies that invent new products set high initial prices to ‘skim’ revenues layer by layer
market-skimming from the market. Apple frequently uses this strategy, called market-skimming pricing (or price
pricing (price skimming). When Apple first introduced the iPhone, it charged an initial price of as much as
skimming) $599 per phone. The phones were purchased only by customers who really wanted the sleek new
Setting a high price for
a new product to skim smartphone and could afford to pay a high price for it. Six months later, Apple dropped the prices to
maximum revenue from attract new buyers. Within a year, it dropped prices again on the 3G model but held its prices on the
the segments willing to newer 3GS model ($719 for the 8Gb). In this way, Apple skimmed the maximum amount of revenue
pay the high price; the from the various segments of the market on the plain 3G model. But with the introduction of the
company makes fewer
but more profitable iPhone 4 in August 2010, Apple was offering its models at the retail prices of $859 (16Gb) and $999
sales. (32Gb), once again seeking to skim the market with the newer models. It used this same skimming
strategy again in September 2012, when it launched the iPhone 5 at $799 (16Gb) for the basic model
and $200 more for the 64Gb model. At the same time, Apple reduced the prices of the still popular
iPhone 4 to $499 (8Gb), and the 4S to $679 (16Gb). These differences in price ensure there is an
Apple smartphone that suits most customers’ preferences.
Market-skimming pricing makes sense only under certain conditions. First, the product’s quality and
image must support its higher price, and enough buyers must want the product at that price. Second,
the costs of producing a smaller volume cannot be so high that they cancel the advantage of charging
market- more. Finally, competitors should not be able to enter the market easily and undercut the high price.
penetration
pricing Market-penetration pricing
Setting a low price for a
Rather than setting a high initial price to skim off small but profitable market segments, some companies
new product in order to
attract a large number use market-penetration pricing. They set a low initial price in order to penetrate the market quickly
of buyers and a large and deeply – to attract a large number of buyers quickly and win a large market share. The high sales
market share.
9780655702412_CH09.indd 260 3/3/20 10:58 AM

volume results in falling costs, allowing the companies to cut their prices even further. For example,
Samsung has used penetration pricing to quickly build demand for its mobile devices in fast-growing
emerging markets:
In Kenya, Nigeria, and other African countries, Samsung recently unveiled an affordable
yet full-function Samsung Galaxy Pocket Neo model that sells for only about $113 with no
contract. The Samsung Pocket is designed and priced to encourage millions of first-time
African buyers to trade up to smartphones from their more basic handsets. Samsung also offers
a line of Pocket models in India, selling for as little as $87. Through penetration pricing, the
world’s largest smartphone maker hopes to make quick and deep inroads into India’s exploding
mobile device market, which consists of mostly first-time users and accounts for nearly one-
quarter of all smartphones sold globally each year. Low prices are also required in emerging
markets to compete with super-cheap phones from competitors, such as Chinese phone maker
Xiaomi. Samsung’s penetration pricing has set off price wars with Apple, which has responded in
emerging markets with heavy discounts and more affordable models of its own. Apple iPhones
have typically sold for more than $300 in India, limiting Apple’s market share to only about
2 per cent there.8
Several conditions must be met for this low-price strategy to work. First, the market must be highly
price sensitive so that a low price produces more market growth. Second, production and distribution
costs must fall as sales volume increases. Finally, the low price must help keep out the competition, and
the company adopting penetration pricing must maintain its low-price position – otherwise, the price
advantage may be only temporary.
Product-mix pricing strategies

The strategy for setting a product’s price often has to be changed when the product is part of a product
mix. In this case, the firm looks for a set of prices that maximises the profits on the total product
mix. Pricing is difficult because the various products have related demand and costs and face different
degrees of competition.
We now take a closer look at the five product-mix pricing situations summarised in Table 9.1:
(1) product-line pricing, (2) optional-product pricing, (3) captive-product pricing, (4) by-product pricing and
(5) product-bundle pricing.
Table 9.1 Product-mix pricing

Pricing situation Description
Product-line pricing Setting prices across an entire product line
Optional-product pricing Pricing optional or accessory products sold with the main product
Captive-product pricing Pricing products that must be used with the main product
By-product pricing Pricing low-value by-products to get rid of them or to make money on them and the
main products
Product-bundle pricing Pricing bundles of products sold together
Product-line pricing
Companies usually develop product lines rather than single products. For example, Kenwood offers
some 15 different mixers in an array of designer shapes and sizes, at prices that range from $249 for a
retro Patissier mixer to nearly $2000 for a mixer that cooks.
In product-line pricing, management must decide on the price steps to set between the various products
in a line. The price steps should take into account cost differences between the products in the line.
9780655702412_CH09.indd 261 3/3/20 10:58 AM

More importantly, they should account for differences in customer perceptions of the value of different
features. For example, Kenwood offers a range of kitchen machines in various colours and with various
features at a wide range of prices. Many buyers happily pay more to obtain additional features and premier
attachments. Kenwood’s task is to establish perceived value differences that support the price differences.9
Optional-product pricing
Many companies use optional-product pricing – offering to sell optional or accessory products along
with their main product. For example, a car buyer may choose to order a GPS navigation system and
Bluetooth wireless communication – or, in the case of an Audi A5, a range of features, including 18-,
19- or 20-inch wheels. Refrigerators come with optional ice makers. And when you order a new PC,
you can select from a bewildering array of storage devices, docking systems, software options, service
plans and carrying cases.
Pricing these options can be complicated. Car companies must decide which items to include in the
base price and which to offer as options. European car dealers usually adopt a normal pricing strategy of
advertising a stripped-down model at a base price to pull people into showrooms and then devote most of
the showroom space to showing option-loaded cars and demonstrators at higher prices.
Captive-product pricing
Companies that make products that must be used along with a main product are using captive-product
pricing. Examples of captive products are razor-blade cartridges, video games and printer cartridges.
Producers of the main products (razors, video-game consoles, printers, single-cup coffee-brewing
systems and tablet computers) often price the main products low and set high markups on the supplies.
For example, when Sony first introduced its PlayStation3 (PS3) video-game console, priced at $499
and $599, respectively, for the regular and premium versions, it lost as much as $306 per unit sold.
Sony hoped to recoup the losses through sales of more lucrative PS3 and now PS4 games, such as
Gran Turismo, from its Sony Computer Entertainment division – Polyphony Digital. Similarly, Amazon
makes little or no profit on its Kindle readers and tablets. It hopes to more than make up for thin
margins through sales of digital books, music, movies, subscription services and other content for the
devices. ‘We want to make money when people use our devices, not when they buy our devices,’ declares
Amazon CEO Jeff Bezos.10
However, companies that use captive-product pricing must be careful. Finding the right balance between the
main product and captive-product prices can be tricky. For example, despite
industry-leading PS3 video-game sales, it was not until four years after launch
that Sony first made a profit on its PS3 console.11 What is more, consumers
trapped into buying expensive captive products may come to resent the brand
that ensnared them.
In the case of services, captive-product pricing is called two-part pricing.
The price of the service is broken into a fixed fee plus a variable usage rate.
Thus, at some amusement parks, you pay a daily ticket or season-pass
charge plus additional fees for food and other in-park features. Cinemas
charge admission and then generate additional revenues from concessions.
And mobile phone companies charge a flat rate for a basic calling plan,
then charge for minutes, or data in the case of 4G data plans, over what
the plan allows. The service firm must decide how much to charge for the
Product line pricing: Kenwood’s Titanium Major KMM025 basic service and how much to charge for the variable usage. The fixed
is a premium kitchen machine in Kenwood’s mixer range.
amount should be low enough to induce usage of the service; profit can be
De’Longhi Australia Pty Ltd
made on the variable fees.
9780655702412_CH09.indd 262 3/3/20 10:58 AM

By-product pricing
Producing products and services often generates by-products. If the by-products have no value and if
getting rid of them is costly, this will affect the pricing of the main product. Using by-product pricing, the
company seeks a market for these by-products to help offset the costs of disposing of them and to help
make the price of the main product more competitive. The by-products themselves can even turn out
to be profitable – turning trash into cash. For example, old tyres are cryogenically frozen, then chipped
into pieces that are used as fillers. Sawdust and resin are used to make park benches, while sawdust
and cement are used to make lighter-weight structural pieces. The by-products of white meat and red
meat abattoirs are used to manufacture stockfeed and wet and dry pet foods, such as Mars PetCare’s
many brands, which include Dine, My Dog, Pedigree, Schmackos and Whiskas, thus off-setting the
manufacturing costs of chicken and red meat products that we humans consume.
Product-bundle pricing
Using product-bundle pricing, sellers often combine several of their products and offer the bundle at a
reduced price. For example, fast-food restaurants bundle a burger, fries and a soft drink at a ‘meal deal’
price. And Telstra, Optus and other telecommunications companies bundle various combinations of
cable-TV service, landline and mobile telephone services, and broadband internet connections at a low
combined price. Price bundling can promote the sales of products consumers might not otherwise buy,
but the combined price must be low enough to get them to buy the bundle.12
Price-adjustment strategies
Companies usually adjust their basic prices to account for various customer differences and changing
situations. Here, we examine the seven price-adjustment strategies summarised in Table 9.2: (1) discount
and allowance pricing, (2) segmented pricing, (3) psychological pricing, (4) promotional pricing, (5) geographical
pricing, (6) dynamic pricing and (7) international pricing.
Table 9.2 Price adjustments

Strategy Description
Discount and allowance pricing Reducing prices to reward customer responses such as volume purchases, paying early or
promoting the product
Segmented pricing Adjusting prices to allow for differences in customers, products or locations
Psychological pricing Adjusting prices for psychological effect
Promotional pricing Temporarily reducing prices to increase short-term sales
Geographical pricing Adjusting prices to account for the geographic location of customers
Dynamic pricing Adjusting prices continually to meet the characteristics and needs of individual customers
and situations
International pricing Adjusting prices for international markets
Discount and allowance pricing

Most companies adjust their basic price to reward customers for certain responses, such as early payment
of bills, volume purchases and off-season buying. These price adjustments – called discounts and allowances
– can take many forms. discount
The many forms of discounts include a cash discount, a price reduction to buyers who pay their bills A straight reduction
in price on purchases
promptly. A typical example is ‘2/10, net 30’, which means that although payment is due within 30 days, the
during a stated period of
buyer can deduct 2 per cent if the bill is paid within 10 days. A quantity discount is a price reduction to buyers time or when purchasing
who buy large volumes. Such discounts provide an incentive to the customer to buy more at a time, or larger quantities.
9780655702412_CH09.indd 263 3/3/20 10:58 AM

more from one given seller rather than from many different sources. Often, this type of discount takes the
form of a rebate paid retrospectively at the end of a trading period when various quantity levels are reached.
Another type of rebate might be termed a ‘marketing rebate’, which can become the cost of doing business
with a retailer and used by the retailer to increase earnings.13
A functional discount (also called a trade discount) is offered by the seller to trade-channel members who
perform certain functions, such as selling, storing and record keeping. A seasonal discount is a price reduction
to buyers who buy merchandise or services out of season. For example, lawn and garden equipment
manufacturers offer seasonal discounts to retailers during the autumn and winter months to encourage
early ordering in anticipation of the heavy spring and summer selling seasons. Seasonal discounts allow the
seller to keep production steady during an entire year.
allowance Allowances are another type of reduction from the list price. For example, trade-in allowances are price
Promotional monies reductions given for turning in an old item when buying a new one. Trade-in allowances are most common
paid by suppliers to
in the automobile industry but are also given for other durable goods. Promotional allowances are payments
retailers in return for an
agreement to feature or price reductions to reward dealers for participating in advertising and sales support programs.
the suppliers’ products
in some way. Segmented pricing
Companies will often adjust their basic prices to allow for differences in customers, products and
segmented locations. In segmented pricing, the company sells a product or service at two or more prices, even
pricing though the difference in price is not based on differences in costs.
A company sells a Segmented pricing takes several forms. Under customer-segment pricing, different customers pay
product or service at
two or more prices, different prices for the same product or service. Museums, for example, may charge a lower admission
even though the for students and senior citizens. Under product-form pricing, different versions of the product are
difference in price is not priced differently but not according to differences in their costs. For instance, a retailer’s house-brand
based on differences in
product may come from the same factory as a manufacturer’s brand, yet the house brand is sold at a
costs.
lower price.
Using location-based pricing, a company charges different prices for different locations, even though the
cost of offering each location is the same. For instance, theatres vary their seat prices because of audience
preferences for certain vantage points, and universities charge higher tuition fees for fee-paying and
international students. Finally, using time-based pricing, a firm varies its price by the season, the month, the
day and even the hour. Movie cinemas charge matinee pricing during the daytime. Resorts give weekend
and seasonal discounts.
For segmented pricing to be an effective strategy, certain conditions must exist. The market must be
segmentable, and segments must show different degrees of demand. The costs of segmenting and reaching
the market cannot exceed the extra revenue obtained from the price difference. Of course, the segmented
pricing must also be legal.
Most importantly, segmented prices should reflect real differences in customers’ perceived value.
Consumers in higher price tiers must feel they are getting their extra money’s worth for the higher
prices paid. By the same token, companies must be careful not to treat customers in lower price tiers
as second-class citizens. Otherwise, in the long run, the practice will lead to customer resentment and
ill will. For example, in recent years, the airlines have incurred the wrath of frustrated customers at
both ends of the aircraft. Passengers paying full fare for business- or first-class seats often feel they are
being gouged. At the same time, passengers in lower-priced coach seats feel they are being ignored or
treated poorly.
Psychological pricing
Price says something about the product. For example, many consumers use price to judge quality.
A $100 bottle of perfume may contain only $3 worth of scent, but some people are willing to pay the
$100 because this price indicates something special.
9780655702412_CH09.indd 264 3/3/20 10:58 AM

In using psychological pricing, sellers consider the psychology of prices and not simply the psychological
economics. For example, consumers usually perceive higher-priced products as having higher quality. pricing
Sellers consider the
When they can judge the quality of a product by examining it or by calling on past experience with
psychology of prices
it, they place less reliance on price to judge quality. But when they cannot judge quality because they and not simply the
lack the information or skill, price becomes an important quality signal. For example, who is the better economics.
lawyer – one who charges $200 per hour or one who charges $1000 per hour? You would have to do a
lot of digging into the respective lawyers’ credentials to answer this question objectively and, even then,
you might not be able to judge accurately. Most of us would simply assume the higher-priced lawyer
is better.
Another aspect of psychological pricing is reference prices – prices that buyers carry in their reference prices
minds and refer to when looking at a given product. The reference price might be formed by noting Prices that buyers carry
in their minds and refer
current prices, remembering past prices or assessing the buying situation. Sellers can influence or use
to when looking at a
these consumers’ reference prices when setting price. For example, a company could display its product given product.
next to more-expensive ones in order to imply that it belongs in the same class, such as when a grocery
retailer shelves its house brand of oat flakes and raisins cereal, priced at $3.49, next to Uncle Tobys Bran
Plus, priced at $5.59.
For most purchases, consumers do not have all the skill or information they need to work out whether
they are paying a good price. They do not have the time, ability or inclination to research different brands
or stores, compare prices and get the best deals. Instead, they may rely on certain cues that signal whether
a price is high or low (see Marketing in Action 9.1). Interestingly, such pricing cues are often provided by
sellers.
Even small differences in price can signal product differences. Consider a smartphone-capable digital
radio priced at $200 compared to one priced at $199.99. The actual price difference is only 1 cent, but the
psychological difference can be much greater. For example, some consumers will see the $199.99 as a price
in the $100 range, rather than in the $200 range. The $199.99 will more likely be seen as a bargain price,
whereas the $200 price suggests more quality. Some psychologists argue that each digit has symbolic and
visual qualities that should be considered in pricing. Thus, 8 is round and even and creates a soothing effect,
whereas 7 is angular and creates a jarring effect.14
Promotional pricing
With promotional pricing, companies will temporarily price their products below list price, and promotional
sometimes even below cost, to create buying excitement and urgency. Promotional pricing takes several pricing
forms. A seller may simply offer discounts from normal prices to increase sales and reduce inventories. A company temporarily
prices its product
Sellers also use special-event pricing in certain seasons to draw more customers. Thus, large-screen below list price, and
televisions and other consumer electronics are promotionally priced before major sporting events, and sometimes even below
in November and December to attract Christmas shoppers into stores. cost, to create buying
excitement and urgency.
Manufacturers sometimes offer cash rebates to consumers who buy the product from dealers
within a specified time; the manufacturer sends the rebate directly to the customer. Rebates have
been popular with car makers and producers of mobile phones and small appliances, but they are
also used with consumer packaged goods. Some manufacturers offer low-interest financing, longer
warranties or free maintenance to reduce the consumer’s ‘price’. This is a favourite practice of the
motor vehicle industry.
Promotional pricing, however, can have adverse effects. Used too frequently and copied by competitors,
price promotions can create ‘deal-prone’ customers who wait until brands go on sale before buying them.
Or, constantly reduced prices can erode a brand’s value in the eyes of customers. Marketers sometimes
become addicted to promotional pricing, especially in difficult economic times. They use price promotions
as a quick fix instead of sweating through the difficult process of developing effective longer-term strategies
9780655702412_CH09.indd 265 3/3/20 10:58 AM

Marketing
in Action Pricing cues are customer clues
9.1
It is Saturday morning and you stop by your local supermarket to pick up a few this pricing cue is remarkable.’ Normally, you would expect that demand for
items for tonight’s barbecue. Navigating the aisles, you are bombarded with price an item would fall as the price goes up. Yet, in one study involving women’s
signs, all suggesting that you just cannot beat this store’s deals. A 5-kilogram bag clothing, raising the price of a dress from $34 to $39 increased demand by a
of house-brand charcoal briquettes for the Weber goes for only $3.99 with your third. By comparison, raising the price from $34 to $44 yielded no difference
frequent-shopper card ($4.39 without the card), cans of Heinz baked beans are in demand.
four for $1 (four for $2.16 without the card). An aisle display hard-sells big bags But are prices ending in 9 accurate as pricing cues? ‘The answer varies,’
of Kettle potato chips at an ‘everyday low price’ of just $3.99. And a sign atop a the researchers report. ‘Some retailers do reserve prices that end in 9 for
huge mound of Coke 12-packs advertises two for $9. their discounted items. For instance, more than one store uses 00-cent
These sure look like good prices, but are they? If you are like most shoppers, endings on regularly priced merchandise and 99-cent endings on discounted
you do not really know. Researchers have noted that, ‘For most of the items items. Comparisons of prices at major department stores reveal that this is
they buy, consumers don’t have an accurate sense of what the price should be.’ common, particularly for apparel. But at some stores, prices that end in 9 are
In fact, customers often do not even know what prices they are actually paying. a miscue – they are used on all products regardless of whether the items
In one study, supermarket shoppers were asked the price of an item just as they are discounted.’
were putting it into their shopping trolley. Fewer than half of the shoppers gave
the right answer.
To be absolutely sure you are paying the best price, you would have to
compare the marked price with past prices, prices of competing brands and prices
in other stores. For most purchases, consumers just do not bother. Instead, they
rely on a most unlikely source. ‘Remarkably … they rely on the retailer to tell
them if they are getting a good price,’ say the researchers. ‘In subtle and not-
so-subtle ways, retailers send signals [or pricing cues] to customers, telling them
whether a given price is relatively high or low.’ In their article, the researchers
outline the following common retailer pricing cues:
• Sale signs. The most straightforward retail-pricing cue is a sale sign. It might
take any of several familiar forms: ‘Sale!’, ‘Reduced!’, ‘New low price!’,
‘Price after rebate!’ or ‘Now 2 for only …!’ Such signs can be very effective
in signalling low prices to consumers and increasing sales for the retailer.
The researchers’ studies into retail stores and mail-order catalogues reveal
that using the word ‘sale’ beside a price (even without actually varying
the price) can increase demand by more than 50 per cent.
Sale signs can be effective, but overuse or misuse can damage both the
seller’s credibility and its sales. This is one reason why David Jones has only
half-yearly sales. Unfortunately, some retailers do not always use such signs
truthfully. Still, consumers trust sale signs. Why? ‘Because they are accurate
most of the time,’ say the researchers. ‘And, besides, customers are not that
easily fooled.’ They quickly become suspicious when sale signs are used
improperly.
• Prices ending in ‘9’. Just like a sale sign, a 9 at the end of a price often signals Pricing cues, such as sale signs and prices ending
a bargain. You see such prices everywhere. For example, browse the websites in 9, can be effective in signalling low prices to
of discount stores. It is almost impossible to find even one price that does consumers and thus stimulating higher sales for
retailers.
not end in 9. (Really, try it!) ‘In fact, this pricing tactic is so common,’ say the
Vstock LLC/Thinkstock
researchers, ‘you’d think customers would ignore it. Think again. Response to
9780655702412_CH09.indd 266 3/3/20 10:58 AM

• Signpost pricing (or loss-leader pricing). Unlike sale signs and prices that end of price-matching policies by introducing “branded variants” – slightly
in 9, signpost pricing is used on frequently purchased products about which different versions of products with different model numbers for different
consumers tend to have accurate price knowledge. For example, you probably retailers.’
know a good price on a 12-pack of Coke when you see one. New parents Used properly, pricing cues can help consumers. Careful buyers really can
usually know how much they expect to pay for disposable nappies. Research take advantage of signals such as sale signs, 9-endings, loss leaders and price
suggests that customers use the prices of such signpost items to gauge a guarantees to locate good deals. Used improperly, however, these pricing cues
store’s overall prices. If a store has a good price on Coke or Huggies or Omo can mislead consumers, tarnishing a brand and damaging customer relationships.
washing powder, they reason, it probably also has good prices on other items. The researchers conclude: ‘Customers need price information, just as they
Retailers have long known the importance of signpost pricing, often called need products. They look to retailers to provide both. Retailers must manage
‘loss-leader pricing’. They offer selected signpost items at or below cost to pricing cues in the same way that they manage quality … No retailer …
pull customers into the store, hoping to make money on the shopper’s other interested in [building profitable long-term relationships with customers] would
purchases. For instance, a retailer such as JB Hi-Fi might sell recently released purposely offer a defective product. Similarly, no retailer who [values customers]
DVDs at several dollars below wholesale price. Customers get a really good would deceive them with inaccurate pricing cues. By reliably signalling which
deal. And although JB Hi-Fi loses money on every DVD sold, the low DVD prices are low, companies can retain customers’ trust – and [build more solid
prices increase store traffic and purchases of higher-margin complementary relationships].’
products, such as Blu-Ray DVD players.
Sources: Quotes and other information from Eric Anderson & Duncan Simester, ‘Mind your
• Price-matching guarantees. Another widely used retail-pricing cue is price pricing cues’, Harvard Business Review, September 2003, pp. 96–103. See also Joydeep
matching, whereby stores promise to meet or beat any competitor’s price. Srivastava & Nicholas Lurie, ‘Price-matching guarantees as signals of low store prices:
Survey and experimental evidence’, Journal of Retailing, 80(2), 2004, pp. 117–28; Bruce
A retailer, for example, advertises, ‘We’ll meet or beat any local competitor’s McWillams & Elten Gerstner, ‘Offering low price guarantees to improve customer retention’,
price, guaranteed! If you find a better price within 30 days on something Journal of Retailing, June 2006, pp. 105–13; Manoj Thomas & Vicki Morvitz, ‘Penny wise
and pound foolish: The double digit effect in price cognition’, Journal of Consumer Research,
you bought, we will refund the difference plus 10 per cent.’ Many consumer- June 2005, pp. 54–64; Heyong Min Kim & Luke Kachersky, ‘Dimensions of price salience: A
electronics retailers even offer a self-enforced price-matching policy. Imagine conceptual framework for perceptions of multi-dimensional prices’, Journal of Product and
Brand Management, 15(2), 2006, pp. 139–47; Robert M Schindler, ‘The 99 price ending as a
the goodwill created if a retailer found a competitor with a lower advertised signal of a low-price appeal’, Journal of Retailing, 82(1), 2006, pp. 71–7.
price and mailed a cheque for the difference to any of its frequent-buyer
customers who had paid a higher price in the previous 30 days. Questions
Evidence suggests customers perceive that stores offering price-matching ❶ Reference prices are those that are carried in customers’ minds and which
guarantees have overall lower prices than competing stores, especially in they refer to when they look at a given product. Why might these be used
markets where they perceive price comparisons to be relatively easy. But are when buying some products and not others?
such perceptions accurate? ‘The evidence is mixed,’ say the researchers. ❷ Why might a higher price signal higher quality to many buyers?
‘Consumers can usually be confident that they’ll pay the lowest price on ❸ Why might prices ending in 9 signify lower or sale prices? Can you identify
eligible items. However, some manufacturers make it hard to take advantage and elaborate on a recent experience of this pricing strategy?
for building their brands. But companies must be careful to balance short-term sales incentives against
long-term brand building. One analyst advises:
When times are tough, there’s a tendency to panic. One of the first and most prevalent tactics that
many companies try is an aggressive price cut. Price trumps all. At least, that’s how it feels these days.
20% off. 30% off. 50% off. Buy one, get one free. Whatever it is you’re selling, you’re offering it at
a discount just to get customers in the door. But aggressive pricing strategies can be risky business.
Companies should be very wary of risking their brands’ perceived quality by resorting to deep and
frequent price cuts. Some discounting is unavoidable in a tough economy and consumers have
come to expect it. But marketers have to find ways to shore up their brand identity and brand equity
during times of discount mayhem.15
The point is that promotional pricing can be an effective means of generating sales for some companies
in certain circumstances; however, it can be damaging for other companies or if used too regularly.
9780655702412_CH09.indd 267 3/3/20 10:58 AM

Geographical pricing
A company also must decide how to price its products for customers located in different parts of the
country or world. Should the company risk losing the business of more-distant customers by charging
them higher prices to cover the higher shipping costs? Or should it charge all customers the same
prices regardless of location? Here, we look at five geographical pricing strategies for the following
hypothetical situation:
The Peerless Paper Company is located in Melbourne, Victoria, and sells paper products to
customers all over Australia and New Zealand. The cost of freight is high and affects the companies
from whom customers buy their paper. Peerless wants to establish a geographical pricing policy.
It is trying to determine how to price a $10 000 order to three specific customers: Customer A
(Melbourne), Customer B (Sydney, NSW), and Customer C (Wellington, New Zealand).
One option is for Peerless to ask each customer to pay the shipping cost from the Melbourne factory
to the customer’s location. All three customers would pay the same factory price of $10 000, with Customer
A paying, say, $100 for shipping; Customer B, $150; and Customer C, $350. Called FOB-origin pricing,
this practice means the goods are placed free on board (hence, FOB) a carrier. At that point, the title and
responsibility pass to the customer, who pays the freight from the factory to the destination. Because each
customer picks up its own cost, supporters of FOB pricing believe this is the fairest way to assess freight
charges. The disadvantage, however, is that Peerless will be a high-cost firm to distant customers.
Uniform-delivered pricing is the opposite of FOB pricing. Here, the company charges the same price
plus freight to all customers, regardless of their location. The freight charge is set at the average freight
cost. Suppose this is $150. Uniform-delivered pricing therefore results in a higher charge to the Melbourne
customer (who pays $150 freight instead of $100) and a lower charge to the New Zealand customer (who
pays $150 instead of $350). Although the Melbourne customer may prefer to buy paper from another
local paper company that uses FOB-origin pricing, Peerless has a better chance of winning over the
New Zealand customer. Other advantages of uniform-delivered pricing are that it is fairly easy to administer
and it lets the firm advertise its price nationally.
Zone pricing falls between FOB-origin pricing and uniform-delivered pricing. The company sets up
two or more zones. All customers within a given zone pay a single total price; the more distant the zone,
the higher the price. For example, Peerless might set up a South/Eastern Zone and charge $100 freight to
all customers in this zone, a North/Eastern Zone in which it charges $150, and a South/Western Zone in
which it charges $350. In this way, the customers within a given price zone receive no price advantage from
the company. For example, customers in Adelaide and New Zealand pay the same total price to Peerless.
The complaint, however, is that the Adelaide customer is paying part of the New Zealand customer’s freight
cost.
Using basing-point pricing, the seller selects a given city as a ‘basing point’ and charges all customers the
freight cost from that city to the customer location, regardless of the city from which the goods are actually
shipped. For example, Peerless might set Sydney as the basing point and charge all customers $10 000 plus
the freight from Sydney to their locations. This means that a Melbourne customer pays the freight cost
from Sydney to Melbourne, even though the goods may be shipped from Melbourne. If all sellers used the
same basing-point city, delivered prices would be the same for all customers and price competition would
be eliminated. Industries such as sugar, cement, steel and automobiles used basing-point pricing for years,
but this method has become less popular today. Some companies set up multiple basing points to create
more flexibility; they quote freight charges from the basing-point city nearest to the customer.
Finally, the seller who is anxious to do business with a certain customer or geographical area might use
freight-absorption pricing. Using this strategy, the seller absorbs all or part of the actual freight charges in
9780655702412_CH09.indd 268 3/3/20 10:58 AM

order to get the desired business. The seller might reason that if it can get more business, its average costs
will fall and more than compensate for its extra freight cost. Freight-absorption pricing is used for market
penetration and to hold on to increasingly competitive markets.
Dynamic and online pricing

Throughout most of history, prices were set by negotiation between buyers and sellers. Fixed-price
policies – setting one price for all buyers – is a relatively modern idea that arose with the development
of large-scale retailing at the end of the 19th century. Today, most prices are set this way. However, some
companies are now reversing the fixed-pricing trend. They are using dynamic pricing – adjusting dynamic pricing
prices continually to meet the characteristics and needs of individual customers and situations. Prices are adjusted
continually to meet the
For example, think about how the internet has affected pricing. From the mostly fixed-pricing
characteristics and needs
practices of the past century, the internet seems now to be taking us back – into a new age of fluid pricing. of individual customers
The flexibility of the internet allows online sellers to instantly and constantly adjust prices on a wide range and situations.
of goods based on demand dynamics (sometimes called real-time pricing). In other cases, customers control
pricing by bidding on auction sites, such as eBay, or negotiating on some sites. Still other companies customise
their offers based on the characteristics and behaviours of specific customers.
Dynamic pricing offers many advantages for marketers.
For example, internet sellers, such as Amazon.com, can
mine their databases to gauge a specific shopper’s desires,
measure his or her means, instantaneously tailor products to
fit that shopper’s behaviour and price products accordingly.
Catalogue retailers, such as CableChick.com.au, can adjust
prices almost instantaneously according to changes in demand
or costs – changing prices for specific items on a day-by-day or
even hour-by-hour basis.
Many direct marketers monitor inventories, costs and
demand at any given moment and adjust prices instantly.
For example, Dell Computer uses dynamic pricing to achieve
real-time balancing of supply and demand for computer Dynamic pricing: Sites such as AppliancesOnline offer instant price
components. By raising prices on components in short supply comparisons for hundreds of brands, making it easier than ever
before for customers to negotiate the best prices when shopping.
and dropping prices for oversupplied items, Dell actually
AppliancesOnline
reshapes demand on the go to meet supply conditions.
Consumers also benefit from the web and dynamic
pricing. A wealth of price comparison sites – such as Yahoo! Shopping, ShopBot and GetPrice – offer
instant product and price comparisons from thousands of vendors. Most such comparison sites let shoppers
browse by category or search for specific products and brands, and report back links to sellers offering the
best prices, along with customer reviews. In addition to simply finding the best product and the vendor with
the best price for that product, customers armed with price information can often negotiate lower prices.
GetPrice even has an app that enables customers to use its service when shopping in-store.
In addition, consumers can negotiate prices at online auction sites and exchanges. Suddenly, the
centuries-old art of haggling is back in vogue. Want to sell that antique pickle jar that has been collecting
dust for generations? Post it on eBay, the world’s biggest online flea-market, or on its sibling site, Gumtree.
Want to name your own price for a hotel room or rental car? Visit a reverse auction site. Want to get a
cheap overnight stay on a business trip or a weekend away from home? Then visit Wotif.com.
Dynamic pricing can also be controversial. Most customers would find it galling to learn that the
person in the next seat on that flight from Adelaide to Alice Springs paid 10 per cent less just because he
9780655702412_CH09.indd 269 3/3/20 10:58 AM

or she happened to call at the right time or buy online. Amazon.com learned this some years ago when
it experimented with lowering prices to new customers in order to woo their business. When regular
customers learned through internet chatter that they were paying generally higher prices than first-timers,
they protested loudly. An embarrassed Amazon.com halted the experiments.
Dynamic pricing makes sense in many contexts – it adjusts prices according to market forces, and it
often works to the benefit of the customer. But marketers need to be careful not to use dynamic pricing to
take advantage of certain customer groups, thereby damaging important customer relationships.
International pricing
Companies that market their products internationally must decide what prices to charge in the
different countries in which they operate. In some cases, a company can set a uniform worldwide price.
For example, Boeing sells its jetliners at about the same price everywhere, whether in Oceania, the
United States, Europe or a third-world country. However, most companies adjust their prices to reflect
local market conditions and cost considerations.
The price that a company should charge in a specific country depends on many factors, including
economic conditions, competitive situations, laws and regulations, and development of the wholesaling and
retailing system. Consumer perceptions and preferences also may vary from country to country, calling for
different prices. Or the company may have different marketing objectives in various world markets, which
require changes in pricing strategy. As we have already discussed, Samsung might introduce a new product
into mature markets in highly developed countries with the goal of quickly gaining mass-market share –
this would call for a penetration-pricing strategy. In contrast, it might enter a less-developed market by
targeting smaller, less-price-sensitive segments; in this case, market-skimming pricing makes sense.
Costs play an important role in setting international prices. Overseas travellers are often surprised
to find that goods that are relatively expensive at home may carry outrageously lower price tags in other
countries. A pair of Skechers sneakers selling for $129 in Australia might go for just half that price in the
United States. A McDonald’s Big Mac selling for a modest $4.20 in the United States might cost $7.85 in
Norway or $5.65 in Brazil; and an Oral-B electric-toothbrush head that sells for $2.49 in New York may
cost $10 in China. Conversely, a Gucci handbag that sells for only $140 in Milan, Italy, might fetch $350 in
Australia or New Zealand.
In some cases, such price escalation may result from differences in selling strategies or market conditions.
In most instances, however, it is simply a result of the higher costs of selling in another country – the
additional costs of product modifications, shipping and insurance, exchange-rate fluctuations and physical
distribution. Import tariffs and taxes can also add to costs. For example, China imposes duties as high as
25 per cent on imported Western luxury products, such as watches, designer dresses, shoes and leather
handbags. It also levies consumption taxes of 30 per cent for cosmetics and 20 per cent on high-end
watches. As a result, Western luxury goods bought in mainland China carry prices as much as 50 per cent
higher than in Europe.16
Price has become a key element in the international marketing strategies of companies attempting to
enter less-affluent emerging markets. Typically, entering such markets has meant targeting the exploding
middle classes in developing countries, such as China, India, Russia and Brazil, whose economies have
been growing rapidly. More recently, however, as the weakened global economy has slowed growth in both
domestic and emerging markets, many companies are shifting their sights to include a new target – the
so-called ‘bottom of the pyramid’, the vast untapped market consisting of the world’s poorest consumers.
Not long ago, the preferred way for many brands to market their products in developing markets –
whether consumer products or cars, computers and smartphones – was to paste new labels on existing
models and sell them at higher prices to the privileged few who could afford them. However, such a pricing
approach put many products out of the reach of the tens of millions of poor consumers in emerging
9780655702412_CH09.indd 270 3/3/20 10:58 AM

markets. As a result, many companies developed smaller, more basic and affordable product versions for
these markets. For example, Unilever – the maker of such brands as Dove, Sunsilk, Lipton and Vaseline –
shrank its packaging and set low prices that even the world’s poorest consumers could afford. It developed
single-use packages of its shampoo, laundry detergent, face cream and other products that it could sell
profitably for just pennies a pack. As a result, today, more than half of Unilever’s revenues come from
emerging economies.17
Although this strategy has been successful for Unilever, most companies are learning that selling
profitably to the ‘bottom of the pyramid’ requires more than just repackaging or stripping down existing
products and selling them at low prices. Just like more well-to-do consumers, low-income buyers want
products that are both functional and aspirational. Thus, companies today are innovating to create products
that not only sell at very low prices but also give bottom-of-the-pyramid consumers more for their money,
not less.
9780655702412_CH09.indd 271 3/3/20 10:58 AM

Student passes through its life cycle. In pricing innovative new products, the company
can use market-skimming pricing by initially setting high prices to ‘skim’ the
Learning maximum amount of revenue from various segments of the market. Or it can use
Centre market-penetrating pricing by setting a low initial price to penetrate the market
deeply and win a large market share.
Learning Objective 3. Explain how companies

Reviewing the learning objectives determine a set of prices that maximises the profits
Before you put pricing behind you, let us further review the important concepts. from the total product mix.
Price can be defined as the sum of all the values that customers give up in order When the product is part of a product mix, the firm searches for a set of prices
to gain the benefits of having or using a product or service. Pricing decisions that will maximise the profits from the total mix. In product-line pricing, the
are subject to an incredibly complex array of company, environmental and company decides on price steps for the entire set of products it offers. In addition,
competitive forces. the company must set prices for optional products (optional or accessory products
included with the main product), captive products (products that are required for
Learning Objective 1. Identify the three main
use of the main product), by-products (waste or residual products produced when
pricing strategies, and discuss the importance
making the main product) and product bundles (combinations of products at a
of understanding customer-value perceptions, reduced price).
company costs and competitor strategies when
setting prices. Learning Objective 4. Discuss how companies adjust
A price is the sum of all the values that customers give up in order to gain their prices to take into account different types of
the benefits of having or using a product or service. The three main pricing customers and situations.
strategies include customer value-based pricing, cost-based pricing and Companies apply a variety of price-adjustment strategies to account for
competition-based pricing. Good pricing begins with a complete understanding differences in consumer segments and situations. One such strategy is discount
of the value that a product or service creates for customers and setting a price and allowance pricing, whereby the company establishes cash, quantity,
that captures that value. The price the company charges will fall somewhere functional or seasonal discounts, or varying types of allowances. A second
between one that is too high to produce any demand and one that is too low strategy is segmented pricing, where the company sells a product at two or more
to produce a profit. prices to accommodate different customers, product forms, locations or times.
Customer perceptions of the product’s value set the ceiling for prices. Sometimes, companies consider more than economics in their pricing decisions,
If customers perceive that the price is greater than the product’s value, they using psychological pricing to better communicate a product’s intended position.
will not buy the product. At the other extreme, company and product costs set In promotional pricing, a company offers discounts or temporarily sells a product
the floor for prices. If the company prices the product below its costs, its profits below list price as a special event, sometimes even selling below cost as a loss
will suffer. Between these two extremes, consumers will base their judgments leader. Another approach is geographical pricing, whereby the company decides
of a product’s value on the prices that competitors charge for similar products. how to price to distant customers, choosing from such alternatives as FOB-origin
Thus, in setting prices, companies need to consider all three factors – customers’ pricing, uniform-delivered pricing, zone pricing, basing-point pricing and freight-
perceived value, costs and competitors’ pricing strategies. absorption pricing. Finally, international pricing means the company adjusts its
Costs are an important consideration in setting prices. However, cost-based price to meet different conditions and expectations in different world markets.
pricing is often product-driven. The company designs what it considers to be a
good product and sets a price that covers costs plus a target profit. If the price
turns out to be too high, the company must settle for lower markups or lower
❶ Price should be what you can get in the market! If value-based pricing
sales, both resulting in disappointing profits. Value-based pricing reverses this
considers the customer’s viewpoint, should not the price be set at the highest
process. The company assesses customer needs and value perceptions and then
level a customer will pay? Surely this means the customer is getting value and
sets a target price to match targeted value. The targeted value and price then
the company is maximising profit? Or are there other factors to consider?
drive decisions about product design and what costs can be incurred. As a result,
Explain your answer. (Learning Objective 1) (AACSB: Reflective Thinking)
price is set to match customers’ perceived value.
❷ In mature markets, competitors drive prices; to compete effectively, a
company must match its competitors’ prices. As products reach maturity in
Learning Objective 2. Describe the main strategies
their life cycle, they become like commodities and competition is typically
for pricing new products.
price-based – but what of the situation when companies introduce
Pricing is a dynamic process. Companies design a pricing structure that covers all
innovative new products? Some companies seem to be able to command
their products. They change this structure over time and adjust it to account for
a much higher price. How do they do it? (Learning Objective 2) (AACSB:
different customers and situations. Pricing strategies usually change as a product
9780655702412_CH09.indd 272 3/3/20 10:58 AM

❸ Some things go together – an airline seat and space for your suitcase; an athletic shoes. Are there differences of opinion among members of your
e-book reader and e-books – so how do companies price each part of their group? Explain why those differences exist. Discuss some examples of
product offering? Deciding on the prices for each product can be tricky. brands of these products that are positioned to deliver different value to
Why not include the whole lot in a single price? What should be considered consumers. (Learning Objective 1) (AACSB: Communication; Teamwork;
when setting the price for each part of the product or service mix? (Learning Application of Knowledge)
Objective 3) (AACSB: Reflective Thinking) ❷ In a small group, determine the costs associated with offering an online
❹ A retailer may display a product for an odd price, such as $4.99. Certainly, MBA degree in addition to a traditional MBA degree at a university. Which
$4.99 is perceived to be under $5, even though we know that no change costs are fixed and which are variable? Determine the fees (i.e. price) to
is given when $5 is paid. Why are such odd prices employed by retailers? charge for each subject in this degree program. Which pricing method is
(Learning Objective 4) (AACSB: Reflective Thinking) your group using to determine the price? (Learning Objectives 1, 2, 3 and 4)
(AACSB: Communication; Teamwork; Analytical Thinking)
Critical thinking exercises

❶ In a small group, discuss your perceptions of value and how much you are
willing to pay for the following products: cars, frozen dinners, jeans and
Mini cases
9.1 Online price tracking
Most consumers know that prices fluctuate throughout the year, but did to inform them of the prices. All of this is free. Camel makes its money
you know they fluctuate even hourly? If you take regular trips on Australia’s from an unlikely partner – Amazon – which funnels price data directly
domestic airlines, then you will know they hold regular sales days. One way to Camel. Camel is a member of Amazon’s Affiliate program, rebating
to find out about these fluctuating prices is to sign up with the airlines 8.5 per cent of sales for each customer Camel refers. It would seem
for email notification. Another is to sign up with Tripadviser.com.au or that Amazon would want customers to buy when prices are higher, not
Ozbargain.com.au for travel deals and coupons. lower. But the online behemoth sees this as a way to keep the bargain
If you often buy items on Amazon, then you know that prices for hunters happy while realising more profitability from less-price-sensitive
various products change regularly. Perhaps it is simply seasonal changes, customers. This is an improvement over Amazon’s earlier pricing tactics,
but if you cannot keep up with the price changes, there is an app that can. which charged different customers different prices based on their buying
Camelcamelcamel is a tool that tracks Amazon’s prices for consumers and behaviour.
sends alerts when a price hits the sweet spot. At the time of writing, this app ❶ Go to <www.ozbargain.com.au>. Track the prices of two flights that
only benefitted residents of Canada, China, Germany, Italy, Japan, Spain, the interest you. Did the prices of any of the flights come close to your
United Kingdom and the United States. Of course, you may buy from within desired price? Write a report on the usefulness of this type of app for
Australia and have your goods delivered to a Shipito.com warehouse for consumers. (AACSB: Communication; Use of IT)
on-forwarding to your Australian or New Zealand address. ❷ Camel is not the only tracking or online price-tracking application.
The Amazon price-tracking app allows users to import entire Amazon Find and describe an example of another online price-tracking tool for
wishlists and to set desired price levels at which emails or tweets are sent consumers. (AACSB: Communication; Use of IT)
9.2 Rebates under the microscope

At various points in the book, we have referred to the demise of Dick Smith Please research this matter and answer the following questions.
Holdings (DSH) before the rise of the online version, bought by retail mogul ❶ Explain the difference between promotional rebates and what we have
Ruslan Kogan and which he runs along with his other business interests.18 termed ‘marketing rebates’? (Learning Objective 4) (AACSB: Reflective
Financial analysts have commented on the allegations that the former Thinking)
directors and managers of DSH inflated earnings and hid the truth about ❷ How might a retailer use rebates to inflate earnings? (Learning
retail sales levels between the time DSH was floated on the stock exchange Objective 4) (AACSB: Analytical Thinking; Reflective Thinking)
and its demise in early 2016.19
In the present chapter, we refer to two types of rebates when discussing
allowances. Both these types of rebates are common in the retailing of fast-
moving consumer goods (FMCG).
9780655702412_CH09.indd 273 3/3/20 10:58 AM


Weighted average and breakeven analysis
In this marketing analytics at work exercise, you are asked to use weighted Please answer the following questions to illustrate the particular
averages in breakeven analysis. In doing so, please consider the pricing measures we are examining in this mini case.
situation facing the marketer of a new suite of office productivity software ❶ What is the formula (equation) for calculating breakeven point (BEP)?
– Transformer Software Corporation (TSC). ❷ How would you calculate the weighted average sales unit and variable
Three software components form a bundled suite (OfficeTransformer) in cost unit to use in breakeven analysis given that we must use single
the first instance, and they will also be sold as individual products from the sales, variable costs and fixed costs units in the breakeven formula?
end of the first year: (1) word processor, (2) spreadsheet/cashbook account, The BEP formula is explained in the present chapter, and in Appendix 3,
and (3) internet browser, flat file database and email client. The brand Spotlight 8.
names, competitor’s unit direct sell price, projected sales, unit retail selling ❸ Given the projected unit sales volume for year 1, will the company, TSC,
prices and variable costs are shown in Table 9.3. achieve breakeven based on the unit selling prices shown?
The company’s projected fixed costs for the first 12 months include Note: When you arrive at a single breakeven number of sales units, this
integrated marketing communication ($10 million), depreciation on plant needs to be converted back into the units for the various individual products.
and equipment ($1.5 million), interest on loans ($0.5 million), equipment OfficeTransformer _______
lease payments ($1.5 million), and other (including salaries) ($86 million). WordTransformer _______
In addition, the company expects an annual 40 per cent return on the AccountsTransformer _______
$500 million invested in the business as a result of an initial public offering (IPO). InfoTransformer _______
Table 9.3 Product pricing and costs

Competitor unit direct Projected sales units,
Product/brand sell price year 1 Sales ratios Unit variable costs
OfficeTransformer $859 200 000 1 $245
WordTransformer $559 600 000 3 $50
AccountsTransformer $659 400 000 2 $120
InfoTransformer $239 200 000 1 $75

Psychology of mobile payments
As the meteoric adoption of Nintendo’s Pokémon Go has shown, will lose their monsters if they do not purchase more space. All the while,
consumers love to play games on their mobile devices. While this is a mathematicians and statisticians work behind the scenes to track game
global phenomenon, Japanese consumers seem to be the most passionate play and make it easier or more challenging to keep players engaged
players. Mobile game publishers in Japan have mastered the art of getting and spending. One expert called Puzzle & Dragons ‘truly diabolical’ in
as much revenue as possible from players – some earning more than convincing players to pay and play more. These and other game producers’
$4 million per day. The makers of Puzzle & Dragons have seemingly tactics have propelled Japan’s game revenue alone to exceed revenue
cracked the revenue code by using the psychology of mobile payments from all apps in the United States.
to squeeze more revenue by encouraging players to play longer. ❶ Is it ethical for game producers to use game-playing data to encourage
One Puzzle & Dragons secret was to issue its own virtual currency, called consumers to spend more? Explain why, or why not. (AACSB:
magic stones, so that consumers do not feel they are spending real money Communication; Ethical Reasoning)
for chances to enhance play. Then the game offers a little reward at the ❷ Is this similar to the ‘freemium’ model used by many game producers?
end with a reminder of what is lost if the player does not take the offer. Explain the ‘freemium’ model and discuss examples of games that
Limited-time sales offer players monsters to use in battle for just a few use this model. (AACSB: Communication; Reflective Thinking; Ethical
magic stones and, if players run out of space, the game reminds them they Reasoning)
9780655702412_CH09.indd 274 3/3/20 10:58 AM

References
1 Dhruv Grewal, Anne L Roggeveen, Larry D Compeau & Michael Levy, ‘Retail value-based 12 See Thomas Nagle, John Hogan & Joseph Zale, The Strategy and Tactics of Pricing: A
pricing strategies: New times, new technologies, new consumers’, Journal of Retailing, Guide to Growing More Profitably, 5th edn, Prentice Hall: Upper Saddle River, NJ, 2011,
88(1), March 2012, pp. 1–6. pp. 51–5; Bram Foubert & Els Gijsbrechts, ‘Shopper response to bundle promotions
2 For more on the importance of sound pricing strategy, see Thomas T Nagle, John Hogan for packaged goods’, Journal of Marketing Research, November 2007, pp. 647–62;
& Joseph Zale, The Strategy and Tactics of Pricing: A Guide to Growing More Profitably, Roger M Heeler, Adam Nguyen & Cheryl Buff, ‘Bundles = discount? Revisiting complex
5th edn, Prentice Hall: Upper Saddle River, NJ, 2011, chapter 1. theories of bundle effects’, Journal of Product & Brand Management, 16(7), 2007,
3 See Megan Willett, ‘How Swiss watchmaker Patek Philippe handcrafts its famous pp. 492–500; and Timothy J Gilbride, Joseph P Guiltinan & Joe Urbany, ‘Framing effects
$500,000 watches’, Business Insider, 12 July 2013, <www.businessinsider.com/how-a- in mixed price bundling’, Marketing Letters, June 2008, pp. 125–40.
patek-philippe-watch-is-made-2013-7>; Stacy Perman, ‘Patek Philippe crafts its future’, 13 See Sue Mitchell, ‘Dick Smith “inflated’ profit”’, Australian Financial Review, 12 July
Fortune, 16 June 2014, pp. 37–44; and <www.patek.com/contents/default/en/values. 2016, pp.1, 8; Sue Mitchell, ‘Dick Smith trouble began under private equity owners’ and
html>, accessed October 2015. ‘Anchorage started Dick Smith rebate’, Australian Financial Review, 13 July 2016, pp. 1,
4 See Mercedes-Benz Australia, <www.mercedes-benz.com.au>, accessed July 2016. 13, 16. Also see Mini case 2.3 ‘Marketing analytics at work’ in Chapter 2 for more on
5 See Gulliver Business Travel, ‘Ryanair’s business class’, The Economist, 28 February 2013; the demise of Dick Smith Electronics.
Nick Webb, ‘One-in-four suits “slumming it” as Ryanair chases business’, 14 See Anthony Allred, E K Valentin & Goutam Chakraborty, ‘Pricing risky services:
The Sunday Independent, 3 February 2013; Kevin Done, ‘Runway success – Ryanair’, Preference and quality considerations’, Journal of Product and Brand Management,
Financial Times, 20 March 2009; Matthew Maier, ‘A radical fix for airlines: Make flying 19(1), 2010, p. 54; Kenneth C Manning & David E Sprott, ‘Price endings, left-digit
free’, Business 2.0, April 2006, pp. 32–4; Kerry Capell, ‘Fasten your seatbelt, Ryanair’, effects, and choice’, Journal of Consumer Research, August 2009, pp. 328–36; Travis
BusinessWeek, 18 February 2008, p. 16; and <www.ryanair.com>, accessed March 2013. Nichols, ‘A penny saved: Psychological pricing’, Gumroad, 18 October 2013, <http://
6 See V Shankar & R N Bolton, ‘An empirical analysis of determinants of retailer pricing blog.gumroad.com/post/64417917582/a-penny-saved-psychological-pricing>; and
strategy’, Marketing Science, 23(1), pp. 28–49. Bouree Lam, ‘The psychological difference between $12.00 and $11.67’, The Atlantic,
7 Example adapted from Anupam Mukerji, ‘Monsoon marketing’, Fast Company, April 30 January 2015, <www.theatlantic.com/business/archive/2015/01/the-psychological-
2007, p. 22; also see ‘Ask a shopkeeper: Ebrahim Currim & Sons’, Mumbai Boss, difference-between-1200-and-1167/384993/>.
30 June 2011. 15 Adapted from information found in Elizabeth A Sullivan, ‘Stay on course’, Marketing
8 ‘Lower cost Samsung GALAXY unveiled in Kenya’, BiztechAfrica, 23 May 2014, News, 15 February 2009, p. 1113.
<www.biztechafrica.com/article/lower-cost-samsung-samsung-galaxy-unveiled- 16 Liza Lin, ‘Shhh … luxury goods are discounted in China’, Bloomberg Businessweek,
kenya/2967/>; Bruce Einhorn & Bhuma Shrivastava, ‘Samsung’s China problems come 21 August 2014, pp. 28–9.
to India’, Bloomberg Businessweek, 23 October 2014, pp. 44–5; and ‘Samsung Galaxy 17 Matthew Boyle, ‘Unilever: Taking on the world, one stall at a time’, Bloomberg
Pocket Neo’, <www.mysmartprice.com/mobile/samsung-galaxy-pocket-neo-msp2810>, Businessweek, 7 January 2013, pp. 18–20; and Martinne Geller, ‘Unilever sticks with
accessed October 2015. emerging markets as sales rebound’, Reuters, 21 January 2014, <http://uk.reuters.com/
9 See Kenwood, <kenwoodworld.com.au>, accessed July 2016. article/2014/01/21/uk-unilever-results-idUKBREA0K09A20140121>.
10 Karis Hustad, ‘Kindle fire HDX keeps Amazon’s low price, adds extra features’, Christian 18 See Mini case 2.3 ‘Marketing analytics at work’ in Chapter 2 for more on the demise of
Science Monitor, 26 September 2013, <www.csmonitor.com/Innovation/2013/0926/ Dick Smith Electronics.
Kindle-Fire-HDX-keeps-Amazon-s-low-price-adds-extra-features>. 19 Dominic Powell, ‘Dick Smith management accused of disguising rebates as profit:
11 See James Trew, ‘Playstation and image sensors help Sony turn a profit’, Engadget, How supplier rebates work’, 12 July 2016, <www.smartcompany.com.au/industries/
29 October 2015, <www.engadget.com/2015/10/29/sony-q2-profit-2015>, accessed July retail/71637-dick-smith-management-accused-of-disguising-rebates-as-profit-how-
2016. supplier-rebates-work>, accessed July 2016.
9780655702412_CH09.indd 275 3/3/20 10:58 AM

Chapter
10 Placement: Customer value

fulfilment
In this chapter, we examine the changing supply chain for member organisations: manufacturers, service
providers, intermediaries such as wholesalers and retailers, and, of course, consumers. After discussing the
nature and benefits of supply chain management, we work our way through these logistics networks with
an explanation of decision areas before examining the nature of marketing channels and the distribution
of goods and services. We then examine two main aspects of supply chains in more detail – retailing and
wholesaling. We start by looking at the nature of retailing and its importance, the main types of store and
non-store retailers, the decisions retailers make and the future of retailing. We then discuss the same topics
for wholesalers. While we discuss direct fulfilment – or non-store retailing, as it is often termed – in more
detail when considering direct and digital marketing (see Chapter 13), we introduce the topic of digital
retailing in this chapter.
Learning Objective 1 Describe the nature of supply chain management and how marketing
channels add value.
Learning Supply chains and the value delivery network pp. 278–86
Objectives Learning Objective 2 Describe the nature of marketing channels and how they organise to
create value.
The nature of marketing channels and value creation pp. 286–90
Channel behaviour and organisation pp. 290–7
Channel design and management decisions pp. 297–9
Learning Objective 3 Discuss retailing, retailers’ marketing decisions and the different ways
of classifying stores, and describe retailing trends and developments.
Retailing pp. 300–6
Learning Objective 4 Compare and contrast the different types of wholesalers and their
marketing decisions, and discuss wholesaling trends.
Wholesaling pp. 307–11
9780655702412_CH10.indd 276 3/3/20 11:00 AM

Chapter 10 Placement: Customer value fulfilment 277
LO 1 Manufacturer Manufacturer Manufacturer

Describe the nature of supply
chain management and how
marketing channels add value.
Wholesaler
Agents and
brokers
FUNCTIONS: information, promotion, contact, matching,
LO 2
negotiation, physical distribution, financing, risk taking
Describe the nature of

marketing channels and how
they organise to create value.
Retailer Retailer
Customer Customer Customer
RETAILERS
Speciality Department Supermarkets Convenience

LO 3 stores stores stores
Discuss retailing, retailers’
marketing decisions and the
different ways of classifying stores, Discount Mass Off-price
and describe retailing trends and Superstores
stores merchants retailers
developments.
WHOLESALERS
LO 4 Merchant Full Limited Brokers and Sales branch

Compare and contrast the different
wholesalers service service agents and offices
types of wholesalers and their
marketing decisions, and discuss
wholesaling trends.
9780655702412_CH10.indd 277 3/3/20 11:00 AM

Supply chains and the value delivery

network
One difficulty in understanding the management system of making and distributing products is that the
following terms may be used interchangeably by different commentators: logistics, marketing logistics,
integrated logistics management, supply chain management, materials management and physical distribution.
supply chain We use the term supply chain when describing the system of efficiently and effectively producing, making
A system of efficiently and getting products to end-users. We also use the term supply chain management to encompass the
and effectively
management of upstream and downstream value-added flows of materials, final goods and related
producing, making and
getting products to end- information among suppliers, the company, resellers and final consumers. The terms supply chain and supply
users. chain management are used, rather than the term logistics, since the latter is but a subset of supply chain
supply chain management and the two terms are not seen to be synonymous.1
management Additionally, we need to take into account the fact that service organisations such as banks, government
Managing upstream departments and motor vehicle rental companies – to name but three types of marketing organisations –
and downstream also move their offerings to customers as efficiently as possible.
value-added flows of
materials, final goods For some, the term supply chain may still be too limiting, as it suggests a make-and-sell view of the
and related information business. It suggests that raw materials, productive inputs and factory capacity should serve as the starting
among suppliers, the point for market planning. Rather, it makes more sense to use the term demand chain, since this term suggests
marketing organisation,
a sense-and-respond view of the market. If we look at placement this way, planning starts by identifying the
resellers and final
consumers. needs of target customers, to which the company responds by organising a chain of resources and activities
with the goal of creating customer value.
At the outbound logistics section of the supply chain (see Figure 10.1), between the producer and the
customer, we find the marketing channels, which are the direct responsibility of marketing management.
marketing These are part of the firm’s marketing logistics system – also called physical distribution, for it
logistics (physical involves planning, implementing and controlling the physical flow of goods, services and related information
distribution) from points of origin to points of consumption in order to meet customer requirements at a profit. In short,
The tasks involved in
planning, implementing it involves getting the right product to the right customer in the right place at the right time.
and controlling the Regardless of the terms used for any part of the supply chain, we find that most large companies today
physical flow of are engaged in building and managing a complex, continuously evolving value delivery network. A value
materials and final goods
delivery network is made up of the marketing organisation, suppliers, distributors and, ultimately,
from points of origin to
points of consumption customers who ‘partner’ with each other to improve the performance of the entire system. In the case
in order to meet the of many services, for example, the supplier and customer co-produce the offering, such as when you, the
needs of customers at reader, learn at university.
a profit.
Information systems play a critical role in managing supply chains. Major gains in logistical efficiency
value delivery have resulted from information technology, such as point-of-sale terminals, uniform product codes,
network
The network made
up of the marketing
organisation, suppliers,
distributors and, Inbound Outbound
ultimately, customers logistics Marketing logistics
who partner with each Suppliers Resellers Customers
organisation
other to improve the
performance of the
entire system.
Reverse logistics
Figure 10.1 Supply chain management
9780655702412_CH10.indd 278 3/3/20 11:00 AM

satellite tracking of transport (monitoring position and managing speed and fuel consumption), radio-
frequency identification (RFID) tags, electronic data interchange (EDI), electronic funds transfer (EFT)
and now the internet.2
These developments have made it possible for companies to make or require such promises as, ‘The
product will be at dock 25 at 10 am tomorrow’, and to control this promise through information. Supply
chain decisions – including those related to marketing channels, the finished-goods delivery end – are among
the most important facing management today. Decisions such as whether or not to sole-source, operations
decisions such as where to locate a plant and the type of process to use, and scheduling decisions such as
whether to supply from inventory or from production, are among many of the most critical decisions a firm
can make. Such business design decisions are critical because they affect every other decision.
Supply chain management involves several activities. The first is sales forecasting, on the basis of
which the company schedules production, inventory levels and distribution. The production plans
indicate the materials the purchasing department must order. These materials arrive through inbound
transportation, enter the receiving area and are stored in raw material inventory. Raw materials are
converted into finished goods. The finished-goods inventory is the link between the customers’ orders
and the company’s manufacturing activity. Customers’ orders draw down the finished-goods inventory
level and manufacturing activity builds it up. Finished goods flow off the assembly line and pass through
packaging, in-plant warehousing, shipping-room processing, outbound transportation, field warehousing,
and customer delivery and servicing. This flow is demonstrated in Figure 10.2.
Management is continually concerned about the total cost of logistics, which can amount to
30–40 per cent of a product’s cost. Companies spend large amounts, up to 10 per cent of the country’s
GDP, to wrap, bundle, load, unload, sort, reload and transport goods. The grocery industry is one that
is constantly revamping its logistics in an endeavour to lower costs. Products may spend anything up to
100 days getting from factories to supermarkets, as they move through a labyrinth of wholesalers,
distributors, brokers and other consolidators. With expensive inefficiencies like these, it is no wonder that
Agents and
brokers
Distributor
Retailer
Raw Assembly Final

materials packing
Supplier
Batch, line
continuous
process
Manufacturer
End-user
QRT
EDI link JIT system
EDI link
Inventory EFTPOS & POS scan data
Figure 10.2 Supply chain for a typical grocery product
9780655702412_CH10.indd 279 3/3/20 11:00 AM

experts have called logistics ‘the last frontier for cost economies’. Lower logistics costs permit lower prices
and yield higher profit margins, and may produce both.
Though the cost of coordination can be high, a well-planned supply chain management program can
be a potent tool in competitive marketing. Companies can attract additional customers by offering better
service, faster cycle time or lower prices through logistics improvements. This is the thinking behind cross-
docking, where branded fast-moving consumer goods (FMCGs) move quickly through the network from
suppliers to transporters, bypassing central retailer warehouses and arriving at stores days or weeks earlier
than before.
What happens if a company’s logistics networks are not set up properly? Companies lose customers
when they fail to supply goods on time. Until recently, Woolworths Limited’s supermarkets achieved
superior performance to Coles Supermarkets for many years because of continual improvement of the
company’s supply chain. While both companies have sought to gain from logistics improvements, it is
Woolworths’ Project Refresh that initially showed major gains in the cost of doing retail business.3
The direct linking of the manufacturer and retailer, initiated between Procter & Gamble and Walmart
in the United States, has been extended to many other manufacturers and retailers around the world,
including Lever-Rexona and Coles Supermarkets in Australia, and is a direct outcome of technological
change and a willingness to see advantage in supply chain management. In Figure 10.2, we see the supply
chain for a typical grocery product. In this supply chain, goods flow from the supplier to the end-user.
services
However, other flows are involved: information, such as orders and delivery advice; and communication,
marketing
logistics such as advertising, title to the goods and payments. Supply chains can be likened to a pipeline delivering
Coordinating non- water to the household dwelling, for the intent is, as far as possible, to supply on demand rather than to
material activities carry inventories of finished goods. Services marketing logistics addresses the issue of coordinating
needed to provide a
the non-material activities necessary to provide a service in a cost-efficient way with the level of quality
service in a cost-effective
way and with the quality expected. This is represented in the case of a legal service in Figure 10.3 and, in the case of an experiential
expected. product, in Figure 10.4.
Business
Government Courts
Legal casework and

service conversion
Households
LEGAL FIRM
DIGITAL NETWORKS
FLOWS: Information • Materials • Title • Payment/Credit
Figure 10.3 Supply chain for a legal service
9780655702412_CH10.indd 280 3/3/20 11:00 AM

• Actors/players
• Sponsors
• Ticketing
• Managers, etc.
THEATRE SPORT
STUDIO Households
S Y N D I C ATO R
DIGITAL NETWORKS
FTA-TV/Subscriber/Web
FLOWS: Information • Materials • Payment/Credit
Figure 10.4 Supply chain for an experiential product
Figures 10.2 to 10.4 also illustrate that a number of marketing channels can be used to ensure that
products reach their final destination and thus satisfy demand and customer service requirements.
The reference to QRT (quick retail technology) in Figure 10.2 involves the use of telesales and EDI to speed
the movement of products through the network in response to orders taken by suppliers from individual
stores. In Figure 10.4 we see that, once a video production has been produced, it may be distributed via free-
to-air TV (FTA-TV), subscriber-TV, such as Foxtel, or streamed over the web by one of the many services,
such as Netflix and Stan, now available. Such streaming services have grown rapidly – by some 46 per cent
between June 2015 and June 2016 – and some of the 2.6 million customers streaming video on demand
(SVOD) subscribe to multiple services.4 It is noticeable that, unlike the flows involved in the case of goods,
no title is passed to the customer in the case of experiential products.
Finally, more than almost any other marketing function, supply chains affect the environment and
a firm’s environmental sustainability efforts. Transportation, warehousing, packaging and other logistics
functions are typically the biggest supply chain contributors to the company’s environmental footprint.
At the same time, they also provide one of the most fertile areas for cost savings. So, developing a green
supply chain is not only environmentally responsible; it can also be profitable. ‘Your CO2 footprint of
transportation and your cost of fuel are permanently linked,’ says one supply chain manager. ‘The good
news is if you can reduce logistics costs you can write an environmental story about it.’5
Nike is one company that measures environmental impact across the supply chain, using the Higg
Index to work with suppliers and distributors to reduce its supply chain’s environmental footprint.
For instance, during just the past three years, the more-than 900 contract factories that make Nike footwear
worldwide have reduced their carbon emissions by 6 per cent, despite production increases of 20 per cent.
That is equivalent to an emissions savings equal to more than 1 billion kilometres of car travel.6
Supply chain goals

When making marketing logistics decisions that aim to provide a targeted level of customer service at
the least cost, there arises the notion of a trade-off in the five logistics variables involved when meeting
9780655702412_CH10.indd 281 3/3/20 11:00 AM

Product Process
Promotion People
Price Physical evidence
PLACEMENT
(CUSTOMER
SERVICE)
Inventory carrying Transportation

costs costs
Conversion lot Warehousing

quantity costs throughput costs
Order-processing
and information
costs
Figure 10.5 Supply chain trade-offs and interaction with the extended marketing mix elements in providing
customer service
Source: Adapted from D M Lambert, The Development of Inventory Costing Methodology: A Case Study of Costs Associated with Holding Inventory,
National Council of Physical Distribution Management, 1976, p. 7.
customers’ service requirements. The trade-off is illustrated in Figure 10.5. Customer service in this context
might mean that the customer requires all major brands of a range to be delivered into their distribution
centre within 24 hours of order placement, and minor brands to be delivered with greater time tolerances.
It should be noted that there is a considerable difference in perspective in the supply chain involved in
providing goods compared with that used to provide a service. For example, the experience of a night
at a live Go Violets concert cannot be stored. Thus, it is meaningless to talk of inventory. Or is it?
The experience at an entertainment centre also requires supporting products, such as food and beverages,
which must be stored so they will be available to meet the needs of the concert patrons. These items are a
supply chain vital part of the overall service encounter or experiential aspect of consuming such a product.
trade-offs Supply chain trade-offs occur because management seeks an optimal result in terms of achieving a
The trade-offs in costs customer service level acceptable to the customer at a cost that gives an optimal profit and cashflow result
areas involved when
to the company. In achieving these outcomes, several decisions are involved. Supply chains typically add
deciding on the service
level the organisation value through the following decisions:
will offer customers. • cycle-time reductions (e.g. changing the manufacturing or service-delivery process)
9780655702412_CH10.indd 282 3/3/20 11:00 AM

• conversion operations location (e.g. placing the manufacturing plant close to the source of raw
materials or the television studio close to qualified technicians)
• purchasing decisions to make or buy or vertically integrate or network with suppliers
• manufacturing and operations process decisions (e.g. product scheduling to produce larger lot sizes
and thereby reduce costs, or making many ‘soapies’ simultaneously)
• order processing and costs (e.g. using telecommunications technology to run a single telesales
operation in a regional location where labour is flexible and costs are lower, or to operate an online
operation’s pick-and-pack warehouse from a location adjacent to transport infrastructure)
• warehouse and distribution centre numbers and costs (e.g. improving customer service by placing
warehouses in each capital city and using cross-docking to speed the delivery cycle)
• inventory levels and costs (e.g. reducing inventory levels and costs by introducing cross-docking and
radio tags to track inventory)
• transport type and costs (e.g. using rail transport instead of road transport to reduce freight costs,
or directly beaming television shows and commercials via microwave links to television stations or
movies to cinema complexes via satellite)
• restructuring the marketing channels used to place products within easy reach of buyers and
end-users.
Some companies state their supply chain objective as providing maximum customer service at the least
cost. Unfortunately, no supply chain can both maximise customer service and minimise distribution costs.
Maximum customer service implies rapid delivery, large inventories, flexible product assortments, liberal
returns policies and other services – all of which raise distribution costs. In contrast, minimum distribution
costs imply slower delivery, smaller inventories and larger shipping lots – which represent a lower level of
overall customer service.
The goal of any supply chain should be to provide a targeted level of customer service at the least
cost. A company must first research the importance of various distribution services to customers and then
set desired service levels for each segment. The objective is to maximise profits, not sales. Therefore, the
company must weigh the benefits of providing higher levels of service against the costs to do so. Some
companies offer less service than do their competitors and charge a lower price. Other companies offer
more service and charge higher prices to cover higher costs.
Major supply chain functions

Given a set of supply chain objectives, the company is ready to design a system that will minimise the
cost of attaining these objectives. The main supply chain functions focusing on the customer end include
warehousing, inventory management, transportation and logistics information management.
Warehousing
Production and consumption cycles rarely match. So, most companies must store their goods while
they wait to be sold. For example, lawn-mower manufacturers operate their factories all year long and
distribution
store up products for the heavy spring and summer buying seasons. The storage function overcomes centre
differences in needed quantities and timing, ensuring that products are available when customers are Large and highly
ready to buy them. automated warehouse
A company must decide on how many and what types of warehouses it needs and where they will be designed to receive
goods from various
located. The company might use either storage warehouses or distribution centres. Storage warehouses store plants and suppliers,
goods for moderate to long periods. In contrast, distribution centres are designed to move goods, take orders, fill them
rather than just store them. They are large and highly automated warehouses designed to receive goods efficiently and deliver
goods to the stores
from various plants and suppliers, take orders, fill them efficiently and deliver goods to customers as
of the retail owner of
quickly as possible. In FMCG retailing, for example, Coles Supermarkets, Woolworths and wholesaler the centre as quickly as
Metcash operate a network of large distribution centres in capital cities and major centres, which aggregate possible.
9780655702412_CH10.indd 283 3/3/20 11:00 AM

orders for many of the products stocked at store level and distribute them to individual stores. We find a
similar situation in the distribution of pharmaceutical and health-care products by wholesalers Australian
Pharmaceutical Industries (API), Sigma and Symbion.
The distribution of online products is no different – as Amazon illustrates. Amazon operates more
than 50 distribution centres, called fulfilment centres, which fill online orders and handle returns.
These centres are huge and highly automated. For example, the Amazon fulfilment centre in Tracy,
California, covers more than 110 000 square metres (equivalent to 27 football fields). At the centre,
4000 employees control an inventory of 21 million items and ship up to 700 000 packages a day to
Amazon customers in Northern California and parts of the Pacific Northwest. During a recent Cyber
Monday, Amazon’s fulfilment-centre network filled customer orders at a rate of 426 items per second
globally. Moreover, like many such centres, Amazon uses an army of army of squat, ottoman-size, day-glo
orange robots to assist the human operators it employs.7
Like almost everything else these days, warehousing has seen dramatic changes in technology in recent
years. Outdated materials-handling methods are steadily being replaced by newer, computer-controlled
systems requiring few employees. As Amazon illustrates, some larger centres use computers and scanners to
read orders and to direct lift trucks, electric hoists or robots to gather goods, move them to loading docks
and issue invoices.
Inventory management
Inventory management also affects customer satisfaction. Here, managers must maintain the delicate
balance between carrying too little inventory and carrying too much. With too little stock, the firm
risks not having products when customers want to buy. To remedy this, the firm may need costly
emergency shipments or production. Carrying too much inventory results in higher-than-necessary
inventory-carrying costs and stock obsolescence. Thus, in managing inventory, firms must balance
the costs of carrying larger inventories against resulting
sales and profits.
Many companies have greatly reduced their inventories
and related costs through just-in-time ( JIT ) logistics networks.
With such systems, producers and retailers carry only small
inventories of parts or merchandise, often only enough for a
few days of operations. New stock arrives exactly when needed,
rather than being stored in inventory until being used.
JIT systems require accurate forecasting along with fast,
frequent and flexible delivery, so that new supplies will be
available when needed. However, these systems result in
substantial savings in inventory-carrying and handling costs.
Marketers are always looking for new ways to make
inventory management more efficient. In the not-too-distant
future, handling inventory might even become fully automated
by using RFID or ‘smart tag’ technology, by which small
transmitter chips are embedded in or placed on products and
packaging on everything from flowers and razors to tyres.
‘Smart’ products could make the entire supply chain – which
Sea carrier transportation: As a major trading nation with large accounts for nearly 75 per cent of a product’s cost – intelligent
customers such as China and Japan, Australia is dependent on sea and automated.
transport to and from the rest of the world. Companies using RFID would know, at any time, exactly
Aleksey Stemmer/Fotolia
where a product is located physically within the supply chain.
9780655702412_CH10.indd 284 3/3/20 11:00 AM

‘Smart shelves’ would not only tell them when it is time to reorder, but would also place the order
automatically with their suppliers. Such exciting new information technology applications will revolutionise
distribution as we know it. Many large and resourceful marketing companies, such as Coles, Woolworths,
Metcash, Unilever, Procter & Gamble, Kraft, IBM, HP and others, are investing heavily to make the full use
of RFID technology a reality.8
Transportation
The choice of transportation carriers affects the pricing of products, delivery performance and
condition of the goods when they arrive – all of which will affect customer satisfaction. In shipping goods
to its warehouses, dealers and customers, the company can choose among five main transportation
modes: truck, rail, water, pipeline and air, along with an alternative mode for digital products – the
internet.
Trucks (articulated vehicles) have the third-highest share of transportation and account for some
30 per cent of total cargo tonne-kilometres travelled in Australia.9 They are efficient for short hauls of
high-value merchandise. Trucking firms have evolved in recent years to become full-service providers
of global transportation services. For example, large trucking firms now offer everything from satellite
tracking, web-based shipment management and logistics planning software, to cross-border shipping
operations.
Railroads account for the major share of freight movement within Australia, with some 40 per cent of
total cargo tonne-kilometres moved. They are one of the most cost-effective modes for shipping large
amounts of bulk products – coal, sand, minerals, and farm and forest products – over long distances.
In recent years, railroads have increased their customer services by designing new equipment to handle
special categories of goods; providing flatcars for carrying truck trailers by rail (piggyback); and providing
in-transit services, such as the diversion of shipped goods to other destinations en route and the processing
of goods en route.
Sea carriers, which account for about one-third of cargo tonne-kilometres, transport large amounts of
goods by ships. Although the cost of water transportation is very low for shipping bulky, low-value, non-
perishable products, such as sand, coal, grain, oil and metallic ores, water transportation is the slowest mode
and may be affected by the weather.
Pipelines, which account for about 1 per cent of cargo tonne-kilometres, are a specialised means of
shipping petroleum, natural gas and chemicals from sources to markets. Most pipelines are used by their
owners to ship their own products.
Although air carriers transport less than 1 per cent of cargo tonne-kilometres of the nation’s goods,
they are an important transportation mode. Airfreight rates are much higher than rail or truck rates, but
airfreight is ideal when speed is needed or distant markets have to be reached. Among the most frequently
airfreighted products are perishables (fresh fish and crustaceans, cut flowers) and high-value, low-bulk items
(technical instruments, jewellery). Companies find that airfreight also reduces inventory levels, packaging
costs and the number of warehouses needed.
The internet carries digital products from producer to customer via satellite, cable or copper
wire. Software firms, the media, entertainment companies and education all make use of the internet
to transport digital products. Although these firms primarily use traditional transportation to
distribute DVDs, newspapers and more, the internet holds the potential for lower product distribution
costs. Whereas planes, trucks and trains move freight and packages, digital technology moves
information bits. multimodal
Shippers also use multimodal transportation – combining two or more modes of transportation.
transportation
Combining two or
Total cargo tonne-kilometres moved via multiple modes is 14 per cent. Piggyback describes the use of more modes of
rail and trucks; fishyback, the use of water and trucks; trainship, water and rail; and airtruck, air and trucks. transportation.
9780655702412_CH10.indd 285 3/3/20 11:00 AM

Combining modes provides advantages that no single mode can

deliver. Each combination offers advantages to the shipper.
For example, not only is piggyback cheaper than trucking alone,
but it also provides flexibility and convenience.
In choosing a transportation mode for a product, shippers must
balance many considerations: speed, dependability, availability, cost
and others. Thus, if a shipper needs speed, then air and truck are the
prime choices. If the goal is low cost, then water or rail are likely
to be chosen.
Supply chain information management

Companies manage their supply chains through information.
Multimodal transportation: Aurizon’s nationwide transportation Channel partners often link up to share information and to make
of bulk and containerised freight involves truck trailers on rail better joint logistics decisions. From a logistics perspective, flows
cars or enabling a fast changeover from road wheels to rail
of information, such as customer transactions, billing, shipment
bogies on these trailers.
© Prasit Rodphan/Shutterstock
and inventory levels, and even customer data, are closely linked
to channel performance. Companies need simple, accessible, fast
and accurate processes for capturing, processing and sharing
channel information.
Information can be shared and managed in many ways, but most sharing takes place through traditional
or internet-based electronic data interchange, the digital exchange of data between organisations, which
primarily is transmitted via the internet.10 Coles Supermarkets, for example, requires EDI links with its
many suppliers.
In some cases, suppliers might actually be asked to generate orders and arrange deliveries for their
customers. Large retailers, such as Kmart, work closely with major suppliers to set up vendor-managed
inventory (VMI) systems or continuous inventory replenishment systems. Using VMI, the customer shares real-
time data on sales and current inventory levels with the supplier. The supplier then takes full responsibility
for managing inventories and deliveries. Some retailers even go so far as to shift inventory and delivery
costs to the supplier. Such systems require close cooperation between the buyer and seller.

Let’s stop here for a moment and apply the distribution channel ● If you were managing Nestlé’s Uncle Tobys operations located
concepts we have discussed so far. in the Victorian town of Wahgunyah, which transport modes
● Can you identify and elaborate on the supply chain tradeoffs? might you consider? (See Google Maps reference.11) For an
Is the aim to reduce costs, or is there something more that overview of Uncle Tobys’ products, see
marketing organisations aim to fulfil by optimising these <www.uncletobys.com.au/products>.
functions?
The nature of marketing channels

marketing channel
(distribution
and value creation
channel) Marketing channels are a major part of any supply chain and involve the interaction of intermediaries used
A set of interdependent to bring finished goods and services to the marketplace, within easy reach of buyers and end-users.
organisations involved in
A marketing channel (or distribution channel) is a network of interdependent organisations –
the process of making
a product or service intermediaries – involved in the process of making goods and services available for use or consumption by
available to users. the consumer or business user.
9780655702412_CH10.indd 286 3/3/20 11:00 AM

How marketing channels add value

Why do producers give some of the selling and distribution jobs to channel
partners? Doing so means giving up some control over how, and to whom, a
producer’s or supplier’s products are sold. However, suppliers also gain certain
advantages by using intermediaries. These advantages are described in this section.
Many suppliers lack the financial resources to carry out direct marketing,
or customers want personal interaction before buying large-ticket items.
For example, car makers Ford and General Motors sell their cars through a
number of independent franchises and company-owned dealers. Locally and
globally, the big car makers would be unwise to bypass their dealers. No matter
how much car makers turn to online methods, they will still need their dealers.
Direct and online marketing would require many suppliers to set up
company-managed networks of intermediaries for their producers if they wished
to achieve the mass distribution economies their current marketing channels
offer. For example, the pie maker, Patties (Four’N Twenty brand), would find
it impractical to set up small retail pie shops around the country, or to sell its
meat pies door-to-door or by mail order via post or the web in Australia and
New Zealand. In order to be viable, the company would have to sell pies along
with many other small products, and would end up in the milk bar and food Marketing channels: Value is added by marketing
store business. The company finds it advantageous to work through a network of channel members for companies such as Patties,
which must get the 50 000 Four’N Twenty meat
third-party distributors and retailers. pies an hour it produces to market.
Even producers that can afford to set up their own channels can often earn a Four’N Twenty is a trademark of Patties Foods Pty Ltd
greater return by increasing their investment in their main business. For example,
if a company earns a 20 per cent rate of return on manufacturing and foresees only
a 10 per cent return on retailing, it may be unwise to undertake its own retailing. The use of intermediaries
largely reflects their greater efficiency in making goods available to target markets. Through their contacts,
experience, specialisation and scale of operation, intermediaries usually offer a producer or supplier more
than it can achieve on its own.
Figure 10.6 shows one way that using intermediaries can provide economies and add value. Part A
(on the left-hand side of the figure) shows three producers, each using a direct marketing approach to
1
M 2 C M C
1 4
3
4
5 2 5
M C M D C
6
7
8
3 6
M 9 C M C
A. Number of contacts B. Number of contacts

MxC=3x3=9 M+C=3+3=6
M = Manufacturer C = Customer D = Distributor
Figure 10.6 How a distributor reduces the number of channel transactions
9780655702412_CH10.indd 287 3/3/20 11:00 AM

reach three customers. This system requires nine different contacts. Part B shows the three producers
working through one distributor, who contacts the three customers. This system requires only six
contacts. In this way, intermediaries reduce the amount of work that must be done by suppliers to sell
and distribute the product, and by customers to search for and buy such products.
From an economic point of view, the role of marketing intermediaries is to transform the assortment
of products made by producers into the assortments wanted by consumers. Producers make and supply
narrow assortments of products in large quantities. However, as we observe from the popularity of
shopping malls, supermarkets, banks and direct factory outlets (DFOs), consumers want broad assortments
of products in small quantities, within easy reach by transport or accessible by telephone or the internet.
By using marketing channels, customers interact with intermediaries who buy and break down into smaller
quantities the large assortments they bring together from the suppliers of many brands and product ranges.
Thus, intermediaries play an important role in coordinating supply and demand.
Members of the marketing channel add value when they move goods from producers and suppliers to
consumers. This overcomes the main time, placement and possession gaps that arise when separate suppliers
are unable to coordinate supply and demand. Marketing channel members perform many key functions:
• information – gathering and distributing marketing research and intelligence information about
actors and forces in the marketing environment needed for planning and aiding exchange
• promotion – developing and spreading persuasive communications about an offer
• contact – finding and communicating with prospective buyers
• matching – shaping and fitting the offer to the buyer’s needs, including such activities as manufacturing,
grading, assembling and packaging
• negotiation – reaching an agreement on price and other terms of the offer so that ownership or
possession can be transferred
• physical distribution – transporting and storing goods
• financing – acquiring and using funds to cover the costs of the channel work
• risk taking – assuming the risks of carrying out the channel work.
The question is not whether these functions need to be performed – they must be – but, rather, who
is to perform them. All the functions have three things in common: (1) they use up scarce resources;
(2) they can often be performed better through specialisation; and (3) they can be transferred to other
channel members. To the extent that the producer performs these functions, its costs go up and so, too, do
its prices. At the same time, when some functions are shifted to intermediaries, the producer’s costs and
prices are lower, but the intermediaries must add a charge to cover the cost of their work and their own
profits. In dividing the work of the channel network as a whole, the various functions should be assigned to
the channel members who add the most value for the cost involved.
Number of channel levels

Marketing channels may be described by the number of channel levels involved. Each layer of intermediaries
that performs some work in bringing the product and its ownership closer to the final buyer is a channel
channel level level. Because the manufacturer, or supplier, and the final consumer each perform some work, they are part
A layer of intermediaries
who perform some
of every channel. We use the number of intermediary levels to indicate the length of a channel.
work in bringing Figure 10.7 shows several distribution channels of different lengths. Channel 1, called a direct
the product and its marketing channel, has no intermediary levels. It consists of a manufacturer selling directly to
ownership closer to the consumers. For example, Avon sells its products door-to-door and online, Vodafone sells its services from
final buyer.
retail stores and online, Foxtel and Optus Television sell their subscriber-TV services through telesales,
direct marketing
and private health insurance companies sell their resources through their own outlets or person-to-person.
channel
A direct marketing Channel 2 contains one intermediary level. In consumer markets, this level is typically a retailer, as in the
channel has no case where large retailers, such as Big W and Kmart, sell televisions, cameras, tyres, furniture, appliances
intermediary levels. and many other products that they buy directly from manufacturers. Channel 3 contains two intermediary
9780655702412_CH10.indd 288 3/3/20 11:00 AM

Producer Producer Producer Producer Producer Producer
Wholesaler Manufacturer’s
representatives
or sales branch
Business Business
Retailer Retailer
distributor distributor
Business Business Business

Consumer Consumer Consumer
customer customer customer
Channel 1 Channel 2 Channel 3 Channel 1 Channel 2 Channel 3

A. Customer marketing channels B. Business marketing channels
Figure 10.7 Consumer and industrial marketing channels
levels. In consumer markets, these levels are typically a wholesaler and a retailer. This channel is often used
by small manufacturers of food, pharmaceutical, hardware and other products.
Distribution channels with more levels are still evident but are becoming less common as time goes
on. For the producer, a greater number of levels means less control. And the more levels, the greater the
channel’s complexity and the more costs involved. In Japan, for example, retail products often flow through
many levels, making it difficult for suppliers from Australia and New Zealand to understand the complex
relationships and influence the market.
Figure 10.7 shows some common business-
to-business marketing channels. The industrial
goods producer can use its own salesforce to
sell directly to industrial customers. It can also
sell to industrial distributors who, in turn, sell
to industrial customers. It can sell through a
manufacturer’s representatives or its own sales
branches to industrial customers, or use either
to sell through industrial distributors. Thus,
zero-, one- and two-level distribution channels
are common in industrial goods markets.
As we saw earlier in Figures 10.2 to 10.4,
the institutions in the channel are connected by
several types of flows. These include the product
flow of goods and services, the flow of ownership (in
the case of goods, but not in the case of services),
payment flow, information flow and promotion flow. Direct marketing channels: Vodafone sells its services from retail stores and also
online.
These flows can make channels very complex,
Takatoshi Kurikawa/Alamy Stock Photo
even those with only one or a few levels.
9780655702412_CH10.indd 289 3/3/20 11:00 AM

Channels in the service sector

The concept of marketing channels is not limited to the distribution of goods. Producers of services and
experiences also face the problem of making their output available to target populations. Governments
market ideas when they develop ‘educational distribution systems’ and ‘health delivery systems’. They must
determine agencies and locations for reaching a widely spread population.
Hospitals must be located in a geographic space to provide people with complete medical care, and
schools must be built close to the children who need to learn there. Fire stations must be located so as to
give rapid access to potential fires. Voting booths must be placed so that people can cast their ballots without
expending unreasonable amounts of time, effort or money to reach a polling station, even in countries
such as Australia where voting is compulsory. In cities, playgrounds are created and located for children.
In many overpopulated countries, to ensure contraceptive and family-planning information reaches the
people, birth-control clinics must be assigned or widely distributed consumer goods used as a vehicle for
distributing such information or aids.
Marketing channels are also used in ‘person’ marketing. Before the advent of television in Australia
and New Zealand in 1956, professional comedians could only reach audiences through theatres, special
events, nightclubs, radio, movies and carnivals. By the late 1950s, television had become a strong channel
and vaudeville began to disappear. More recently, comedians’ channels have grown to include subscriber-
TV (e.g. the Comedy Channel), television shows, the web, promotional events, product endorsements,
videotapes and DVDs. As elections the world over show, politicians seek cost-effective channels, such as the
mass media, and social networking internet sites such as Facebook, YouTube and Twitter, but still resort to
visiting shopping malls and rallies to distribute their messages to voters.
Channel behaviour and

organisation
Marketing channels are more than simple collections of firms tied together by various flows – networks, if
you will. They are complex behavioural networks in which people and companies interact to accomplish
individual, company and channel goals. Some channel networks consist only of informal interactions among
loosely organised firms; others consist of formal interactions guided by strong organisational structures.
And channel networks do not stand still: new types of intermediaries surface and whole new channel networks
evolve. Here, we look at channel behaviour, and at how members organise to do the work of the channel.
Channel behaviour
A marketing channel consists of firms that have partnered for their common good. Each channel member
depends on the others. Ideally, because the success of individual channel members depends on overall
channel success, all channel firms should work together smoothly. They should understand and accept their
roles, coordinate their goals and activities, and cooperate to attain overall channel goals. By cooperating,
they can more effectively sense, serve and satisfy the target market.
In some cases, individual channel members may not take such a broad view. They may be more
concerned with their own short-run goals and their dealings with those firms closest to them in the
channel. Cooperating to achieve overall channel goals sometimes means giving up individual company
channel conflict goals. Although channel members are dependent on one another, they sometimes act alone in trying to
Disagreements among meet their own short-run best interests. They may disagree on the roles each should play, on who should do
marketing channel what and for what rewards. Such disagreements over goals and roles generate channel conflict.
members on goals, roles Horizontal conflict is conflict between firms at the same level of the channel. Such conflict might be
and rewards – that is, on
who should do what and due, for example, to rivalry between insurance agents encroaching on each other’s territories or customers.
for what rewards. Franchisees of large fast-food chains might complain about the pricing practices of other franchisees in
9780655702412_CH10.indd 290 3/3/20 11:00 AM

the same image chain. If claims such as cheating on ingredients are made, this must be investigated by the
franchisor. Some car dealers complain about other dealers that sell the same brand stealing sales from them
by being too aggressive in their pricing and advertising.
Vertical conflict refers to conflicts between different levels of the same channel and is even more common.
For example, when Kmart commenced operations in Australia, some paint manufacturers were wary about
supplying them with the manufacturer’s branded product because of the potential backlash that would
occur from other retailers who stocked the brand.
Some conflict in the channel takes the form of healthy competition. This competition can be good for
the channel – without it, the channel might not be proactive or innovative. Sometimes, conflict can damage
the channel. For the channel as a whole to perform well, each channel member’s role must be specified and
channel conflict must be managed. Cooperation, role assignment and conflict management in the channel
are attained through strong channel leadership. The channel will perform better if it contains a company,
agency or mechanism that has the power to assign roles and manage conflict.
In a large company, the formal organisation structure assigns roles and provides the needed leadership;
however, in a marketing channel made up of independent organisations, leadership and power are not
formally set. Traditionally, marketing channels have lacked the leadership needed to assign roles and
manage conflict. In recent years, however, new types of channel organisations have appeared that provide conventional
stronger leadership and improved performance. marketing
channel
Channel organisation A channel consisting
of one or more
Marketing channels perform best when channel members’ roles are well defined and the potential for
independent producers,
channel conflict is recognised and managed. wholesalers and
retailers, each a separate
Conventional marketing channels business seeking to
Historically, marketing channels have been loose collections of independent companies, each showing maximise its own profits,
perhaps even at the
little concern for overall channel performance. In conventional marketing channels, each channel
expense of profits for
member is a separate business seeking to maximise its own profits, perhaps even at the expense of the the system as a whole.
system as a whole. No channel member has much control over the other members, and no formal means
vertical marketing
exist for assigning roles and resolving channel conflict.
network (VMN)
A distribution channel
Vertical marketing networks structure in which
In contrast to conventional marketing channels, a vertical marketing network (VMN) consists of producers, wholesalers
producers, wholesalers and retailers acting as a unified system. One channel member owns the others, and retailers act as a
has contracts with them or wields so much power that all channel members cooperate. The VMN can be unified network; one
channel member owns
dominated by the producer, the wholesaler or the retailer. the others, has contracts
Figure 10.8 contrasts the two types of channel arrangements. with them or wields
We look now at the main types of VMNs, shown in Figure 10.9. Each type uses a different means of so much power that
all channel members
setting up leadership and power in the channel. In a corporate VMN, coordination and conflict management
cooperate.
are attained through common ownership at different levels of the channel. In a contractual VMN, they are
attained through contractual agreements among channel members. In an administered VMN, leadership is corporate vertical
marketing
assumed by one or a few dominant channel members.
network
A vertical marketing
Corporate VMNs network that combines
A corporate vertical marketing network integrates successive stages of production and distribution successive stages
under single ownership. Bristol Paints and its decorator stores are one example. In such corporate networks, of production and
cooperation and conflict management are handled through regular organisational channels. And integrating distribution under single
ownership; channel
the entire distribution chain – from its own design and manufacturing operations to distribution through leadership is established
its own managed stores – has turned Spanish clothing chain Zara into one of the world’s fastest-growing through common
fast-fashion retailers.12 ownership.
9780655702412_CH10.indd 291 3/3/20 11:00 AM

CONVENTIONAL VERTICAL
MARKETING MARKETING
CHANNEL NETWORK
Manufacturer Manufacturer
Wholesaler Wholesaler
Retailer Retailer
Consumer Consumer
Figure 10.8 A conventional marketing channel versus a vertical marketing network
Vertical marketing
networks (VMNs)
Corporate Contractual Administered

VMN VMN VMN
Wholesaler- Retailer Franchise

sponsored cooperatives organisations
voluntary chains
Manufacturer- Manufacturer- Service-firm-

sponsored sponsored sponsored
retailer wholesaler retailer
franchise franchise franchise
network network network
contractual
vertical marketing Figure 10.9 The main types of vertical marketing networks
network
network in which Contractual VMNs
independent firms A contractual VMN consists of independent firms at different levels of production and distribution,
at different levels
which join together through contracts to obtain more economies or sales impact than they could achieve
of production and
distribution join together alone. Contractual VMNs have expanded rapidly in recent years. There are three types of contractual
through contracts. VMNs: franchise organisations, wholesaler-sponsored voluntary chains and retailer cooperatives.
9780655702412_CH10.indd 292 3/3/20 11:00 AM

The franchise organisation is the most common type of contractual relationship. In this type of network, a
channel member, called a franchisor, links several stages in the production–distribution process. Franchising
has been the fastest-growing retailing form in recent years. In Australia alone, some 1060 franchises, with
79 000 individual franchise outlets, account for more than $172 billion revenue and employ some 570 000
people. Despite our awareness of the large global franchise brands, 86 per cent of franchise operations in
Australia are homegrown.13 Almost every kind of business has been franchised – from motels and fast-food
restaurants to dental centres and dating services, from wedding consultants and maid services to fitness
centres and funeral homes.
There are three forms of franchises:
1. Manufacturer-sponsored retailer franchise networks, as found in the car industry: Motor
vehicle manufacturers, such as Ford, Honda and Suzuki, license dealers to sell their cars;
the dealers are independent business people who agree to meet various conditions of sales
and service.
2. M anufacturer-sponsored wholesaler franchise networks, as found in the soft-drink industry:
Coca-Cola’s international distribution strategy, for example, is to license bottlers (wholesalers)
in various markets, such as Coca-Cola Amatil (CCA) in Australasia, that buy the syrup
concentrate from Coca-Cola Corporation (CCC) of Atlanta, Georgia, and then carbonate,
bottle and sell the finished product to retailers in local markets.
3. Service-firm-sponsored retailer franchise networks, in which a service firm licenses a network of
retailers to bring its service to consumers: Examples are found in the car-rental business (Avis,
Europcar, Hertz and Thrifty), apparel retailers (The Athlete’s Foot), the fast-food service
business (Hungry Jack’s (Burger King), KFC, McDonald’s and Pizza Hut), the hotel/motel
business (Holiday Inn/Homestead), the real estate business (Century 21, Ray White, LJ Hooker)
and personal services (James’ Pet Grooming, Jim’s Dog Wash).14
Wholesaler-sponsored voluntary chains are networks in which wholesalers organise voluntary chains of
independent retailers to help them compete with large chain organisations. The wholesaler develops a
program in which independent retailers standardise their selling practices and achieve buying economies
that let the group compete effectively with chain organisations. Examples include small grocery stores
that trade under the IGA banner and larger stores trading under the Supa IGA banner, both owned by the
grocery wholesaler, Metcash.15
Retailer cooperatives are networks in which retailers organise a new, jointly owned business to carry
on wholesaling and, possibly, production. Members buy most of their goods through the retailer co-op
and plan their advertising jointly. Profits are passed back to members in proportion to their purchases.
Non-member retailers may also buy through the co-op but do not share in the profits.
Contractual VMN: Jim’s Mowing is one of the many different service-firm sponsored franchise networks operating
in Australia.
www.jims.net
9780655702412_CH10.indd 293 3/3/20 11:00 AM

The fact that most consumers cannot tell the difference between contractual and corporate VMNs
shows how successfully the contractual organisations compete with corporate chains.
Administered VMNs
administered An administered vertical marketing network coordinates successive stages of production and
vertical marketing distribution – not through common ownership or contractual ties, but through the size and power of one
network of the dominant channel members. Manufacturers of a top brand can obtain strong trade cooperation and
support from resellers. Thus, Arnott’s, Panasonic, Unilever, Kraft and HJ Heinz can command unusual
network that
coordinates successive cooperation from resellers regarding displays, shelf space, promotions and price policies. Large retailers,
stages of production and such as Coles and Woolworths, can exert strong influence on manufacturers that supply the product they
distribution, not through sell, even to the point of insisting on house-brand production.
common ownership
or contractual ties but
through the size and
Horizontal marketing networks
power of one of the Another channel development is horizontal marketing networks, in which two or more companies
parties. at one level join together to follow a new marketing opportunity. By working together, companies can
combine their capital, production capabilities or marketing resources to accomplish more than could
horizontal
any one company working alone. Companies might join forces either with non-competitors, as News
marketing
network Corporation and Telstra Corporation have done in the case of Foxtel; or with competitors, as Microsoft
A channel arrangement (Bing) and Yahoo! did by creating a horizontal internet search alliance.16
in which two or more It is claimed that the development of such strategic alliances is important as Australian products gain
companies at one
distribution in some overseas markets. By working together, companies can gain impact, scale and flexibility
level join together to
follow a new marketing that would not be achieved if each acted by itself. When Australian bands performed in Los Angeles under
opportunity. the banner ‘Wizards of Oz’, they reached more booking agents than they could have achieved individually.
Airlines work with the domestic tourist industry to offer tour packages and promotional activities, such
as visits by travel agents and writers, to expand the overall market of visitors to this country. In Victoria’s
Goulburn Valley, the fruit canners have joined forces to market their product overseas under a single brand
name in order to achieve greater impact and wider distribution. Many Australian products, such as Carbon
Revolution’s carbon fibre car wheels, are marketed overseas under a common brand – Australia Unlimited.17
Such symbiotic marketing arrangements have increased dramatically in recent years and the end is nowhere
in sight.
Multichannel distribution networks

In the past, many companies used a single channel to sell to a single market or market segment. Today, with
the proliferation of customer segments and channel possibilities, more and more companies have adopted
multichannel multichannel distribution networks (see Marketing in Action 10.1). Such multichannel marketing
distribution occurs when a single firm sets up two or more marketing channels to reach one or more customer segments
network (see Figure 10.10).
A multichannel
distribution system Orica’s Dulux paint is sold through company-owned trade stores in Australasia as well as
in which a single firm through competing outlets, such as Bunnings and Mitre 10, and is sold directly via the internet
sets up two or more to professional painters. Inghams and Bartter Enterprises (Steggles) sell dressed chicken portions
marketing channels to KFC as well as to myriad independent takeaway-food shops, and also sell breaded portion-
to reach one or more
marketing segments. controlled chicken products to every part of the food services industry, including McDonald’s
and KFC.
The marketer using such multichannels gains sales with each new channel but also risks offending
existing channels. Existing channels can cry ‘unfair competition’ and threaten to drop the marketer unless
it limits the competition or repays them in some way, perhaps by offering them exclusive models or special
allowances.
9780655702412_CH10.indd 294 3/3/20 11:00 AM

Producer
Distributors
Catalogues,
telephone, Salesforce
internet
Retailers Dealers
Consumer Consumer Business Business

segment 1 segment 2 segment 1 segment 2
Figure 10.10 Multichannel distribution system
Changing channel organisation

Changes in technology and the explosive growth of direct and online marketing are having a profound
impact on the nature and design of marketing channels. One major trend is towards disintermediation – a
term with a clear message and important consequences. Disintermediation occurs when product or disintermediation
service producers cut out intermediaries and go directly to final buyers, or when radically new types of The removal of
marketing channel
channel intermediaries displace traditional ones. intermediaries by goods
Thus, in many industries, traditional intermediaries are dropping by the wayside. For example, Qantas, or service producers,
Virgin Australia and other airlines sell tickets directly to final buyers, thereby cutting travel agents from or the displacement of
their marketing channels altogether for some customers. In other cases, new forms of resellers are displacing traditional resellers by
new and different types
traditional intermediaries. For example, online marketers have taken business from traditional brick-and- of intermediaries.
mortar retailers. Consumers can buy hotel rooms and airline tickets from Wotif.com Australia; and books,
videos, toys, jewellery, sporting goods, consumer electronics, home and garden items, and almost anything
else from Amazon.com – all without ever stepping into a traditional retail store. Online music download
services, such as iTunes and Amazon MP3, are threatening the very existence of traditional music-store
retailers. In turn, streaming music services, such as Pandora, Spotify, TuneIn Radio and Vevo, are now
disintermediating digital download services.
Disintermediation presents both opportunities and problems for producers and resellers. Channel
innovators who find new ways to add value in the channel can displace traditional resellers and reap
the rewards. In turn, traditional intermediaries must continue to innovate to avoid being swept aside.
For example, when Netflix pioneered online DVD-by-mail video rentals in the United States, it sent
traditional brick-and-mortar video stores, such as Blockbuster, into ruin. Then Netflix itself faced
disintermediation threats from an even hotter channel – video streaming. But instead of simply watching
developments, Netflix has led them.
Similarly, superstore booksellers Borders and Barnes & Noble pioneered huge book selections and
low prices, shutting down most small independent bookstores. Then along came Amazon.com, which
threatened even the largest brick-and-mortar bookstores. Amazon.com almost single-handedly bankrupted
Borders in less than 10 years. Now, both offline and online sellers of physical books are being threatened
9780655702412_CH10.indd 295 3/3/20 11:00 AM

Marketing
in Action Multichannel services marketing
10.1
It is rare for marketers of consumer products to use a single marketing channel
to reach their target markets. Mostly, these shopping goods require wide
distribution and therefore many channels are used. However, some marketing
organisations use a single channel and this may allow competitors to make
inroads into their target market through other channels or, by using different
technologies, to bypass the traditional channel. Some use a single channel and
find that channel conflict results.
When Google released the HTC-made Nexus One phone in 2010, it upset
the US telecommunications companies because it decided to distribute the new
smartphone from its own online store. The Nexus and many others of today’s
smartphones and tablets run Google’s Android operating system, which is an
open-source system that puts these mobile phones in direct competition with
Apple’s iPhone and iPad among others (see the sample marketing plan in
Appendix 2 for more information on the range of devices on offer). As Google Google’s CEO, Sundar Pichai, presenting Chrome Web
released the new product further afield in early 2010 – in Europe and Hong Kong,
Store markets apps and games.
AFP/Stringer/Getty
initially – buyers in Australia could not ‘officially’ buy from the Google website.
Their options were to import the Nexus One from Hong Kong sellers; buy through
friends domiciled in the United States, or via a shipping agent such as <www. install apps and games, such as Docs To Go™ office suite, and Angry Birds or
shipito.com/au>; or buy from a few local online retailers who were importing the Bejeweled for their phones, tablets and for the microcomputer running from the
devices from Hong Kong. Google went on to set up its Playstore to market all Cloud through Google’s Chrome browser.
manner of third-party apps, and the Google Store to market Nexus smartphones Other services marketers have likewise turned to multichannels in their
and tablets. However, back in the days of the Nexus One, Google found it needed attempt to maintain competitive advantage. The offering grid shown in Figure 1
to turn to the more traditional sellers for wider distribution. can be used to see how organisations might approach marketing channel design.
In effect, Google has adopted the more usual multichannel approach for The horizontal axis of the grid shows products ranging from customised products
its smartphone. Even so, it still takes a direct channel approach for those who through to commodities. The vertical axis shows levels of distribution-value-
have purchased any smartphone and/or tablet running Android and who want to added service, ranging from low to high.
High
Private
trading
Distribution
Focus
value-added
Internet
trading
Low
Customised Commodity
Figure 1 Offering grid
9780655702412_CH10.indd 296 3/3/20 11:00 AM

Taking the example of a financial services institution, such as a bank, their personal brokers in an opulent environment. Other services are offered over
superannuation fund management offering might be shown in the top-left cell. the telephone or via electronic kiosks and automatic teller machines (ATMs),
Superannuation funds management is a highly customised service that requires with touch screens allowing more astute investors to interface with their
much personal interaction between customers and the bank’s relationship stockbroking service remotely. The same concept can be applied to any service.
executive, as well as requiring information and execution. In contrast, a service
Source: This discussion is adapted from Distribution: A Competitive Weapon, The MAC
that allows a stockbroker’s customers to do their own share trading from home or Group: Cambridge, MA, 1985, pp. 14–18. Also see Adam Lashinsky, ‘Sundar Pichai: Why
office over the internet would be placed at the other end of the continuum. Google can afford to be patient’, Fortune, 29 May 2015, <fortune.com/2015/05/29/google-
pichai-android/>, accessed July 2016.
This product might be considered simple and requiring little interaction, in much
the same way that architects and engineers use the telephone to maintain
contact with building sites. Thus, little value is added by the channel. Questions
Each cell on the diagonal represents a potential opportunity if there is sufficient ❶ Select a service of your choice. Can you apply the concept discussed in this
demand. Companies that use only one channel for several products and customer box to that service?
groups will inevitably face increased competition. As customers become more ❷ Might this concept of multichannel services marketing apply to the retailing
knowledgeable about a service and as technology permits further automation, an of streamed television shows and movies? If so, how would the concept
increasing number of channels will open in the lower right-hand cells of the grid, apply?
thus presenting competition to higher distribution-value-added channels. ❸ What types of businesses might benefit from using multichannel services
This is why stockbrokers, such as JB Were, offer a range of services. Those marketing? What types of businesses might be threatened by multichannel
services provided for the very wealthy are highly customised and offered by services marketing?
by digital-book downloads and e-readers, and print-on-demand retailers. Rather than yielding to digital
developments, however, Amazon.com is leading them, with its highly successful Kindle e-readers and
tablets. By contrast, Barnes & Noble – the giant that put so many independent bookstores out of business –
was a latecomer with its struggling Nook e-reader and now finds itself locked in a battle for survival.18
Like resellers, to remain competitive, product and service producers must develop new channel
opportunities, such as the internet and other direct channels. However, in developing these new channels,
product and service producers often end up in direct competition with their established channels, resulting
in conflict. To ease this problem, companies look for ways to make going direct a plus for the entire channel.
For example, Volvo Car Group (now owned by Chinese car maker, Geely) recently announced plans to
start selling Volvo vehicles online in all of its markets. Some 80 per cent of Volvo buyers already shop online
for other goods, so cars seem like a natural extension. Few car makers have tried selling directly, with the
exception of Tesla, which sells its all-electric cars online, bypassing dealers altogether. Other car companies
worry that selling directly would alienate their independent dealer networks. ‘If you say e-commerce,
initially dealers get nervous,’ says Volvo’s head of marketing. So, to avoid channel conflicts, Volvo will pass
all online sales through established dealers for delivery. In that way, boosting sales through direct marketing
will benefit both Volvo and its channel partners.19
Channel design and management

decisions
We now look at several channel-design decisions manufacturers face. In designing marketing channels,
manufacturers struggle between what is ideal and what is practical. A new firm with limited capital usually
starts by selling in a limited market area. In this case, deciding on the best channels might not be a problem;
the problem might simply be how to convince one or a few good intermediaries to handle the product line.
If successful, the new firm can branch out to new markets through existing intermediaries. In smaller
markets, the firm might sell directly to retailers; in larger markets, it might sell through distributors. In one
part of the country, it might grant exclusive franchises; in another, it might sell through all available outlets.
9780655702412_CH10.indd 297 3/3/20 11:00 AM

Then it might add an online store that sells directly to hard-to-reach customers. In this way, channel
systems often evolve to meet market opportunities and conditions.
For maximum effectiveness, however, channel analysis and decision making should be more
marketing purposeful. Marketing channel design calls for (1) analysing consumer needs, (2) setting channel
channel design objectives, (3) identifying major channel alternatives and (4) evaluating those alternatives. We discuss each of
Analysing consumer
needs, setting these components below.
channel objectives,
identifying major Analysing consumer needs
channel alternatives As we have seen. marketing channels are part of the overall customer value delivery network. Each channel
and evaluating those
member and level adds value for the customer. Thus, designing the marketing channel starts with finding out
alternatives.
what target consumers want from the channel. Do consumers want to buy nearby or are they willing to travel
to more centralised locations? Would customers rather buy in person, by phone or online? Do they value
breadth of assortment or do they prefer specialisation? Do consumers want many add-on services (delivery,
installation, repairs) or will they obtain these services elsewhere? The faster the delivery, the greater the
assortment provided, and the more add-on services supplied, the greater the channel’s service level.
Providing the fastest delivery, the greatest assortment and the most services, however, may not be
possible, practical or desired. The company and its channel members may not have the resources or skills
needed to provide all the desired services. Also, higher levels of service result in higher costs for the channel
and higher prices for consumers. The success of modern discount retailing shows that consumers often
accept lower service levels in exchange for lower prices. Many companies, however, position themselves on
higher service levels, and customers willingly pay the higher prices.
Setting channel objectives

Companies should state their marketing channel objectives in terms of targeted levels of customer service.
Usually, a company can identify several segments wanting different levels of service. The company should
decide which segments to serve and the best channels to use in each case. In each segment, the company
wants to minimise the total channel cost of meeting customer service requirements.
The company’s channel objectives are also influenced by the nature of the company, its products,
its marketing intermediaries, its competitors and the environment. For example, the company’s size and
financial situation determine which marketing functions it can handle itself and which it must give to
intermediaries. Companies selling perishable products, for example, may require more direct marketing to
avoid delays and too much handling.
In some cases, a company may want to compete in or near the same outlets that carry competitors’ products.
For example, Asko and other appliance makers want their products displayed alongside competing brands to
facilitate comparison shopping. In other cases, companies may avoid the channels used by competitors.
Finally, environmental factors, such as economic conditions and legal constraints, may affect channel
objectives and design. For example, in a depressed economy, producers will want to distribute their goods
in the most economical way, using shorter channels and dropping unneeded services that add to the final
price of the goods.
Identifying major channel alternatives

When the company has defined its channel objectives, it should next identify its major channel alternatives
in terms of the types of intermediaries, the number of intermediaries and the responsibilities of each channel
member.
Types of intermediaries
A firm should identify the types of channel members available to carry out its channel work. Most companies
face many channel member choices. Using many types of resellers in a channel provides both benefits and
drawbacks.
9780655702412_CH10.indd 298 3/3/20 11:00 AM

Number of marketing intermediaries

Companies must also determine the number of channel members to use at each level. Three strategies are
available: intensive distribution, exclusive distribution and selective distribution. Producers of convenience
products and common raw materials typically seek intensive distribution – a strategy in which they intensive
stock their products in as many outlets as possible. These products must be available where and when distribution
A distribution strategy in
consumers want them. For example, toothpaste, chocolates and other similar items are sold in millions
which companies stock
of outlets to provide maximum brand exposure and consumer convenience. Kraft, Coca-Cola, Kimberly- their products in as
Clark and other consumer-goods companies distribute their products in this way. many outlets as possible.
By contrast, some producers purposely limit the number of intermediaries handling their products.
The extreme form of this practice is exclusive distribution, in which the producer gives only a limited exclusive
number of dealers the exclusive right to distribute its products in their territories. Exclusive distribution distribution
A distribution strategy
is often found in the distribution of luxury brands. Breitling watches – positioned as ‘Instruments for
in which companies give
Professionals’ and selling at prices from $5000 to more than $100 000 – are sold by only a few authorised only a limited number
dealers in any given market area. Exclusive distribution enhances Breitling’s distinctive positioning and of dealers the exclusive
earns greater dealer support and customer service. right to distribute the
companies’ products in
Between intensive and exclusive distribution lies selective distribution – the use of more than one the dealers’ territories.
but fewer than all of the intermediaries that are willing to carry a company’s products. Most consumer
electronics, furniture and home appliance brands are distributed in this manner. For example, outdoor selective
power-equipment maker STIHL does not sell its chain saws, blowers, hedge trimmers and other products distribution
through mass merchandisers, such as Bunnings. Instead, it sells through a select group of independent A distribution strategy
in which companies
hardware and lawn-and-garden dealers. By using selective distribution, STIHL can develop good working
use more than one but
relationships with dealers and expect a better-than-average selling effort. Exclusive distribution also fewer than all of the
enhances the STIHL brand’s image and allows for higher markups resulting from greater value-added intermediaries that are
dealer service. willing to carry their
products.
Evaluating the major alternatives
After selecting individual channel members comes the task of managing and motivating channel members.
When selecting intermediaries, the company should determine what characteristics distinguish the better
ones. It will want to evaluate each channel member’s years in business, other lines carried, location, growth
and profit record, cooperativeness and reputation.
Channel management decisions

The practice of maintaining strong partner relationship management to forge long-term partnerships
with channel members is particularly important. In managing their selected channel members, many
companies are now installing integrated high-tech partnership relationship management (PRM) systems
to coordinate their whole-channel marketing efforts. Just as they use customer relationship management
(CRM) software systems to help manage relationships with important customers, companies can now use
PRM and supply chain management (SCM) software to help recruit, train, organise, manage, motivate and
evaluate relationships with channel partners.

We will stop again here for a moment, and apply the marketing ● What are the roles and responsibilities of the members in
channel concepts we have discussed so far. each channel? How well do these channel members work
● Compare the Volvo, Tesla and Ford channels for motor together towards overall channel success?
vehicles. Draw a diagram that shows the types of
intermediaries in each channel. What kind of channel system
does each company use?
9780655702412_CH10.indd 299 3/3/20 11:00 AM

Retailing
retailing What is retailing? We all know that Bunnings, Costco, David Jones, Harris Scarfe and Myer are retailers,
All activities involved but so too are Avon representatives, the local Westin Stamford Hotel, a bank or credit union, a doctor
in selling goods or
services directly to final
seeing patients, and the travel retailer Flight Centre using both traditional and online marketing channels
consumers for their via <www.flightcentre.com.au>. We define retailing as all the activities involved in selling goods or services
personal, non-business directly to final consumers for their personal, non-business use.
use.
Retailing: Connecting brands with consumers

Retailers connect brands with consumers in the final phases of the buying process and at the point of
shopper purchase. In fact, many marketers are now embracing the concept of shopper marketing, using
marketing point-of-purchase promotions and advertising to extend brand equity to ‘the last mile’ and encourage
Using point-of-sale favourable point-of-purchase decisions. Shopper marketing involves focusing the entire marketing
promotions and
advertising to extend process – from product and brand development to logistics, promotion and merchandising – towards
brand equity to ‘the last turning shoppers into buyers at the point of sale.
mile’ and encourage Shopper marketing builds around what P&G calls the ‘First Moment of Truth’ – the critical three
favourable in-store
to seven seconds that a shopper considers a product on a store shelf.20 However, the dramatic growth
purchase decisions.
of online and mobile shopping has added new dimensions to shopper marketing. The retailing
‘moment of truth’ no longer takes place only in stores. Instead, Google defines a ‘zero moment
of truth’, when consumers begin the buying process by searching for and learning about products
online.
Today’s consumers are increasingly omni-channel buyers who make little distinction between in-store
and online shopping and for whom the path to a retail purchase runs across multiple channels. For these
buyers, a particular purchase might consist of researching a product online and buying it from an online
retailer, without ever setting foot in a retail store. Alternatively, they might use a smartphone to research
a purchase on the fly, or even while in retail store aisles. For example, it is common to see a consumer
omni-channel
retailing examining an item on a shelf at Kmart or Big W while at the same time using a mobile app to look for
Creating a seamless coupons or check product reviews and prices online.
cross-channel buying Thus, these days, shopper marketing and the ‘point of purchase’ go well beyond in-store buying. They
experience that
involve consumers working across multiple channels as they shop. Influencing consumers’ buying decisions
integrates in-store,
online and mobile calls for omni-channel retailing, creating a seamless cross-channel buying experience that integrates
shopping. in-store, online and mobile shopping.21
Types of retailers
Many institutions, financial institutions, manufacturers, wholesalers and retailers are engaged in
retailer retailing. But most retailing is done by retailers – businesses whose sales come primarily from retailing.
A business whose sales And, although most retailing is done in retail stores, in recent years direct and online retailing have
come primarily from
retailing.
grown: interacting and fulfilling orders or transacting by mail, by telephone, by door-to-door contact, by
vending machines, by numerous electronic means including the internet and mobile phone. Regardless
of type, retailing plays a very important role in most marketing channels. Ironically, at least 40 per cent
of all consumer decisions are made in or near the store.
Of course, every well-designed marketing effort focuses on customer buying behaviour. What
differentiates the concept of shopper marketing from customer buying is the suggestion that these efforts
should be coordinated around the shopping process itself.
Retail stores come in all shapes and sizes, and new retail types continue to emerge. Retail stores can be
classified by one or more of four characteristics: (1) amount of service, (2) product line sold, (3) relative prices
and (4) how they are organised; this last characteristic now includes whether they have a physical presence,
9780655702412_CH10.indd 300 3/3/20 11:00 AM

Table 10.1 Major store retailer types

Type Description Examples
Specialty stores Carry a narrow product line with a deep assortment, such as apparel The Athlete’s Foot, JB Hi-Fi, Dick
stores, sporting-goods stores, furniture stores, florists and bookstores. Smith, JayCar, Tandy, Sydney’s
A clothing store would be a single line store, a men’s clothing store Lounges, Swarovski Crystal
would be a limited-line store and a men’s custom shirt store would be
a superspecialty store.
Department stores Carry several product lines – typically, clothing, home furnishings and David Jones, Myer, Harris Scarfe
household goods – with each line operated as a separate department
managed by specialist buyers or merchandisers.
Supermarkets A relatively large, low-cost, low-margin, high-volume, self-service Coles Supermarkets, Woolworths,
operation designed to serve the consumers’ needs for grocery and ALDI, Bi-Lo, IGA, Richies
household products.
Convenience stores Relatively small stores located near residential areas, open long 7-Eleven, Coles Express, NightOwl,
hours seven days a week, and carrying a limited line of high-turnover Food Plus
convenience products at slightly higher prices.
Discount stores Carry standard merchandise sold at lower prices with lower margins Big W, Kmart, Target
and higher volumes.
Mass merchants Carry a large assortment of home and home improvement Mitre 10, Retravision
merchandise, including DIY hardware items.
Off-price retailers Sell merchandise bought at less-than-regular wholesale prices and Costco, Metcash’s Campbells
sold at less than retail prices, often leftover goods, seconds, overruns Cash & Carry
and irregulars obtained at reduced prices from manufacturers or
other retailers. These include factory outlets owned and operated by
manufacturers, independent off-price retailers owned and operated
by entrepreneurs or by divisions of larger retail corporations, and
warehouse (or wholesale) clubs selling a limited selection of brand-
name groceries, appliances, clothing and other goods at deep discounts
to consumers who pay membership fees.
Superstores Very large stores traditionally aimed at meeting consumers’ total needs Bunnings, IKEA (category killers)
for routinely purchased food and non-food items. Includes supercentres,
combined supermarket and discount stores, and category killers, category killer
which are the size of aircraft hangars and carry a deep assortment in a A giant specialty store
particular category and have knowledgeable staff. that carries a very
deep assortment of a
particular line.
an online presence or both. The most important types of retail stores are described in Table 10.1 and
discussed in detail in the following sections.
self-service
Amount of service retailer
A retailer that provides
Different products need different amounts of service, and customer service preferences vary. To meet these
few or no services to
varying service needs, retailers may offer one of three service levels: self-service, limited service and full service. shoppers; shoppers
Self-service retailers serve customers who are willing to perform their own locate–compare–select perform their own
process to save money. Today, self-service is the basis of all discount operations and is typically used by locate–compare–select
process.
sellers of FMCGs (e.g. supermarkets) and nationally branded, fast-moving shopping goods (such as those
found in Kmart, Target or Big W). limited-service
Limited-service retailers, such as hardware chains – even the category killers – provide limited, retailer
but technically competent, sales assistance because they carry shopping goods about which many customers A retailer that provides
only a limited number of
need less information. They also offer additional services, such as credit and merchandise return, that may services to shoppers.
not be offered by low-service stores. The increased operating costs of smaller stores result in higher prices,
although, in hardware and homewares retailing, the category-killer shed concept pioneered by Bunnings full-service
and IKEA has changed the face of retailing in these sectors. retailer
A retailer that provides a
Full-service retailers, such as high-end specialty stores (Swarovski Crystal) and first-class full range of services to
department stores (David Jones), may be distinguished by the fact that salespeople assist customers in every shoppers.
9780655702412_CH10.indd 301 3/3/20 11:00 AM

phase of the shopping process. Full-service stores usually carry more specialty goods and slower-moving
items, such as cameras, jewellery and fashions, for which customers like to be ‘waited on’. These stores
provide more-liberal return policies, various credit plans, free delivery, home servicing, and extras such as
cafés and restaurants. More services mean higher operating costs, costs which are passed along to customers
as higher prices. However, service is a point of difference well recognised by customers.
Digital retailers may also be distinguished on the basis of the service they provide. A purely transaction-
based e-commerce digital retailer, such as DStore.com.au, is similar to WishList.com.au, which allows a
form of customer personalisation and gift reminders, even though both offer to send customers information
on new offers and the product assortment carried. Infomediaries, such as NineMSN.com.au, offer greater
personalisation to members, as well as email and other services.
Product line
specialty store Retailers can also be classified by the length and breadth of their product assortments. Among the most
A retail store that carries important types are the specialty store, the department store, the supermarket, the convenience store, the superstore
a narrow product line and the service business.
with a deep assortment
A specialty store carries a narrow product line with a deep assortment within that line. Examples
within that line.
include stores selling sporting goods, furniture, books, music and games, electronics, flowers or toys.
combination store Specialty stores can be further classified by the narrowness of their product lines. A clothing store is a
A combined grocery single-line store, a men’s clothing store is a limited-line store and a men’s custom shirt store is a fine-line
and general merchandise
specialty store.
store.
Today, specialty stores are flourishing for several reasons. The increasing use of market segmentation,
department store market targeting and product specialisation has resulted in a greater need for stores that focus on specific
A retail organisation
products and segments. Moreover, because of changing consumer lifestyles and the increasing number of
that carries a wide
variety of product two-income households, many consumers have greater incomes but less time to spend shopping. They are
lines, typically clothing, attracted to specialty stores that provide high-quality products, convenient locations, longer opening hours,
home furnishings and excellent service and quick entry and exit. The growth in Australian and New Zealand specialty store sales
household goods; each
line is operated as a
has been greatest among household goods retailers, with pharmacies also showing growth.
separate department, Combination stores often merchandise a combination of products normally associated with specialty
which may be managed stores, such as pharmaceutical products, grocery products and general merchandise. They are a growing
by specialist buyers store type as the competition facing specialty stores becomes fiercer due to larger chains encroaching
or merchandisers, or
this function may be further into specialty retailing. For example, ALDI, Costco, Coles and Woolworths are involved in liquor
performed centrally. retailing, while the middle two are also involved in petrol retailing. Woolworths also planned to sell chemist-
dispensed pharmaceuticals from its stores until it was prevented
from doing so by the Australian government.
A department store carries a wide variety of product
lines, typically clothing, home furnishings and household
goods. Each line is operated as a separate department, which
may be managed by specialist buyers or merchandisers, or this
function may be performed centrally. Examples of well-known
department stores in Australia include David Jones, Harris
Scarfe and Myer. New Zealand has The Farmers Trading
Group and Kmart, while Great Britain has Marks & Spencer,
which is renowned for clothing, homewares and ready-to-eat
foods, and has been one of the most profitable retail groups in
the world. Singapore and Malaysia sport their own department
Department stores: Since 1838, David Jones department stores stores such as Tsangs and Robinsons.
have offered world-class service. Department stores such as David Jones have opened
Bloomberg/Getty
suburban stores and often add ‘unique’ attractions to meet
9780655702412_CH10.indd 302 3/3/20 11:00 AM

the discount threat presented by Kmart and Big W. Still others have remodelled their stores or set up
‘boutiques’ that compete with specialty stores. Since the 1960s, many large department stores have been
joining, rather than fighting, the competition by diversifying into discount and specialty stores.
Supermarkets are the most frequently shopped type of retail store. They are large, low-cost, low- supermarket
margin, high-volume self-service stores that carry a wide assortment of food, laundry and household A large, low-cost, low-
margin, high-volume,
products. The supermarket sector is the largest of the retailing groups in Australia, with turnover self-service store that
accounting for 34 per cent of total retail turnover of nearly $12 billion in 2013. The top two food and carries a wide variety
grocery retailers – Coles and Woolworths – account for some 70 per cent share of the market, a large of food, laundry and
jump from 35 per cent in 1975.22 household products.
In the United Kingdom, Asda, Sainsbury’s and Tesco hold over 60 per cent of that market, while in
the United States the lean, mean distribution machine that is Walmart has sales revenue of well over
US$1 billion a day.23 In Australia and New Zealand, Woolworths and Coles compete vigorously with
relative newcomer ALDI and the smaller IGA chain for a share of the $120+ billion food and grocery
market.24 Wesfarmers is the largest retail group in Australia, with many different types of retailers:
Bunnings and Homebase (home improvement stores); Coles Supermarkets, Bi-Lo and Coles Online
(grocery); Pharmacy Direct; Dan Murphy’s, First Choice, Liquorland, Spirit Hotels and Vintage Cellars
(alcohol); Kmart, Target and Target Home (apparel and houseware); Officeworks (officeware) and Coles
Express (fuel and convenience stores); and Coles Financial Services (insurance and credit cards).25
Supermarkets continue to improve their facilities and services to attract more customers. Typical
improvements are better locations, improved décor, longer trading hours, EFTPOS, home delivery, and
specialised services such as banking and even car and truck fuel. Although consumers have always expected
supermarkets to offer good prices, convenient locations and speedy checkout, today’s more affluent and
sophisticated food buyer wants more. Many supermarkets, therefore, are ‘moving up-market’, providing
‘from-scratch’ bakeries, gourmet deli counters and seafood departments. Finally, to attract more customers,
large supermarket chains are more likely to customise their stores for individual neighbourhoods.
Thus, a Woolworths store in Double Bay in Sydney’s eastern suburbs, or in Elsternwick in Melbourne’s
inner eastern suburbs, is more likely to carry kosher foods and delicacies such as smoked eel than is a store
in the western suburbs of Melbourne or Sydney. Costco goes so far as to target Jewish families.26 They tailor
store size, product assortments, prices and promotions to the economic and ethnic needs of local markets.
The advent of electronic scanning at the checkout and quick-response retail systems has made this practice
more cost-effective.
The trend now is for Australasian supermarkets to try to reduce their costs and increase sales further by
emulating their larger US (e.g. Walmart) and UK (e.g. Tesco) brethren. They are introducing more store-
branded merchandise to replace manufacturers’ brands and, to capitalise on their automated reordering
systems, they are cramming more merchandising space – shelving and gondola ends – into their stores, as
well as carrying many lines formerly carried by the mass merchants Big W and Kmart. They continually
need to improve their operations and protect their market as international competitors, such as ALDI
(Germany-based) and Costco (US-based), move deeper into the Australasian marketplace.
New competitors, such as Costco, represent a major threat since they dwarf the Australian retailers
and may apply margins that are as low as 9 per cent of the retail selling price. Costco is one of the world’s
largest retailers, with an annual global turnover of over US$150 billion – larger than the Australian food
and grocery market – gained from some 700 ‘warehouses’ throughout the world. While the biggest of
Costco’s megastores is larger than a Bunnings shed at 19 000 square metres, it is the sale of memberships to
some 85.5 million customers that makes Costco different, and makes them money. In this respect, they are
more like Metcash’s Campbells Cash & Carry, which caters to those independent retailers and food service
operators who join as members.27
9780655702412_CH10.indd 303 3/3/20 11:00 AM

convenience store Convenience stores (C-stores) are small stores that carry a limited line of high-turnover
(C-store) convenience goods. Examples include NightOwl, 7-Eleven and Food Plus. These stores are located near
A small store, located
residential areas and remain open for long hours, seven days a week. Convenience stores must charge high
near a residential area,
open long hours seven prices to make up for higher operating costs and lower sales volume. But they satisfy an important consumer
days a week, carrying a need. Consumers use convenience stores for ‘fill-in’ purchases during off-peak hours or when time is short,
limited line of high- and they are willing to pay for the convenience. The number of convenience stores has increased in recent
turnover convenience
years. Because they have taken market share from supermarkets, supermarket chains have sought, and won,
goods.
legislative change to trading hours to allow them to stay open for longer. This, in turn, has had an impact
on convenience stores. Their clientele is biased towards young people who are out late at night and want a
range of products, including petrol and snacks.
C-stores are constantly revamping their offerings in an attempt to remain strongly differentiated
from other types of food stores, while adapting to today’s fast-paced consumer lifestyles. Because of
their location, many service station sites operated by Shell and BP contain convenience stores, and
many 7-Eleven stores sell fuel through a strong and attractive franchised network of service stations,
convenience stores and truckstops. Franchising has been a stimulant to the growth of convenience stores.
For example, BP franchises such operations as New Wave carwash, BP Car Care workshops and BP
Express convenience stores.
mass merchant Mass merchants, such as Mitre 10 and Retravision, carry a large assortment of home and home
A type of store carrying improvement merchandise. They are dominated by the superstore category killer in this class. For example,
a large assortment of
Bunnings carries over 40 000 products, compared with some 12 000 lines carried by a supermarket. Bunnings
merchandise, such as
hardware (Bunnings Warehouse pioneered the ‘shed’ concept in Australian hardware and home improvement retailing and now
Warehouse), electrical has a national brand. However, archrival Woolworths entered the market with Masters Home Improvement
goods (Harvey Norman) Stores and then withdrew. Bunnings has now expanded into the United Kingdom.
or personal and health
care (Priceline). Superstores and hypermarkets combine supermarket, discount and warehouse retailing. A typical
superstore or hypermarket might have 50 or more checkout counters. They carry more than routinely
superstore purchased goods such as groceries, also selling furniture, appliances, clothing and many other items found
A store almost twice
the size of a regular in department and discount stores. The hypermarket operates like a warehouse. Products in wire ‘baskets’
supermarket, carrying are stacked high on metal racks; forklifts move through the aisles during selling hours to restock shelves.
a large assortment of The store gives discounts to customers who carry their own heavy appliances and furniture out of the store.
routinely purchased
Hypermarkets, such as those operated by Carrefour, have grown quickly in Europe, the United States and
food and non-food
items, and offering such Asia. However, they are not successful everywhere they open. Their very size often seems to act against
services as dry cleaning, them. As the populations of developed countries become ‘greyer’, these older, time-rich shoppers are
photo developing, bill unlikely to want to walk the distances required when shopping in hypermarkets.
paying, car care and pet
care. Superstores and hypermarkets have not been a feature of Australian retailing, apart from Aspley
Hypermarket in Queensland. Thus far, the growth of superstores has been constrained by the generally
hypermarket
A huge store that ‘overshopped’ nature of the Australian market and the absence of large concentrations of population. In the
combines supermarket, United States, they have all but been abandoned as a business design, although WalMart continues to open
discount and warehouse some 120 per year and has some 3400 superstores.28
retailing; in addition to
For many businesses, the ‘product line’ is actually a service. Remember, all retailers are classified as being
food, it carries furniture,
appliances, clothing and in the service sector. However, this class of retailer does not carry tangible goods to any great extent.
many other items. Service businesses include hotels and motels, banks, airlines, universities, hospitals, movie theatres,
tennis clubs, theme parks, casinos, bowling alleys, restaurants, repair services, hair-care salons and dry
service business
cleaners. Service retailers in Australia are growing faster than product retailers, and each service industry has
A business where the
product line is actually its own retailing context. All banks, building societies and credit unions have followed the United Kingdom’s
a service – for example, First Direct and ANZ Direct in Australia and found new ways to distribute their services. Banks use
hotels, motels, airlines electronic dispensing machines, direct deposit and online services (internet and phone). Health organisations
and restaurants.
are changing the way consumers receive and pay for health services. H&R Block has built a franchise
network to help consumers pay as little as legally possible to the Australian Taxation Office. A listing of
9780655702412_CH10.indd 304 3/3/20 11:00 AM

theme parks around the world is astounding for the variety of services on offer: Disneyland/Disney World/
Disney Epcot (United States, France, Hong Kong and Japan); Jurassic Park, California (billed as ‘the most
technically advanced theme ride in entertainment history’); Movie World (Gold Coast, Australia); Sea
World (Gold Coast, Australia); Wet ‘n’ Wild (Gold Coast, Australia); LEGOLAND® (Odense, Denmark);
Tivoli (Copenhagen); Prater (Vienna); Fantasy Island (Singapore); Ocean Park (Hong Kong); and Blackpool
(United Kingdom).29 However, the theme hotels/casinos in Las Vegas and Macau, such as Caesar’s Palace,
Treasure Island and The Venetian, must take the award for scale and technology usage.
Relative prices
Retailers can also be classified according to their prices. Most retailers charge regular prices and offer
normal-quality goods and customer service. Some offer higher-quality goods and service at higher prices.
The retailers that feature low prices are discount stores and ‘off-price’ retailers. discount store
A discount store sells standard merchandise at lower prices by accepting lower margins and selling A retail institution
higher volumes. The use of occasional discounts or specials does not make a discount store. A true discount that sells standard
merchandise at lower
store regularly sells its merchandise at lower prices, offering mostly national brands, not inferior goods.
prices by accepting
Early discount stores cut expenses by operating in warehouse-like facilities in low-rent but heavily travelled lower margins and selling
districts. They slashed prices, advertised widely and carried a reasonable width and depth of products. The at higher volume.
most common examples specialised in selling refrigerators and other major electrical appliances off-price retailer
(whitegoods), smaller appliances including CD players, television sets and video recorders (brown goods), A retailer that buys
at less than regular
and furniture.
wholesale prices and
When the major discount stores traded up, a new wave of off-price retailers moved in to fill the low- sells at less than retail,
price, high-volume gap. Ordinary discounters buy at regular wholesale prices and accept lower margins to usually carrying a
keep prices down. On the other hand, off-price retailers – factory outlets, independents and warehouse changing and unstable
collection of higher-
clubs – buy at less than regular wholesale prices and charge consumers less than retail. They tend to carry quality merchandise,
a changing and unstable collection of higher-quality merchandise, often leftover goods, overruns and often leftover goods.
irregulars obtained at reduced prices from manufacturers or other retailers. Off-price retailers have made
direct factory
the biggest inroads in clothing, accessories and footwear. Whether we look in Australasia, the United
outlet (DFO)
Kingdom or the United States, we find that 2 Dollar shops seem to be exploding in number. The United An off-price retailing
Kingdom has its 2 Pound shops, and the United States has Dollar General and Family Dollar, among operation owned
others. Some are chains, while others are independent stores. and operated by
manufacturers,
Direct factory outlets (DFOs) are owned and operated by manufacturers and retailers alike and normally carrying the
may carry the manufacturer’s or retailer’s surplus, or discontinued or irregular goods. Increasingly, these manufacturers’ surplus,
outlets group together in factory outlet malls – such as those adjacent to Moorabbin Airport in south-east discontinued or irregular
Melbourne and Essendon Airport in Melbourne’s North; and South Wharf, where dozens of outlet stores goods.
offer prices as low as 50 per cent below retail on a wide range of items. warehouse club
Warehouse clubs (or wholesale clubs) sell a limited selection of brand-name grocery items, (wholesale club)
appliances, clothing and a hotchpotch of other goods at deep discounts to members who pay an annual An off-price retailer
that sells a limited
membership fee. Costco is one wholesale club that operates in huge, low-overhead, warehouse-like facilities
selection of brand-
and offers few frills. Often, stores are draughty in winter and stuffy in summer. Customers themselves must name grocery items,
wrestle furniture, heavy appliances and other large items into the checkout line. They are usually required to appliances, clothing and
buy in bulk rather than select individual packs. Such clubs make no home deliveries and accept no credit cards. a hotchpotch of other
goods at deep discounts
But they do offer rock-bottom prices, typically 20–40 per cent below supermarket and discount-store prices.
to members who pay an
annual membership fee.
Organisational approach
Although there are many more independently owned retail stores than any other form of ownership in
Australia and New Zealand, a feature of Australia in particular is the dominance of all retailing turnover by
a limited number of firms. This has implications for many marketers, who have to gain distribution with
key retailers if they are to achieve market coverage. We have noted the dominance of Wesfarmers after
9780655702412_CH10.indd 305 3/3/20 11:00 AM

it acquired the Coles Group, and also of Woolworths Limited. In this section, we discuss corporate chains,
voluntary chains, retailer cooperatives and franchise organisations.
chain stores Chain stores are two or more outlets that are commonly owned and controlled, employ central
(corporate chain)
Two or more outlets buying and merchandising, and sell similar lines of merchandise. Corporate chains appear in all types
that are commonly of retailing but they are strongest in consumer electronics, department stores, grocery stores, hardware
owned and controlled, stores, pharmacies, sporting and dress shoe stores, and clothing stores. Corporate chains gain many
employ central buying
advantages over independents. Their size allows them to buy in large quantities at lower prices. They can
and merchandising,
and sell similar lines of afford to hire specialists to deal with such areas as pricing, promotion, merchandising, inventory control
merchandise. and sales forecasting. Moreover, chains gain promotional economies because their advertising costs are
voluntary chain spread over many stores and a large sales volume.
A wholesaler-sponsored The great success of corporate chains caused many independents to band together in one of two forms
group of independent of contractual association. One is the voluntary chain – a wholesaler-sponsored group of independent
retailers that engages
retailers that engages in group buying and common merchandising. IGA food and grocery stores are one
in group buying and
common merchandising. example. The other form of contractual association is the retailer cooperative – a group of independent
retailers who band together to set up a jointly owned central wholesale operation and conduct joint
retailer
merchandising and promotion efforts. These organisations give independents the buying and promotion
cooperative
A group of independent economies they need to meet the prices of corporate chains.
retailers who band A franchise is a contractual association between a manufacturer, wholesaler or service organisation
together to set up a (the franchisor) and independent business people (franchisees) who buy the right to own and operate one
jointly owned central
or more units in the franchise system. The main difference between a franchise and other contractual
wholesale operation
and conduct joint systems (voluntary chains and retail cooperatives) is that franchise systems are normally based on a unique
merchandising and product or service, on a method of doing business, or on the trade name, goodwill or patent that the
promotion efforts. franchisor has developed. Franchising has been prominent in fast foods, motels, petrol stations, tax-
franchise preparation services, health and fitness centres, car rentals, hairdressing, real estate, travel agencies, and
A contractual dozens of other product and service areas.
association between
One of the best-known and most successful franchisers, McDonald’s, now has more than
a manufacturer,
wholesaler or 36 000 restaurants in more than 100 countries, including more than 900 in Australia and 160 in New
service organisation Zealand. It serves 70 million customers a day and earns more than US$98 billion in annual system-
(a franchisor) and wide sales. More than 80 per cent of McDonald’s restaurants worldwide are owned and operated by
independent business
franchisees. Not far behind is Subway, one of the fastest-growing franchise restaurants, with system-
people (franchisees)
who buy the right to wide sales of US$18.8 billion and more than 43 000 stores in 110 countries, including more than 1400
own and operate one in Australia.30
or more units in the The compensation received by the franchisor might include an initial fee, a royalty on sales, lease fees
franchise system.
for equipment and a share of the profits. McDonald’s franchisees might invest as much as $1 million in
initial start-up costs for a franchise. Then McDonald’s charges a percentage service fee and a rental charge
on the franchisee’s volume. It also requires franchisees to go to ‘Hamburger University’ for three weeks to
learn how to manage the business.

Pause here and think about all the different kinds of retailers you specialty store on the other. Then shop for the product online.
deal with regularly, many of which overlap in the products they Compare the three shopping outlets in terms of product
carry. assortment, services and prices. If you were going to buy the
● Pick a familiar product: a camera, microwave oven, lawn tool, product, where would you buy it, and why?
smartphone or something else. Shop for this product at two ● What does your shopping trip suggest about the futures of the
very different store types – say, a discount store or category competing store formats that you sampled?strategy does it
killer on the one hand and a department store or smaller use?
9780655702412_CH10.indd 306 3/3/20 11:00 AM

Wholesaling
Wholesaling includes all activities involved in selling goods and services to those buying for resale or wholesaling
business use. A retail bakery acts like a wholesaler when it sells pastry to the local hotel. However, we call All activities involved
in selling goods and
wholesalers those firms engaged primarily in wholesaling activity. Wholesalers differ from retailers in services to those buying
several ways. First, wholesalers deal mostly with business customers – particularly retailers – rather than for resale or business
with final consumers. Second, wholesalers usually cover larger trade areas and have larger transactions than use.
retailers. Third, wholesalers face different legal regulations and taxes. wholesaler
Wholesalers buy mostly from producers and sell mostly to retailers, industrial consumers and other A firm engaged primarily
in wholesaling activity.
wholesalers. But why are wholesalers used at all? For example, why would a producer use wholesalers rather
than selling directly to retailers or consumers? Quite simply, wholesalers add value by performing one or
more of the following channel functions:
• Selling and promoting. Wholesalers’ sales teams help manufacturers to reach many small customers at
a low cost. The wholesaler has more contacts, and buyers often trust the wholesaler more than they
trust the distant manufacturer.
• Buying and assortment building. Wholesalers can select items and build assortments needed by their
customers, thereby saving consumers much work.
• Bulk breaking. Wholesalers save their customers money by buying in carload lots and breaking bulk
(breaking large lots into small quantities).
• Warehousing. Wholesalers hold inventories, thereby reducing the inventory costs and risks of suppliers
and customers. merchant
• Transportation. Wholesalers can provide quicker delivery to buyers because they are located closer to wholesaler
An independently
the buyers than the producers are. owned business that
• Financing. Wholesalers finance their customers by giving credit, and they finance their suppliers by takes title to the
ordering early and paying bills on time. merchandise it handles.
• Risk bearing. Wholesalers absorb risk by taking title and bearing the cost of theft, damage, spoilage
and obsolescence. broker
A person or business
• Market information. Wholesalers give information to suppliers and customers about competitors, new
who does not take title
products and price developments. to goods and whose
• Management services and advice. Wholesalers often help retailers to train their salespeople, improve function is to bring
store layouts and displays, and set up accounting and inventory control systems. buyers and sellers
together and assist in
negotiation.
Types of wholesalers
Wholesalers fall into three main groups (see Table 10.2): (1) merchant wholesalers, (2) agents and brokers and
agent
A person or business
(3) manufacturers’ sales branches and offices. Merchant wholesalers are the largest single group of who represents buyers
wholesalers, accounting for roughly 50 per cent of all wholesaling. Merchant wholesalers include two broad or sellers on a more
types: full-service wholesalers and limited-service wholesalers. Full-service wholesalers provide a full set of permanent basis,
performs only a few
services, whereas the various limited-service wholesalers offer fewer services to their suppliers and customers. functions and does not
The several different types of limited-service wholesalers perform varied specialised functions in the take title to goods.
distribution channel.
Brokers and agents differ from merchant wholesalers in two ways: they do not take title to goods and they manufacturers’
perform only a few functions. Like merchant wholesalers, they generally specialise by product line or sales branches
customer type. A broker brings buyers and sellers together and assists in negotiation. Agents represent and offices
Wholesaling by
buyers or sellers on a more permanent basis. Manufacturers’ agents (also called manufacturers’ representatives) sellers or buyers
are the most common type of agent wholesaler. themselves, rather than
The third main type of wholesaling is that done in manufacturers’ sales branches and offices through independent
wholesalers.
by sellers or buyers themselves, rather than through independent wholesalers.
9780655702412_CH10.indd 307 3/3/20 11:00 AM

Table 10.2 Main types of wholesalers

Independently owned businesses that take title to the merchandise they handle.
They are the largest single group of wholesalers and include two broad types:
Merchant wholesalers full-service wholesalers and limited-service wholesalers.
Full-service wholesalers Provide a full set of services, such as carrying stock, using a salesforce, offering credit, making deliveries
and providing management assistance. Full-service wholesalers include wholesale merchants and
industrial distributors.
Wholesale merchants Sell primarily to retailers and provide a full range of services. They vary in
the width of their product line. Some carry several lines of goods to meet
the needs of both general merchandise retailers and single-line retailers.
Others carry one or two lines of goods in a greater depth of assortment.
Examples are hardware wholesalers, pharmaceutical wholesalers and
clothing wholesalers. Some specialty wholesalers carry only part of a
line in great depth. Examples are wholesalers of health foods, seafood
and car parts. They offer customers deeper choice and greater product
knowledge.
Industrial distributors Sell to producers, rather than to retailers. They provide inventory, credit,
delivery and other services. They may carry a broad range of merchandise,
a general line or a specialty line.
Limited-service Offer fewer services to their suppliers and customers. There are several types of limited-service
wholesalers wholesalers: cash-and-carry wholesalers, truck wholesalers (cash-van operators), drop shippers,
producers’ cooperatives and mail-order or web wholesalers.
Cash-and-carry Carry a limited line of fast-moving goods, sell to small retailers for cash
wholesalers and normally do not deliver. A small fish-store retailer, for example,
normally drives at dawn to a cash-and-carry fish wholesaler and buys
several crates of fish, pays on the spot, drives the merchandise back to
the store and unloads it. Flower retailers do much the same.
Truck wholesalers Perform a selling and delivery function. They carry a limited line of goods
(also called (such as snack foods), which they sell for cash as they make their rounds
cash-van operators) of supermarkets, small grocery stores, hospitals, restaurants, factory
cafeterias and hotels.
Drop shippers Operate in bulk industries such as coal, timber and heavy equipment.
They do not carry inventory or handle the product. Once an order is
received, they find a producer who ships the goods directly to the
customer. The drop shipper takes title and risk from the time the order
is accepted to the time it is delivered to the customer. Because drop
shippers do not carry inventory, their costs are lower and they can pass
on some savings to customers.
Rack jobbers Serve grocery stores and pharmacies, mostly in non-food items. Rack
jobbers send delivery trucks to stores, where the delivery people set up
items such as toys, paperback books, hardware items, health and beauty
aids, or other goods. Rack jobbers price the goods, keep them fresh, set
up point-of-purchase displays and keep inventory records.
Producers’ Owned by farmer members, they assemble farm produce to sell in local
cooperatives markets. Their profits are divided among members at the end of the year.
They often try to improve product quality and promote a co-op brand
name, such as Chiquita bananas.
Mail-order or web Send catalogues to retail, industrial and institutional customers offering
wholesalers jewellery, cosmetics, specialty foods and other small items. Their main
customers are businesses in small outlying areas. They have no salesforce
to call on customers. The orders are filled and sent by mail, truck or other
means.
Brokers and agents differ from merchant wholesalers in two ways: they do not
take title to goods and they perform only a few functions. Their main function is
to aid in buying and selling, and for these services they earn a commission on the
selling price. Like merchant wholesalers, they generally specialise by product line
Brokers and agents or customer type.
Brokers Bring buyers and sellers together and assist in negotiation. They are paid by the parties hiring them.
They do not carry inventory, get involved in financing or assume risk. The most familiar examples are
food brokers, real estate brokers, insurance brokers and security brokers.
9780655702412_CH10.indd 308 3/3/20 11:00 AM

Agents Represent buyers or sellers on a more permanent basis. There are several types: manufacturers’
agents, selling agents, purchasing agents and commission merchants.
Manufacturers’ agents Represent two or more manufacturers of related lines, often in such lines
as apparel, furniture and electrical goods. They have a formal agreement
with each manufacturer, covering prices, territories, order-handling
procedures, delivery and warranties, and commission rates. They know
each manufacturer’s product line and use their wide contacts to sell the
products. Most manufacturers’ agents are small businesses, with only
a few employees who are skilled salespeople. They are hired by small
producers who cannot afford to maintain their own field sales teams,
and by large producers who want to open new territories or sell in areas
that cannot support full-time salespeople.
Selling agents Contract to sell a producer’s entire output when the manufacturer either
is not interested in doing the selling or feels unqualified. They serve
as a sales department and have much influence over prices, terms and
conditions of sale. They normally have no territory limits. They are found
in such product areas as textiles, industrial machinery and equipment,
coal and coke, chemicals and metals.
Purchasing agents Generally have a long-term relationship with buyers. They make
purchases for buyers and often receive, inspect, warehouse and ship
goods to the buyers. One type consists of resident buyers in major
apparel markets, purchasing specialists who look for apparel lines that
can be carried by small retailers located in small cities. They know a
great deal about their product lines, provide helpful market information
to clients, and obtain the best goods and prices available.
Commission Take physical possession of products and negotiate sales. They are
merchants not normally used on a long-term basis. They are used most often in
agricultural marketing by farmers who do not want to sell their own
output and who do not belong to cooperatives. Typically, the commission
merchant will take a truckload of commodities to a central market, sell
it for the best price, deduct a commission and expenses, and pay the
balance to the producer.
Wholesaling operations conducted by sellers or buyers themselves, rather than
Manufacturers’ sales through independent wholesalers. Some large retailers set up purchasing offices in
branches and offices major market centres elsewhere in the world.
Sales branches and Manufacturers often set up their own sales branches and offices to
offices improve inventory control, selling and promotion. Sales branches carry
inventory and are found in such industries as timber and car equipment
and parts.
Purchasing offices Perform a role similar to that of brokers or agents but are part of the
buyer’s organisation. Many retailers set up purchasing offices in major
market centres.
Wholesaler marketing decisions

Wholesalers now face growing competitive pressures, more demanding customers, new technologies, and
more direct-buying programs on the part of large industrial, institutional and retail buyers. As a result, they
have taken a fresh look at their marketing strategies. As with retailers, their marketing decisions include
choice of target markets, positioning and the marketing mix – product and service assortment; price;
promotion; placement; and people, processes and physical evidence (see Figure 10.11).
Segmentation, targeting, differentiation and positioning decisions

Like retailers, wholesalers must define their target markets and position themselves effectively – they
cannot serve everyone. They can choose a target group by size of customer (only large retailers), type of
customer (convenience stores only), need for service (customers who need credit) or other factors. Within
the target group, they can identify the more profitable customers, design stronger offers and build better
relationships with them. They can propose automatic reordering systems, set up management-training
9780655702412_CH10.indd 309 3/3/20 11:00 AM

WHOLESALER STRATEGY WHOLESALER MARKETING MIX

Wholesale segmentation Product and service assortment
and targeting Wholesale prices
Differentiation and service Promotion
positioning
Placement
People, processes and physical
evidence
CREATE VALUE FOR TARGETED WHOLESALE CUSTOMERS
Figure 10.11 Wholesaler marketing decisions
and advising systems or even sponsor a voluntary chain. They can discourage less-profitable customers by
requiring larger orders or adding a service charge to smaller orders.
Marketing mix decisions

Like retailers, wholesalers must decide on product assortment and ancillary services; prices; promotion;
placement; and people, processes and physical evidence. The wholesaler’s ‘product’ is the assortment of
products and ancillary services that it offers. Wholesalers are often under great pressure to carry a full line
and to stock enough for immediate delivery. However, this practice can damage profits. Wholesalers today
are cutting down on the number of lines they carry, choosing to carry only the more profitable ones. They
are also rethinking which services count most in building strong customer relationships and which should
be dropped or charged for. The key is to find the mix of services most valued by their target customers.
Price is also an important wholesaler decision. Wholesalers usually mark-up the cost of goods by
a standard percentage – say, 20 per cent. Expenses may run 17 per cent of the gross margin, leaving a
profit margin of 3 per cent. In grocery wholesaling, the average profit margin is often less than 2 per cent.
Wholesalers are trying new pricing approaches. They may cut their margin on some lines in order to win
important new customers. They may ask suppliers for special price breaks when they can turn them into an
increase in the supplier’s sales.
Although promotion can be critical to wholesaler success, most wholesalers are not promotion-minded.
Their use of trade advertising, sales promotion, personal selling and public relations is largely scattered
and unplanned. Many are behind the times in personal selling – they still see selling as a single salesperson
talking to a single customer, instead of as a team effort to sell, build and service major accounts. Wholesalers
also need to adopt some of the non-personal promotion techniques used by retailers. They need to develop
an overall promotion strategy and make greater use of supplier promotion materials and programs.
Not surprisingly, placement is important: wholesalers must choose their locations, facilities and web
locations carefully. Wholesalers typically locate in low-rent, low-tax areas and tend to invest little money in
their buildings, equipment and systems. As a result, their materials-handling and order-processing systems
are often outdated. In recent years, however, large and progressive wholesalers are reacting to rising costs
by investing in automated warehouses and online order-processing systems. Orders are fed from the
9780655702412_CH10.indd 310 3/3/20 11:00 AM

retailer’s system directly into the wholesaler’s computer; items are picked up by mechanical devices and
automatically taken to a shipping platform where they are assembled. Most large wholesalers are using
technology to carry out accounting, billing, inventory control and forecasting. Modern wholesalers are
adapting their services to the needs of target customers and finding cost-reducing methods of material
handling, order processing and delivery. They are also transacting more business online.
Finally, people, processes and physical evidence are every bit as important to a wholesaler’s marketing mix as
they are in any service industry. Salespeople and delivery-truck drivers, particularly cash-van drivers who
must both sell and deliver goods, must ensure they are adding value to their customers in every facet of the
service they offer.
Wholesaling trends and developments

Today’s wholesalers face considerable challenges. The industry remains vulnerable to one of its most
enduring trends – the need for greater and greater efficiency. Recent economic conditions have led to
demands for even lower prices and the winnowing out of suppliers who are not adding value based on cost
and quality. Progressive wholesalers constantly watch for better ways to meet the changing needs of their
suppliers and target customers. They recognise that their only reason for existence comes from adding
value by increasing the efficiency and effectiveness of the entire marketing channel.
Several developments in the wholesaling industry are likely. Consolidation will significantly reduce the
number of firms in the industry. The remaining wholesaling companies will grow larger, primarily through
acquisition, merger and geographical expansion. Geographical expansion will require distributors to learn
how to compete effectively over wider and more diverse areas. Wholesalers will be helped in this by the
increased use of information technology and automated systems.
The distinction between large retailers and large wholesalers continues to blur. In Australia, the
wholesaler, Metcash, provides thousands of products, as well as marketing, servicing and grocery supply,
to independently owned supermarkets in the IGA banner group, enabling them to compete against the
large chains, Woolworths and Coles. Metcash also wholesales hardware through its ownership of Mitre
10, thereby competing with Wesfarmers’ Bunnings and other smaller outlets, and supplies hardware
products to a further 400 non-branded independent stores and trade customers. Metcash is also a liquor
wholesaler, supplying 12 000 hotels in Australia through its wholly owned ALM (Australian Liquor
Markets) division, and servicing the New Zealand market through its Tasman Liquor Company subsidiary.
In addition, Metcash services banner groups, such as Cellarbrations, IGA Liquor, Bottle-O and Bottle-O
Neighbourhood, through its IBA (Independent Brands Australia) subsidiary.31
Wholesalers will continue to increase the services they provide to retailers, such as retail pricing,
cooperative advertising, marketing and management information reports, accounting services and others.
Rising costs on the one hand, and the demand for increased services on the other, will put the squeeze on
wholesaler profits. Wholesalers that do not find efficient ways to deliver value to their customers will soon
fall by the wayside. Like many other industries, business design is affected by technology as well as by the
entry of globally oriented players. As international wholesalers enter the Australian market, Australian and
New Zealand wholesalers are increasingly expanding their overseas operations, particularly into Asia.

Let’s take another break and review this last section on wholesaling. size of Metcash can help retail banner groups to compete
● Why might a food manufacturer use an agent? Why might a effectively against large chains such as ALDI, Coles, Costco
broker be used, rather than an agent? and Woolworths? Explain your answer.
● Research the Australian and/or New Zealand retail markets.
Based on your findings, do you think that a wholesaler the
9780655702412_CH10.indd 311 3/3/20 11:00 AM

Student communicating with prospective buyers; by matching – shaping and fitting

the offer to the buyer’s needs; and by entering into negotiation to reach an
Learning agreement on price and other terms of the offer so that ownership can be
Centre transferred. Other functions help to fulfil the completed transactions by offering
physical distribution – transporting and storing goods; by financing – acquiring
and using funds to cover the costs of the channel work; and by risk taking –
assuming the risks of carrying out the channel work.
Reviewing the learning objectives The channel will be most effective when each member is assigned the tasks it
can do best. Ideally, because the success of individual channel members depends
Learning Objective 1. Describe the nature of supply
on overall channel success, all channel firms should work together smoothly. They
chain management and how marketing channels should understand and accept their roles, coordinate their goals and activities,
add value. and cooperate to attain overall channel goals. By cooperating, they can more
Just as firms are giving the marketing concept increased recognition, more business effectively sense, serve and satisfy the target market.
firms are paying attention to their supply chain and to supply chain management. In a large company, the formal organisation structure assigns roles and
Supply chains and management of the customer-focused marketing channel end of provides needed leadership. But in a distribution channel made up of independent
the supply chain are an area of potentially high cost savings and improved customer firms, leadership and power are not formally set. Traditionally, distribution
satisfaction. Supply chain management addresses not only outbound distribution channels have lacked the leadership needed to assign roles and manage conflict.
but also inbound distribution, conversion operations and reverse distribution – In recent years, however, new types of channel organisations have appeared that
managing value-added flows between suppliers, the company, resellers and final provide stronger leadership and improved performance.
users. No supply chain can both maximise customer service and minimise distribution Each firm identifies alternative ways to reach its market. Available means
costs. Instead, the goal of supply chain management is to provide a targeted level vary from direct selling to using one, two, three or more intermediary channel
of service at the least cost. The main supply chain functions include warehousing, levels. Marketing channels face continuous and sometimes dramatic change.
inventory management, transportation and logistics information management. Three of the most important trends are the growth in vertical, horizontal and
The integrated supply chain management concept recognises that improved multichannel marketing systems. These trends affect channel cooperation,
logistics requires teamwork in the form of close working relationships across conflict and competition.
functional areas inside the company and across various organisations in the Channel design begins with assessing customer channel-service needs and
supply chain. Companies can achieve logistics harmony among functions by company channel objectives and constraints. The company then identifies the
creating cross-functional logistics teams, integrative supply manager positions, major channel alternatives in terms of the types of intermediaries, the number of
and senior-level logistics executives with cross-functional authority. Channel intermediaries and the channel responsibilities of each. Each channel alternative
partnerships can take the form of cross-company teams, shared projects and must be evaluated according to economic, control and adaptive criteria. Channel
information-sharing systems. Today, some companies are outsourcing their management calls for selecting qualified intermediaries and motivating them.
logistics functions to third-party logistics providers to save costs, increase Individual channel members must be evaluated regularly.
efficiency and gain faster and more effective access to global markets. Producers vary in their ability to attract qualified marketing intermediaries.
Some producers have no trouble signing up channel members. Others have to work
Learning Objective 2. Describe the nature of hard to engage enough qualified intermediaries. When selecting intermediaries,
marketing channels and how they organise to the company should evaluate each channel member’s qualifications and select
create value. those that best fit its channel objectives.
In creating customer value, a company cannot go it alone. It must work within Once selected, channel members must be continuously motivated to do their
an entire network of partners – a value delivery network – to accomplish this best. The company must sell not only through the intermediaries, but with them.
task. Individual companies and brands do not compete; their entire value delivery It should work to forge strong partnerships with channel members to create
networks do. a marketing system that meets the needs of both the manufacturer and the
Most producers use intermediaries to bring their products to market. They try partners. The company must also regularly check channel member performance
to forge a marketing channel (or distribution channel) – a set of interdependent against established performance standards, rewarding intermediaries that are
organisations involved in the process of making a product or service available for performing well and assisting or replacing weaker ones.
use or consumption by the consumer or business user. Through their contacts,
experience, specialisation and scale of operation, intermediaries usually offer the
Learning Objective 3. Discuss retailing, retailers’
firm more than it can achieve on its own. marketing decisions and the different ways of
Marketing channels perform many key functions. Some functions help classifying stores, and describe retailing trends and
to complete transactions by gathering and distributing information needed developments.
for planning and aiding exchange; by developing and spreading persuasive Retailing and wholesaling consist of many organisations bringing goods and
communications about an offer; by performing contact work – finding and services from the point of production to the point of use. In this chapter, we first
9780655702412_CH10.indd 312 3/3/20 11:00 AM

looked at the nature and importance of retailing, the main types of retailers, the Like retailers, wholesalers must target carefully and position themselves
decisions retailers make and the future of retailing. We then examined these strongly. And, like retailers, wholesalers must decide on product and service
same topics for wholesalers. assortment; price; promotion; placement; and people, processes and physical
Retailing includes all activities involved in selling goods or services directly evidence. Progressive wholesalers constantly watch for better ways to meet the
to final consumers for their personal, non-business use. Retail stores come in all changing needs of their suppliers and target customers. They recognise that, in the
shapes and sizes, and new retail types continue to emerge. Store retailers can be long run, their only reason for existence comes from adding value by increasing
classified by the amount of service they provide (self-service, limited service or the efficiency and effectiveness of the entire marketing channel. As with other
full service), product line sold (specialty stores, department stores, supermarkets, types of marketers, the goal is to build value-adding customer relationships.
convenience stores, superstores and service businesses) and relative prices
(discount stores and off-price retailers). Today, many retailers are banding Discussion questions
together in corporate and contractual retail organisations (corporate chains, ❶ Trade-offs. Business managers seek to exceed customer service expectations
voluntary chains and retailer cooperatives, and franchise organisations). at a price that ensures profits and a positive cashflow. Thinking about this
Retailers are always searching for new marketing strategies to attract and statement and Figure 10.5, might it be more appropriate to consider the eight
hold customers. They face major marketing decisions about segmentation and so-called trade-offs as must-dos? Why, or why not? (Learning Objectives 1
targeting, store differentiation and positioning, and the retail marketing mix. and 2) (AACSB: Communication; Analytical Thinking; Reflective Thinking)
Retailers must first segment and define their target markets and then decide ❷ Customer service. Consider Figure 10.5 further, and how it suggests the
how they will differentiate and position themselves in these markets. Those that importance of customer service. Does this notion of delivering customer
try to offer ‘something for everyone’ end up satisfying no market well. In contrast, service apply only to goods, or does it also apply to services? Justify your
successful retailers define their target markets well and position themselves strongly. answer. (Learning Objectives 1 and 2) (AACSB: Communication; Analytical
Guided by strong targeting and positioning, retailers must decide on a retail Thinking; Reflective Thinking)
marketing mix – product and service assortment; price; promotion; placement; ❸ Cooperation and competition in marketing channels. In many cases,
and people, processes and physical evidence. Retail stores are much more than businesses cooperate with each other rather than compete. For example,
simply an assortment of goods – beyond the products and services they offer, some companies join forces with competitors or non-competitors, as
today’s successful retailers carefully orchestrate virtually every aspect of the News Corporation Ltd and Telstra Corporation have done in their joint
consumer store experience. A retailer’s price policy must fit its target market and ownership and management of pay-TV operator, Foxtel. Is there greater
positioning, product and service assortment, and competition. Retailers use any risk of businesses colluding on pricing and other matters because of such
or all of the promotion tools – advertising, personal selling, sales promotion, partnering and cooperation, thereby acting illegally under the Competition
public relations and direct marketing – to reach consumers. Finally, it is very and Consumer Act 2010 (Cth)? Justify your answer. (Learning Objectives 1,
important that retailers select locations that are accessible to the target market 2 and 3) (AACSB: Communication; Analytical Thinking; Reflective Thinking)
in areas that are consistent with the retailer’s positioning. ❹ Wholesaler value-adding. Consider the functions wholesalers perform.
Retailers operate in a harsh and fast-changing environment, which offers Do wholesalers really add value, or might they have reached a stage where
threats as well as opportunities. New retail forms continue to emerge to meet they face disintermediation? Justify your answer, and be sure to explain the
new situations and consumer needs. Other trends in retailing include the slowed term disintermediation. (Learning Objective 4) (AACSB: Communication;
economy and tighter consumer spending, the rapid growth of non-store retailing, Analytical Thinking; Reflective Thinking)
retail convergence (the merging of consumers, products, prices and retailers), the ❺ Private labels. Retailers in Australia have had a love–hate relationship with
growing importance of retail technology, the global expansion of major retailers, private labels, it seems. Consider the use of private labels by department
and the resurgence of retail stores as consumer ‘communities’. stores and supermarkets. Do they appear to have adopted a dual strategy?
Why might this be the case? What part, if any, does retail convergence play
Learning Objective 4. Compare and contrast the in this action by retailers? (Learning Objective 3) (AACSB: Communication;
different types of wholesalers and their marketing Analytical Thinking; Reflective Thinking)
decisions, and discuss wholesaling trends. ❻ People, processes and physical evidence. Taking each of these marketing
Wholesaling includes all the activities involved in selling goods or services to mix elements in turn, how important is each in retailing? Provide examples
those who are buying for the purpose of resale or for business use. Wholesalers wherever possible. (Learning Objective 3) (AACSB: Communication;
fall into three groups. First, merchant wholesalers take possession of the Analytical Thinking; Reflective Thinking)
goods. They include full-service wholesalers (wholesale merchants, industrial
distributors) and limited-service wholesalers (cash-and-carry wholesalers, truck Critical thinking exercises
wholesalers, rack jobbers, drop shippers, producers’ cooperatives and mail- ❶ In a small group, debate whether or not the internet might result in
order or web wholesalers). Second, brokers and agents do not take possession disintermediation of the following types of retail stores: (1) video rental
of the goods but are paid a commission for aiding buying and selling. Finally, stores, (2) music stores, (3) grocery stores, (4) book stores and (5) clothing
manufacturers’ sales branches and offices are wholesaling operations conducted stores. (Learning Objectives 1, 2 and 3) (AACSB: Communication; Analytical
by non-wholesalers to bypass the wholesalers. Thinking; Reflective Thinking)
9780655702412_CH10.indd 313 3/3/20 11:00 AM

❷ Let us take the situation where you have been asked to explain to your ❸ Shop for a product of your choice on Amazon.com. Do the consumer reviews
colleagues in the marketing department of a retailer where you are influence your perception of a product or brand offered? Many of the product
employed how the use of RFID tags might benefit the company. Assuming reviews on Amazon.com are submitted by consumers. Learn about this review
you turn to YouTube (e.g. see <www.youtube.com/watch?v=XGu_fktA_ process and discuss whether or not a review from a consumer in Amazon’s review
qM>), prepare your presentation. What other consequences, if any, might program is more useful than one from a consumer not in this program. (Learning
there be for suppliers and consumers? (Learning Objectives 1, 2 and 3) Objectives 1, 2 and 3) (AACSB: Communication; Use of IT; Reflective Thinking)
(AACSB: Communication; Use of IT; Reflective Thinking)
Mini cases
10.1 Corporate VMN
Value fulfilment across the globe
Retailing is all about position. It certainly must be when we find that stores designs that resemble those of big-name fashion houses but at moderate
are willing to pay over $6000 per square metre per year to locate in Sydney’s prices. However, Zara’s amazing success comes not just from what it sells,
Pitt Street Mall or a bit less – some $4500 – to locate in Melbourne’s but from how fast its cutting-edge distribution system delivers what it sells.
Bourke Street. When we look at the global retail scene, we see that New Zara delivers fast fashion – really fast fashion. Thanks to vertical integration,
York’s Fifth Avenue is the most expensive retail position, followed by Zara can take a new fashion concept through design, manufacturing and
Hong Kong’s Causeway Bay and then Paris’s Avenue des Champs-Élysées store-shelf placement in as little as two weeks, whereas competitors, such
(which has overtaken London’s New Bond Street), followed by Milan’s as Gap, Benetton or H&M, often take six months or more. And the resulting
Via Montenapoleone, Zurich’s Bahnhofstrasse, Tokyo’s The Ginza, Seoul’s low costs let Zara offer the very latest mid-market chic at downmarket prices.
Myeongdong, Vienna’s Kohlmarket and Munich’s Kaufinger/Neuhauser. Speedy design and distribution allow Zara to introduce a copious supply
In each of these locations, we find two ingredients that explain the of new fashions – at three times the rate of competitor introductions. Then,
astronomical rentals that retailers pay: high-end brands and tourists. Zara’s distribution system supplies its stores with small shipments of new
The Spanish fashion retailer, Zara, has spread around the globe and merchandise two to three times each week, compared with competing
is now found in Australia. Its Melbourne store, located on Bourke Street chains’ outlets, which get large shipments seasonally, usually just four to six
in the CBD, is adjacent to rival department stores and close to the many times per year. The combination of a large number of timely new fashions
boutiques tucked away in shopping arcades and lanes. Zara has attracted a delivered in frequent small batches gives Zara stores a continually updated
near cult-like clientele of shoppers swarming to buy its ‘cheap chic’ – stylish merchandise mix that brings customers back more often. Fast turnover also
results in less outdated and discounted merchandise.32
❶ How do retailers like Zara add value to the marketing system? (Learning
Objectives 1, 2 and 3) (AACSB: Communication; Analytical Thinking;
❷ Using the types of retail organisations described in this chapter, classify
each of the following retailers: David Jones, Myer, Gap, Benetton, H&M,
Zara. How would you classify a nearby Apple Store and Apple Store
Online? (Learning Objectives 1, 2 and 3) (AACSB: Use of IT; Analytical
Thinking; Reflective Thinking)
Ashley Cooper/Corbis
❸ Conduct a small poll among your Gen X friends and family to find out
whether they think buying online is simply a gender issue. Or are there
other factors at work, such as the type of product? Explain your answer.
Zara’s Melbourne outlet benefits from the store’s fast (Learning Objectives 1, 2 and 3) (AACSB: Communication; Use of IT;
cutting-edge distribution system. Reflective Thinking)
9780655702412_CH10.indd 314 3/3/20 11:00 AM

10.2 Multichannel distribution networks

Disintermediate or be disintermediated
Less than a decade ago, if you wanted to watch a movie at home, your only
choice was to visit your local Blockbuster or other neighbourhood video-
rental store. At the time, Blockbuster dominated DVD rentals, certainly in
the United States, if not in Australia. But all that changed for Blockbuster –
abruptly and radically in the United States. Facing losses and store closures,
© Francis Vachon/Alamy Stock Photo

the once-mighty movie-rental chain declared bankruptcy in the United
States in late 2010. In early 2011, it was bought for a song by Dish Network,
primarily for its fledgling video-streaming services to complement Dish’s
satellite-TV offerings. In Australia, Blockbuster – along with the Video Ezy
and EzyDVD chains – is owned by the Franchise Entertainment Group (FEG)
and continues to operate. FEG is also the franchisor for 45 franchisees under
the two main brands, which operate nearly 1000 DVD vending-machine
kiosks with aspirations to open a further 3000.
Netflix’s internet-based distribution system allows
delivery of over 100 000 DVD titles, reaching more than
However, FEG faces huge digital and direct competition from the likes
60 million global subscribers using any form of internet-
of BigPond, Apple TV and subscriber-TV, as well as from Netflix and Stan. connected device, from ‘smart’ TVs to game consoles,
And these are only the legal sources. Quickflix is moving from a movie ‘post Android media players, tablets and smartphones.
and play’ system to a ‘download and play’ approach, based on the Xbox
games console. It is also an app on internet-connected Samsung Smart Hub
television sets, set to Australia as the default country and involving a subset services. Google is not far behind, and other firms must surely be preparing
of the 55 000 titles in its DVD catalogue. to offer cable-service streaming videos as soon as the National Broadband
Given the global nature of the direct and digital market for legal movie Network becomes widespread in Australia. As Blockbuster and other slower-
downloads, perhaps the fiercest competitor Quickflix may face is the US- moving competitors learned the hard way, it is a case of disintermediate or
based Netflix. Netflix was rumoured to be entering the Australian market be disintermediated.33
but instead entered the Nordic market. In the late 1990s, Netflix pioneered ❶ Discuss the term disintermediation. Does it really apply in the situation
the movie ‘post and play’ market that QuickFlix later emulated in Australia. Quickflix faces? Justify your answer. (Learning Objectives 1, 2 and 3)
Netflix has over 100 000 DVD titles to choose from but has turned away (AACSB: Communication; Use of IT; Reflective Thinking)
from the physical delivery mode, for which it increased its charges by a ❷ Conduct desk research, then compare and contrast the competitors in
startling 60 per cent. The company adopted an internet-based delivery the traditional and digital home-movie rental business in Australia and
model, partly explaining Blockbuster’s demise in the United States. This New Zealand. Be sure to describe the distribution model the companies
distribution system includes delivery to every form of internet-connected use. (Learning Objectives 1, 2 and 3) (AACSB: Communication; Use of
device, from ‘smart’ TVs (e.g. Samsung’s Smart Hub televisions) to game IT; Analytical Thinking)
consoles (Wii, PS3, Xbox), Android media players, tablets and smartphones. ❸ Thinking about the way you use the various mobile technologies
Globally, Netflix now has more than 60 million subscribers, a subscriber- mentioned, do you believe there is a long-term market in digitally
base that outstrips Australia’s total population! delivered movies on these devices? Why, or why not? Debate this
Perhaps, the soundest advice one could give Quickflix is to be afraid … with your classmates. (Learning Objectives 1, 2 and 3) (AACSB:
very afraid … of the competition – even that which has now arrived. After all, Communication; Use of IT; Reflective Thinking)
Amazon.com, Apple and YouTube also offer streaming-video subscription

Weighted averages, breakeven point and inventory turnover
UltraKleen Pty Ltd – makers of a wide selection of household cleaning to be led by Reckitt Benckiser, followed by SC Johnson and Pental Products.
products – have developed a 500-mL product entrant in the toilet-care These three companies hold over 70 per cent of the market in terms of
market in Australia under the WhiteSwan brand. The retail value of this sales revenue. This is due to the brand equity held by their brands in the
category is some $116 million in Australia. The toilet-care market continues category – Harpic, Duck and White King, respectively.
9780655702412_CH10.indd 315 3/3/20 11:00 AM


According to UltraKleen’s research, Duck brand’s distinctive plastic The retailer sales forecast was based on information supplied by the
bottle with the duck’s neck initially caught many customers’ attention in various buyers rather than using retailer share of trade calculated by
advertising and on retail shelves in the mid-1990s, and the neck has been Nielsen or Roy Morgan Research. After estimating opening and closing
adopted by the other brands. That is, the neck enables users to squirt the inventory, the team calculated average inventory at cost for the year to
thixotropic liquid contents under the toilet-bowl rim, where they believe all be $1.8 million.
manner of harmful bacteria live. UltraKleen decided to accentuate this neck Take on Alicia Poh’s role and calculate the following from the information
feature as this would highlight their unique selling proposition. given, ensuring that you use Appendix 3 for guidance.
As Appendix 3’s Spotlight 4 tells us, one indicator of brand equity is ❶ What is the formula to calculate breakeven point?
distribution level and this aspect, and the level of stockturns retailers would ❷ Calculate the weighted average net selling price for WhiteSwan’s
find acceptable, have been at the forefront of UltraKleen management’s 500-mL product.
minds. Based on marketing research data for the category, the WhiteSwan ❸ What sales volume (units) will UltraKleen need to sell to break even in
product manager – Alicia Poh – estimates retail and net selling prices and the first year?
sales forecasts for the WhiteSwan 500-mL pack as shown in Table 10.3. ❹ What is/are the formula(s) for calculating inventory turnover?
Based on product costings she and the new product development team ❺ What is the inventory turnover figure projected for WhiteSwan’s
have calculated, fixed costs are put at $2 035 000 for the first year and unit 500-mL product? What does this tell you?
variable costs at $0.55.
Table 10.3 WhiteSwan 500-mL pricing and sales forecast

RETAILER Coles Woolworths ALDI Others
RSP for each retailer stocking
$2.57 $2.55 $2.41 $3.49
WhiteSwan
Retail selling price per sales unit $2.57 $2.55 $2.41 $3.49
Retailer gross margin percentage 38% 33% 25% 40%
Retailer gross margin $0.9766 $0.8415 $0.6025 $1.3960
Retailer buy price $1.59 $1.71 $1.81 $2.09
Wholesale sell price n/a n/a n/a $2.09
Wholesaler markup n/a n/a n/a 10%
Ultraclean’s sell price $1.59 $1.71 $1.81 $1.90
less warehouse allowance –6.50% –7.00% –5.00% 0.00%
UltraKleen’s net selling price $1.49 $1.59 $1.72 $1.90
Sales volume (500 mL) forecast 600 000 (40%) 450 000 (30%) 100 000 (6.7%) 350 000 (23.3)

The ethics of multichannel marketing
Put yourself in the position of the owner–manager of a marketer of pet ‘O’Possum’ brand. You plan to sell into the current customer base of pet
products – we will call it Bonza Pets. Your company markets through pet stores, using the Bonza Pets salesforce. As you are not willing to add to
stores in all Australian states except Western Australia, and does not market salesforce costs or to sell through wholesalers, your current plans entail
in New Zealand. While on a business trip to China, you picked up the agency setting up a transacting website to market directly to the Western Australian
to market a product throughout Australasia. The product is like a frisbee but and New Zealand geographic markets.
made from wire and sailcloth, and the Chinese manufacturers will brand ❶ What issues (if any) could arise from using what is in effect a ‘global
it for your company. The product is lightweight, flies through the air and medium’ to sell ‘locally’? Are these likely to be solely ethical issues?
is easily retrieved by small and medium-sized breeds of dog. You plan to Explain your answer.
bring the product into Australia and New Zealand and market it under the
9780655702412_CH10.indd 316 3/3/20 11:00 AM

References
1 See Martha C Cooper, Douglas M Lambert & Janus D Pagh, ‘Supply chain management: -report>; and ‘Procter & Gamble’, Growth Champions, March 2015,
More than a new name for logistics’, International Journal of Logistics Management, <http://growthchampions.org/growth-champions/procter-gamble/>.
8(1), 1997, pp. 1–14; and Douglas M Lambert, Martha C Cooper & Janus D Pagh, 21 For more on digital aspects of shopper marketing and omni-channel retailing, see Tim
‘Supply chain management: Implementation issues and research opportunities’, Simmons, ‘The keys to unlocking the retail omni-channel advantage’, Forbes,
International Journal of Logistics Management, 9(2), 1998, pp. 1–19. 1 January 2015, <www.forbes.com/sites/teradata/2015/01/02/the-keys-to-unlocking-
2 See Mary C O’Connor, ‘Can RFID save brick-and-mortar retailers after all?’, Fortune, the-retail-omni-channel-advantage/print/>; Lisa R Melsted, ‘Retailers turn to
16 April 2016, <fortune.com/2014/04/16/can-rfid-save-brick-and-mortar-retailers-after- omnichannel strategies to remain competitive’, Forbes, 9 February 2015, <www.forbes.
all>, accessed June 2016. com/sites/samsungbusiness/2015/02/09/retailers-turn-to-omnichannel-strategies-
3 See Liz Tay, ‘Woolworths seeks technology edge after completing $100m Project Galaxy’, to-remain-competitive/print/>; and <www.shoppermarketingmagâ€‹.com/home/>,
Australian Financial Review, 17 March 2015, <www.afr.com/technology/woolworths- accessed May 2015; and ‘ZMOT’, Google Digital Services, <www.zeromomentoftruth.
seeks-technology-edge-after-completing-100m-project-galaxy-20150313-143i2z>. com/>, accessed October 2015.
4 Paul Smith, ‘Netflix streams ahead of the rest’, Australian Financial Review, 27 June 22 See Australian Food and Grocery Council, ‘Competitiveness & sustainable growth’,
2016, p. 31. KPMG, June 2014, <www.afgc.org.au/wp-content/uploads/AFGC-Competitiveness-
5 William Hoffman, ‘Supplying sustainability’, Traffic World, 7 April 2008. Sustainable-Growth-2014-FINAL-.pdf>, accessed July 2016; Chris Pash, ‘MOODY’S:
6 Also see Jessica Stillman, ‘Green cred: Sustainability a cost-cutting move for suppliers’, How Aldi is about to steal market share from Woolworths and Coles’, Business
Forbes, 11 December 2012, <www.forbes.com/sites/ups/2012/12/11/green-cred- Insider, 9 March 2015, <www.businessinsider.com.au/moodys-how-aldi-is-about-to-
sustainability-a-cost-cutting-move-for-suppliers/>; and <www.apparelcoalition.org/ steal-market-share-from-woolworths-and-coles-2015-3>, accessed July 2016.Table
higgindex/>, <www.nikeresponsibility.com/> and <www.nikeresponsibility.com/report/ 10.2 IBISWorld top 25 companies in Australia, by revenue, March 2017
content/chapter/manufacturing>, accessed October 2015. 23 See Kantar Worldpanel data, <www.kantarworldpanel.com/en/grocery-market-share/
7 See Andrew S Ross, ‘Forget the elves; Amazon turns to robots this holiday season’, great-britain>, accessed July 2016; and Phil Wahba, ‘The big cloud hanging over
SFGATE, 21 December 2014, <www.sfgate.com/business/bottomline/article/Forget-the- Walmart’s improving sales? Soft e-commerce growth’, Fortune, 17 November 2015,
elves-Amazon-turns-to-robots-this-5928294.php>; and ‘Working at Amazon’, January <fortune.com/2015/11/17/walmart-ecommerce>, accessed July 2016.
2015, <www.amazon.com/gp/help/customer/display.html?nodeId=200787540&view- 24 See ‘The Aldi effect: Australia’s changing supermarket scene’, Roy Morgan Research,
type=stand-alone>. 22 June 2015, <www.roymorgan.com/findings/6297-aldi-effect-australias-changing-
8 See Chris Warry, ‘How to establish an RFID strategy’, pwc, 12 January 2016, <www. supermarket-scene-201506220132>, accessed July 2016; and Australian Food &
digitalpulse.pwc.com.au/rfid-strategy-retail-3>, accessed June 2016. Grocery Council, State of the Industry 2015, <www.afgc.org.au/download/4027/>,
9 Transportation percentages and other data in this section are from Australian Bureau accessed July 2016.
of Statistics, Road Freight Movements, Australia, 12 months ended 31 October 2014, 25 See Wesfarmers’ information at <www.wesfarmers.com.au>, accessed July 2016.
Cat. No. 9223.0, 29 October 2015, <www.abs.gov.au/ausstats/abs@.nsf/mf/9223.0>; 26 Kath Walters, ‘Costco goes Kosher’, BRW, 11 March 2010.
and Freight Movements, Australia, Summary, Mar 2001, Cat. No. 9220.0, 6 September 27 See Costco Wholesale, ‘Corporate profile’, <phx.corporate-ir.net/phoenix.
2002, <www.abs.gov.au/ausstats/abs@.nsf/mf/9220.0>; both accessed June 2016. zhtml?c=83830&p=irol-homeprofile>, accessed July 2016.
10 See Sriram Narayanan, Ann S Marucheck & Robert B Handfield, ‘Electronic data interchange: 28 WalMart, <corporate.walmart.com/our-story/our-locations>, accessed July 2016;
Research review and future directions’, Decision Sciences, February 2009, p. 121. and ‘Supermarket facts’, FMI, <www.fmi.org/research-resources/supermarket-facts>,
11 For the location of Uncle Tobys’ operations in Wahgunyah, see Google Maps accessed July 2016.
<www.google.com.au/maps/place/13+Talbot+Rd,+Wahgunyah+VIC+3687/@- 29 For a listing of Australian theme parks, visit <goaustralia.about.com/od/
36.0101024,146.4094949,17z/data=!3m1!4b1!4m5!3m4!1s0x6b213a93e13fe471:0 discoveraustralia/a/themeparks.htm>, accessed July 2016.
x6507b9d1cb5a90e5!8m2!3d-36.0101068!4d146.4116836?hl=en>. 30 Company and franchising information from ‘2014 Franchise Times top 200 franchise
12 See Cecilie Rohwedder, ‘Turbocharged supply chain may speed Zara past Gap as top systems’, Franchise Times, October 2014, <www.franchisetimes.com/pdf/2014/Top200-
clothing retailer’, Globe and Mail, 26 March 2009, p. B12; Felipe Caro & Jeremie 2014.pdf>, and <www.score.org/resources/should-i-buy-franchise>; also see <www.
Gallien, ‘Inventory management of a fast-fashion retail network’, Operations Research, aboutmcdonalds.com/mcd/our_company.html> and <www.subway.com/subwayroot/
March–April 2010, pp. 257–73. About_Us/default.aspx>, accessed October 2015; and Mike King, ‘Australia’s top ten
13 Franchising facts from ‘Franchising trends’, Australian Financial Review Supplement, fast food franchises’, <www.fool.com.au/2014/04/04/australias-top-ten-fast-food-
24 June 2016, p. 2. franchises>, accessed July 2016.
14 For a listing of the top 50 franchise organisations in Australia, see Inside Retailing, 31 See Metcash, <www.metcash.com/about>, accessed July 2016.
<www.insideretail.com.au/blog/2013/09/30/video-easy>, accessed July 2016. 32 See Cushman & Wakefield, ‘New York’s Upper Fifth Avenue world’s most expensive retail
15 See Sue Mitchell, ‘Metcash results to show how IGA retailers are hitting back’, street’, 18 November 2015, <www.cushmanwakefield.com.au/en/news/2015/11/ny-
Australian Financial Review, 20 June 2016, pp. 15, 18. upper-fifth-avenue-worlds-most-expensive-retail-street>, accessed July 2016; and Clara
16 See ‘The Microsoft/Yahoo search alliance: The good, the bad, and the ugly’, The ROI Lu, ‘Zara’s secret to retail success – its supply chain’, tradegecko, <www.tradegecko.
Revolution Blog, <www.roirevolution.com/blog/2015/05/the-microsoftyahoo-search- com/blog/zara-supply-chain-its-secret-to-retail-success>, accessed July 2016.
alliance-the-good-the-bad-and-the-ugly/>, accessed July 2016. 33 See Adam Bender, ‘Quickflix seeks to keep Netflix out of Australia’, Computerworld,
17 Australian government media release, ‘Australia unlimited: The nation’s new brand’, 17 October 2012; QuickFlix Smart Movies, <quickflix.com.au>, accessed July 2016;
<www.trademinister.gov.au/releases/2010/sc_100514.html>, accessed July 2016; and Susan Young, ‘2014 SUCCESS achiever of the year: Reed Hastings’, SUCCESS,
Australia Unlimited, <www.australiaunlimited.com/>, accessed July 2016. 10 February 2015, <success.com/article/2014-success-achiever-of-the-year-reed-hastings>,
18 ‘Barnes & Noble abandons plan to spin off Nook business’, New York Post, 24 February accessed July 2016; Brian Stelter, ‘Netflix grabs a slice of Star Wars’, CNNMoney,
2015, <http://nypost.com/2015/02/26/barnes-noble-abandons-plan-to-spin-off-nook- 13 February 2014, <money.cnn.com/2014/02/13/technology/netflix-star-wars>, accessed
business/>. July 2016; Mike Snider, ‘Netflix, adding customers and profits, will raise prices’, USA
19 Lawrence Frost, ‘Volvo to launch online car sales in marketing shift’, Reuters, Today, 22 April 2014, <usatoday.com/story/tech/2014/04/21/netflix-results/7965613>,
15 December 2014, <www.reuters.com/article/2014/12/15/us-volvo-internet- accessed July 2016; Michael Leidtke, ‘With “House of Cards”, Netflix got a winning
idUSKBN0JT0D020141215>; and Diana Kuryiko, ‘Volvo dealers are hungry for hand’, Boston Globe, 27 February 2015, <bostonglobe.com/business/2015/02/27/
the redesigned XC90’, Automotive News, 25 January 2015, <www.autonews. house-cards-dealt-netflix-winning-hand/M5kBWc916HP1XMQyjdAd8N/story.html>,
com/article/20150123/RETAIL06/301249995/volvo-dealers-are-hungry-for-the- accessed July 2016; Lisa Richwine, ‘Netflix beats forecasts with 62 million streaming
redesigned-xc90>. subscribers’, Reuters, 15 April 2015, <reuters.com/article/2015/04/15/us-netflix-results-
20 See ‘Just released: P&G 2014 annual report’, P&G Corporate Newsroom, 20 August idUSKBN0N62HC20150415>, accessed July 2016; and annual reports and information
2014, <http://news.pg.com/blog/company-strategy/just-released-pg-2014-annual at <www.netflix.com>, accessed October 2015.
9780655702412_CH10.indd 317 3/3/20 11:00 AM

9780655702412_CH10.indd 318 3/3/20 11:00 AM

SESSION Integrated
6
marketing
communication
• Communicating customer value: Advertising
and public relations
• Salespeople and sales promotion: Creating
value in relationships
• Direct and digital marketing: Interactivity and
fulfilment
9780655702412_CH11.indd 319 3/3/20 11:01 AM

Chapter
11 Communicating customer value:

Advertising and public relations
We now forge ahead into the last of the marketing mix tools – promotion. Companies must do more than
just create customer value. They must also use promotion to clearly and persuasively communicate that
value. This chapter shows that promotion is not a single tool but, rather, a mix of several tools. Ideally, under
the concept of integrated marketing communications, the company will carefully coordinate these promotion
elements to deliver a clear, consistent and compelling message about the organisation and its products.
We begin the chapter by introducing the various promotion mix tools. Next, we examine the rapidly
changing communications environment – especially the addition of digital, mobile and social media – and
the need for integrated marketing communications. Finally, we look more closely at two of the promotion
tools – advertising and public relations. In Chapter 12, we visit two other promotion mix tools – personal
selling and sales promotion. Then, in Chapter 13, we explore direct and digital marketing.
Learning Objective 1 Define the five promotion mix tools for communicating customer
value.
Learning The promotion mix p. 322
Objectives Learning Objective 2 Discuss the changing communications landscape and the need for
integrated marketing communications.
Integrated marketing communications pp. 322–26
Shaping the overall promotion mix pp. 326–29
Learning Objective 3 Describe and discuss the main decisions involved in developing an
advertising program.
Advertising pp. 329–35
Learning Objective 4 Explain how companies use public relations to communicate with
their publics.
Public relations pp. 335–38
9780655702412_CH11.indd 320 3/3/20 11:01 AM

Chapter 11 Communicating customer value: Advertising and public relations 321
Messag
get e an
Bud ns decisi d med
sio
LO 1 deci ons ia
Define the five promotion
mix tools for communicating
customer value.
Ad alua
tin s
set ctive
ve tio
ev
r tis n
g
ing Adv
je
ell ert
ing
Ob l s
ix o i
ded m f promo
na
sin
len tio
so
b
g
ly
Per
nsistent • Co
na
l
efu
l to
LO 2 Co
Car
ols
mp
Discuss the changing
r•
• Clea
elling
communications landscape
and the need for integrated MESSAGE
m a a n d d igit a l
marketing communications.
S ale s p
ng
r ke t i
ect
ro m
D ir
o ti
on
LO 3
Describe and discuss the
P u b li c
main decisions involved r el a tio n s
in developing an
B ui
advertising program. ldin g ing
good relations us Spe
s
c
bli s
New
Publ ivities
nts
Pu tion
ech
Written m
erial
Corporate identity
act
eve
a
visua eting
ic se
rel ools
es
l mat
t
cial
material
r vice
rk
Spe
LO 4
zz ma
teriala

u
use public relations to

y audio
B
communicate with
their publics.
Invest
Lobbying
agenc
blicity
Public affairs
or rela
To im
Product pu
Press
pact
tions
Various publics
9780655702412_CH11.indd 321 3/3/20 11:01 AM

322 Session 6 Integrated marketing communication
The promotion mix

promotion mix A company’s total promotion mix – also called its marketing communications mix – consists of
(marketing the specific blend of advertising, public relations, personal selling, sales promotion and direct-marketing
communications tools that the company uses to persuasively communicate customer value and build customer relationships.
mix)
The specific blend The five major promotion tools are defined as follows:1
of advertising, public • Advertising: Any paid form of non-personal presentation and promotion of ideas, goods or services by
relations, personal an identified sponsor.
selling, sales promotion
• Sales promotion: Short-term incentives to encourage the purchase or sale of a product or service.
and direct-marketing
tools that the company • Personal selling: Personal presentation by the firm’s salesforce for the purpose of making sales and
uses to persuasively building customer relationships.
communicate customer • Public relations: Building good relations with the company’s various publics by obtaining favourable
value and build customer
publicity, building up a good corporate image and handling or pre-empting unfavourable rumours,
relationships.
stories and events.
• Direct and digital marketing: Interacting directly with carefully targeted individual consumers and
communities to both obtain an immediate response and build lasting customer relationships.
Each category involves specific promotional tools used to communicate with consumers. For example,
advertising includes broadcast, print, internet, outdoor and other forms. Sales promotion includes
discounts, coupons, displays and demonstrations. Personal selling includes sales presentations, trade shows
and incentive programs. Public relations includes press releases, sponsorships, special events and web
pages. And direct marketing includes catalogues, telephone marketing, kiosks, the internet, mobile phones
and more.
At the same time, marketing communication goes beyond these specific promotion tools. The product’s
design and price, the shape and colour of its packaging and the stores that sell the product all communicate
something to buyers. Thus, although the promotion mix is the company’s primary communication activity,
the entire marketing mix – promotion and product, price, place, people, process and physical evidence –
must be coordinated for greatest impact.
Integrated marketing communications

In past decades, marketers perfected the art of mass marketing – selling highly standardised products to
masses of customers. In the process, they developed effective mass-media communications techniques to
support these strategies. Large companies now routinely invest millions of dollars in television, magazine
or other mass media advertising, reaching millions of customers with a single ad. Today, however, marketing
managers face some new marketing communications realities. Perhaps no other area of marketing is
changing so profoundly as marketing communications, creating both exciting and scary times for marketing
communicators.
The new marketing communications model

Several major factors are changing the face of today’s marketing communications. First, consumers
are changing. In this digital, wireless age, they are better informed and more communications
empowered. Rather than relying on marketer-supplied information, they can use the internet and
other technologies to seek out information on their own. More than that, they can more easily connect
with other consumers to exchange brand-related information or even to create their own marketing
messages.
Second, marketing strategies are changing. As mass markets have fragmented, marketers are shifting away
from mass marketing. More and more, they are developing focused marketing programs designed to build
closer relationships with customers in more narrowly defined micromarkets.
9780655702412_CH11.indd 322 3/3/20 11:01 AM

Finally, sweeping changes in digital technology are causing remarkable changes in the ways in which
companies and customers communicate with each other. The digital age has spawned a host of new
information and communication tools – from smartphones and tablets to pay-TV, and the many faces of the
internet (email, social networks, brand websites, online communities, the mobile web and so much more).
Just as mass marketing once gave rise to a new generation of mass media communications, the new digital
and social media have given birth to a more targeted, social and engaging marketing communications model.
Although television, magazines, newspapers and other mass media remain very important, their dominance
is declining. In their place, advertisers are now adding a broad selection of more specialised and highly targeted
media to reach smaller customer segments with more personalised, interactive content. Today, media range
from specialty television channels and made-for-the-web videos to online ads, email and texting, blogs, mobile
and online catalogues, and a burgeoning list of social media. Such media have taken marketing by storm.
Some advertising industry experts are even predicting that the old mass-media communications model
will eventually become obsolete. Mass media costs are rising, audiences are shrinking, ad clutter is increasing
and viewers are gaining control of message exposure through technologies such as video streaming or digital
recorders that let them skip past disruptive television commercials. As a result, marketers are shifting ever-
larger portions of their marketing budgets away from old-media mainstays and moving them to online,
social, mobile and other new media.
Despite this shift, television is still a dominant advertising medium, attracting over one-quarter of all
media expenditure in Australia and New Zealand. Spending in magazines and newspapers has declined while,
at the same time, radio spend has increased. Meanwhile, digital media (internet and mobile) have come from
nowhere during the past several years to account for roughly one-third of advertising spending in Australia
and New Zealand, replacing television as the go-to medium. By one estimate, companies around the world
now invest an average of 40 per cent of their media budgets on internet and mobile media.2
The growth in mobile media spend has been staggering. As consumers spend more time on their
mobile devices, marketers spend more money on mobile advertising. One enormously successful campaign
saw Australian brand Rip Curl launch a GPS watch, IOS app and a desktop website that allowed surfers to
share their surf. The watch tracks surfer moves on the waves using GPS while, on the beach, surfers relive
their experience by syncing with their IOS device and adding extra details, such as photos, surf conditions
and the board they rode. Surfers can check-in with their mates and compare their stats. Importantly for
Rip Curl, each ride that is logged is shared on social channels. Stories about Rip Curl Search have reached
over 30 million people, and social media channels – including Instagram, Pinterest and Twitter – have been
abuzz with surfing superstars, such as Alana Blanchard and Mick Fanning, wearing the watch #SearchGPS.
The new product and mobile media campaign has been a massive commercial success, with Rip Curl
profitability growing while other big surfing brands are becoming less relevant to their surfer market.3
In the new marketing communications world, rather than the old approaches that interrupt customers
and force-feed them mass messages, the new media formats let marketers reach smaller communities of
consumers in more engaging ways. For example, just think about what is happening to television viewing
these days. Consumers can now watch their favourite programs on just about anything with a screen – on
televisions, but also on laptops, mobile phones or tablets. And they can choose to watch programs whenever
and wherever they wish, often without commercials. Increasingly, some programs, ads and videos are being
produced only for online viewing.
Despite the shift towards digital media, however, traditional mass media still capture a sizable share of
the promotion budgets of most major marketing firms, a fact that is unlikely to change quickly. Thus, rather
than the old-media model collapsing completely, most marketers foresee a shifting mix of both traditional
mass media and online, mobile and social media that engage more-targeted consumer communities in a
more personalised way. In the end, regardless of the communications channel, the key is to integrate all
of these media in a way that best engages customers, communicates the brand message and enhances the
customer’s brand experiences.
9780655702412_CH11.indd 323 3/3/20 11:01 AM

As the marketing communications environment shifts, so will the role of marketing communicators.
Rather than just creating and placing ‘TV ads’ or ‘print ads’ or ‘Snapchat branded story ads’, many marketers
content now view themselves more broadly as content marketing managers. As such, they create, inspire and
marketing share brand messages and conversations with and among customers across a fluid mix of paid, owned, earned
Creating, inspiring
and shared communication channels. These channels include media that are both traditional and new, as
and sharing valuable,
relevant and consistent well as controlled and not controlled (see Marketing in Action 11.1).
brand messages and
conversations with The need for integrated marketing communications
and among consumers The shift towards a richer mix of media and content approaches poses a problem for marketers. Consumers
across a mix of paid,
owned, earned and today are bombarded by commercial messages from a broad range of sources. But all too often, companies
shared media channels. fail to integrate their various communication channels. Mass media ads say one thing whereas the company’s
internet site, emails, social media pages or videos posted on YouTube may say something altogether different.
One problem is that marketing content often comes from different parts of the company. For example,
advertising messages are prepared by the company’s advertising department while public relations messages,
sales promotion events, and online or social media content are often prepared by other departments within
the company. Additionally, these different departments may also engage external agencies to assist with
integrated content development. However, consumers do not distinguish between content sources the way marketers
marketing do. In the consumer’s mind, brand-related content from different sources – whether a television ad, in-store
communications display, mobile app or a friend’s social media post – all merge into a single message about the brand or
(IMC) company. Conflicting content from these different sources can result in confused company images, brand
Careful integration
of a company’s many positions and customer relationships.
communications Thus, the explosion of online, mobile and social media marketing presents tremendous opportunities
channels to deliver a but also big challenges. It gives marketers rich new tools for understanding and engaging customers.
clear, consistent and At the same time, it complicates and fragments overall marketing communications. The challenge is to
compelling message
about the organisation bring it all together in an organised way. Today, more companies are adopting the concept of integrated
and its brands. marketing communications (IMC). Under this concept, as illustrated in Figure 11.1, the company
IX OF PRO
NDED M MO
Y BLE TIO
LL NT
U
EF Pe
O
rso
R
OL
ng na
CA
isi
S
l
rt
se
ve
llin
Ad
CONSISTENT, CLEAR
AND COMPELLING
COMPANY
ons
S ale s p
AND BRAND
relati
MESSAGES
ro m
b li c
oti
Pu
on
D ir e c l
t a n d d i g it a
m a r k e ti n g
Figure 11.1 Integrated marketing communications
9780655702412_CH11.indd 324 3/3/20 11:01 AM

Marketing
It’s content marketing, not advertising
in Action
11.1
In the good old days, life seemed so simple for advertisers. When a brand needed Shared media – media shared by consumers with other consumers, such as
an advertising campaign, everybody knew what that meant. The brand team and social media, blogs, mobile media and viral channels, as well as traditional
ad agency came up with a creative strategy, developed a media plan, produced word of mouth.
and placed a set of television commercials and magazine or newspaper ads, In the past, advertisers have focused on traditional paid (broadcast, print)
and perhaps issued a press release to stir up some news. But in these digital or earned (public relations) media. Now, however, content marketers are rapidly
times, the practice of placing ‘advertisements’ in well-defined ‘media’ within the adding the new digital generation of owned (websites, blogs, brand communities)
tidy framework of a carefully managed ‘advertising campaign’ just doesn’t work and shared (online social, mobile, email) media. Whereas a successful paid ad
anymore. used to be an end in itself, marketers are now developing integrated marketing
Instead, the lines are rapidly blurring between traditional advertising and content that leverages the combined power of all the POES channels. Thus, many
new digital content. To be relevant, today’s brand messages must be social, television ads are often not just ‘TV ads’ anymore. They are ‘video content’ you
mobile, interactively engaging and multi-platformed. Says one industry insider: might see anywhere – on a television screen but also on a tablet or phone. Other
‘Today’s media landscape keeps getting more diverse – it’s broadcast, cable, and video content looks a lot like television advertising but was never intended for
streaming; it’s online, tablet, and smartphone; it’s video, rich media, social media, television, such as made-for-online videos posted on websites or social media.
branded content, banners, apps, in-app advertising, and interactive technology Similarly, printed brand messages and pictures no longer appear only in carefully
products.’ crafted magazine ads or catalogues. Instead, such content, created by a variety of
The new digital landscape has called into question the very definition of sources, pops up in anything from formal ads and online brand pages to mobile and
advertising. ‘What is advertising anyway?’, asks one provocative headline. Call social media and independent blogs.
it whatever you want, admonishes another, but ‘Just don’t call it advertising.’ The new ‘content marketing’ campaigns look a lot different from the old
Instead, according to many marketers these days, it’s ‘content marketing’ – that ‘advertising’ campaigns. For example, Coles Supermarket has a content marketing
is, creating and distributing a broad mix of compelling content that engages strategy that began with a magazine. Today, the Coles magazine is the most read
customers, builds relationships with and among them, and moves them to action. in Australia, with a circulation of over 1.5 million (surpassing magazines such as
To feed today’s digital and social media machinery and to sustain ‘always-on’ The Australian Women’s Weekly, Better Homes & Gardens and Women’s Day).
consumer conversations, brands need a constant supply of fresh content across a The magazine solves a real problem for its readers . . .: ‘What will I have for
breadth of traditional and digital platforms. dinner?’
Many advertisers and marketers now view themselves more broadly
as content marketing managers who create, inspire, share and curate
marketing content – both their own content and that created by
consumers and others. Rather than using traditional media breakdowns,
they subscribe to a new framework that builds on how and by whom
marketing content is created, controlled and distributed. The new
classification identifies four major types of media: paid, owned, earned
and shared (POES):
Paid media – promotional channels paid for by the marketer, including
traditional media (such as television, radio, print or outdoor) and online and
digital media (paid search ads, mobile ads, email marketing, or web and
social media display ads and sponsored content).
Owned media – promotional channels owned and controlled by the
company, including company websites, corporate blogs, owned social media
sites, proprietary brand communities, salesforces and events.
Earned media – PR media channels, such as television, newspapers, blogs, Partnering with taste.com.au allows Coles to share content
online video sites and other media not directly paid for or controlled by the and make connections with an even wider audience.
marketer but which incorporate the content because of viewer, reader or user www.taste.com.au/NewsLifeMedia 2016
interest.
9780655702412_CH11.indd 325 3/3/20 11:01 AM

But Coles content marketing strategy does not stop with its magazine. Sources: Randall Rothenberg, ‘What is advertising anyway?’, Ad Week,
16 September 2013, p. 15; Peter Himler, ‘Paid, earned & owned: Revisited’, The Flack,
The supermarket has its own YouTube channel, ‘At Home with Coles’, which 21 June 2011, <http://flatironcomm.com/paid-earned-owned-revisited/>; <http://
is hosted by celebrity chef Curtis Stone, as well as social media platforms on contentmarketinginstitute.com>; ‘Customer-driven content at Coles’, Marketing,
2 September 2016, <www.marketingmag.com.au/hubs-c/content-marketing-coles/>;
Facebook, Instagram and Twitter. Not stopping there, Coles have established
‘Why Coles mag?’, Coles, <http://coles.mediumrarecontent.com/why/>; as well as
an online partnership with taste.com.au, thereby solving another customer various social media sites, including <www.facebook.com/coles>, <www.youtube.com/
coles>, <https://twitter.com/Coles>, <www.instagram.com/colessupermarkets/> and
problem: filling the shopping list. By managing content across multiple
<www.taste.com.au>; accessed October 2016.
platforms, Coles is able to reach out to millions of Australians with valuable,
relevant content, creating consistent brand messages and conversations that Questions
impact brand loyalty and company performance. ❶ Take a look online, and classify the content marketing efforts of Coles
So, we can’t just call it ‘advertising’ anymore.Today’s shifting and sometimes by the four main types of media: paid, owned, earned and shared.
chaotic marketing communications environment calls for more than simply ❷ When advertisers develop content marketing strategies, one of the big
creating and placing ads in well-defined and controlled media spaces. Rather, challenges is to make the content relevant. Take a look at the websites
today’s marketing communicators must be marketing content strategists, of a few of your favourite brands. How are these marketers making
creators, connectors and catalysts who manage brand conversations with content relevant?
and among customers and help those conversations catch fire across a fluid ❸ Television advertising is still a considerable part of total advertising
mix of channels. That’s a tall order, but with today’s new thinking, anything is expenditure. How can television be used to support content marketing
POES-ible! efforts?
carefully integrates its many communications channels to deliver a clear, consistent and compelling message
about the organisation and its brands.
Often, different media play unique roles in engaging, informing and persuading consumers.
For example, a recent study showed that more than two-thirds of advertisers and their agencies are planning
video ad campaigns that stretch across multiple viewing platforms, such as traditional television, and digital,
mobile and social media. Such video convergence combines television’s core strength – vast reach – with
digital’s better targeting, interaction and engagement.4 These varied media and roles must be carefully
coordinated under the overall integrated marketing communications plan.
Coles Supermarkets’ content marketing shows the benefits of a well-integrated marketing
communications effort (see Marketing in Action 11.1). The company pays great attention to integrating
its traditional media use with its content marketing, internet and mobile media strategies and its visual
identity. In-store, the market experience brings the integrated media strategy to life with strong visuals,
as well as links to online and magazine content. Everything is coordinated down to the smallest detail
– on a recent Australia Day, the in-store soundtrack was drawn from the top-10 Aussie songs. Through
its integrated communications, Coles Supermarkets continues to do well in the highly competitive
grocery market.5
Shaping the overall promotion

mix
The concept of integrated marketing communications suggests that the company must blend the
promotion tools carefully into a coordinated promotion mix. But how does the company determine what
mix of promotion tools it will use? Companies within the same industry differ greatly in the design of their
9780655702412_CH11.indd 326 3/3/20 11:01 AM

promotion mixes. For example, Avon spends most of its promotion funds on personal selling and direct
(catalogue) marketing, whereas competitor L’Oréal spends heavily on consumer advertising. We now look
at factors that influence the marketer’s choice of promotion tools.
The nature of each promotion tool

Each promotion tool has unique characteristics and costs. Marketers must understand these characteristics
in shaping the promotion mix.
Advertising
Advertising can reach masses of geographically dispersed buyers at a low cost per exposure, and it enables
the seller to repeat a message many times. For example, television advertising can reach huge audiences.
Over 3.2 billion people are estimated to have tuned in to watch the 2014 World Cup live; in Australia, over
4 million Aussie rules fans watched the 2016 AFL Grand Final; and each week around 1 million people tune
in to watch reality television shows such as The Block, Married at First Sight and The Bachelor. For companies
that want to reach a mass audience, television is the place to be.6
In addition to the size of the potential audience it can reach, large-scale advertising says something
positive about the seller’s size, popularity and success. Because of advertising’s public nature, consumers
tend to view advertised products as being more legitimate. Advertising is also very expressive – it allows
the company to dramatise its products through the artful use of visuals, print, sound and colour.
On the one hand, advertising can be used to build up a long-term image for a product (such as Coca-Cola
ads). On the other hand, advertising can trigger quick sales (as when Forty Winks advertises weekend
specials).
Advertising also has some shortcomings. Although it reaches many people quickly, advertising is
impersonal and cannot be as directly persuasive as can company salespeople. For the most part, advertising
can carry on only a one-way communication with the audience, and the audience does not feel it has to pay
attention or respond. In addition, advertising can be very costly. Although some advertising methods, such
as newspaper and radio advertising, can be done on smaller budgets, other forms, such as network television
advertising, require very large budgets.
Personal selling
Personal selling is the most effective tool at certain stages of the buying process, particularly in
building up buyers’ preferences, convictions and actions. It involves personal interaction between two
or more people, so each person can observe the other’s needs
and characteristics and make quick adjustments. Personal
selling also allows all kinds of customer relationships to
spring up, ranging from matter-of-fact selling relationships
to personal friendships. An effective salesperson keeps the
customer’s interests at heart in order to build a long-term
relationship by solving customer problems. Finally, with
personal selling, the buyer usually feels a greater need to
listen and respond, even if the response is a polite ‘No,
thank you’.
These unique qualities come at a cost, however. A salesforce
requires a longer-term commitment than does advertising –
advertising can be increased or decreased relatively easily,
Personal selling: With personal selling, the customer feels a greater
but salesforce size is harder to change. Personal selling is
need to listen and respond, even if the response is a polite ‘No,
also the company’s most expensive promotion tool, costing thank you’.
US companies as much as US$600 on average per sales call, © Arne9001 | Dreamstime.com
9780655702412_CH11.indd 327 3/3/20 11:01 AM

depending on the industry.7 US and Australian firms spend up to three times as much on personal selling as
they do on advertising.
Sales promotion
Sales promotion includes a wide assortment of tools – coupons, contests, cents-off deals, premiums and
others – all of which have many unique qualities. They attract consumer attention, offer strong incentives
to purchase, and can be used to dramatise product offers and to boost sagging sales. Sales promotions invite
and reward quick response. Whereas advertising says, ‘Buy our product’, sales promotion says, ‘Buy it now’.
Sales promotion effects are often short-lived, however, and often are not as effective as advertising or
personal selling in building long-run brand preference and customer relationships.
Public relations
Public relations is very believable – news stories, features, sponsorships and events seem more real and
believable to readers than ads do. Public relations can also reach many prospects who avoid salespeople and
advertisements – the message gets to the buyers as ‘news’, rather than as a sales-directed communication.
And, as with advertising, public relations can dramatise a company or product. Marketers tend to underuse
public relations or to use it as an afterthought. Yet, a well-thought-out public relations campaign used with
other promotion mix elements can be very effective and economical.
Direct and digital marketing

Although there are many forms of direct marketing – direct mail and catalogues, online marketing, telephone
marketing and others – they all share four distinctive characteristics. Direct marketing is less public: The
message is normally directed to a specific person. Direct marketing is immediate and personalised: Messages
can be prepared very quickly and can be tailored to appeal to specific consumers. Finally, direct marketing is
interactive: it allows a dialogue between the marketing team and the consumer, and messages can be altered
depending on the consumer’s response. Thus, direct marketing is well suited to highly targeted marketing
efforts and to building one-to-one customer relationships.
Promotion mix strategies

Marketers can choose from two basic promotion mix strategies – push promotion or pull promotion.
push strategy Figure 11.2 contrasts the two strategies. The relative emphasis given to the specific promotion tools
A promotional differs for push and pull strategies. A push strategy involves ‘pushing’ the product through marketing
strategy using the
salesforce and trade channels to final consumers. The producer directs its marketing activities (primarily personal selling and
promotions to push trade promotion) towards channel members to induce them to carry the product and to promote it to
the product through final consumers.
marketing channels to
Using a pull strategy, the producer directs its marketing activities (primarily advertising and
final consumers. The
producer promotes consumer promotion) towards final consumers to induce them to buy the product. For example,
the product to channel Unilever promotes its Lynx grooming products directly to its young male target market using television
members who, in turn, and print ads, a brand website, its YouTube channel, and other channels. If the pull strategy is effective,
promote it to final
consumers.
consumers will then demand the brand from retailers, such as Woolworths and Coles, who will in turn
demand it from Unilever. Thus, under a pull strategy, consumer demand ‘pulls’ the product through
pull strategy the channels.
The producer directs
its marketing activities Some industrial-goods companies use only push strategies; some direct-marketing companies use only
(primarily advertising pull strategies. However, most large companies use some combination of both. For example, Unilever
and consumer spends nearly US$8 billion worldwide each year on consumer marketing and sales promotions to create
promotion) towards
brand preference and to pull customers into stores that carry its products.8 At the same time, it uses its own
final consumers to
induce them to buy the and distributors’ salesforces and trade promotions to push its brands through the channels so that these
product. products will be available on store shelves when consumers come calling.
9780655702412_CH11.indd 328 3/3/20 11:01 AM

Producer marketing activities Reseller marketing activities

(personal selling, trade (personal selling, advertising,
promotion, other) Retailers and sales promotion, other)
Producer Consumers
wholesalers
Push strategy
Demand Retailers and Demand

Producer Consumers
wholesalers
Producer marketing activities (consumer advertising, sales promotion, other)
Pull strategy
Figure 11.2 Push versus pull promotional strategy
Companies consider many factors when designing their promotional mix strategies, including type of
product/market and the product life-cycle stage. For example, the importance of different promotion tools
varies between consumer markets and business markets. Business-to-consumer companies usually ‘pull’
more, putting more of their funds into advertising, followed by sales promotion, personal selling and
then public relations. In contrast, business-to-business marketers tend to ‘push’ more, putting more
of their funds into personal selling, followed by sales promotion, advertising and public relations. In
general, personal selling is used more heavily with expensive and risky goods and in markets with fewer
and larger sellers.
Now that we have examined the concept of integrated marketing communications and the factors that
firms consider when shaping their promotion mixes, we turn our focus in the next section to look more
closely at the specific marketing communications tools.

Pause here for a few minutes. Flip back through the chapter and their products and services? If you were in the market for
link the parts of the chapter you have read so far. a new car, where might you hear about various available
● How does the integrated marketing communications (IMC ) models? Where would you search for information?
concept relate to the promotion mix concept?
● How has the changing communications environment affected
the ways in which companies communicate with you about
Advertising
Advertising can be traced back to the very beginnings of recorded history. Archaeologists working in the
countries around the Mediterranean Sea have dug up signs announcing various events and offers.
The Romans painted walls to announce gladiator fights, and the Phoenicians painted pictures on large
9780655702412_CH11.indd 329 3/3/20 11:01 AM

rocks along parade routes to promote their wares. During the golden age in Greece, town criers announced
the sale of cattle, crafted items and even cosmetics.
advertising Modern advertising, however, is a far cry from these early efforts. Today, advertising includes any
Any paid form of non- paid form of non-personal presentation and promotion of ideas, goods or services by a sponsor. Australian
personal presentation
and New Zealand advertisers now run up an estimated combined annual advertising bill of about
and promotion of ideas,
goods or services by an US$14.5 billion; worldwide ad spending exceeds an estimated US$545 billion. Procter & Gamble, the
identified sponsor. world’s largest advertiser, spent more than US$4.6 billion on advertising within the United States and
US$11.5 billion worldwide.9
Although advertising is used mostly by businesses, a wide range of not-for-profit organisations,
professionals and social agencies also use advertising to promote their causes to various target publics.
Advertising is a good way to inform and persuade, whether the purpose is to sell Coca-Cola worldwide,
to help smokers kick the habit or to get consumers in a developing nation to use birth control.
Marketing management must make four important decisions when developing an advertising program
(see Figure 11.3): (1) setting advertising objectives, (2) setting the advertising budget, (3) developing advertising
strategy (message decisions and media decisions) and (4) evaluating advertising campaigns. We discuss each of these
advertising decisions below.
Setting advertising objectives

The first step is to set advertising objectives. These objectives should be based on past decisions about the
target market, positioning and the marketing mix, which define the job that advertising must do in the
total marketing program. The overall advertising objective is to help build customer relationships by
communicating customer value. Here, we discuss specific advertising objectives.
advertising An advertising objective is a specific communication task to be accomplished with a specific
objective target audience during a specific period of time. Advertising objectives can be classified by primary
A specific
communication task to
purpose – whether the aim is to inform, persuade or remind. Table 11.1 lists examples of each of these
be accomplished with a specific objectives.
specific target audience Informative advertising is used heavily when introducing a new product category. In this case,
during a specific period the objective is to build primary demand. Thus, early producers of HDTVs first had to inform
of time.
MESSAGE DECISIONS
Message strategy
Message execution
OBJECTIVES SETTING BUDGET DECISIONS ADVERTISING
Communication Affordable approach EVALUATION
objectives Per cent of sales Communication impact
Sales objectives Competitive parity Sales and profit impact
MEDIA DECISIONS
Objective and task Return on advertising
Reach, frequency, impact
Major media types
Specific media vehicles
Media timing
Figure 11.3 Major advertising decisions
9780655702412_CH11.indd 330 3/3/20 11:01 AM

Table 11.1 Possible advertising objectives

Informative advertising
Communicating customer value Suggesting new uses for a product
Building a brand and company image Informing the market of a price change
Telling the market about a new product Describing available services and support
Explaining how a product works Correcting false impressions
Persuasive advertising
Building brand preference Persuading customers to purchase now
Encouraging switching to a brand Persuading customers to receive a sales call
Changing customers’ perception of product value Convincing customers to tell others about the brand
Reminder advertising
Maintaining customer relationships Reminding consumers where to buy the product
Reminding consumers that the product may be needed in the Keeping the brand in customer’s mind during
near future off-seasons
consumers of the image quality and convenience benefits of the new product. Persuasive advertising
becomes more important as competition increases. Here, the company’s objective is to build
selective demand. For example, once HDTVs became established, Sony began trying to persuade
consumers that its brand offered the best quality for their money. Such advertising wants to engage
customers and create a feeling of community among the consumers
of the brand.
Some persuasive advertising has become comparative advertising (or
attack advertising), in which a company directly or indirectly compares its
brand with one or more other brands. You see examples of comparative
advertising in almost every product category, ranging from sports drinks,
coffee and soup to computers, car rentals and credit cards. For example,
in a series of ads, ALDI compares a competitor and an ALDI brand, and
uses the tag line, ‘Like Brands. Only Cheaper’. The ads feature ‘experts’,
including a caveman judging aluminium foil, a seagull judging tomato
sauce and a vampire judging sunscreen, with each ‘judge’ announcing they
like both brands while the ad prominently displays a price comparison.
Each ad emphasises the quality of the ALDI brand while at the same time
establishing it to be cheaper.10
Advertisers should use comparative advertising with caution. All too
often, such ads invite competitor responses, resulting in an advertising
war that neither competitor can win. Upset competitors might also take
more drastic action, such as filing complaints with the self-regulatory
Advertising Claims Board of the Advertising Standards Bureau or even
filing false-advertising lawsuits.11
Reminder advertising is important for mature products – it helps to
maintain customer relationships and keep consumers thinking about
the product. Expensive Coca-Cola television ads primarily build and
maintain the Coca-Cola brand relationship, rather than inform or
persuade customers to buy in the short run. Reminder advertising: Catalogues and VIP customer email
Advertising’s goal is to help move consumers through the buying messages are used as reminders for shoppers to visit stores.
© Joern Wolter/vario Images/age Fotostock
process. Some advertising is designed to prompt people to immediate
9780655702412_CH11.indd 331 3/3/20 11:01 AM

action. For example, a direct-response television ad by Weight Watchers urges consumers to pick up the
phone and sign up right away, and a Spotlight VIP Club catalogue encourages immediate store visits.
However, many other ads focus on building or strengthening long-term customer relationships. For
example, a Nike television ad in which well-known athletes undergo extreme challenges while wearing
their Nike gear never directly asks for a sale. Instead, the goal is to change the way customers think or feel
about the brand.
Setting the advertising budget

advertising After determining its advertising objectives, the company next sets its advertising budget for each
budget product. Here, we look at four common methods used to set the total budget for advertising: (1) the
The dollars and other
affordable method, (2) the percentage-of-sales method, (3) the competitive-parity method and (4) the objective-and-
resources allocated to
a product or company task method.
advertising program.
Affordable method
affordable Some companies use the affordable method, setting the promotion budget at the level they think
method the company can afford. Small businesses often use this method, reasoning that the company cannot
The promotion budget
spend more on advertising than it has. When using this method, companies start with total revenues,
is set at the level the
company can afford. deduct operating expenses and capital outlays, and then devote some portion of the remaining funds to
advertising.
Unfortunately, this method of setting budgets completely ignores the effects of promotion on sales.
It tends to place promotion last among spending priorities, even in situations in which advertising is critical
to the firm’s success. It leads to an uncertain annual promotion budget, which makes long-range market
planning difficult. Although the affordable method can result in overspending on advertising, it more often
results in underspending.
Percentage-of-sales method
percentage-of- Other companies use the percentage-of-sales method, setting their promotion budget at a certain
sales method percentage of current or forecasted sales. Alternatively, they budget a percentage of the unit sales price.
The percentage-of-sales method has advantages. It is simple to use and helps management to consider the
is set at a certain
percentage of current or relationships between promotion spending, selling price and profit per unit.
forecasted sales. Despite these claimed advantages, however, the percentage-of-sales method has little to justify it.
It wrongly views sales as the cause of promotion, rather than as the result. Although studies have found
a positive correlation between promotional spending and brand strength, this relationship often turns
out to be effect and cause, not cause and effect. Stronger brands with higher sales can afford the biggest
ad budgets.
Thus, the percentage-of-sales budget is based on availability of funds, rather than on opportunities.
It may prevent the increased spending sometimes needed to turn around falling sales. Because the budget
varies with year-to-year sales, long-range planning is difficult. Finally, the method does not provide any
basis for choosing a specific percentage, except what has been done in the past or what competitors are doing.
Competitive-parity method
competitive- Still other companies use the competitive-parity method, setting their promotion budgets
parity method to match competitors’ outlays. They monitor competitors’ advertising or access industry promotion
The promotion
spending estimates from publications or trade associations, and then set their budgets based on the
budget is set to match
competitors’ outlays. industry average.
Two arguments support this method. First, competitors’ budgets represent the collective wisdom of the
industry. Second, spending what competitors spend helps prevent promotion wars. Unfortunately, neither
argument is valid. There are no grounds for believing that the competition has a better idea of what a
9780655702412_CH11.indd 332 3/3/20 11:01 AM

company should be spending on promotion than does the company itself. Companies differ greatly, and
each has its own special promotion needs. Finally, there is no evidence that budgets based on competitive
parity prevent promotion wars.
Objective-and-task method
The most logical budget-setting method is the objective-and-task method, whereby the company sets objective-and-task
its promotion budget based on what it wants to accomplish with promotion. This budgeting method entails method
(1) defining specific promotion objectives, (2) determining the tasks needed to achieve these objectives and
is set by defining
(3) estimating the costs of performing these tasks. The sum of these costs is the proposed promotion budget. specific objectives
The advantage of the objective-and-task method is that it forces management to spell out its assumptions and determining the
about the relationship between dollars spent and promotion results. But it is also the most difficult method promotional tasks
required to achieve
to use. Often, it is difficult to determine which specific tasks will achieve stated objectives. For example,
these objectives. The
suppose Microsoft wants 75 per cent awareness for the latest version of its Surface tablet during the three- budget is set to cover
month introductory period. What specific advertising messages and media schedules should Microsoft use the costs of these tasks.
to attain this objective? How much would these messages and media schedules cost? Microsoft management
must consider such questions, even though they are difficult to answer.
No matter what method is used, setting the advertising budget is no easy task. John Wanamaker, the
department store magnate, once said: ‘I know that half of my advertising is wasted, but I don’t know which
half. I spent $2 million for advertising, and I don’t know if that is half enough or twice too much.’
As a result of such thinking, advertising is one of the easiest budget items to cut when economic times
get tough. Cuts in brand-building advertising appear to do little short-term harm to sales. For example,
in the wake of the 2008–09 recession, Australian and New Zealand advertising expenditures dropped by
15 per cent and 22 per cent, respectively, over the previous year. In the long run, however, slashing ad
spending risks causing long-term damage to a brand’s image and market share. In fact, companies that
can maintain or even increase their advertising spending while competitors are decreasing theirs can gain
competitive advantage.
Other advertising considerations

In developing advertising strategies and programs, the company must address two additional questions.
First, how will the company organise its advertising function – who will perform which advertising
tasks? Second, how will the company adapt its advertising strategies and programs to the complexities of
international markets?
Organising for advertising

Different companies organise in different ways to handle advertising. In small companies, advertising
might be handled by someone in the sales department. Large companies set up advertising departments
whose job it is to set the advertising budget, work with the ad agency and handle other advertising not
done by the agency. Most large companies use outside advertising agencies because they offer several
advantages.
How does an advertising agency work? Advertising agencies were started in the mid- to late 1800s advertising agency
by salespeople and brokers who worked for the media and received a commission for selling advertising A marketing services
business that assists
space to companies. As time passed, the salespeople began to help customers prepare their ads. Eventually,
companies in planning,
they formed agencies and grew closer to the advertisers than to the media. preparing, implementing
Today’s ad agencies employ specialists who can often perform advertising tasks more effectively and evaluating all
than the company’s own staff can. Agencies also bring an outside point of view to solving the company’s or portions of their
advertising programs.
problems, along with a wealth of experience from working with different clients and situations. So, today,
even companies with strong advertising departments of their own use advertising agencies.
9780655702412_CH11.indd 333 3/3/20 11:01 AM

Some ad agencies are huge; the largest US agency, Y&R, has annual gross revenues of US$1.69 billion.
In recent years, many agencies have grown by buying up other agencies, thus creating huge agency-holding
companies. The largest of these megagroups, WPP, includes several large advertising, public relations,
digital and promotion agencies, with combined worldwide revenues of more than US$17 billion.12
Most large advertising agencies have the staff and resources to handle all phases of an advertising
campaign for their clients, from creating a marketing plan, to developing ad and content campaigns, and
preparing, placing and evaluating ads and content. Large brands commonly employ several agencies that
handle everything from mass media advertising campaigns to shopper marketing and social media content.
International advertising decisions

International advertisers face many complexities not encountered by domestic advertisers. The most
basic issue concerns the degree to which global advertising should be adapted to the unique characteristics
of markets in different countries. Some large advertisers have attempted to support their global brands
with highly standardised worldwide advertising, with campaigns that work as well in Bangkok as they
do in Melbourne. For example, McDonald’s now unifies its creative elements and brand presentation
under the familiar ‘I’m lovin’ it’ theme in all of its 100-plus markets worldwide. VISA coordinates
its US$500 million worldwide advertising efforts for its
debit and credit cards under the ‘Everywhere you want to
be’ creative platform, which works as well in Korea as it
does in Brazil.13 And Snickers runs similar versions of its
‘You’re not you when you’re hungry’ ads in 80 different
countries, from the United Kingdom to Mexico, Australia
and even Russia. No matter what the country, the ads
strike a common human emotion that everyone can relate
to – people get out of sorts and do uncharacteristic things
when they need nutrition. A Snickers bar can help them get
back to being their ‘real selves’. Snickers lets local markets
make adjustments for local languages and personalities.
Otherwise, the ads are similar worldwide.14
In recent years, the increased popularity of online
social networks and video sharing has boosted the need
for advertising standardisation for global brands. Most big
Standardised worldwide advertising: Although Snickers uses its marketing and advertising campaigns include a large online
‘You’re not you when you’re hungry’ theme globally, ads in specific
presence. Connected consumers can now easily cross virtual
locales make adjustments for local languages and personalities. In one
campaign, Snickers combined words in their classic Snickers logo style borders via the internet and social media, making it difficult
and typeface to get their point across. for advertisers to roll out adapted campaigns in a controlled,
Richard Levine/Alamy Stock Photo orderly fashion. As a result, at the very least, most global
consumer brands coordinate their websites internationally.
For example, check out the McDonald’s websites from Germany to Jordan to China and you will find
the golden arches logo, the ‘I’m lovin it’ logo and jingle, a Big Mac equivalent and maybe even Ronald
McDonald himself.
Standardisation produces many benefits – lower advertising costs, greater global advertising coordination
and a more consistent worldwide image. But it also has drawbacks. Most importantly, it ignores the fact
that markets in various countries differ greatly in their cultures, demographics and economic conditions.
Thus, most international advertisers ‘think globally, but act locally’. They develop global advertising
9780655702412_CH11.indd 334 3/3/20 11:01 AM

strategies that make their worldwide advertising efforts more efficient and consistent. They then adapt
their advertising programs to make them more responsive to consumer needs and expectations within local
markets. For example, although VISA employs its ‘Everywhere you want to be’ theme globally, ads in
specific locales employ local language and inspiring local imagery that make the theme relevant to the local
markets in which they appear.
Global advertisers face several special problems. For instance, advertising media costs and availability
differ vastly from country to country. Countries also differ in the extent to which they regulate advertising
practices. Many countries have extensive systems of laws restricting how much a company can spend
on advertising, the media used, the nature of advertising claims and other aspects of the advertising
program. Such restrictions often require advertisers to adapt their campaigns from country to country.
For example, alcohol products cannot be advertised in India or in Muslim countries. In many countries –
Sweden and Canada, for example – junk-food ads are banned from children’s television programs. To play
it safe, McDonald’s advertises itself in Sweden as a family restaurant. Comparative ads, although acceptable
and even common in Australia and New Zealand, are less commonly used in the United Kingdom and
are illegal in India and Brazil. China bans sending email for advertising purposes to people without their
permission, and all advertising email that is sent must be titled ‘advertisement’.
Thus, although advertisers may develop global strategies to guide their overall advertising efforts, specific
advertising programs must usually be adapted to meet local cultures and customs, media characteristics and
regulations.

Think about what goes on behind the scenes for the ads we all ● Dig a little deeper and learn about the campaign behind your
tend to take for granted. ad. What are the campaign’s objectives? What is its budget?
● Pick a favourite print or television ad. Why do you like it? Do Assess the campaign’s message and media strategies. What
you think it is effective? Explain your answer. Describe an ad other brand content does the campaign contain? Looking
you have seen that people like but which you believe may not beyond your own feelings about the ad, how likely is the
be effective. Justify your answer. campaign to be effective?
public relations
Public relations (PR)
Building good relations
Another major mass-promotion tool is public relations (PR) – building good relations with the with the company’s
company’s various publics by obtaining favourable publicity, building up a good corporate image and various publics by
obtaining favourable
handling or pre-empting unfavourable rumours, stories and events. The aim is to produce favourable public publicity, building up a
commentary, stories and rumours about the brand, company and its employees that are not paid for or good corporate image
controlled by the company. and handling or pre-
empting unfavourable
Public relations departments may perform any or all of the following functions:15
rumours, stories and
• Press relations or press agency: Creating and placing newsworthy information in the news media to events.
attract attention to a person, product or service.
publicity
• Product publicity: Publicising specific products. Favourable or
• Public affairs: Building and maintaining national or local community relations. unfavourable public
• Lobbying: Building and maintaining relations with legislators and government officials to influence commentary, rumours
and stories about a
legislation and regulation.
brand, a company or
its employees that are
not controlled by the
sponsor.
9780655702412_CH11.indd 335 3/3/20 11:01 AM

• Investor relations: Maintaining relationships with shareholders and others in the financial community.
• Development: Public relations with donors or members of non-profit organisations to gain financial or
volunteer support.
Public relations is used to promote products, people, places, ideas, activities, organisations and even
nations. Companies use public relations to build good relations with consumers, investors, the media and
their communities.
Sometimes this activity is planned but often it is about taking advantages of the opportunities that arise.
For example, remember #theDress as the internet melted down with discussion regarding its colour –
black and blue or white and gold? Specsavers got in the mix with a clever tweet: ‘For all of you who think
#theDress is #WhiteandGold, come and visit us for an eye test #shouldve.’ Specsavers’ slogan is ‘should’ve
gone to Specsavers’™.16
Trade associations also use public relations to rebuild interest in declining commodities, such as wool,
apples, potatoes and milk. For example, Woolmark launched a ‘Campaign for Wool’ with the patronage
of HRH The Prince of Wales. The global campaign aimed to ‘reconnect consumers with the versatility of
wool, from luxurious next to skin Merino apparel to the safety and comfort of natural carpet’.17
The role and impact of public relations

Public relations can have a strong impact on public awareness at a much lower cost than advertising can.
The company does not pay for the space or time in the media. Rather, it pays for a staff to develop and
circulate information and to manage events. If the company develops an interesting story or event, it could
be picked up by several different media, having the same effect as advertising that would cost millions of
dollars. What is more, public relations has the power to engage consumers and make them a part of the
brand story and its telling.
Public relations results can sometimes be spectacular. Consider the launch of Niantic’s Pokémon GO.
Months before the game launched, Niantic invited gamers to ‘field test’ the experience. The following
publicity and social chatter meant that, with only a few release notifications on the company website and
the Pokémon GO Twitter account, Niantic was able to achieve app downloads beyond all expectation.
Within 19 days of the app’s release, downloads reached 50 million and, by two months, the app had been
downloaded over 500 million times worldwide, more than any other app in history. The game was released
first in Australia and New Zealand and, today, it is played in over 100 countries worldwide – and all with no
paid advertising.18
Despite its potential strengths, public relations is sometimes described as a marketing stepchild because
of its often limited and scattered use. The PR department is often located at corporate headquarters, or
PR is handled by a third-party agency. Its staff is so busy dealing with various publics – shareholders,
employees, legislators, the press – that PR programs to support product marketing objectives may be
ignored. Moreover, marketing managers and PR practitioners do not always speak the same language.
Whereas many PR practitioners see their jobs as simply communicating, marketing managers tend to be
much more interested in how advertising and public relations affect brand building, sales and profits, and
customer engagement and relationships.
This situation is changing, however. Although public relations still captures only a small portion
of the overall marketing budgets of most firms, PR can be a powerful brand-building tool. Especially
in this digital age, the lines between advertising and PR are blurring. For example, are brand websites,
blogs, social media and brand videos advertising efforts or PR efforts? They are both. As the use of
earned and shared digital content grows rapidly, PR may play a bigger role in marketing content
management. More than any other department, PR has always been responsible for creating relevant
9780655702412_CH11.indd 336 3/3/20 11:01 AM

marketing content that draws consumers to a brand rather than pushing messages out. ‘PR pros
are an organization’s master storytellers. In a word, they do content,’ says one expert. ‘The rise of
social media [is] moving public relations professionals from the backroom, crafting press releases and
organizing events, to the forefront of brand development and customer engagement,’ says another.19
The point is that PR should work hand in hand with advertising within an integrated marketing
communications program to help build customer engagement and relationships. And paid or not, the
Australian Association of National Advertisers includes the PR activities controlled by marketers under
its regulatory framework.20
The main public relations tools

Public relations uses several tools. One of the main tools is news. PR professionals find or create favourable
news about the company and its products or people. Sometimes news stories occur naturally, and sometimes
the PR person can suggest events or activities that would create news. Another common PR tool is special
events, ranging from news conferences and speeches, press tours, grand openings and sponsorships, to laser
shows, multimedia presentations or educational programs designed to reach and interest target publics.
Increasingly, company executives must field questions from the media or host major presentations, and
these events can either build or hurt the company’s image.
Public relations people also prepare written materials to reach and influence their target markets.
These materials include annual reports, brochures, articles and company newsletters and magazines.
Audiovisual materials, such as DVDs and online videos, are increasingly being used as communication
tools. Corporate identity materials can also help create a corporate identity that the public immediately
recognises. Logos, stationery, brochures, signs, business forms, business cards, buildings, uniforms
and company cars and trucks – all become marketing tools when they are attractive, distinctive and
memorable. Finally, companies can improve public goodwill by contributing money and time to public
service activities.
As discussed previously, the internet and social media are also important PR channels. Websites,
blogs and social media, such as YouTube, Facebook, Instagram, Snapchat, Pinterest and Twitter, are
providing new ways to reach and engage people. As noted, storytelling and engagement are core PR
strengths, and that plays well into the use of online,
mobile and social media.
For example, The a2 Milk Company™ uses a diverse
portfolio of direct and online media to share their brand
stories and to create publicity. They have an important
message: a2 Milk™ is different. Most cows produce
milk containing a mix of A1 and A2 beta-casein milk
proteins. Research has shown that it is A1 milk proteins
that can cause some people difficulties with milk.
a2 Milk™ is 100 per cent A1 protein-free, and contains
only the A2 protein. Sharing the highly technical
message behind a2 Milk™ requires a fine balance
between the science and the stories. Consequently, the Public relations tools: The a2 Milk Company™ website plays a big part
company focuses its PR efforts on health professionals in sharing the science and telling stories directly to the company’s many
stakeholders.
just as much as it does on consumers using its website,
The a2 Milk Company™
social media and online discussion.21
9780655702412_CH11.indd 337 3/3/20 11:01 AM

As with the other promotion tools, in considering when and how to use product public relations,
management should set PR objectives, choose the PR messages and vehicles, implement the PR plan
and evaluate the results. The firm’s public relations should be blended smoothly with other promotion
activities within the company’s overall integrated marketing communications effort.
9780655702412_CH11.indd 338 3/3/20 11:01 AM

Student Learning Objective 3. Describe and discuss the

main decisions involved in developing an advertising
Learning program.
Centre Advertising – the use of media by a seller to inform, persuade and remind about
its products or organisation – is a strong promotion tool that takes many forms
and has many uses. Advertising decision making involves decisions about the
objectives, the budget, the message, the media and, finally, the evaluation of results.
Reviewing the learning objectives Advertisers should set clear objectives as to whether the advertising is supposed to
In this chapter, we have discussed how companies use integrated marketing
inform, persuade or remind buyers. The advertising budget can be based on what
communications (IMC) to engage customers and communicate customer value.
is affordable, on sales, on competitors’ spending or on the promotion objectives
We have also explored two major elements of the marketing communications
and tasks. The message decision calls for planning a creative concept and message
mix – advertising and public relations. Modern marketing calls for more than
strategy and executing them effectively. The media decision involves defining
just creating customer value by developing a good product, pricing it attractively
reach, frequency and impact goals; choosing major media types; selecting media
and making it available to target customers. Companies also must clearly and
vehicles; and deciding on media timing. Message and media decisions must be
persuasively communicate that value to current and prospective customers. To do
closely coordinated for maximum campaign effectiveness. Finally, evaluation calls
this, they must blend five communication mix tools, guided by a well-designed
for evaluating the communication and sales effects of advertising before, during
and implemented integrated marketing communications strategy.
and after the advertising is placed, and measuring advertising return on investment.
Learning Objective 1. Define the five promotion mix Learning Objective 4. Explain how companies use
tools for communicating customer value. public relations to communicate with their publics.
A company’s total promotion mix – also called its marketing communications mix –
Public relations involves building good relations with the company’s various
consists of the specific blend of advertising, personal selling, sales promotion, public
publics. Its functions include press agency, product publicity, public affairs,
relations and direct and digital marketing tools that the company uses to persuasively
lobbying, investor relations and development. Public relations can have a
communicate customer value and build customer relationships. Advertising includes
strong impact on public awareness at a much lower cost than advertising can,
any paid form of non-personal presentation and promotion of ideas, goods or services
and PR results can sometimes be spectacular. Despite its potential strengths,
by an identified sponsor. In contrast, public relations focuses on building good
however, public relations sometimes sees only limited and scattered use.
relations with the company’s various publics. Personal selling is any form of personal
PR tools include news, special events, written materials, audiovisual materials,
presentation by the firm’s salesforce for the purpose of making sales and building
corporate identity materials and public service activities. A company’s website
customer relationships. Firms use sales promotion to provide short-term incentives
can be a good public relations vehicle. In considering when and how to use
to encourage the purchase or sale of a product or service. Finally, firms seeking
product public relations, management should set PR objectives, choose the
immediate response from targeted individual customers use direct-marketing tools to
PR messages and vehicles, implement the PR plan and evaluate the results.
communicate with customers and cultivate relationships with them.
Public relations should be blended smoothly with other promotion activities
within the company’s overall integrated marketing communications effort.
Learning Objective 2. Discuss the changing
communications landscape and the need for
integrated marketing communications. Discussion questions
The explosive developments in communications technology and changes in ❶ Marketing communications extends beyond the specific promotional tools.
marketer and customer communication strategies have had a dramatic impact on We have discussed at length the importance of aligning the marketing mix so
marketing communications. The new digital and social media have given birth to that the customer communication is consistent. Suppose a disposable coffee-
a more targeted, social and engaging marketing communications model. Along cup manufacturer wished to present its ‘eco-credentials’. How could this be
with traditional media, advertisers are now adding a broad selection of more achieved by aligning the marketing mix and communications mix? In your
specialised and highly targeted media to engage smaller customer segments with answer, consider how the product, price and distribution of a good or service
more-personalised, interactive content. As they adopt richer but more fragmented can affect the brand. (Learning Objective 1) (AACSB: Reflective Thinking)
media and promotion mixes to reach their diverse markets, advertisers risk ❷ Is the notion of integrated marketing communication simply a flight of
creating a communications hotchpotch for consumers. To prevent this, more fancy, or do advertisers really carry their creative themes through into each
companies are adopting the concept of integrated marketing communications of the media they use in any particular campaign? To test this by way of an
(IMC). Guided by an overall IMC strategy, the company works out the roles the experiment, choose brands from two product categories (e.g. toothpaste –
various promotional tools will play and the extent to which each will be used. Colgate; soft drinks – Coca-Cola; and mobile phones – Optus). Next, use the
It carefully coordinates the promotional activities and the timing of when major 14 information cues suggested by Resnik and Stern to check off the contents
campaigns take place. of the print ads, catalogues, and radio and television commercials you audit:
‘price’; ‘quality’; ‘performance’; ‘components’ or ‘parts’; ‘availability’ or
9780655702412_CH11.indd 339 3/3/20 11:01 AM

‘available at’ or ‘available from’; ‘special offer(s)’; ‘warranties’; ‘safety’; expenditure) is a part determinant of sales levels. We do know that word
‘independent research’; and ‘company research’.22 of mouth is another such determinant. After the worldwide slowdown in
Next, collect various advertising pieces for each brand, such as: (1) magazine advertising expenditure during the Global Financial Crisis, Australian and
ads; (2) direct mail – catalogues; (3) listening to any radio commercials; (4) watching New Zealand advertisers increased their ad spend. Today, ad spending has
their television commercials; and (5) checking their brand or corporate websites. stabilised and this has coincided with a general period of low economic
Set up a spreadsheet, with the brands in the first column and the information growth. With a great many advertisers using the percentage-of-sales
cues as the headers for the next 14 columns. Also allow one column where you method to determine promotion budgets, discuss whether, in your view,
allocate five (5) points across a scale anchored by 0 = no advertising theme carried advertising led the improvement in sales or if an improving financial
through, and one point for each instance where the same advertising theme is climate and increased sales meant that advertisers could spend more on
carried through into the media listed in (1) to (5) above. When you total the scores advertising? (Learning Objective 3) (AACSB: Reflective Thinking)
for each of the three brands in the last column, you may be able to answer the ❻ Is there ever a positive reason to employ public relations? Public relations is
question about the degree of integration in marketing communication. something a company turns to when one of its ships has spewed oil into a penguin
Clearly, there are many opportunities for error in this small-scale rookery, or when a social commentator sends a negative tweet. It does seem
experiment; for example, not all brands use all the media indicated and so that companies and governments turn to ‘spin-doctors’ when things go wrong
their rating will be affected by their budget size. What are your findings? and they become the targets of negative publicity. However, today’s marketers
Briefly outline a better method of testing the proposition that the synergistic are making increasing use of PR in a systematic way to support the brand and
effects of integrated marketing communication may be lost to many company marketing communication efforts. There are also social causes and ideas
marketing organisations. (Learning Objective 2) (AACSB: Reflective Thinking) that need promotional assistance if they are to receive any consideration in the
❸ Is long-term (i.e. longer than 10 weeks) brand building the only reason to broader community. There are a great many positive and important ways public
advertise? You will find those who argue that mass media advertising is the relationships contribute to the communications mix. Briefly describe some of the
direct impetus to sales, even short-term sales. This may not apply across all ways public relations has been used proactively and positively by companies and
products. In large measure, it depends on the decay rate for the advertising organisations. (Learning Objective 4) (AACSB: Reflective Thinking)
in individual product categories, and for particular brands, as to whether
or not advertising has an effect on long-term measures, including sales.
Certainly, there are short-term sales outcomes to advertising, particularly
Critical thinking exercises
❶ The manager of a small manufacturing concern is considering incorporating
when a sales promotion (see Chapter 12) is included for the purpose of
socially responsible marketing messages in the company’s advertising, and is
stimulating immediate or short-term sales. It seems that advertising has a
seeking your marketing advice. Some companies are criticised for exploiting
long-term outcome that is best measured by intervening variables, such as
social issues or organisations for their own gain. Write an email to the
awareness, attitude and relative brand positioning. The link between the
manager providing your assessment of the risks and benefits of a marketing
intervening variables and a sales response can, however, be more tenuous.
communications strategy that includes socially responsible messages.
Nevertheless, companies maintain that they advertise to gain a sales
Be sure to include some examples of companies that have been successful
response. What are your views? (Learning Objective 3) (AACSB: Reflective
and/or unsuccessful in adopting this approach. (Learning Objective 2) (AACSB:
Thinking)
Communication; Application of Knowledge)
❹ Might media scheduling vary by product category and brand? An interesting
❷ Marketers use Q Scores to determine a celebrity’s appeal to their target
perspective on this question is provided by one study which showed that
audience. Research Q Scores and write a report on a specific celebrity’s Q Score
90 per cent of respondent product managers had the key objective of increasing
for the past several years. If the score changed considerably, give possible
category share for their brand. The respondent fast-moving consumer goods
reason(s). What else are Q Scores used for, apart from rating celebrity appeal?
brand managers indicated that, for many brands, ‘their message decays rapidly
(Learning Objective 3) (AACSB: Communication; Application of Knowledge)
in the mind of the consumer’.23 What media strategy does this suggest for
❸ In a small group, discuss the major public relations tools and develop three
such products? (Learning Objective 3) (AACSB: Reflective Thinking)
public relations items for each of the following: (a) your university, (b) a frozen
❺ Advertising impacts a company’s annual sales, so what happens when
yogurt store, (c) a dentist, (d) a bank and (e) a community centre. (Learning
advertising budgets are set based on sales forecasts? It is marketing heresy
Objective 4) (AACSB: Communication; Teamwork; Reflective Thinking)
to suggest anything other than that marketing effort (e.g. advertising
9780655702412_CH11.indd 340 3/3/20 11:01 AM

Mini cases
11.1 Integrated marketing communication
Lighting up business
Small to medium-size businesses (SMBs) account for about 95 per cent of home electrical work and repairs in your suburb. The business has a larger-
all Australian and New Zealand businesses and many do not have resources than-usual online budget of $11 000 for the forthcoming year.24
to spare for promotion. Although newspaper, radio and the Yellow Pages ❶ Develop an integrated marketing communications plan for the business,
have been the mainstay media for local businesses, they can be expensive. which includes a website revamp and links to Facebook and Pinterest.
Carefully executed social media marketing can be a very effective tool. Ensure you include strategies as to how you will evaluate the return
But research has shown that only 30 per cent of small businesses are turning on investment for the business owner. (Learning Objective 3) (AACSB:
to the internet. With marketing budgets as low as $2000 for small businesses Communication; Analytical Thinking; Critical Thinking)
and about $12 000 for medium-sized enterprises, it is crucial that every ❷ What opportunities (if any) are there for PR for the business? How
online dollar is well spent. You, as a marketing communications expert, have would you integrate PR with the online social media campaign?
been approached for marketing advice from a local electrician providing (Learning Objectives 2 and 4) (AACSB: Critical Thinking)
11.2 Public relations

An activist workforce
Public relations efforts have changed significantly with the rising tide of digital ❶ Develop a public relations plan for your university that considers the likely
and social media. Today, marketers need to make sure integrated communication activity of students and staff on digital media. How would you try to manage
plans include both advertising and PR. But who would have thought that the any damage from ReActivists? You might like to complete the short online quiz
plan would need to include the company employees? A recent study has to see how you rate as an activist for your university <www.webershandwick.
revealed just how important employees are in the PR space. A company’s com/showcase/employeerisingquiz#>. (Learning Objective 4) (AACSB:
workforce can be viewed in terms of the six main types of behaviours (see the Analytical Thinking; Information Technology; Reflective Thinking)
table below), ranging from ProActivists who are highly social and who advocate ❷ Imagine you are the marketing manager for a medium-sized company
for their workplace both online and off (22 per cent) to the ReActivists who and the human relations manager advises you that a disaffected staff
are critical of workplace conditions and share their views online (13 per cent). member had posted comments on the company’s FaceBook page that
In some ways, this is not a new insight. Employees have always been an misrepresent the customer service experience. What would you do?
important part of the customer experience and most marketers understand Prepare a draft FaceBook post in response. What other creative actions
this. However, with these new insights, companies can go further in planning could the company take to counteract this negative social media post?
the PR efforts to include those employees who are most likely to positively (Learning Objective 4) (AACSB: Communication; Analytical Thinking;
engage with various stakeholders. 25
Information Technology; Reflective Thinking)
Employees with the most positive actions, with nearly no negative actions. They have the highest level of employer
ProActivists (22%) engagement and are highly social.
PR effort: Leverage and empower activism
Employees that take positive actions – nearly as many as the ProActivists – but they engage in some negative actions. They
PreActivists (19%) are not as social as ProActivists and have an average level of engagement.
PR effort: Ignite activism; Upgrade to ProActivists
Wildcat employees who have the most potential to help or damage an employer’s reputation. They sometimes post things
HyperActives (8%) online that they later regret. The majority have jobs that entail social media so they are highly social.
PR effort: Handle with care; Upgrade to ProActivists
Employees who mainly take positive actions but who are also very likely to be critical. They are highly social.
ReActivists (13%)
PR effort: Focus on attending to internal matters; Defuse negative social media
Employees who take negative actions and are the least engaged and the most distrustful of leadership. They are not very
Detractors (11%) social so damage is often contained offline.
PR effort: Defuse negative social media (if any)
Employees who do not take either negative or positive actions. They are unengaged and least motivated.
InActives (27%)
PR effort: Focus on increasing company engagement not activism
Source: Adapted from The Workforce Activism Spectrum, p. 12, <http://webershandwick.asia/employees-rising-internal-activists/>, accessed October 2016.
9780655702412_CH11.indd 341 3/3/20 11:01 AM


Advertising-to-sales ratios
Using the percentage-of-sales method, an advertiser sets its advertising same percentage of sales on advertising next year. The average advertising-to-
budget at a certain percentage of current or forecasted sales. However, sales ratio for the sector is 2 per cent of sales.
determining what percentage to use is not always clear. Many marketers look ❶ Using the percentage-of-sales method of advertising budgeting,
at industry averages and competitor spending for comparisons. Websites and determine how much the company will budget for advertising if the
trade publications publish data regarding industry averages to guide marketers budget is based on projected sales of $19 million. (Learning Objective 3)
in setting the percentage to use. For example, firms competing in the toy and (AACSB: Analytical Reasoning; Reflective Thinking)
apparel industries spend 10 per cent or more of sales on advertising, whereas ❷ How much would the manufacturer budget if the company based
firms competing in the mortgage servicing and insulation industries spend less its advertising spending on the industry advertising-to-sales ratio?
than 1 per cent of sales on advertising. Let us consider a large solar-panel Is the solar-panel manufacturer consistent with average industry
manufacturer. Suppose the company had $17 million in revenue last year. ad spending? (Learning Objective 3) (AACSB: Analytical Reasoning;
It spent $0.8 million on advertising that year and plans to continue spending the Reflective Thinking)

Ads that upset
Some ads take your breath away for all the wrong reasons. They seem to be Authority (<www.asa.co.nz/>). Pick two or three cases where
intent on upsetting people. Whether it is the recent Meat & Livestock Australia’s complaints were upheld. What changes would you recommend to the
Australia Day ad, which came under fire for offending vegans, or the Ultra Tune advertising message to make the ads more acceptable to consumers
‘Get into Rubber’ and ‘Unexpected Situation’ ads for objectifying women, these and communities? (Learning Objective 3) (AACSB: Communication;
ads seem to be focused on brand attention – even if it is negative. Each year, Reflective Thinking; Ethical Reasoning)
the Advertising Standards Bureau (in Australia) and the Advertising Standards ❷ Even when complaints are dismissed, provocative ads can generate a
Authority (in New Zealand) consider many complaints about advertising from frenzy of social media attention that is far from ideal. Where do you
the community. When complaints are upheld, advertisers may be required to draw the line in terms of advertising that is designed to create comment
remove the ad or correct misinformation. However, that might be a small price (good or bad)? What factors do you think should be taken into account
to pay for the media attention that a provocative ad can produce. by a company when considering an advertising message that might
❶ Review some of the complaints considered by the Advertising Standards attract negative social media attention? (Learning Objectives 3 and 4)
Bureau (<adstandards.com.au/>) or the Advertising Standards (AACSB: Reflective Thinking; Ethical Reasoning)
References
1 For other definitions, see <www.ama.org/resources/Pages/Dictionary.aspx>, accessed teams/western-bulldogs/more-than-4-million-fans-watched-afl-grand-final-between-
October 2015. western-bulldogs-and-sydney/news-story/25dbfd06ae8ec9c7c5f53c782c4e164e>; and
2 See Warc, <www.warc.com>, accessed October 2016. <www.tvtonight.com.au/category/ratings>, accessed October 2016.
3 See Emma Siemasko, ‘How Rip Curl is making waves with email marketing’, Business 2 7 See discussions at Mike Ishmael, ‘The cost of a sales call’, 22 October 2012,
Community, 5 October 2015, <www.business2community.com/brandviews/campaign- <http://4dsales.com/the-cost-of-a-sales-call/>; Jeff Green, ‘The new Willy Loman
monitor/how-rip-curl-is-making-waves-with-email-marketing-01344278#fAPaZZOBY survives by staying home’, Bloomberg Businessweek, 14–20 January 2013, pp. 16–17;
EIVe3Qy.97>; ‘Rip Curl: Search GPS’, Warc, 2016, <www.warc.com>; Eli Greenblat, and ‘What is the real cost of a B2B sales call?’, <www.marketing-playbook.com/sales-
‘Rip Curl outshines surfwear rivals with 25pc rise in full-year net profit’, The Australian marketing-strategy/what-is-the-real-cost-of-a-b2b-sales-call>, accessed October 2016.
Business Review, 30 October 2015, <www.theaustralian.com.au/business/rip-curl- 8 ‘100 largest global marketers’, Advertising Age, 8 December 2014, p. 26.
outshines-surfwear-rivals-with-25pc-rise-in-fullyear-net-profit/news-story/4f9fedcaea5c 9 For these and other advertising spending facts, see Advertising Age Marketing Fact
b5bdaaece561d40a0a65>, accessed October 2016. Pack 2015, 29 December 2014; and ‘200 leading national advertisers’, Advertising
4 See ‘Advertisers blend digital and TV for well-rounded campaigns’, eMarketer, Age, 13 July 2015, pp. 14–23.
12 March 2014, <www.emarketer.com/Article/Advertisers-Blend-Digital-TV-Well- 10 For campaign details, see <www.bmf.com.au/our-work/like-brands-only-cheaper/>;
Rounded-Campaigns/1010670>, accessed October 2016. ‘Aldi continues with “Like brands. Only cheaper” campaign’, Adnews, 14 March
5 ‘Customer-driven content at Coles’, Marketing, 2 September 2016, <www. 2016, <www.adnews.com.au/campaigns/aldi-continues-with-like-brands-only-
marketingmag.com.au/hubs-c/content-marketing-coles/>; ‘DMG Radio and Coles cheaper-campaign>; ‘ALDI continues “Like Brands. Only Cheaper” campaign via BMF
enhance in-store experience’, B&T Magazine, 24 January 2014, <www.bandt.com.au/ with a twist in every aisle’, Campaign Brief, 26 May 2016, <www.campaignbrief.
marketing/dmg-radio-and-coles-enhance-in- store-experience>, accessed October 2016. com/2015/05/aldi-continues-like-brands-onl.html>, accessed October 2016.
6 Ratings from ‘2014 FIFA World Cup™ reached 3.2 billion viewers, one billion watched 11 For details of the self-regulatory advertising processes via the Advertising Claims Board,
final’, FIFA.com, 16 December 2014, <www.fifa.com/worldcup/news/y=2015/m=12/ see <https://adstandards.com.au/>, accessed October 2016.
news=2014-fifa-world-cuptm-reached-3-2-billion-viewers-one-billion-watched--2745519. 12 Information on advertising agency revenues from ‘Agency report’, Advertising Age,
html>; AAP, ‘More than 4 million fans watched AFL Grand Final between Western 28 April 2014, pp. 8ff; and ‘Marketing fact pack 2015’, Advertising Age, 29 December
Bulldogs and Sydney’, Herald Sun, 2 October 2016, <www.heraldsun.com.au/sport/afl/ 2014, pp. 26–9.
9780655702412_CH11.indd 342 3/3/20 11:01 AM

13 Stuart Elliott, ‘Visa trims slogan to expand meaning’, New York Times, 13 January public relations firms have emerged from the shadows’, Financial Post, 28 December
2014, p. B6. 2014, <http://business.financialpost.com/entrepreneur/the-changing-role-of-public-
14 See E J Schultz, ‘Behind the Snickers campaign that launched a global comeback’, relations-firms>, accessed October 2016.
Advertising Age, 4 October 2013, <http://adage.com/print/244593>; and <http:// 20 See Australian Association of National Advertisers website for codes of practice,
adsoftheworld.com/media/outdoor/snickers_running> and <http://cargocollective.com/ <http://aana.com.au/self-regulation/codes/>; and also Peter Roper, ‘AANA updates
mirceaandronescu/SNICKERS-OOH>, accessed October 2016. definition of “advertising” in response to evolving nature of PR’, 23 October 2015,
15 Based on Glen Broom & Bey-Ling Sha, Cutlip & Center’s Effective Public Relations, <www.marketingmag.com.au/news-c/definition-of-advertising/>; accessed
11th edn, Prentice Hall: Upper Saddle River, NJ, 2013, chapter 1. October 2016.
16 See tweet at <https://twitter.com/Specsavers/status/571292607021625344?ref_ 21 See The a2 Milk Company™ website, <https://a2milk.com.au/>, and also Rob Grant,
src=twsrc%5Etfw>, accessed October 2016. ‘Sacred cows: The secret to A2 Milk’s success’, Marketing Magazine, 2 July 2015,
17 See Lisa Griplas, ‘Australia celebrates campaign for wool’, 24 May 2016, <www.marketingmag.com.au/hubs-c/sacred-cows-secret-a2-milks-success/>, accessed
<www.merino.com/wool/conscious/australia-celebrates-campaign-for-wool/>; October 2016.
‘Campaign for wool’, Woolmark, 16 September 2013, <www.woolmark.com/campaign- 22 Avery M Abernethy & George R Franke, ‘The information content of advertising: A meta
for-wool>; and also <www.campaignforwool.org/>; all accessed October 2016. analysis’, Journal of Advertising, 25(2), 1996, pp. 1–17.
18 See Niantic website and Twitter account, <https://nianticlabs.com/blog/>, and 23 Vanessa Evans & Chris Wilson, ‘What media strategy is best for your brand?’, B&T
<https://twitter.com/pokemongoapp>; see also Craig Smith, ‘Pokemon Go statistics Marketing and Media, 12 December 2001.
(September 2016)’, DMR, 21 September 2016, <http://expandedramblings.com/index. 24 See ‘Only 30 per cent of SMEs use social media’, BRW, 23 May 2013; and ‘Aussies are
php/pokemon-go-statistics/>; Dean Takahashi, ‘Analytics firms show how Pokémon getting socially mobile while businesses miss the mark!’, Sensis, 21 May 2013.
Go became a phenomenon’, VB, 14 July 2016, <http://venturebeat.com/2016/07/14/ 25 ‘The workforce activism spectrum: Infographic, including pro tips for dealing with
analytics-firms-take-us-inside-the-pokemon-go-phenomenon/>; and Lee Scott, ‘Why detractors’, Marketing Magazine, 3 April 2014, <www.marketingmag.com.au/news-c/
Niantic didn’t need marketing to make Pokémon Go viral’, The Conversation, 29 July the-workforce-activism-spectrum-infographic-including-pro-tips-for-dealing-with-
2016, <http://theconversation.com/why-niantic-didnt-need-marketing-to-make- detractors/>; and also ‘Employee activists spark movement in digital age’, Weber
pokemon-go-viral-63159>; all accessed October 2016. Shandwick, 3 April 2016, <http://webershandwick.com.au/employee-activists-spark-a-
19 Quotes from Sarah Skerik, ‘An emerging PR trend: Content PR strategy and tactics’, PR new-social-movement-in-the-digital-age/>; both accessed October 2016.
Newswire, 15 January 2013, <http://blog.prnewswire.com/2013/01/15/an-emerging-
pr-trend-content-pr-strategy-tactics/>; and Mary Teresa Bitti, ‘The new mad men: How
9780655702412_CH11.indd 343 3/3/20 11:01 AM

344
Chapter
12 Salespeople and sales promotion:

Creating value in relationships
In Chapter 11, you learned about communicating customer value through integrated marketing
communications (IMC) and about two elements of the promotion mix – advertising and public relations.
In this chapter, we examine two more IMC elements – personal selling and sales promotion. Personal selling
is the interpersonal arm of marketing communications, in which the salesforce interacts with customers
and prospects to build relationships and make sales. Sales promotion consists of short-term incentives to
encourage purchase or sale of a product or service. As you read on, remember that, although this chapter
examines personal selling and sales promotion as separate tools, they must be carefully integrated with
other elements of the promotion mix.
Learning Objective 1 Discuss the role of a company’s salespeople in creating value for
customers and building customer relationships.
Learning Personal selling pp. 346–48
Objectives Learning Objective 2 Identify and explain the six main salesforce management steps.
Managing the salesforce pp. 348–58
Learning Objective 3 Explain how sales promotion campaigns are developed and
implemented.
Sales promotion pp. 359–64
9780655702412_CH12.indd 344 3/3/20 11:02 AM

Chapter 12 Salespeople and sales promotion: Creating value in relationships 345
LO 2
Identify and explain the
six main salesforce
management steps.
rce managemen
Salesfo t
g Compen
Trainin le sa
espeop salespe ting
sa l ople
nd
n ga Su
ti
rui tin e
g sal per v
ec elec eopl esp isi
s esp eo n
R
ple
g
l
sa
stru gy and force
s
stra g sale
Eva speop
sal
e
luat le
ctur
e
nin
te
ing
Desig
LO 1
Discuss the role
of a company’s
salespeople in
creating value Company SALES Customers
for customers Represents FORCE Represents
the customers the company
and building to the company to the customers
customer
relationships.
prom
Set objec
otio
te
sale tive
lua
n
Eva
s s
Se
lec
S ale te
s p r o m o ti o n t o ols
tt
oo mo
l Pro
Dete
rmine
incentive ation
size Par ticip ns
conditio
LO 3
Explain how sales
promotion campaigns
are developed and
implemented.
9780655702412_CH12.indd 345 3/3/20 11:02 AM

Personal selling
Robert Louis Stevenson once noted that ‘everyone lives by selling something’. Companies all around the
world use salesforces to sell products and services to business customers and final consumers. But salesforces
are also found in many other kinds of organisations. For example, universities use recruiters to attract new
international students, and clubs use membership committees to attract new members. Museums and fine
arts organisations use fundraisers to contact donors and raise money. Even governments use salesforces.
In the first part of this chapter, we examine the role of personal selling in the organisation, salesforce
management decisions and the personal selling process. The latter part of the chapter focuses on sales
promotion.
The nature of personal selling

personal selling Personal selling consists of interpersonal interactions with customers and prospects to make sales and
Personal presentation by maintain customer relationships. It is one of the oldest professions in the world. The people who do the
the business’s salesforce
for the purpose of selling go by many names: salespeople, sales representatives, district managers, account executives, sales
making sales and building consultants, sales engineers, agents and account development reps, to name just a few.
customer relationships. People hold many stereotypes of salespeople – including some unfavourable ones. ‘Salesman’ may bring
to mind the image of Arthur Miller’s pitiable Willy Loman in Death of a Salesman or the consummate sales
team from reality TV’s Say Yes to the Dress. And then there are the real-life ‘yell-and-sell’ ‘pitchmen’, who
flog everything from OxiClean (stain remover), NuWave (convection oven) and ShamWow (cleaning cloth)
to the Magic Bullet (blender) and the Snuggie (blanket with sleeves) in television infomercials. However,
the majority of salespeople are a far cry from these unfortunate stereotypes.
Most salespeople are well-educated, well-trained professionals who add value for customers
and maintain long-term customer relationships. They listen to their customers, assess customer
salesperson needs and organise the company’s efforts to solve customer problems. The best salespeople are
An individual the ones who work closely with customers for mutual gain. Consider Boeing, the aerospace giant
representing a company competing in the rough-and-tumble worldwide commercial aircraft market. It takes more than
to customers by
performing one or fast talk and a warm smile to sell expensive high-tech aircraft. A single big sale can easily run into
more of the following billions of dollars – for example, the list price for the Boeing 787-9 Dreamliner is US$264.6 million.
activities: prospecting, Jetstar received the first of fourteen 787s in 2013. The multi-billion dollar order was placed by
communicating, selling,
Qantas some years ago and includes options for 50 more aircraft. After upgrading its Jetstar fleet,
servicing, information
gathering and Qantas is now set to bring eight new Dreamliners into service on its long-haul flights by 2019.
relationship building. Boeing salespeople head up an extensive team of company specialists – sales and service technicians,
financial analysts, planners, engineers – all dedicated to
finding ways to satisfy airline customer needs. The selling
process is nerve-rackingly slow – it can take two or three
years from the first sales presentation to the day the sale is
announced. After getting the order, salespeople then must
stay in almost constant touch to make certain the customer
stays satisfied. Success depends on building solid, long-
term relationships with customers, based on performance
and trust.1
The term salesperson covers a wide range of positions.
Professional selling: To sell the Dreamliner 787, the Boeing sales At one extreme, a salesperson might be largely an order taker,
team builds solid, long-term relationships with customers such as such as the department store salesperson standing behind the
Jetstar and Qantas. counter. At the other extreme are order getters, whose positions
Qantas
demand creative selling, social selling and relationship building
9780655702412_CH12.indd 346 3/3/20 11:02 AM

for products and services ranging from appliances, industrial equipment and aircraft, to insurance and
information technology services. Here, we focus on the more creative types of selling and on the process of
building and managing an effective salesforce.
The role of the salesforce

Personal selling is the interpersonal arm of the promotion mix. Advertising consists largely of
non-personal communication with target consumer groups. In contrast, personal selling involves
interpersonal interactions between salespeople and individual customers – whether face-to-face, by
telephone, via email, through video or web conferences, or by other means. Personal selling can be
more effective than advertising in more complex selling situations. Salespeople can probe customers
to learn more about their problems and then adjust the marketing offer and presentation to fit each
customer’s needs.
The role of personal selling varies from company to company. Some firms have no salespeople at all –
for example, companies that sell only online or through catalogues, or those that sell through manufacturer’s
reps, sales agents or brokers. In most firms, however, the salesforce plays a major role. In companies that
sell business products and services, such as IBM or Boeing, the company’s salespeople work directly with
customers. In consumer-product companies, such as Procter & Gamble and Nike, the salesforce plays an
important behind-the-scenes role. It works with wholesalers and retailers to gain their support and to help
them be more effective in selling the company’s products.
Linking the company with its customers

The salesforce serves as a critical link between a company and its customers. In many cases,
salespeople serve both masters – the seller and the buyer. First, they represent the company to customers.
They find and develop new customers and communicate information about the company’s products
and services. They sell products by approaching customers, presenting their offerings, answering
objections, negotiating prices and terms, closing sales, servicing accounts and maintaining account
relationships.
At the same time, salespeople represent customers to the company, acting inside the company as ‘champions’
of customers’ interests and managing the buyer–seller relationship. Salespeople relay customer concerns
about company products and actions back inside the company to those who can manage them.
They learn about customer needs and work with other marketing and non-marketing people in the
company to develop greater customer value.
In fact, to many customers, the salesperson is the company – the
only tangible manifestation of the company they see. So, customers
may become loyal to salespeople as well as to the companies and
products they represent. This concept of salesperson-owned loyalty
lends even more importance to the salesperson’s customer
relationship-building abilities. Strong relationships with
the salesperson will result in strong relationships with the
company and its products. Conversely, poor salesperson
relationships will probably result in poor company and product
relationships.
Coordinating marketing and sales

Ideally, the salesforce and the firm’s other marketing functions Connecting with customers: Salespeople link the company with its
(marketing planners, brand managers, marketing content customers. To many customers, the salesperson is the company.
© Blue Jean Images/Alamy Stock Photo
managers and researchers) should work closely together to create
9780655702412_CH12.indd 347 3/3/20 11:02 AM

value for both customers and the company. Unfortunately, however, some companies still treat ‘marketing’
and ‘sales’ as separate functions. When this happens, the relationship between the separated marketing and
sales functions can be dysfunctional. When things go wrong, the marketers blame the salesforce for its poor
execution of an otherwise splendid strategy. In turn, the sales team blames the marketers for being out of
touch with what is really going on with customers. Neither group fully values the other’s contributions.
If not repaired, such disconnects between marketing and sales can damage customer relationships and
company performance.
A company can take several actions to help bring its marketing and sales functions closer together.
At the most basic level, it can increase communications between the two groups by arranging joint
meetings and by spelling out when and with whom each group should communicate. The company can
create opportunities for marketers and salespeople to work together. Brand managers and researchers
can tag along on sales calls or sit in on sales account-planning sessions. In turn, salespeople should help
to develop marketing plans and sit in on product-planning reviews to share their first-hand customer
knowledge.
A company can also create joint objectives and reward systems for sales and marketing or appoint marketing–
sales liaisons – people from marketing who ‘live with the salesforce’ and help to coordinate marketing and
salesforce programs and efforts. Finally, the firm can appoint a high-level marketing executive who oversees
both marketing and sales. Such a person can help infuse marketing and sales with the common goal of
creating value for customers in order to capture value in return.2
Managing the salesforce

salesforce We define salesforce management as analysing, planning, implementing and controlling salesforce
management activities. It includes designing salesforce strategy and structure, and recruiting, selecting, training,
Analysing, planning,
compensating, supervising and evaluating the firm’s salespeople. These major salesforce management
implementing and
controlling salesforce decisions are shown in Figure 12.1 and are discussed in the following sections.
activities.
Designing salesforce strategy and structure
Marketing managers face several salesforce strategy and design questions. How should salespeople and
their tasks be structured? How large should the salesforce be? Should salespeople sell independently or
work in teams with other people in the company? Should they sell in the field, by telephone or using online
and social media? We address these issues next.
Salesforce structure
A company can divide sales responsibilities along any of several lines. The structure decision is simple if
the company sells only one product line to one industry with customers in many locations. In that case,
the company would use a territorial salesforce structure. However, if the company sells many products
to many types of customers, it might need a product salesforce structure, a customer salesforce structure or a
combination of the two.
Designing sales- Recruiting and

Training Compensating Supervising Evaluating
force strategy selecting
salespeople salespeople salespeople salespeople
and structure salespeople
Figure 12.1 The main steps in salesforce management
9780655702412_CH12.indd 348 3/3/20 11:02 AM

Territorial salesforce structure

In the territorial salesforce structure, each salesperson is assigned to an exclusive geographic area territorial
and sells the company’s full line of products or services to all customers in that territory. This organisation salesforce
clearly defines each salesperson’s job and fixes accountability. It also increases the salesperson’s desire structure
A salesforce organisation
to build local customer relationships that, in turn, improve selling effectiveness. Finally, because each that assigns each
salesperson travels within a limited geographic area, travel expenses are relatively small. A territorial sales salesperson to an
organisation is often supported by many levels of sales management positions. For example, individual exclusive geographic
territory sales reps may report to area managers, who in turn report to regional managers who report to a area in which that
salesperson sells the
director of sales. company’s full line.
Product salesforce structure

If a company has numerous and complex products, it can adopt a product salesforce structure, product salesforce
in which the salesforce sells along product lines. For example, General Electric (GE) employs structure
different salesforces within different product and service divisions of its major businesses. Within GE
where salespeople
Infrastructure, for instance, the company has separate salesforces for aviation, energy, transportation, specialise in selling
and water-processing products and technologies. No single salesperson can become expert in all of only a portion of the
these product categories, so product specialisation is required. Similarly, GE Healthcare employs company’s products or
lines.
different salesforces for diagnostic imaging, life sciences and integrated IT products and services.
In all, a company as large and complex as GE might have dozens of separate salesforces serving its
diverse product and service portfolio.
The product salesforce structure can lead to problems, however, if a single large customer buys many
different company products. For example, several different GE salespeople might end up calling on the
same large health-care customer in a given period. This means that they travel over the same routes and
wait to see the same customers’ purchasing agents. These extra costs must be compared with the benefits of
better product knowledge and attention to individual products.
Customer salesforce structure

Using a customer (or market) salesforce structure, a company organises its salesforce along customer
customer or industry lines. Separate salesforces may be set up for different industries, for serving (market)
current customers versus finding new ones and for major accounts versus regular accounts. Organising salesforce
structure
the salesforce around customers can help a company to build closer relationships with important
customers. Many companies even have special salesforces set up to handle the needs of individual large where salespeople
customers. In Australia, Unilever understands that the relationships it has with large retailers, such as specialise in selling only
Coles, Kmart and Target, are so important, it has a customer (or relationship) manager and an assistant to certain customers or
industries.
customer manager. Unilever see these roles as being crucial in order to ‘cement on-going relationships
with our customers’.3
Complex salesforce structures

When a company sells a wide variety of products to many types of customers over a broad geographic
area, it often employs a complex salesforce structure, which combines several types of salesforce structures.
Salespeople can be specialised by customer and territory, by product and territory, by product and customer,
or by territory, product and customer. No single structure is best for all companies and situations. Each
company should select a salesforce structure that best serves the needs of its customers and fits the company’s
overall marketing strategy.
An appropriate salesforce structure can mean the difference between success and failure. Over time,
salesforce structures can grow complex, inefficient and unresponsive to customers’ needs. Companies
should periodically review their salesforce organisations to be certain they serve the needs of the company
and its customers.
9780655702412_CH12.indd 349 3/3/20 11:02 AM

Salesforce size
Once the company has set its structure, it is ready to consider salesforce size. Salesforces may range in size from
only a few salespeople to tens of thousands. Salespeople constitute one of the company’s most productive –
and most expensive – assets. Therefore, increasing their number will increase both sales and costs.
Many companies use some form of workload approach to set salesforce size. Using this approach, a company
first groups accounts into different classes according to size, account status or other factors related to the
amount of effort required to maintain them. It then determines the number of salespeople needed to call
on each class of accounts the desired number of times. Figure 12.2 illustrates the workload approach in action.
Type A: LARGE BUSINESS Type B: SMALL BUSINESS
100×Customer account 200×Customer account
SALESFORCE WORKLOAD IS
6000 calls per year:
(100×36) + (200×12) = 6000
IF AN AVERAGE SALESPERSON COULD MAKE
1000 calls per year, then:
6000 ÷ 1000 = 6
6 SALESPEOPLE ARE REQUIRED

to do the work
Figure 12.2 Workload approach in action: Calculating salesforce size

outside salesforce
(field salesforce)
Salespeople who travel Other salesforce strategy and structure issues
to or call on customers Sales management must also decide who will be involved in the selling effort and how various sales and sales
in the field. support people will work together.
inside salesforce
Salespeople who Outside and inside salesforces
conduct business The company may have an outside salesforce (or field salesforce), an inside salesforce or both.
from their offices by Outside salespeople travel to call on customers in the field. Inside salespeople conduct business from their
telephone, through offices via telephone, through online and social media interactions or by visits from buyers.
online and social media
interactions or by visits Some inside salespeople provide support for the outside salesforce, freeing them to spend more time
from buyers. selling to major accounts and finding new prospects. For example, technical sales support people provide
9780655702412_CH12.indd 350 3/3/20 11:02 AM

technical information and answers to customers’ questions.

Sales assistants provide administrative backup for outside
salespeople. They track down sales leads, call ahead and confirm
appointments, follow up on deliveries and answer customers’
questions when outside salespeople cannot be reached. Using
such combinations of inside and outside salespeople can help
to serve important customers better. The inside rep provides
daily access and support; the outside rep provides face-to-face
collaboration and relationship building.
Other inside salespeople do more than just provide support.
Telemarketers and online sellers use the phone, internet and social
media to find new leads, to learn about customers and their business,
and to sell and service accounts directly. Telemarketing and online
Inside salesforces: For many types of selling situations, phone or
selling can be very effective and less-costly ways to sell to smaller, online selling can be as effective as a personal sales call.
harder-to-reach customers. Depending on the complexity of the © Blue Jean Images/Alamy Stock Photo
product and customer, for example, a telemarketer can make from
20 to 33 decision-maker contacts a day, compared to the average of four that an outside salesperson can make.
Although the Australian government’s Do Not Call Register put a dent in telephone sales to consumers,
telemarketing remains a vital tool for many business-to-business marketers. For some smaller companies,
telephone and online selling may be the primary sales approaches. However, most of the larger companies
also use these tactics extensively, either to sell directly to small and mid-size customers or to assist their
salesforces in selling to larger customers.
In addition to cost savings, in today’s digital, mobile and social media environments, many buyers are
more receptive to – or even prefer – phone and online contact versus the high level of face-to-face contact
once required. Today’s customers are more inclined to gather their own information online – one study
showed that a typical buyer reports contacting a sales rep only after independently completing about
60 per cent of the buying process. Then buyers routinely use the phone, online meetings and social media
interactions to engage sellers and close deals. ‘With virtual meeting software such as GoToMeeting.com
and WebEx, communications tools such as Skype, and social media sites such as Twitter, Facebook, and
LinkedIn, it’s become easier to sell with few if any face-to-face meetings,’ says an inside sales consultant. As
a result of these trends, telephone and online selling are growing much faster relative to in-person selling.4
For many types of products and selling situations, phone or online selling can be as effective as a personal
sales call. That does not mean there is no salesperson at all. It is the way they work that is different. Online
and telesales businesses will still need a customer service team to resolve customer concerns and answer
questions. Savvy businesses are not interested only in customer service – they are also interested in customer
experience management and, for the online and telesales business, that means being accessible and responsive.
As one expert explains, ‘Those salespeople and companies that are not easily accessible, that take too long to
respond or to deliver are going to find themselves at the back of the line, with the more agile, responsive and
[nimble] footed salespeople and sales organisations taking the lion’s share of the business.’ Managed well, the
phone and internet can be surprisingly personal when it comes to building customer relationships.5
Team selling
team selling
As products become more complex, and as customers grow larger and more demanding, a single
Using teams of people
salesperson simply cannot handle all of a large customer’s needs. Instead, most companies now use from sales, marketing,
team selling to service large, complex accounts. Sales teams can unearth problems, solutions and sales engineering, finance,
opportunities that no individual salesperson could. Such teams might include experts from any area or technical support and
even upper management
level of the selling firm – sales, marketing, technical and support services, research and development, to service large, complex
engineering, operations, finance and others. customer accounts.
9780655702412_CH12.indd 351 3/3/20 11:02 AM

In many cases, the move to team selling mirrors similar

changes in customers’ buying organisations. Many large
customer companies have implemented team-based purchasing,
requiring marketers to employ equivalent team-based selling.
When dealing with large, complex accounts, one salesperson
cannot be an expert in everything the customer needs. Instead,
selling is done by strategic account teams, led by senior account
managers or customer business managers.
Some companies, such as IBM, Xerox and Procter &
Gamble (P&G), have used teams for a long time. P&G sales
reps are organised into ‘customer business development
(CBD) teams’. Each CBD team is assigned to a major P&G
customer. The CBD organisation places the focus on serving
the complete needs of each major customer. It lets P&G ‘grow
Team selling: Many companies combine several types of salesforce
structure and work in teams to service large, complex accounts. business by working as a “strategic partner” with our accounts’,
Andres Rodriguez/Fotolia not just as a supplier.6
Team selling does have some pitfalls. For example,
salespeople are by nature competitive and have often been trained and rewarded for outstanding individual
performance. Salespeople who are used to having customers all to themselves may have trouble learning to
work with and trust others on a team. In addition, selling teams can confuse or overwhelm customers who
are used to working with only one salesperson. Finally, difficulties in evaluating individual contributions to
the team-selling effort can create some tricky compensation issues.
Recruiting and selecting salespeople

At the heart of any successful salesforce operation is the recruitment and selection of good salespeople.
The performance difference between an average salesperson and a top salesperson can be substantial. In a
typical salesforce, the top 30 per cent of the salespeople might bring in 60 per cent of the sales. Thus, careful
salesperson selection can greatly increase overall salesforce performance. Beyond the differences in sales
performance, poor selection results in costly turnover. When a salesperson quits, the costs of finding and
training a new salesperson – plus the costs of lost sales – can be very high. One expert estimates that the cost
of hiring a new salesperson can be as much as twice their salary.7 Also, a salesforce with many new people is
less productive, and turnover disrupts important customer relationships.
What sets great salespeople apart from all the rest? In an effort to profile top sales performers, Gallup
Management Consulting Group, a division of the well-known Gallup polling organisation, has interviewed
hundreds of thousands of salespeople. Its research suggests that the best salespeople possess four key talents:
intrinsic motivation, disciplined work style, the ability to close a sale and, perhaps most importantly, the
ability to build relationships with customers.8
Super salespeople are motivated from within – they have an unrelenting drive to excel. Some salespeople
are driven by money, a desire for recognition or the satisfaction of competing and winning. Others are
motivated by the desire to provide service and to build relationships. The best salespeople possess some of
each of these motivations. However, another analysis found that the best salespeople are driven by a strong
sense of purpose: ‘The salespeople who sold with noble purpose, who truly want to make a difference to
customers, consistently outsold the salespeople focused on sales goals and money.’ Selling with such a sense
of customer-related purpose is not only more successful, it is also more profitable and more satisfying to
salespeople.9
Super salespeople also have a disciplined work style. They lay out detailed, organised plans and then
follow through in a timely way. But motivation, discipline and effective thinking mean little unless they
result in closing more sales and building better customer relationships. Super salespeople build the skills
9780655702412_CH12.indd 352 3/3/20 11:02 AM

and knowledge they need to get the job done. Perhaps most importantly, top salespeople are excellent
customer problem solvers and relationship builders. They understand their customers’ needs. Talk to sales
executives and they will describe top performers in these terms: Empathetic. Patient. Caring. Responsive.
Good listeners. Top performers can put themselves on the buyer’s side of the desk and see the world through
their customers’ eyes. They want to add value for their customers.
That said, there is no one right way to sell. Each successful salesperson uses a different approach, one
that best applies his or her unique strengths and talents. For example, some salespeople enjoy the thrill of a
harder sell in confronting challenges and winning people over. Others might apply ‘softer’ talents to reach
the same goal. ‘The truth is, no two great sales reps are alike,’ says one sales consultant. ‘You might thrive on
fierce competition, while a colleague wins by being a super-analytical problem solver. Or maybe you have a
tremendous talent for building relationships, while your fellow top performer is a brilliant strategist. What’s
most important is that you win business your way.’10
When recruiting, a company should analyse the sales job itself and the characteristics of its most
successful salespeople to identify the traits needed by a successful salesperson in their industry. Then,
it must recruit the right salespeople. The human resources department looks for applicants by seeking
recommendations from current salespeople, using employment agencies, placing classified ads, searching
the internet and online social media, and working through university careers and placement services.
Another source is to attract top salespeople from other companies. Proven salespeople need less training
and can be productive immediately.
Recruiting will attract many applicants from whom the company must select the best. The selection
procedure can vary from a single informal interview to lengthy testing and interviewing. Many
companies give formal tests to sales applicants. Tests typically measure sales aptitude, analytical and
organisational skills, personality traits and other characteristics. But test scores provide only one piece
of information in a set that includes personal characteristics, references, past employment history and
interviewer reactions.
Training salespeople
New salespeople may spend anywhere from a few weeks or months to a year or more in training. Then,
most companies provide continuing sales training via seminars, sales meetings and online e-learning
throughout the salesperson’s career. Companies invest heavily in training salespeople, and sales training
typically captures the largest share of the company’s overall
training budget. Although training can be expensive, it can also
yield dramatic returns. For instance, one training organisation
reports it was able to achieve a 16 per cent increase in sales
for its client, an Australian manufacturer and exporter of
fibreglass swimming pools. Such massive improvements show
the value of investing in training a sales team.11
Training programs have several goals. First, salespeople
need to know about customers and how to build relationships
with them. So, the training program must teach them about
different types of customers and their needs, buying motives
and buying habits. And it must teach them how to sell effectively
and train them in the basics of the selling process. Salespeople
also need to know and identify with the company, its products Sales training: Training can make a sales team much more effective.
An Australian swimming-pool manufacturer and exporter increased
and its competitors. So, an effective training program teaches sales by 16 per cent after supporting dealers to develop their sales
salespeople about the company’s objectives, organisation and skills.
chief products and markets, and about the strategies of major © Alexandre Zveiger/Shutterstock.com
competitors.
9780655702412_CH12.indd 353 3/3/20 11:02 AM

Today, many companies are adding e-learning to their sales training programs. Online training may
range from simple text-based product training, to internet-based sales exercises that build sales skills, to
sophisticated simulations that re-create the dynamics of real-life sales calls. One of the most basic forms of
online training is virtual instructor-led training (VILT). Using this method, a small group of salespeople
at various remote locations log in to an online conferencing site, where a sales instructor leads training
sessions using online video, audio and interactive learning tools.
Training online instead of on-site can cut travel and other training costs, and it takes up less of
salespeople’s selling time. It also makes on-demand training available to salespeople, letting them train
as little or as much as needed, whenever and wherever needed. Although most e-learning is web-based,
many companies now offer on-demand training from anywhere via almost any mobile digital device.
Many companies are now using imaginative and sophisticated e-learning techniques to make sales training
more efficient – and sometimes even more fun. For example, one Australian sales training company uses
sales simulations to develop sales skills with its clients.12
Compensating salespeople
To attract good salespeople, a company must have an appealing compensation plan. Compensation is
made up of several elements – a fixed amount, a variable amount, expenses and fringe benefits. The fixed
amount, usually a salary, gives the salesperson some stable income. The variable amount, which might be
commissions or bonuses based on sales performance, rewards the salesperson for greater effort and success.
Management must decide what mix of these compensation elements makes the most sense for each
sales position. Different combinations of fixed and variable compensation give rise to four basic types of
compensation plans: straight salary, straight commission, salary plus bonus and salary plus commission.
According to one study of salesforce compensation, 18 per cent of companies pay straight salary,
19 per cent pay straight commission and 63 per cent pay a combination of salary plus incentives. Another
study showed that the average salesperson’s pay consists of about 67 per cent salary and 33 per cent
incentive pay.13
The salesforce compensation plan can both motivate salespeople and direct their activities.
Compensation should direct salespeople towards activities that are consistent with overall salesforce
and marketing objectives. For example, if the strategy is to acquire new business, grow rapidly and gain
market share, the compensation plan might include a larger commission component, coupled with a new-
account bonus to encourage high sales performance and new-account development. In contrast, if the
goal is to maximise current-account profitability, the compensation plan might contain a larger base-salary
component with additional incentives for current-account sales or customer satisfaction.14
In fact, more and more companies are moving away from high commission plans that may drive
salespeople to make short-term grabs for business. They worry that a salesperson who is pushing too hard to
close a deal may ruin the customer relationship. Instead, companies are designing compensation plans that
reward salespeople for building customer relationships and growing the long-run value of each customer.
When times get tough economically, some companies are tempted to cut costs by reducing sales
compensation. However, although some cost-cutting measures make sense when business is sluggish,
cutting salesforce compensation across the board is usually an action of last resort. Top salespeople are
always in demand, and paying them less might mean losing them at a time when they are most needed.
Thus, short-changing key salespeople can result in short-changing important customer relationships. If the
company must reduce its compensation expenses, rather than making across-the-board cuts, companies
should continue to pay top performers well while turning loose poor performers.
Supervising and motivating salespeople

New salespeople need more than a territory, compensation and training – they need supervision and
motivation. The goal of supervision is to help salespeople ‘work smart’ by doing the right things in the right
9780655702412_CH12.indd 354 3/3/20 11:02 AM

ways. The goal of motivation is to encourage salespeople to ‘work hard’ and energetically towards salesforce
goals. If salespeople work smart and work hard, they will realise their full potential, to both their own and
the company’s benefit.
Supervising salespeople
Companies vary in how closely they supervise their salespeople. Many companies help salespeople to
identify target customers and set call norms. Some may also specify how much time the salesforce should
spend prospecting for new accounts and set other time-management priorities. One tool is the weekly,
monthly or annual call plan that shows which customers and prospects to call on and which activities to
carry out. Another tool is time-and-duty analysis. In addition to time spent selling, the salesperson spends
time travelling, waiting, taking breaks and doing administrative tasks.
How salespeople spend their time varies from industry to industry and even from metropolitan to
urban settings. International benchmarks are available for comparing similar businesses. Benchmarks are
not necessarily ‘best practice’, but they do represent what is happening in similar businesses around the
world. For example, Figure 12.3 shows the international benchmark for a field salesforce operating in large
cities. The outer ring shows how salespeople in the benchmark business spend their time. The inner ring
shows how the field salesforce for an example Australian business spends their time. A quick comparison
shows there are a lot of similarities. Salespeople spend about a quarter of their time travelling, waiting and
on personal activity, and about 20 per cent of their time in face-to-face sales meetings.15
But that is where the similarities end. The example Australian business’s salesforce spends much less
time prospecting and a bit less time servicing customers, and a great deal more time on organisational
activities. The Australian business’s salesforce is being pulled away from the active sales functions into
administrative and organisational tasks. By redirecting the salesforce effort to sales-focused activities, it may
be possible to generate more sales.
Figure 12.3 also shows that the field salesforce for the example Australian business is spending much
less time on sales-related activities (less than 40 per cent) compared to the international benchmark business
International benchmark
in major cities
8%
15%
6% 6% Prospecting
Face-to-face selling
19% 19%
20% Servicing customers
Example 19% Organisational activities

Business Travelling and waiting
13% Personal/miscellaneous activity
36%
22%
17%
Figure 12.3 How salespeople spend their time

Source: Sue Barrett, ‘How much valuable selling time are you wasting?’, Smart Company, 7 April 2013. Data used with permission.
9780655702412_CH12.indd 355 3/3/20 11:02 AM

(over 50 per cent). Understanding where the salesforce is spending their time, and directing more time to
sales- and customer-focused activity, could help improve the overall performance of the field sales team in
this example.
Companies are always looking for ways to save time – by simplifying administrative duties, developing
better sales-call and routing plans, supplying more and better customer information, and using phones,
email or videoconferencing instead of travelling. Comparisons such as that shown in Figure 12.3 help
managers to understand where those savings might be.
Many firms have adopted salesforce automation systems – computerised, digitised salesforce operations
that let salespeople work more effectively anytime, anywhere. Companies now routinely equip their
salespeople with laptops, smartphones, wireless connections, webcams for videoconferencing, and
customer-contact and relationship management software. Armed with these technologies, salespeople
can more effectively and efficiently profile customers and prospects, analyse and forecast sales, schedule
sales calls, make presentations, prepare sales and expense reports, and manage account relationships.
The result is better time management, improved customer service, lower sales costs and higher sales
performance. In all, technology has reshaped the ways in which salespeople carry out their duties and
engage customers.
Digital and Cloud-based solutions offer explosive potential for connecting with and engaging
social selling customers. In fact, social selling – the use of online, mobile and social media to engage customers,
Using online, mobile and build strong customer relationships and augment sales performance – is the fastest-growing sales
social media to engage
trend today. Mayo Hardware is a Sydney-based distributor of hardware to retailers such as Bunnings
customers, build strong
customer relationships and Mitre 10. Each week, Mayo Hardware’s 40-plus sales reps are out with customers, pitching
and augment sales new product lines, conducting in-store training, taking orders and managing the various product
performance. lines. The sales team use tablets and smartphones with a Cloud-based app to connect them to Mayo
Hardware’s sales system. This means that while the reps are out and about they can record in-store
training and track opportunities, sales rates and overall progress – all in real-time. Social tools are
used to keep the sales team connected – they can chat throughout the day, sharing information,
insights and solutions to client problems. This keeps the team abreast of all the latest developments
even when they are on the road. In short, salespeople are ‘armed for customer engagement’
(see Marketing in Action 12.1).16
Motivating salespeople
Beyond directing salespeople, sales managers must also motivate them. Some salespeople will do their
best without any special urging from management. To them, selling may be the most fascinating job in
the world. But selling can also be frustrating. Salespeople often work alone and they must sometimes
travel away from home. They may face aggressive competing
salespeople and difficult customers. Therefore, salespeople
often need special encouragement to do their best.
Management can boost salesforce morale and performance
through its organisational climate, sales quotas and positive
incentives. Organisational climate describes the feeling that
salespeople have about their opportunities, value and rewards
for a good performance. Some companies treat salespeople
as if they are not very important, and performance suffers
accordingly. Other companies treat their salespeople as valued
Salesforce automation: Mayo Hardware use digital and Cloud- contributors and allow virtually unlimited opportunity for
based sales systems to support the salesforce and to maintain high income and promotion. Not surprisingly, the latter companies
customer engagement. enjoy higher salesforce performance and lower salesforce
Mayo Hardware, www.mayohardware.com.au
turnover.
9780655702412_CH12.indd 356 3/3/20 11:02 AM

Marketing
Social selling: Who needs salespeople?
in Action
12.1
It is difficult to imagine a world without salespeople. But, according to some by an average of $100 000, while adding a customer communication channel
analysts, there will be a lot fewer of them a decade from now. With the explosion could increase revenue by as much as $160 000 per annum. The challenge for
of the internet, mobile devices, social media and other technologies that link SMBs: fewer than 20 per cent are using social media to engage with customers.
customers directly with companies, they reason, who needs face-to-face selling Digital technologies are providing salespeople with powerful tools for
anymore? According to the doubters, salespeople are rapidly being replaced by identifying and learning about prospects, engaging customers, creating
websites, email, blogs, mobile apps, video sharing, virtual trade shows, social media customer value, closing sales and nurturing customer relationships. Social selling
such as LinkedIn and Facebook, and a host of other digital-age interaction tools. technologies can produce significant organisational benefits for salesforces.
‘Don’t believe it,’ says one sales expert. ‘There may be less face-to-face selling,’ They help conserve salespeople’s valuable time, save travel dollars and give
says another, ‘but on the seller’s side, there needs to be someone in charge of that salespeople new tools for selling and servicing accounts.
(customer) interaction. That will remain the role of the salesperson.’ Thus, online Social selling has not really changed the fundamentals of selling. Salesforces have
and social media technologies are unlikely to make salespeople obsolete. Used always taken the primary responsibility for reaching out to and engaging customers,
properly, however, they will make salespeople more productive and effective. and managing customer relationships. Now, more of that is being done digitally.
A recent report from Deloitte Access Economics highlights the importance of However, online and social media are dramatically changing the customer-buying
digital sales strategies for small and medium-sized businesses (SMBs) in Australia process. As a result, they are also changing the selling process. In today’s digital
and New Zealand today (see also Chapter 13). Within five years, 50 per cent world, many customers no longer rely as much as they once did on information
of sales will involve digital tools, and investment in social selling will pay off. and assistance provided by salespeople. Instead, they carry out more of the buying
A 1 per cent increase in spending on online services will increase average revenues process on their own – especially the early stages. Increasingly, they use online and
social media resources to analyse their own problems, research solutions, get advice
from colleagues and rank buying options before ever speaking to a salesperson.
In response to this new digital buying environment, sellers are reorienting
their selling processes around the new customer-buying process. They are ‘going
where customers are’ – social media, web forums, online communities, blogs – in
order to engage customers earlier in the process. They are engaging customers
not just where and when they are buying but also where and when they are
learning about and evaluating what they will buy.
Salespeople now routinely use digital tools that monitor customer social media
exchanges to spot trends, identify prospects and learn what customers would like
to buy, how they feel about a vendor and what it would take to make a sale.
They generate lists of prospective customers from online databases and social
networking sites, such as LinkedIn and Facebook. They create dialogues when
prospective customers visit their website and social media sites through live chats
with the sales team. They use internet-conferencing tools, such as WebEx, Zoom or
GoToMeeting, to talk live with customers about products and services. They provide
videos and other information on their YouTube channels and Facebook pages.
Ultimately, social selling technologies are helping to make salesforces more
efficient, cost-effective and productive. The technologies help salespeople do
what good salespeople have always done – build customer relationships by
solving customer problems – but to do it better, faster and cheaper.
Sources: Lain Chroust Ehmann, ‘Sales up!’, Selling Power, January/February 2011,
p. 40; Thomas Karemacher, ‘Research reveals how SMBs use digital to engage customers’,
Digital technologies can help small and medium-sized 22 March 2016, Salesforce Australia & NZ Blog, <www.salesforce.com/au/blog/2016/03/
research-reveals-how-smbs-use-digital-to-engage-customers.html>; Tom Pisello, ‘Death of a
businesses improve the customer experience, leading to salesman?’, LinkedIn, 12 March 2015, <www.linkedin.com/pulse/death-salesman-forrester-
increased sales and revenue. says-yes-tom-pisello>; Tony J Hughes, ‘Back to the future of sales in 2015’, LinkedIn,
Salesforce Australia and NZ Blog, www.salesforce.com/au/blog 27 December 2014, <www.linkedin.com/pulse/back-future-sales-2015-tony-j-hughes>;
accessed November 2016.
9780655702412_CH12.indd 357 3/3/20 11:02 AM

Questions business needs to have a face-to-face sales team? Why, or why not? What
social selling strategy would you recommend?
❶ For a traditional salesperson, intrinsic motivation, disciplined work style,
❸ Some experts are highly critical of social selling. Search online and make a
the ability to close a sale and the ability to build relationships with
list of the criticisms. Evaluate each in turn; do you think these criticisms are
customers, are the most important traits. Search social selling online.
justified?
Do you think these traits differ in social selling? Justify your answer.
❷ Choose a small business that has a website (e.g. a locksmith). What social
selling tools would you recommend for this business? Do you think the
sales quota Many companies motivate their salespeople by setting sales quotas – standards stating the amount
A standard stating the they should sell and how sales should be divided among the company’s products. Compensation is often
amount a salesperson
related to how well salespeople meet their quotas. Companies also use various positive incentives to increase
should sell and how
sales should be divided salesforce effort. Sales meetings provide social occasions, breaks from routine, chances to meet and talk
among the company’s with senior managers, and opportunities to air feelings and to identify with a larger group. Companies
products. also sponsor sales contests to spur the salesforce to make a selling effort above what would normally be
expected. Other incentives include corporate recognition, merchandise and cash awards, trips and profit-
sharing plans.
Evaluating salespeople and salesforce performance

We have described how management communicates what salespeople should be doing and how it motivates
them to do it. This process requires good feedback. And good feedback means getting regular information
about salespeople in order to evaluate their performance.
Management gets information about its salespeople in several ways. The most important source
is sales reports, including weekly or monthly work plans and longer-term territory marketing plans.
Salespeople also write up their completed activities on call reports and turn in expense reports, for which
they are partially or wholly repaid. The company can also monitor the sales and profit performance
data in the salesperson’s territory. Additional information comes from personal observation, customer
surveys and talks with other salespeople. Often, these reports are collated in real-time, using a range of
digital and Cloud-based sales solutions and using data input by salespeople while they are working with
customers.
Using various salesforce reports and other information, sales management evaluates members
of the salesforce. It evaluates salespeople on their ability to ‘plan their work and work their plan’.
Formal evaluation forces management to develop and communicate clear standards for assessing
performance. It also provides salespeople with constructive feedback and motivates them to
perform well.
On a broader level, management should evaluate the performance of the salesforce as a whole. Is the
salesforce accomplishing its customer relationship, sales and profit objectives? Is it working effectively with
other areas of the marketing and company organisation? Are salesforce costs in line with outcomes? As with
other marketing activities, the company wants to measure its return on sales investment.

Take a break and re-examine your thoughts about salespeople and ● Find and talk with someone employed in professional sales. Ask
sales management. about and report on how this salesperson’s company designs
● When someone says ‘salesperson’, what image comes to mind? its salesforce, and recruits, selects, trains, compensates,
Have your perceptions of salespeople changed after what you supervises and evaluates its salespeople. Would you like to
have read in the chapter so far? If so, how? Be specific. work as a salesperson for this company? Why, or why not?
9780655702412_CH12.indd 358 3/3/20 11:02 AM

Sales promotion
Personal selling and advertising often work closely with another promotion tool – sales promotion.
Sales promotion consists of short-term incentives to encourage purchase or sales of a product or sales promotion
service. Whereas advertising offers reasons to buy a product or service, sales promotion offers reasons Consists of short-term
incentives to encourage
to buy now.
the purchase or sale of a
Examples of sales promotions are found everywhere. A free-standing insert in the Sunday newspaper product or service.
contains a coupon offering $1 off Schmackos treats for your dog. An email from Officeworks offers free
shipping on your next purchase over $100. A retail website offers a free gift with your purchase. The
end-of-the-aisle display in the local supermarket tempts impulse buyers with a wall of Coke cases. An
executive buys a new Samsung tablet and gets a case cover, or a family buys a new Holden Commodore
and the dealer pays the on-road costs. A hardware store chain receives a 10 per cent discount on selected
Black & Decker portable power tools if it agrees to advertise them in local newspapers. Sales promotion
includes a wide variety of promotion tools designed to stimulate an earlier or stronger market response.
Rapid growth of sales promotion

Sales promotion tools are used by most organisations, including manufacturers, distributors,
retailers and not-for-profit institutions. They are targeted towards final buyers (consumer promotions),
retailers and wholesalers (trade promotions), business customers (business promotions) and members of
the salesforce (salesforce promotions). Today, in the average consumer packaged-goods company, sales
promotion accounts for 60 per cent of all marketing budgets. In Australia, marketers spend more than
$1.34 billion each year on promotional products alone. In New Zealand, the spend is lower but still
a notable NZ$144 million.17
Several factors have contributed to the rapid growth of sales promotion, particularly in consumer
markets. First, inside the company, product managers face greater pressures to increase their current
sales, and promotion is viewed as an effective short-run sales tool. Second, externally, the company faces
more competition, and competing brands are less differentiated. Increasingly, competitors are using
sales promotion to help differentiate their offers. Third, advertising efficiency has declined because of
rising costs, media clutter and legal restraints. Finally, consumers have become more deal-oriented. In
today’s marketing environment, consumers routinely make
comparisons online before purchasing – even when they
plan to shop in-store. One study estimates that 84 per cent
of smartphone owners use their phone while shopping in-
store. Consumers are demanding lower prices and better
deals. Sales promotions can help attract today’s more thrift-
oriented consumers.18
The growing use of sales promotion has resulted in
promotion clutter, similar to advertising clutter. A given
promotion runs the risk of being lost in a sea of other
promotions, weakening its ability to trigger immediate
purchase. Manufacturers are now searching for ways to rise
above the clutter, such as offering larger coupon values,
creating more dramatic point-of-purchase displays, or
delivering promotions through interactive media, such as the Sales promotion: Sales promotions are found everywhere – in
magazines and newspapers, and on businesses’ websites, such as this
internet or mobile phones. According to one study, 88 per
one for Bob Jane T-Marts offering a set of four tyres for the price of
cent of retailers now see digital promotions – such as mobile three.
coupons, shopper emails and online deals – as an important Bob Jane T-Marts
part of their shopper marketing efforts. 19
9780655702412_CH12.indd 359 3/3/20 11:02 AM

In developing a sales promotion program, a company must first set sales promotion
objectives and then select the best tools for accomplishing these objectives.
Sales promotion objectives

Sales promotion objectives vary widely. Sellers may use consumer promotions to urge
short-term customer buying or to enhance customer brand involvement. Objectives
for trade promotions include getting retailers to carry new items and more inventory,
to buy ahead or to promote the company’s products and give them more shelf space.
Sales promotion objectives: One of Business promotions are used to generate business leads, stimulate purchases, reward
Australia’s favourite loyalty programs,
customers and motivate salespeople. For the salesforce, objectives include getting
Coles-powered FlyBuys, offers members
discounts and bonus loyalty points for more salesforce support for current or new products or getting salespeople to sign
reaching activity-tracker step milestones. up new accounts.
© izf/Shutterstock.com Sales promotions are usually used together with advertising, personal selling, direct
marketing or other promotion mix tools. Consumer promotions must usually be advertised
and can add excitement and ‘pulling power’ to ads. Trade and salesforce promotions
support the firm’s personal selling process.
When the economy tightens and sales lag, it is tempting to offer deep promotional discounts to
spur consumer spending. In general, however, rather than creating only short-term sales or temporary
brand switching, sales promotions should help to reinforce the product’s position and build long-term
customer relationships. If properly designed, every sales promotion tool has the potential to build both
short-term excitement and long-term consumer relationships. Marketers should avoid ‘quick fix’, price-
only promotions in favour of promotions designed to build brand equity. Examples of such promotions
include all of the ‘frequency marketing programs’ and loyalty cards that have mushroomed in recent
years. Most hotels, supermarkets and airlines offer frequent-guest/buyer/flyer programs, giving rewards to
regular customers to keep them coming back. All kinds of companies now offer rewards programs. Such
promotional programs can build loyalty through added value rather than through discounted prices.
For example, around 45 per cent of Australian consumers carry a Coles-powered FlyBuys membership
card, and nearly half of those members rate the program as excellent. Members collect points by
shopping at Coles and a myriad of other FlyBuys partners; they can accelerate using Coles insurance
and credit cards; and then receive rewards with multiple rewards-category options. In collaboration
with Medibank, Flybuys members are offered discounts on Coles fruit and vegetables when they reach
Fitbit and Garmen activity-tracker step milestones and Medibank members collect 2000 bonus points
for reaching all five milestones. But that is not all. Members receive offers tailored to their purchasing
patterns – everything from bonus points on select Coles purchases to thousands of bonus points for
switching their electricity supply to AGL online and another 500 for paying their energy bill by direct
debit. By working with its partners, FlyBuys is able to offer members real benefits that they love.20
Major sales promotion tools

Many tools can be used to accomplish sales promotion objectives. Descriptions of the main consumer, trade
and business promotion tools follow.
consumer
promotion Consumer promotions
A sales promotion tool Consumer promotions include a wide range of tools – from samples, coupons, refunds, premiums and
used to boost short- point-of-purchase displays to contests, sweepstakes and event sponsorships.
term customer buying
Samples are offers of a trial amount of a product. Sampling is the most effective – but most expensive –
and involvement or to
enhance a long-term way to introduce a new product or to create new excitement for an existing one. Some samples are
customer relationship. free; for others, the company charges a small amount to offset its cost. The sample might be delivered
9780655702412_CH12.indd 360 3/3/20 11:02 AM

door-to-door, sent by mail, handed out in a store or kiosk, attached to another product or be featured in
an ad. Sometimes, samples are combined into sample packs, which can then be used to promote other
products and services. Sampling can be a powerful promotional tool and can be used for wholesale
and retail customers. For example, Melbourne-based French patisserie and bakery, Noisette, offers free
samples to its wholesale customers.21
Coupons are certificates that give buyers a saving when they purchase specified products. Most
consumers love coupons. Coupons can promote early trial of a new brand or stimulate sales of a mature
brand. However, as a result of coupon clutter, redemption rates have been declining in recent years. Thus,
most major consumer-goods companies are issuing fewer coupons but targeting them more carefully.
Marketers are also cultivating new outlets for distributing coupons, such as supermarket shelf dispensers,
electronic point-of-sale coupon printers, email and online media, or even mobile text-messaging systems.
Digital couponing is very popular in Europe, India, Japan and the United States, and is gaining popularity in
Australia. For example, consider Vouchr, an Australian digital-couponing company. Vouchr (<www.vouchr.
com.au>) and Groupon allow users to clip and save coupons, access digital coupons from subscribed businesses
and redeem coupons at the point of purchase. The mobile app uses the location facility in smartphones to
prompt users when they are near a store for which they have a saved coupon, and users can set reminders
to alert them when coupons are near their expiry date. To use the coupons, users simply call up the stored
coupon list in their smartphone, navigate to the digital coupon they want and show it to the store cashier.22
Mobile and digital coupons offer distinct advantages to both consumers and marketers. Consumers do not
have to find and clip paper coupons, or print out web coupons and bring them along when they shop. They
always have their mobile coupons with them. For marketers, mobile coupons allow more careful targeting and
eliminate the costs of printing and distributing paper coupons. Companies pay for redemptions and customers
redeem digital coupons about 8 per cent of the time compared to 2 per cent for conventional coupons. Other
reports are even more favourable, with digital redemption rates as high as 20 per cent. Although still relatively
new in Australia and New Zealand, mobile and digital couponing is emerging as a new promotional tool.23
Cash refunds (or rebates) are similar to coupons except that the price reduction occurs after the purchase,
rather than at the retail outlet. The consumer sends a ‘proof of purchase’ to the manufacturer, who then
refunds part of the purchase price by mail.
Price packs (also called cents-off deals) offer consumers savings off the regular price of a product. The
producer marks the reduced prices directly on the label or package. Price packs can be single packages
sold at a reduced price (such as two for the price of one) or two
related products banded together (such as a toothbrush and
toothpaste). Price packs are very effective – even more so than
coupons – in stimulating short-term sales (see Chapter 9 for
more on pricing).
Premiums are goods offered either free or at low cost as an
incentive to buy a product, ranging from toys included with
children’s products to phone cards and DVDs. A premium may
come inside the package (in-pack), outside the package (on-pack)
or through the mail. For example, over the years, McDonald’s
has offered a variety of premiums in its Happy Meals – from
Trolls and Hot Wheels, to Barbie Spy Squad and Mr Men books.
Customers can visit <www.happymeal.com.au> and play games
Promotional products: Australian companies spend over $1 billion
and interact with various sponsor-related content on the site.24 each year on promotional products because, as noted by the
Advertising specialties, also called promotional products, are Australasian Promotional Products Association, they work, increasing
useful articles imprinted with an advertiser’s name, logo or favourable brand impressions and brand recall.
Krisztian Bocsi/Bloomberg via Getty Images
message that are given as gifts to consumers. Typical items
9780655702412_CH12.indd 361 3/3/20 11:02 AM

include T-shirts and other apparel, pens, coffee

mugs, calendars, key rings, mouse pads, matchbooks,
tote bags, coolers, caps and golf balls. These items
can be very effective, keeping the brand message
in front of the user for months. The Australasian
Promotional Products Association (APPA) report
that many people keep their promotional product
for over a year, with marketing managers achieving
increased brand interest and more favourable brand
impressions.25
Point-of-purchase (POP) promotions include
displays and demonstrations that take place at the
Event sponsorship: The passion of Australian Football aligns closely with the point of sale. Think of your last visit to the local
Toyota brand, as summed up in the clever use of the Toyota brand tag-line for supermarket. Chances are good that you were
the AFL sponsorship: ‘Footy. Oh what a feeling!’ tripping over aisle displays, promotional signs,
Toyota/AFL ‘shelf talkers’ or demonstrators offering free tastes
of featured food products. Unfortunately, many
retailers do not like to handle the hundreds of displays, signs and posters they receive from manufacturers
each year. Manufacturers have responded by offering better POP materials, offering to set them up and
tying them in with television, print or online messages.
Contests, sweepstakes and games give consumers the chance to win something, such as cash, trips or goods,
by luck or through extra effort. A contest calls for consumers to submit an entry – a jingle, guess, suggestion – to
be judged by a panel that will select the best entries. Sweepstakes call for consumers to submit their names for
a draw. A game presents consumers with something – bingo numbers, missing letters – every time they buy,
which may or may not help them win a prize. Such promotions can create considerable brand attention
and consumer involvement. Marketers running contests, sweepstakes and games must take care to check
local and national laws regarding running competitions. These laws vary from state to state, and between
Australia and New Zealand.26
event marketing Finally, marketers can promote their brands through event marketing (or event sponsorships). They can
Creating a brand- create their own brand-marketing events or serve as sole or participating sponsors of events created by others.
marketing event or
servicing as a sole or
The events might include anything from mobile brand tours to festivals, reunions, marathons, concerts or other
participating sponsor sponsored gatherings. Event marketing is huge, and it may be the fastest-growing area of promotion. Event
of events created by marketing can provide a less-costly alternative to expensive television commercials. When it comes to event
others. marketing, sports are in a league of their own. Marketers often spend millions of dollars in event marketing
or sponsorship. In 2016, Toyota signed up to continue sponsorship of the Australia Football League (AFL, or
Aussie Rules to locals). The new deal is believed to be one of the largest sports-sponsorship arrangements in
Australia, with Toyota supporting the league at all levels. As explained in the AFL press release, the alignment
between Australia’s iconic sport and its favourite car brand is excellent. ‘Toyota is delighted to support and help
grow the game we love, aligning our brand to the spirit and passion of Australian Football, and reinforcing our
commitment to the game at all levels.’ On top of the multi-million dollar sponsorship, Toyota also supports
grassroots footy with its Toyota Good for Footy raffle, which raised a record half a million dollars for better
trade promotion facilities and equipment in 2016 and the AFL National Women’s league.27
A sales promotion
tool used to persuade Trade promotions
resellers to carry a Manufacturers direct more sales promotion dollars towards retailers and wholesalers (79 per cent of all
brand, give it shelf promotion dollars) than to final consumers (21 per cent).28 Trade promotions can persuade resellers to
space, promote it in
advertising and push it carry a brand, give it shelf space, promote it in advertising and push it to consumers. Shelf space is so scarce
to consumers. these days that manufacturers often have to offer price-offs, allowances, buy-back guarantees or free goods
9780655702412_CH12.indd 362 3/3/20 11:02 AM

to retailers and wholesalers to get products on the shelf and,

once there, to keep them on it.
Manufacturers use several trade promotion tools. Many of
the tools used for consumer promotions – contests, premiums,
displays – can also be used as trade promotions. Or the
manufacturer may offer a straight discount off the list price on
each case purchased during a stated period of time (also called
a price-off, off-invoice or off-list). Manufacturers also may offer an
allowance (usually so much off per case) in return for the retailer’s
agreement to feature the manufacturer’s products in some way.
An advertising allowance compensates retailers for advertising
the product. A display allowance compensates them for using
special displays.
Trade shows: Exhibitors at trade shows reach many prospects not
Manufacturers may offer free goods, which are extra cases reached through their salesforces.
of merchandise, to resellers who buy a certain quantity or © Eugenio Marongiu/Shutterstock.com
who feature a certain flavour or size. They may offer push
money – cash or gifts to dealers or their salesforces to ‘push’
the manufacturer’s goods. Manufacturers may give retailers free specialty advertising items that carry the
company’s name, such as pens, pencils, calendars, paperweights and notepads.
Business promotions
Companies spend billions of dollars each year on promotion to industrial customers. Business business
promotions are used to generate business leads, stimulate purchases, reward customers and motivate promotion
A sales promotion
salespeople. Business promotions include many of the same tools used for consumer or trade promotions.
tool used to generate
Here, we focus on two additional major business promotion tools – conventions and trade shows, and sales business leads, stimulate
contests. purchases, reward
Many companies and trade associations organise conventions and trade shows to promote their customers and motivate
salespeople.
products. Firms selling to the industry show their products at the trade show. Vendors receive many
benefits, such as opportunities to find new sales leads, contact customers, introduce new products,
meet new customers, sell more to present customers and educate customers with publications and
audiovisual materials. Trade shows also help companies to reach many prospects not reached through
their salesforces. For example, at the 2016 Fine Food Australia Expo, approximately 1000 exhibitors
attracted 26 805 visitors over the four days of the exhibition. Exhibitors and visitors also connected
via the Expo’s smartphone app and on Facebook. One exhibitor explained the benefits of this type of
promotion: ‘A great event to broaden our customer database, reconnect with suppliers and manufacturers
and share food ideas with industry professionals.’29
A sales contest is a contest for salespeople or dealers to motivate them to increase their sales performance
over a given period. Sales contests motivate and recognise good company performers, who may receive
trips, cash prizes or other gifts. Some companies award points for performance, which the receiver can turn
in for any of a variety of prizes. Sales contests work best when they are tied to measurable and achievable
sales objectives, such as finding new accounts, reviving old accounts or increasing account profitability.
Developing the sales promotion program

Beyond selecting the types of promotions to use, marketers must make several other decisions in designing
the full sales promotion program. First, they must decide on the size of the incentive. A certain minimum
incentive is necessary if the promotion is to succeed; a larger incentive will produce more sales response.
The marketer also must set conditions for participation. Incentives might be offered to everyone or only to
select groups.
9780655702412_CH12.indd 363 3/3/20 11:02 AM

Marketers must decide how to promote and distribute the promotion program itself. A $2-off coupon could
be given out in a package, at the store, via the internet or in an advertisement. Each distribution method
involves a different level of reach and cost. Increasingly, marketers are blending several media into a total
campaign concept. The length of the promotion is also important. If the sales promotion period is too short,
many prospects (who may not be buying during that time) will miss it. If the promotion runs too long, the
deal will lose some of its ‘act now’ force.
Evaluation is also very important. Many companies fail to evaluate their sales promotion programs,
and others evaluate them only superficially. Yet, marketers should work to measure the returns on their
sales promotion investments, just as they should seek to assess the returns on other marketing activities.
The most common evaluation method is to compare sales before, during and after a promotion. Marketers
should ask: Did the promotion attract new customers or more purchasing from current customers?
Can we hold on to these new customers and purchases? Will the long-run customer relationship and sales
gains from the promotion justify its costs?
Clearly, sales promotion plays an important role in the total promotion mix. To use it well, the marketer
must define the sales promotion objectives, select the best tools, design the sales promotion program,
implement the program and evaluate the results. Moreover, sales promotion must be coordinated carefully
with other promotion mix elements within the overall integrated marketing communications program.

Let us reflect on the sales promotion process. ● Sales promotions are sometimes used in-store in combination
● Record all the different sales promotions you see over the with personal selling when a salesperson demonstrates the
next day or two. What types of sales promotion tools did you product, offering a coupon, price pack or samples. What might
observe? Were some types of sales promotion tools used more be the benefits of combining personal selling and a sales
frequently than others? Suggest reasons why marketers promotion?
might favour some types of sales promotion.
9780655702412_CH12.indd 364 3/3/20 11:02 AM

Student university careers and placement services. In the selection process, the procedure
can vary from a single informal interview to lengthy testing and interviewing.
Learning After the selection process is complete, training programs familiarise new
Centre salespeople not only with the art of selling but also with the company’s history,
its products and policies, and the characteristics of its market and competitors.
The salesforce compensation system helps to reward, motivate and direct
salespeople. In compensating salespeople, companies try to have an appealing
Reviewing the learning objectives plan, usually close to the going rate for the type of sales job and needed skills.
This chapter is the second of three chapters covering the final marketing mix In addition to compensation, all salespeople need supervision, and many need
element – promotion. Chapter 11 dealt with overall integrated marketing continuous encouragement because they must make many decisions and face
communications, and advertising and public relations. This chapter investigates many frustrations. Periodically, the company must evaluate the performance of its
personal selling and sales promotion. Personal selling is the interpersonal arm salesforce in order to identify ways that will enable it to perform more effectively.
of the communications mix. Sales promotion consists of short-term incentives to In evaluating salespeople, the company relies on regular information, gathered
encourage the purchase or sale of a product or service. through sales reports, personal observations, customers’ letters and complaints,
customer surveys and conversations with other salespeople.
Learning Objective 1. Discuss the role of a Digital technologies are providing salespeople with powerful tools for
company’s salespeople in creating value for identifying and learning about prospects, engaging customers, creating customer
customers and building customer relationships. value, closing sales and nurturing customer relationships. Many of today’s
Most companies use salespeople, and many companies assign them an important customers no longer rely as much on assistance provided by salespeople. Instead,
role in the marketing mix. For companies selling business products, the firm’s increasingly, they use online and social media resources to analyse their own
salespeople work directly with customers. Often, the salesforce is the customer’s requirements, research solutions, get advice from colleagues and rank buying
only direct contact with the company and therefore may be viewed by customers options before ever speaking to a salesperson. In response, sellers are reorienting
as representing the company itself. In contrast, for consumer-product companies their selling processes around the new customer-buying process. They are using
that sell through intermediaries, consumers usually do not meet salespeople or social media, mobile devices, web forums, online communities, blogs and other
even know about them. The salesforce works behind the scenes, dealing with digital tools to engage customers earlier and more fully. Ultimately, online,
wholesalers and retailers to obtain their support and helping them to become mobile and social media technologies are helping to make salesforces more
effective in selling the firm’s products. efficient, cost-effective and productive.
As an element of the promotion mix, the salesforce is very effective in
achieving certain marketing objectives and carrying out such activities as Learning Objective 3. Explain how sales promotion
prospecting, communicating, selling and servicing, and information gathering. campaigns are developed and implemented.
But, with companies becoming more market-oriented, a customer-focused Sales promotion campaigns call for setting sales promotion objectives (in general,
salesforce also works to produce both customer satisfaction and company profit. sales promotions should be aimed at building consumer relationships); selecting
The salesforce plays a key role in developing and managing profitable customer tools; and developing and implementing the sales promotion program by using
relationships. consumer promotion tools (from coupons, refunds, premiums and point-of-
purchase promotions, to contests, sweepstakes and events), trade promotion
Learning Objective 2. Identify and explain the six tools (discounts, allowances, free goods, push money) and business promotion
main salesforce management steps. tools (conventions, trade shows, sales contests), as well as deciding on such things
High salesforce costs necessitate an effective sales management process as the size of the incentive, the conditions for participation, how to promote and
consisting of six steps: designing salesforce strategy and structure, recruiting and distribute the promotion package, and the length of the promotion. After this
selecting, training, compensating, supervising, and evaluating salespeople and process is completed, the company evaluates its sales promotion results.
salesforce performance.
In designing a salesforce, sales management must address strategy issues Discussion questions
such as what type of salesforce structure will work best (territorial, product, ❶ Sales and marketing – as different as chalk and cheese? If you listen to
customer or complex structure); how large the salesforce should be; who will be salespeople, you will sometimes hear them talk disparagingly about the
involved in the selling effort; and how its various salespeople and sales-support marketing function: ‘The reason we didn’t reach budget was the lousy ad
people will work together (inside or outside salesforces and team selling). campaign!’ And, sometimes, marketing people will blame the salesforce for
Salespeople must be recruited and selected carefully. In recruiting a drop in market share: ‘The only thing our sales team can do well is cut the
salespeople, a company may look to job duties and the characteristics of its price, and even that didn’t save us from losing market share this year. They
most successful salespeople to suggest the traits it wants in its salespeople. don’t seem to appreciate that we make the bullets for them to fire!’ If we
It must then look for applicants through recommendations of current salespeople, believed such talk, sales and marketing would seem to be two functions,
through employment agencies, classified ads and the internet, and by contacting rather than one. Marketing science embraces personal selling and sales
9780655702412_CH12.indd 365 3/3/20 11:02 AM

management as a vital aspect of marketing communication – it is taught most important. Some companies and managers handle sales teams better
this way. So, why do they often seem to be so far apart in practice? (Learning than others do, ensuring that their human assets are allowed to ‘fail’ on
Objective 1) (AACSB: Reflective Thinking) occasions, and helping to build them up. Such companies often maintain
❷ Team selling – or is it a case of how many salespeople does it take to flexibility in their management of salespeople. Returning to the payment
change a light bulb? Some companies have a large range of complex issue, the perennial question is what proportion should be paid as salary and
products. Pharmaceutical companies fall into this category, as do those what proportion provides the ‘carrot and stick’? What is your view? Explain
selling medical equipment. They send in wave after wave of salespeople your answer. (Learning Objective 2) (AACSB: Reflective Thinking)
representing different product ranges, such as antidepressants or gastric ❹ Sales promotions – if they are so effective, why do many sales teams and
reflux drugs. Other companies, such as IBM, have teams that undertake retailers dislike them? Sales promotions enable a brand to present a value
market development, with other teams that go on to service the newly won proposition, such as ‘more for the same’ or ‘more for less’. It is often explicit
clients. Some companies may form pods made up of salespeople together from on-pack offers that a company, such as the one behind the Coca-Cola
with representatives from engineering, operations, logistics, finance and brand (Coca-Cola Amatil Ltd, or CCA), is the hero when such value is added
information systems. Thus, team selling may take many forms. But it is for the consumer. Retailers would like to be seen as the hero and make deep
certainly not a case of too many people being involved. Team selling often price cuts, paid for by the supplying company, to lift their unit and dollar
requires the expertise and foresight of individuals from different facets of sales. In doing so, their margin is protected by the supplying company so
the business to let the customer see just how a supplying company can they make a lot more than when a marketing company diverts its cents-
assist them. What are your views? (Learning Objective 2) (AACSB: Reflective off budget away from the sales team’s direct control (and therefore the
Thinking) retailer’s margin) and into sales promotions. Thus, when the sales team loses
❸ Money makes the world go around – and it takes only bonuses to get an opportunity to maintain or enhance the relationship with retail buyers,
salespeople to perform! Many companies set sales targets and give bonuses members of the team, too, may lose sight of their company’s aim of making
in cash and other forms to salespeople who meet or exceed their budgets. profitable sales. If you feel particularly brave, debate this perspective with a
However, it would be unwise to believe that all it takes to get salespeople member of a sales team. (Learning Objective 3) (AACSB: Reflective Thinking)
to perform to the optimum level for the company is to give them bonuses.
There are several dangers in doing this. For one thing, it can set up pressures Critical thinking exercises
to lower sales targets. Another issue is what to do when consumer and ❶ There are considerable free sales-training resources available on the internet.
business confidence falls away after a major world event and salespeople do Search ‘free sales training’ to find some of these resources and review them.
not meet the targets set for them, resulting in a major part of their income Do the resources discuss the traits and behaviours required of an ethical
being lost through no fault of their own. salesperson? Create a presentation, highlighting your findings regarding
There are other issues. Salespeople experience many knock-backs as ethical sales training. (Learning Objective 2) (AACSB: Communication;
they go about their daily duties. More obstacles are put in their path than Ethical Reasoning)
most other company employees experience, and it requires considerable ❷ In a small group, design a sales promotion campaign using online, social
internal recognition to maintain feelings of positive worth in the face of media and mobile marketing for a small business or organisation in your
such adversity. In addition, salespeople can spend most of their time away community. Develop a presentation to pitch your campaign to the business
from others in the company, maintaining their links through mobile phones, or organisation and incorporate what you have learned about the selling
text messages, or email received through their laptops and tablet devices. process. (Learning Objective 3) (AACSB: Communication; Reflective
Sometimes, the only company people they see are sales managers who Thinking)
are intent on accompanying them to assess their capabilities and ensure
they are working 12-hour days. For this reason, a company’s culture is
Mini cases
12.1 Supervising salespeople
Time on task
Supervising salespeople is crucial. Too much time spent on active selling their ‘sales performance’. Each of the three lawyers is responsible for
and too little time on prospecting may affect the long-term viability of the bringing in new business, managing the case-load and completing all the
business. A local legal practice dealing in commercial law has asked you administrative work in the office. They split their time between sales-related
to evaluate their practice and provide some advice on how to improve activities and legal work. On average, about 20 per cent of their total time is
9780655702412_CH12.indd 366 3/3/20 11:02 AM

spent on sales (assume this is normal for the profession). The practice has a future success. (Learning Objective 2) (AACSB: Communication;
receptionist/legal secretary who is run off his feet and really cannot take on Analytical Thinking)
any sales work. The following table shows the average time spent on selling ❷ Research commercial law practice websites. What are the main
activities for the practice compared to a benchmark commercial law practice. value propositions used by the practices? With this in mind,
❶ Review the data for time spent on sales activity for the practice, and develop a guideline for lawyers in the practice for each step
prepare a brief report analysing how these data compare to the in the selling process, from prospecting to follow-up. (Learning
benchmark for a small commercial law practice. In your report, indicate Objective 3) (AACSB: Information Technology, Application of
how the way in which the practice spends its time might affect its Knowledge)
Practice (%) Benchmark (%)

Prospecting 6 15
Face-to-face selling (building referral relationships) 15 28
Servicing existing customers (maintaining relationships) 49 27
Organisational activities 12 11
Travelling and waiting 15 14
Personal/Miscellaneous activity 3 5
Total time on sales activity 100 100
12.2 Sales promotion

Building brand loyalty with gifts and rewards
Each year, small and medium-sized businesses (SMBs) around Australia a hair salon with a customer base of 500 regular customers and an
spend over $30 000 on promotional products; everything from umbrellas annual turnover of $1.2 million per annum. What promotional products
and pen sets to beach totes and cheese platters. Australasian Promotional would you recommend? How would you evaluate the effectiveness
Products Association research shows that almost every home in Australia has of the sales promotion program? (Learning Objective 4) (AACSB:
a promotional product or two in their kitchen. Offices all over the country Analytical Thinking; Application of Knowledge)
have promotional products. And the best news is that people remember the ❷ Membership and loyalty programs are a useful strategy for retaining
brands and keep the product because they are useful. That’s good news for customers. However, getting the benefit package right is not easy.
Major Motors, an Isuzu truck dealership, in Perth. Each year, they give their Toni&Guy Salons have a program which offers gifts and services for
truck-driving customers a gift pack. ‘It’s our way of providing “value add” loyal customers. Review a selection of loyalty programs (see Toni &
to loyal customers – loyalty which we don’t take for granted. Like many Guy’s loyalty program at <www.toniandguy.com.au/promotions/
SMBs, we operate in a competitive environment and we want to provide our loyalty-program/>). What benefits do you find attractive in loyalty
customers with “a little love” while also promoting our brand,’ explains the programs? Do you think membership and loyalty are worthwhile
sales manager from Major Motors.30 for customers? Justify your answer. (Learning Objective 4) (AACSB:
❶ Develop a sales promotion program using promotional products for Information Technology; Reflective Thinking)

Sales conversions
In clothing retail, it is not uncommon for everyone from a sales assistant to customer and there is a good chance that another customer will walk out
the store manager to receive a part of their pay by commission. It is a fine the door without buying something. So, sales managers and sales assistants
balancing act for the sales team. The more time spent with each customer are interested in understanding sales effectiveness. Let us consider three
usually increases the likelihood of a sale but too much time with one sales assistants: Jae, Chili and Sam. Each is paid differently, and has different
9780655702412_CH12.indd 367 3/3/20 11:02 AM


customer contacts and overall sales. Chili is paid the most and also earns contact with purchases and the ratio of customer contacts to contacts
the most, but actually costs only 5 cents for every dollar in sales. In contrast, with purchases.) (Learning Objective 2) (AACSB: Communication;
Sam earns the least and costs more for each sale she makes. Analytical Thinking)
❶ Review the data in the table. The store manager thinks Sam has real ❷ Develop a training plan for each of the three sales assistants. What
potential (even though Sam costs the most per sales dollar) and has do you think should be the main area of improvement for each team
concerns about Jae (who has the most customer contacts resulting in a member? (Learning Objective 2) (AACSB: Communication; Application
sale). Why might that be? (Hint: Look at the average sales per customer of Knowledge)
Total pay for Customer Sales cost

Pay rate per Commission day (excluding Customer contact with Total sales per sales
hour on sales on costs) contacts purchase per day dollar
Jae $20.00 1.0% $189.75 50 35 $2975 $0.06
Chili $22.00 1.5% $243.50 35 30 $4500 $0.05
Sam $18.00 1.0% $166.50 30 25 $2250 $0.07

Let’s get rid of telemarketers
YIt is six o’clock in the evening and you are about to sit down to chill with lifeblood of the small business operator – how else should such a business
your family (you are staying home tonight – it’s a once-a-week thing you do). reach out to its customers?31
The home phone rings and it’s a telemarketer. Actually it does not ring just ❶ Develop an ethical sales protocol for Pest Control Sydney to reach its
once; it rings three times over the next hour. The calls are all from telemarketers. existing customers. What do you recommend as a standard practice
In frustration, you search online for ‘how to get rid of telemarketers’ and come to make sure their customers get a reminder service that works for
across a Lifehacker Australia story about just that. Tips range from what not both parties? (Learning Outcome 4) (AACSB: Communication; Ethical
to do to a very helpful ‘what to do when you do not want a telemarketer call’. Reasoning)
In 2016 alone, Australians reported over 50 000 phone scams. No wonder ❷ Go to <scamwatch.gov.au> and review some of the buying and selling
people are suspicious and frustrated with telemarketers. scams reported on the site. Some of these scams are obvious but some
Now let’s take a look at the other side. Pest Control Sydney is a family- are very sophisticated and use a wide range of digital and online
run business and they call previous customers to remind them that their next media. What type of personal selling strategy would you recommend
inspection or treatment is due. It is a great service, but sometimes those calls for a medium-sized online retailer aiming to protect their business and
are not welcomed! Clearly, once a customer has said ‘put me on your do customers from scammers? (Learning Outcome 4) (AACSB: Ethical
not call list’ it would not be ethical to continue. But, repeat business is the Reasoning; Application of Knowledge)
9780655702412_CH12.indd 368 3/3/20 11:02 AM

References
1 See Boeing commercial aircraft prices at <www.boeing.com/company/about-bca/>; 15 Data obtained from Sue Barrett, ‘How much valuable selling time are you wasting?’, Smart
and see details of the Qantas and JetStar order at Matt O’Sullivan, ‘New Dreamliners Company, 7 April 2013, <www.barrett.com.au/blogs/SalesBlog/2013/2593/uncategorized/
for Jetstar’, Sydney Morning Herald, 7 October 2013, <www.smh.com.au/business/ how-much-valuable-selling-time-are-you-wasting/>, accessed October 2016.
aviation/new-dreamliners-for-jetstar-20131006-2v2xg.html>; David Flynn, ‘Qantas to 16 See Mayo Hardware’s website, <www.mayohardware.com.au/>; and also ‘Mayo
buy Boeing 787, first flights from 2017’, Australian Business Traveller, 20 August 2015, Hardware’, Salesforce.com, <www.salesforce.com/au/customers/stories/mayo-
<www.ausbt.com.au/qantas-to-buy-boeing-787-first-flights-from-2017>; and ‘Boeing hardware.jsp>, accessed October 2016.
787-9 Dreamliner’, Qantas, <www.qantas.com/travel/airlines/aircraft-boeing-787/ 17 Kantar Retail, Making Connections: Trade Promotion Integration across the Marketing
global/en>; all accessed October 2016. Landscape, Kantar Retail: Wilton, CT, July 2012, p. 5; and Australasian Promotion
2 See Chanin Ballance, ‘End your sales and marketing tug-of-war’, Sales & Marketing Products Association, ‘Industry stats’, <www.appa.com.au/industry-stats>, accessed
Management, 26 September 2014, <http://salesandmarketing.com/content/end- November 2016.
your-sales-and-marketing-tug-war>; and Philip Kotler & Kevin Lane Keller, Marketing 18 ‘How mobile is transforming the shopping experience in stores’, Google Think Insight,
Management, 15th edn, Prentice Hall: Hoboken, NJ, 2016, p. 644. May 2013, <www.google.com/think/research-studies/mobile-in-store.html>, accessed
3 Role details were developed from company advertising on the job-search website, November 2016.
Seek.com, <www.seek.com.au/Job/assistant-customer-manager-coles/in/sydney-ryde- 19 Kantar Retail, Making Connections: Trade Promotion Integration across the Marketing
macquarie-park/18573473>, accessed December 2010; and <www.unilever.com.au/ Landscape, Kantar Retail: Wilton, CT, July 2012, p. 6.
careers/>, accessed October 2016. 20 Lucy Cormack, ‘Customer loyalty schemes attracting nearly three-quarters of Australian
4 Jeff Green, ‘Sales moves beyond face-to-face deals, onto the web’, Bloomberg, shoppers’, Sydney Morning Herald, 27 September 2016, <www.smh.com.au/business/
11 January 2013, <www.bloomberg.com/news/articles/2013-01-10/sales-moves- consumer-affairs/customer-loyalty-schemes-attracting-nearly-threequarters-of-australian-
beyond-face-to-face-deals-onto-the-web>; Dave Stein, ‘The evolution of social selling’, shoppers-20160927-grpfwj.html>; ‘82% of Aussies are in a loyalty program with Coles
Sales & Marketing Management, May/June 2013, p. 14; and Andris A Zoltners, Flybuys ranked as our favourite’, B&T, 11 August 2016, <www.bandt.com.au/marketing/
P K Sinha & Sally E Lorimer, ‘The growing power of inside sales’, Harvard Business study-84-aussies-loyalty-program-coles-flybuys-ranked-favourite>; and see also the
Review, 29 July 2013, <https://hbr.org/2013/07/the-growing-power-of-inside-sa/>; FlyBuys Powered by Coles website, <www.flybuys.com.au>, accessed November 2016.
Matt Mayberry, ‘The amazing evolution and power of inside sales’, Entrepreneur, 21 See Noisette’s website, <http://noisette.com.au/product-samples/>, accessed
8 December 2015, <www.entrepreneur.com/article/253643>; accessed October 2016. November 2016.
5 See Sue Barrett, ‘Why the web is making salespeople more, not less important’, Barrett 22 See Vouchr website, <www.vouchr.com.au/>, accessed November 2016.
Sales Blog, 17 September 2013, <www.barrett.com.au/blogs/SalesBlog/2013/2759/ 23 Simon Sharwood, ‘The hot new marketing tactic that will let bricks and mortar retailers
sales-attitudes/why-the-web-is-making-salespeople-more-not-less-important/>; and combat online stores’, <www.mybusiness.com.au/growth/532-the-hot-new-marketing-
Sue Barrett, ‘Customer experience management (CX) will replace CRMs’, Barrett Sales tactic-that-will-let-bricks-and-mortar-retailers-combat-online-stores#>, accessed
Blog, 17 October 2013, <www.barrett.com.au/blogs/SalesBlog/2013/2784/crm/ November 2016.
customer-experience-management-cx-will-replace-crms/>; accessed October 2016. 24 See <www.happymeal.com.au>, accessed November 2016.
6 ‘Customer business development’, <http://we.experiencepg.com/home/customer_ 25 See Australasian Promotional Products Association (APPA) website, <www.appa.com.
business_development_cbd_sales.html>, accessed September 2015. au>, accessed November 2016.
7 Katherine Graham-Leviss, ‘The high cost of sales team turnover’, Entrepreneur, 26 See, for example, the NSW Fair Trading website, <www.fairtrading.nsw.gov.au/ftw/
15 September 2011, <www.entrepreneur.com/article/220310>; see also ‘The cost of Businesses/Advertising_and_marketing/Special_offers_and_competitions.page>,
turnover calculator’, Drake International Australia, <https://au.drakeintl.com/hr-news/ accessed November 2016.
cost-of-turnover-calculator.aspx>, accessed October 2016. 27 Caroline Wilson, ‘Toyota gears up to sponsor women’s AFL’, The Age, 5 April 2016, <www.
8 For this and more information and discussion, see <www.gallupaustralia.com.au/ theage.com.au/afl/afl-news/toyota-gears-up-to-sponsor-womens-afl-20160405-gnz3ua.
consulting/118729/sales-force-effectiveness.aspx>, accessed July 2012; Lynette Ryals html>; Toyota Australia, ‘Toyota and AFL extend sponsorship deal’, 31 August 2016,
& Iain Davies, ‘Do you really know who your best salespeople are?’, Harvard Business <www.toyota.com.au/news/toyota-and-afl-extend-sponsorship-deal>; ‘AFL statement: AFL
Review, December 2010, pp. 34–5; and Donal Daly, ‘6 things successful salespeople extends partnership with Toyota’, 6 March 2014, <www.afl.com.au/news/2014-03-06/afl-
do’, Salesforce.com, 17 April 2015, <www.salesforce.com/blog/2015/04/6-things- statement-afl-extends-partnership-with-toyota>; accessed November 2016.
successful-sellers-do-cso-gp.html>, accessed October 2016. 28 Kantar Retail, Making Connections: Trade Promotion Integration across the Marketing
9 See Steve Denning, ‘The one thing the greatest salespeople all have’, Forbes, Landscape, Kantar Retail: Wilton, CT, July 2012, p. 10.
29 November 2012, <www.forbes.com/sites/stevedenning/2012/11/29/the-one-thing- 29 See ‘Show report 2016’, Fine Food Australia, 2016; and Fine Food Australia website,
the-greatest-salespeople-all-have/#82f3d97496c6>, accessed October 2016. <www.finefoodaustralia.com.au/>, and Facebook page.
10 ‘Strengths based selling’, <www.gallup.com/press/176651/strengths-based-selling. 30 See ‘The average Aussie SME spends $31 000 on promotional products’, Marketing
aspx>, accessed October 2015. Magazine, 6 August 2014, <www.marketingmag.com.au/news-c/the-average-aussie-
11 ‘Case study: General insurer’, Salesmaster International, <www.salesmasters.com.au/ sme-spends-31 000-on-promotional-products/>; and also the websites for Major
case-studies/>, accessed October 2016. Motors, <www.majormotors.com.au/isuzucv/>, and the Australasian Promotional
12 See Barrett, <www.barrett.com.au/>, accessed October 2016. Products Association (APPA), <www.appa.com.au/>; accessed November 2016.
13 For this and more discussion, see Joseph Kornak, ‘07 compensation survey: What’s it all 31 Erica Elson, ‘I’m a telemarketer. Here’s how to get rid of me’, Lifehacker Australia,
worth?’, Sales & Marketing Management, May 2007, pp. 28–39; and Alexander Group, 3 November 2016, <www.lifehacker.com.au/2016/11/im-a-telemarketer-heres-how-
‘2014 sales compensation trends survey results’, August 2014, <www.alexandergroup. to-get-rid-of-me/>; and see also Scamwatch website, <www.scamwatch.gov.au/>,
com/resources/survey-findings>. and Pest Control Sydney website, <http://pestmanagementsydney.com/>; accessed
14 For more discussion, see Mark Roberge, ‘The right way to use compensation’, Harvard November 2016.
Business Review, April 2015, pp. 70–5; and ‘Getting beyond “show me the money”’,
Harvard Business Review, April 2015, pp. 77–81.
9780655702412_CH12.indd 369 3/3/20 11:02 AM

Chapter
13 Direct and digital marketing:

Interactivity and fulfilment
In Chapters 11 and 12, you learned about communicating customer value through integrated marketing
communication (IMC) and about four specific elements of the marketing communications mix – advertising,
publicity, personal selling and sales promotion. In this chapter, we look at the final IMC element, direct
marketing, and at its fastest-growing form, digital marketing. Actually, direct and digital marketing can
be viewed as more than just a communications tool. In many ways, it constitutes an overall marketing
approach – a blend of communication and distribution channels (see Chapter 10 for more) all rolled into one.
Learning Objective 1 Define direct and digital marketing, and discuss its benefits for
consumers and marketing organisations.
Learning The direct and digital marketing model pp. 372–74
Objectives Benefits of direct and digital marketing to buyers and sellers p. 374
Learning Objective 2 Examine and discuss direct and digital marketing and interactivity.
Direct marketing pp. 375–76
Digital marketing pp. 377–384
Social media marketing pp. 384–85
Other forms of online interaction pp. 385–86
Interactivity pp. 386–87
9780655702412_CH13.indd 370 3/3/20 11:03 AM

Chapter 13 Direct and digital marketing: Interactivity and fulfilment 371
Email Identify
ine prospects
eng Tar
arch ting cust get
e
S ark e ome
m rs
De
ine ing loy e
adv Onltis
pe y
n
alt
er
g Cu
tin sto
etin e
ke m
Rea stomer
mark engin
g
cu ices
ctiv
r
serv
er
ch
ma
ating
Sear
da
tal
tab
COMPANY
Digi
ases
e
Data mini
Search engin
optimisation
LO 1
ng
marketing and discuss its INTERACTIVITY
Kios k a n d
e le c t r o n i c
d isp e n s in
marketing organisations.
D ir e
g
CUSTOMER
Dire s e
resp
ct
t el e v d i o
and
ct-
ma
on
isio
ra
rk
LO 2 tin
n
g
Tel
Examine and discuss

e
s al
direct and digital marketing

es
and interactivity ma Tele-

rke
tin g
C at a
lo g ue
s
D ir e c t
m ail
Eva
luat e s ers
ing p issund consum ful
erforma ering
nce Consid anisations or harm
rg
a
Marketing o ng
irritati s
against
Digital marketing communication Must gua eting practice
r d
Digital marketing channels direct mark
Online relationship management Public policy issues
Customer databases Ethical issues
9780655702412_CH13.indd 371 3/3/20 11:03 AM

The direct and digital marketing

model
Many of the marketing and promotion tools we have examined in previous chapters were developed in
the context of mass marketing: targeting broad markets with standardised messages and making offers
distributed through intermediaries. As we explore the exploding world of direct and digital marketing, do
remember that, although this chapter examines direct marketing and digital or online marketing as separate
models, this one-to-one approach must be carefully integrated with other elements of the marketing mix.
Direct and digital marketing

Early direct marketers – catalogue companies, direct mailers and telemarketers – gathered customer names
and their profiles in company databases, and sold goods mainly by mail and landline telephone. Today,
however, in response to the fact that over 13 million Australians and 4 million New Zealanders are internet
subscribers and that 79 per cent access the internet daily – from smartphones, tablets and other digital
devices – most companies have adopted direct and digital marketing, either as a primary marketing approach
(e.g. Dick Smith online) or as a supplement to other approaches (e.g. JB Hi-Fi), thus becoming omni-
channel retailers.1
direct and digital Direct and digital marketing involves interacting directly with carefully targeted individual
marketing customers and communities to both obtain an immediate response and build lasting relationships.
Interacting directly
See Figure 13.1. This is where social media has come to the fore, as it enables individuals and groups to
with carefully targeted
individual consumers interact with one another and with marketing organisations, ranging from not-for-profit organisations to
and communities commercial suppliers of goods and services. The key point is that such interactions are mostly synchronous
to both obtain an and, because they rely on database information, they are conducted on a one-to-one basis and generate a
immediate response and
measurable response, or fulfilment. It is of note that fulfilment may involve purchasing the company
build lasting customer
relationships. offering, or it may involve information, or it may mean assurance of trust in a company or brand.
Also, please note that when we refer to ‘direct marketers’ throughout this chapter, we mean direct and
digital marketers.
Beyond brand and relationship building, direct and digital marketers usually seek a direct, immediate and
measurable consumer response. As we can readily see when visiting Amazon.com, the company interacts directly
with customers on its websites to help them discover and buy almost anything and everything on the internet,
often with a single click of the mouse button or touch-screen link. Similarly, 1300Insurance.com.au interacts
FULFILMENT RESPONSE
Company-initiated direct
Customers
and digital interactivity
• Direct marketing using direct print and reproduction,

direct-response television and radio, telemarketing,
telesales, kiosks and electronic dispensing, and
Companies landline telephone and fax
• Digital marketing using the internet/web and
mobile cellular networks
Customer-initiated interactivity
with other customers and companies
Figure 13.1 Direct and digital interaction and fulfilment
9780655702412_CH13.indd 372 3/3/20 11:03 AM

directly with customers – by telephone,

through its website or even on Facebook
and Twitter – to give insurance quotes,
sell policies or service customer accounts.
These are but two of many companies that
either commenced their commercial lives
using digital marketing or have integrated
a direct and digital marketing approach
into their business model. And if proof is
needed of the impact of social media on
company marketing, consider that, in a
decade, Facebook, with a global profit of
US$8.15 billion in 2015, had signed up
more than 1.71 billion active users (defined
as those who had logged in during the past
30 days) by the end of the second quarter of
2016.2 To get these socially interconnected
eyeballs focused on a company’s brand and
eliciting positive word of mouth is a major
objective of direct and digital marketers.
And to get these subscribers to ‘like’ a
Facebook brand page, as one of the over
50 million ‘Likes’ a day they contribute to, Aid organisations, such as YourTown, use email alerts to send out reminders to those
signed on to their database service to contribute donations and buy tickets in lotteries.
is often a major fulfilment response set as a Also shown are ‘Likes’ from people engaged on YourTown’s Facebook page.
marketing objective. We discuss fulfilment YourTown, www.yourtown.com.au
response in more detail later in this chapter.
Other companies have their entire catalogues
on Facebook and actively sell from there.
In previous chapters, we referred to direct marketing as direct distribution – that is, as marketing
channels that contain no intermediaries. We also included direct marketing as one element of the promotion
mix – that is, as an approach for communicating directly with consumers. In actuality, direct marketing is
both of these, and more.
When using direct and digital marketing, any media can be used, particularly as acquisition media to gain
subscribers. Importantly, a measured response is sought from a measured input of expenditure. This response
may take many forms, one of which is to subscribe to an information service; another is the placement of
an order; and yet another is to seek the advice of others – whether consumers or potential consumers.
And the response, or a transaction, can take place in any one of a number of ways, as Figure 13.1 illustrates.
A response or transaction may entail paying an energy bill at a kiosk, or opting-in to receive product update
information rather than buying the current model of the product. Or a response may mean placing an order
by telephone in response to receipt of a communication directed to the receiver by name, by direct mail or
email, or delivered en masse via a television commercial. Or, it may mean paying for and downloading an
airline ticket. In each case, there is customer fulfilment.
Many companies still use direct and digital marketing as a supplementary channel or medium.
Thus, BMW markets mostly through mass media advertising and its high-quality dealer network, but
also supplements these channels with direct marketing. Its direct marketing includes its web page,
<www.bmw.com.au>, which provides consumers with information about various models, competitive
comparisons, financing and dealer locations, but includes links to access social media. BMW also relies
9780655702412_CH13.indd 373 3/3/20 11:03 AM

on customers communicating with each other via such online

forums as Bimmerpost.com. Online communities interact on new
models before they are released, and play a part in the design
of and inclusions in many new cars. Similarly, most department
stores, such as David Jones and Myer, sell the majority of their
merchandise off their store shelves but also sell through direct-
mail and online catalogues, even if only in the form of gift cards.
For all companies, the direct and digital marketing model is
rapidly changing the way they think about building relationships
with customers. While most banks commenced business in the
Mobile marketing: ANZ offers smartphone and tablet access. physical world they have gone so far as to integrate the most
© Australia and New Zealand Banking Group (ANZ) pervasive form of digital marketing – mobile marketing – into their
business model, with specially designed websites for smartphones.
Benefits of direct and digital marketing

to buyers and sellers
For buyers, direct and digital marketing is convenient, easy and private. This approach gives buyers anywhere,
anytime access to an almost unlimited assortment of goods and a wealth of product and buying information.
For example, on its website and mobile app, Amazon.com offers more information than most of us can digest,
ranging from top-10 product lists, extensive product descriptions and expert and user product reviews, to
recommendations based on customers’ previous searches and purchases. Through direct marketing, buyers
can interact with sellers by phone or on the seller’s website or mobile app to create exactly the configuration
of information, products or services they want, and then order them on the spot. Finally, for consumers who
want it, digital marketing through online, mobile and social media provides a sense of brand engagement and
community – a place to share brand information and experiences with other brand fans.
For sellers, direct marketing often provides a low-cost, efficient and speedy alternative for reaching
their markets. Today’s direct marketers can target small groups or individual customers. Because of the one-
to-one nature of direct marketing, companies can interact with customers by phone or online, learn more
about their needs and personalise products and services to specific customer tastes. In turn, customers can
ask questions and volunteer feedback.
Direct and digital marketing also offers greater flexibility.
It allows marketers to make ongoing adjustments to their prices
and programs, or to make immediate, timely and personal
announcements and offers. Finally, direct and digital marketing
gives sellers access to buyers that they could not reach through
other channels. Smaller firms can mail catalogues to customers
outside their local markets and post 1-800 telephone numbers to
handle orders and inquiries. Internet marketing is a truly global
medium that allows buyers and sellers to click from one country to
another in seconds. For example, a web user from Paris or Istanbul
can access Boots Online’s digital catalogue and make a purchase just
as easily as can someone living in Melbourne – where the company
behind BootsOnline.com.au, the Stitching Horse Saddlery, has its
Direct and digital marketing: Even small and medium enterprises home. Even small and medium enterprises (SMEs) find they have
(SMEs), such as Boots Online, find they have ready access to ready access to global markets. Not even the threat of a cut to the
global markets using the internet and the web. GST exemption for online imports valued at less than $1000 is
www.bootsonline.com.au
worrying many online businesses.
9780655702412_CH13.indd 374 3/3/20 11:03 AM

Direct marketing
We examined selling (direct selling to customers) in depth in Chapter 12. Here, we examine the more
traditional forms of direct marketing companies use to tailor their offers and content to the needs and direct marketing
interests of narrowly defined segments or individual buyers. In this way, companies build customer Companies tailor their
offers and content to
engagement, brand community and sales by using methods which include (1) direct print and reproduction,
the needs and interests
(2) direct-response television and radio, (3) telemarketing, (4) telesales and (5) kiosks and electronic dispensing. (See of narrowly defined
Mini case 13.3 for your opportunity to put a point of view.) We examine each of these below. segments or individual
We examine the other forms of direct and digital marketing, the major one today being use of the buyers using various
methods, including direct
internet and mobile tools and technologies, in the next section. print and reproduction,
direct-response television
Direct print and reproduction and radio, telemarketing,
Direct print and reproduction involves direct-mail marketing and catalogues. It comprises mail-outs of telesales and kiosks and
letters, product lists, samples, and paper-based and digital catalogues on CD-ROM or DVD to a list or a electronic dispensing.
known database of customers, or to a targeted group that the marketer wishes to convert to a database entry. direct print and
A catalogue may be sent to a database of rural dwellers who have asked to receive a retailer’s catalogue, or with reproduction
whom the retailer already has a relationship. The phrase ‘direct print and reproduction’ does not refer to the Mail-outs of letters,
broadly aimed mailings sent to all post office box-holders that end up in waste bins outside the post office – the product lists, samples,
and paper-based and
ubiquitous ‘scattergram’. Thus, direct print and reproduction marketing consists of direct mail sent both to digital catalogues on
those the company wishes to add as customers and to those who have already responded to previous offers. CD-ROM or DVD sent
Some analysts predict a decline in the use of traditional forms of direct mail in the coming years to a list or a known
as marketers switch to newer digital forms, such as email, online social media and mobile marketing. database of customers,
or to a targeted group
The newer digital direct-marketing approaches deliver messages at incredible speeds and lower costs that the marketer wishes
compared to Australia Post’s and New Zealand Post’s ‘snail mail’. to convert to a database
entry.
Direct-response television and radio
Direct marketers often use direct-response television and radio whereby commercials are put to air direct-response
that persuasively describe a product and then give a toll-free number for viewers to call and place an order. television and
Direct-response television and radio are often used to build a database, as well as to make immediate sales. radio
Where commercials
At one time or another, nearly all the tools of direct marketing are employed. Often, companies employ are put to air that
sales promotion coupled with telemarketing techniques. In some cases, television and radio are used along persuasively describe a
with other media as acquisition media to build a customer database. Home-shopping channels on FTA-TV product and then give
a toll-free number for
(free-to-air television) and pay-TV (subscriber-TV) are also included in this direct and digital marketing
viewers to call and place
category. Increasingly, viewers may use the remote control buttons to interact with these commercials and an order.
order samples and catalogues.
Successful direct-response advertising campaigns can ring up big sales. For example, little-known
infomercial maker, Guthy-Renker, has helped propel its Proactiv Solution acne treatment and other
‘transformational’ products into power brands that pull in US$1.8 billion in sales annually to five million
telemarketing
active customers. (Compare that to only about US$150 million in annual chemist sales of acne products in Where either viewers
the United States.) Guthy-Renker now combines direct-response television with social media campaigns are invited to call a
using Facebook, Pinterest, Google+, Twitter and YouTube to create a powerful integrated direct marketing 1-800, 0055 or 1300
number and place
channel that builds consumer involvement and buying.3
their order – inbound
As the lines continue to blur between television screens and other video screens, interactive ads and telemarketing; or human
infomercials are appearing not just on television, but also on mobile, online and social media platforms, telephone operators or
adding even more television-like interactive direct marketing venues. computers with voice
recognition capabilities
Telemarketing ‘cold call’, seeking an
order or perhaps a
Telemarketing is where either viewers are invited to call a 1-800, 0055 or 1300 number and place their donation – outbound
order – inbound telemarketing – or human telephone operators or computers with voice recognition telemarketing.
9780655702412_CH13.indd 375 3/3/20 11:03 AM

capabilities ‘cold call’, seeking an order or perhaps a donation to an organisation such as CARE Australia or
the Red Cross – outbound telemarketing. Telemarketing covers a broad range of activities, with differing
objectives. At one end of the continuum, it is employed to generate new sales leads and build the database.
At the other end lies full account management.
In between the two are many other means of employing telemarketing. A major use of telemarketing
relates to customer service. Motor vehicle manufacturers make regular follow-up calls to ensure that dealer
service and car performance and satisfaction are all at a level that might ultimately result in a repeat purchase
of the brand. Also see the discussion in Chapter 2 on the Do Not Call register, whereby individuals may
register their landline and mobile phone numbers to reduce the number of unwanted telemarketing calls
they receive.
Telesales
telesales This method is used by all types of marketing firms, not just by direct marketers. Telesales usually
Usually involves a involves a permanent part-time bank of telephone operators who routinely call known customers to take
permanent part-time
their orders. The only feature differentiating this method from telemarketing is that, in telesales, the calls
bank of telephone
operators who routinely are routinely made to regular customers, such as retailers. On average, a field salesperson can make
call known customers, around five or six calls a day, depending on the industry – some 30 calls per week – whereas a telesales
such as retailers, to take operator can make 30 to 40 calls a day and more. In other words, five field salespeople are needed for
their orders.
every telesales operator. As a result, the economics of telesales in such companies far outweigh those of a
field force. Telesales operators are usually set up with a computer workstation linked to a minicomputer.
They are therefore able to see on one screen the sales for this time last week, last month and last year.
Any items on a cents-off promotion can be made to flash or give some other cue. Even the weather, which
impacts on fast-food sales, can be displayed. The telesales operator is thus in a better position than the
retailer’s personnel to know what should be ordered, and can prompt customers for more orders.
Kiosks and electronic dispensing

kiosks As consumers become increasingly comfortable with digital and touch-screen technologies, many
Machines used to companies are placing information and ordering machines – called kiosks (like good old-fashioned vending
provide information machines, but offering so much more) – in stores, airports, hotels, university campuses and other locations.
and take orders of such
offerings as insurance Kiosks are everywhere these days, from self-service hotel and airline check-in devices to in-store ordering
policies. devices that let you order merchandise not carried in the store. ‘Flashy and futuristic, souped-up machines
are popping up everywhere,’ says one analyst. ‘They have touch screens instead of buttons, facades that glow
electronic
dispensing and pulse . . . [they] bridge the gap between old-fashioned stores and online shopping.’4 Kiosks are something
machines (EDMs) of an innovation in the arsenal of direct marketing weaponry. Kiosks often do not dispense anything, but
and card-reading simply allow orders to be placed or payments to be made. They also provide services such as printing
telephones pictures taken on digital cameras and stored on flash memory sticks.
Dispense and receive
Electronic dispensing machines (EDMs) and card-reading telephones that dispense and
cash, as do the EFTPOS
machines used by receive cash are popular today, as are the EFTPOS machines used by retailers. They are now found in
retailers. airports, banks, casinos, licensed clubs and hotels – in fact, anywhere there are high pedestrian densities.

Let’s stop for a moment and reflect on the impact of direct and ● For the next week, keep track of all the direct marketing
digital marketing on your life. offers that come your way via direct mail and catalogues, and
● When was last time you bought something via direct others. Then analyse the offers by type, source and what you
marketing? What did you buy, and why did you buy it direct? liked or disliked about each offer and the way it was delivered.
When was the last time you rejected a direct marketing offer? Which offer best hit its target (you)? Which missed by the
Why did you reject it? Based on these experiences, what widest margin?
advice would you give to direct marketers?
9780655702412_CH13.indd 376 3/3/20 11:03 AM

Digital marketing
Most people think of the internet (net) and its graphical face, the World Wide Web (web), when internet/World
they refer to ‘digital marketing’ or ‘online marketing’ as it is sometimes called. While the internet is a ‘cluster Wide Web (net/
of related IT innovations’ and only one aspect of digital marketing, the devices used are still evolving in form web)
A vast public web of
and function.5 Consider that smartphones, tablets and newer touch-screen notebooks are microcomputers computer networks
that run on a smartphone operating system and have enabled even more users to be interconnected with that connects users of
other users, businesses and government. all types all around the
In one way or another, most organisations now have a website and use digital media even if they only world to each other and
to an amazingly large
use email. Such companies are engaging in digital marketing, as they are marketing their offerings and ‘information repository’.
building customer relationships over the internet and cellular networks. Using this method, companies and
digital marketing
individuals add value through interaction with people and other businesses. Company efforts to
market products and
Interacting in digital marketing services and build
When companies interact online with consumers and other companies, they do so in any or all of the five customer relationships
over the internet and
ways shown in Figure 13.2: (1) by creating a search-engine optimised website; (2) by engaging in search
cellular networks.
engine marketing (SEM); (3) by using online advertising; (4) by setting up or participating in social media
marketing; or (5) by using email.
Search-engine optimised websites

For most companies, the first step in adding value through online marketing is to create a website. However,
beyond simply creating a website, marketers must design an attractive site and find ways to get consumers
to visit the site, stay around and come back often.
corporate and/or
Types of websites brand website
Website designed
Websites vary greatly in purpose and content. The most basic type is a corporate and/or brand to build customer
website. These sites are designed to build customer goodwill, collect customer feedback and supplement goodwill, collect
other sales channels, rather than to sell the company’s products directly. They typically offer a rich variety customer feedback and
supplement other sales
of information and other features in an effort to answer customer questions, build closer customer
channels, rather than
relationships and generate excitement about the company or brand. The main difficulty companies face in to sell the company’s
this regard is to include the company and/or brand name in the domain name. For example, cocacola.com products directly.
Social
ing m
dvertis marke edia
nline a ting
O
e
ngin EM) Em
e (S
g
rke ch
ail
tin
ma Sear
e
optimise -engine
bsit
Othe raction
inte
d we
r onlin
Search
DIGITAL
e
MARKETING
Figure 13.2 Forms of digital marketing
9780655702412_CH13.indd 377 3/3/20 11:03 AM

is a registered top-level global domain name, while cocacola.com.au is a regional domain name. In this
instance, both the company and brand name are the same, giving Coca-Cola a considerable advantage over
brands where the company name is different. The advantage comes from the guessability of the domain
name by users who can navigate directly to the website of such a brand. The brand is less reliant on search
engines directing consumers to their website.
At P&G’s non-transactional Old Spice brand site, <oldspice.com>, you can learn about the different
Old Spice products, watch recent ads, enter the latest contest and post comments on the Old Spice blog.
Arguably, to get to this site, consumers would need to be directed there via traditional media advertising or
via a search engine, such as Google.
marketing Companies either create a marketing website and host it themselves or have a third-party service
website company build the website and then even host the site on an external web server. Regardless of how it is
Website designed to
hosted and who created and maintains the website, it should be designed to engage consumers in an
engage consumers in
an interaction that will interaction that will move them closer to a direct purchase or other marketing outcome, or hold them as
move them closer to a loyal customers. For example, visitors to SonyStyle.com.au can search through dozens of categories of Sony
direct purchase or other products, learn more about specific items and read expert product reviews. They can check out the latest
marketing outcome,
hot deals and place orders online.
or hold them as loyal
customers.
Designing effective websites
Creating a website is one thing; getting people to visit the site is another. To attract visitors, companies
aggressively promote their websites in offline print and broadcast advertising and through ads and links on
other sites. But today’s web users are quick to abandon any website that does not measure up. The key is to
create enough value and excitement to get consumers who come to the site to stick around and come back
again. This means that companies must constantly update their sites to keep them current, fresh and useful.
Of course, many firms – both large and small – set up eBay stores for the reason that the more popular ‘Buy
Now’ method, with payment via PayPal, is a sure-fire online marketing approach.
For some types of products, attracting visitors is easy. Consumers buying new cars, computers or
financial services will be open to information and marketing initiatives from sellers. Marketers of lower-
involvement products, however, may face a difficult challenge in attracting website visitors. If you are in the
market for a computer and you see a pop-up ad that says, ‘The top 10 PCs under $800’, you will likely click
on the banner. But for many other websites, there is little or no attraction.
A key challenge is designing a website that is attractive on first view and interesting enough to encourage
repeat visits. Many marketers create colourful, graphically sophisticated websites that combine text, sound
and animation to capture and hold attention (e.g. see <www.afl.com.au> or <www.nike.com>). Others, such
as Moove Milk, have turned to Facebook – <www.facebook.com/moovemilk> – rather than maintain a
website. To attract new visitors and to encourage revisits, suggests one expert, online marketers should pay
close attention to the seven Cs of effective website design:6
• Context: the site’s layout and design
• Content: the text, pictures, sound and video that the website contains
• Community: the ways in which the site enables user-to-user communication
• Customisation: the site’s ability to tailor itself to different users or to allow users to personalise the site
• Communication: the ways in which the site enables site-to-user, user-to-site or two-way communication
• Connection: the degree to which the site is linked to other sites
• Commerce: the site’s capabilities to enable commercial transactions.
And to keep customers coming back to the site, companies need to embrace yet another ‘C’ – constant
change. This latter point is important not just to appeal to visitors, but also to ensure that the ‘bots’ which
index websites for search engines continue to update the information and help the site rise through the
output of sites the search engine finds in response to a consumer search. The term googling has come into
existence to describe such consumer search actions. Search engine optimisation has come to the fore as
a task for those managing websites, and is part of the broader task of search engine marketing.
9780655702412_CH13.indd 378 3/3/20 11:03 AM

Marketing
in Action Search engine marketing: Three reasons why search engines exist
13.1
Why do search engines exist? First, web users want to find domain names Googlebot-mobile for mobile phones, among other tools. We leave it to you to
associated with products and brands and use the web to search for information read Brin and Page’s paper (see sources) on how large-scale search engines work
via all manner of devices. Second, there was, and still is, money to be made by or other even more interesting reads on the subject.
supplying this information if presented on the basis of a quality ranking. And, so, Here, our focus is on two aspects of search engines as they impact on
many bright young computer engineers set to work developing large-scale crawler marketing: optimising a website’s organic and paid rankings, and making sense of
(aka robots, bots, spiders) and web-page indexing software algorithms to enable search engine marketing metrics. Taking Google as our example, organic rankings
web searching. These software accomplishments were then used to attract venture are different from paid rankings because the former are achieved by website
capital and have now been enhanced to the point where the companies behind design and content quality as well as popularity of the site, while paid rankings
them are valued more highly than long-lived manufacturers such as General also entail paying for keyword usage. Organic rankings appear on the left-hand
Motors. Third, websites want to be found. Why else display web pages via a global side of Google’s search output web pages, whereas paid rankings appear at the
medium if you do not want people to find and view them? To this end, we might top, right-hand side and bottom – if there are any associated with a particular
expect to find the following meta-tag instruction to search engine crawlers to keyword. Since 70 per cent of site visits are generated by search engines, the
appear in the header of all web pages – <meta name=“robots” content= “index, immediate aim is for a marketer’s website to be found and for the user to click
follow”>. Strangely enough, we do not always find such meta-tag usage. We do through to the website – or, better still, to click through and buy the product. After
find many flash-animated ‘splash pages’ that might make marketing people feel all, transacting websites are interested in ARPU (average revenue per user).
warm and fuzzy, but which cannot be read by search engine bots. And so, from It is important to remember that the starting point for any direct and digital
a search engine marketing viewpoint, many companies are wasting their money. marketing campaign is a sound marketing strategy. This means setting goals and
The first search engine that comes to most people’s minds is Google, with budgets before embarking on a particular search engine or any other marketing
over 80 per cent share of searches in Australia. (Apologies to Yahoo!7, Bing and campaign. This also enables you to decide how much to spend on individual
the many hundreds of other search engines that exist.) Google co-founders Larry keywords. With this in mind, we now turn to a discussion on optimising search
Page and Sergey Brin met while candidates in the doctoral program at Stanford engine rankings and analysing results.
University. Their great search engine idea in 1998 has developed to the point
where the company now has extensive computer farms that are estimated to run Optimising organic rankings
to more than 500 000 rack-mounted web servers and employs 10 000 people
around the world. Google uses its web crawlers, Googlebot and Imagebot, and If a library does not list the book you want in its catalogue, you are unlikely
to find that book by a physical search or by asking the librarian. Similarly, if a
search engine has not indexed a particular site, you will not find it by using a
keyword search of that search engine. Not all search engines index the same
pages, even though the main rule they use in their ranking algorithms is the
location and frequency of keywords. So, the astute marketer will ensure that his
or her website has important keywords – such as ‘gardening’, ‘native plants’
and ‘water saving’ in the case of a gardening site – at the top of the page, in
the meta titles and repeated in the meta-tags and meta descriptions. Of course,
there are proprietary aspects to search engine algorithms, which means that we
can never really know all the tricks of optimising organic rankings by way of web
design. We do know that constantly changing the order of these keywords will
not trick search engines into giving a higher organic ranking – or so we are led
to believe. Certainly, keyword spamming, such as repeating keywords hundreds
of times on a web page other than for spelling clarification reasons (how do
Search engine marketing: The first search engine that comes you spell ‘freebee’, ‘freebie’, etc.?), will see the site automatically removed from
to most people’s minds is Google; however, many are search engine indexes.
available. We can say with certainty that a key feature of any website is its link
© dpa picture alliance archive/Alamy popularity. This is like saying that the most popular person in class is the one
whose mobile phone number is in everyone else’s speed dialler. She or he is
9780655702412_CH13.indd 379 3/3/20 11:03 AM

‘connected’ in every sense of the word because everyone wants her or him to of mounting Adword and Adsense campaigns is relatively lengthy, we simply
be their friend. Can link popularity be manipulated in favour of the marketer? point you to Google and suggest you start out by creating a gmail account and
The simple answer is ‘yes’, although this belies the complexity of doing so. use this for the purpose of creating an ‘account’ with Google. Signing in provides
Google’s Conversion University provides sound information on Driving access to ‘My Account’ but does not incur charges.
Traffic to sites and on how to use Google Analytics to assess organic ranking Clicking on the Campaign Management tab is the starting point for setting
performance. One of Amazon’s methods of gaining in the organic rankings is to up Adword campaigns based on your website’s keywords. The other two tabs
pay associates a commission for selling items they have listed on their individual of interest are Reports and Analytics, which we examine later in this box. A key
websites and which have attracted people to click through to a purchase at feature of the campaign management task, which Google assists with, lies in
Amazon that is associated with the seller’s code number. This is an example of a generating keywords and variations on them. This is important, as it is vital to
double whammy in that many other sites are linked to Amazon and are therefore separate keywords in themed Adgroups and to use two or three of these in each
directing traffic to Amazon – and because search engines also rank sites that campaign. For example, it is better not to mix keywords concerning native plants
are attracting clicks more highly than those that are not, the Amazon associates’ with keywords about saving water in the same Adgroup. It is preferable to have
sites benefit, as does Amazon itself. This example provides a neat segue to the a separate Adgroup for each, even if only from an analysis of results viewpoint.
matter of paid rankings. Also, it is important to review, test and make changes to your campaigns before,
and even after, going live. Using one large list of possibly mismatched keywords
Optimising paid rankings in a single Adgroup in the one campaign is not the best way to proceed.
Also, read about and use negative keywords and then keep checking the results.
Merely placing links to popular sites and landing pages on your website is not If location is important to your business, it is suggested that you separate your
enough to optimise your position in search engine rankings – even if these are Adgroups by geography, based on the structure or offering, so you can create
popular YouTube streaming videos or links to your favourite wiki or perhaps to a specific ad text and links to relevant landing pages. It is also wise to monitor
social networking site. Buying Google Adword or Adsense campaigns is one way the search term report for negative keywords as this helps reduce spending on
to increase both organic and paid rankings. As the task of describing every detail keywords that are not relevant to your business.
Figure 1 Google metrics: My Dashboard

Source: Google and the Google logo are registered trademarks of Google Inc., used with permission.
For more, see <https://support.google.com/analytics/answer/1068216>, accessed October 2016.
9780655702412_CH13.indd 380 3/3/20 11:03 AM

Google search metrics We suggest you spend time becoming familiar with the metrics Google
provides by viewing Help Resources, provided in the View Reports and other
In the main body of this chapter, we suggest that marketing organisations might areas at Google. We finish with the reminder that, if it cannot be measured,
employ strategies that involve using a combination of more traditional media and then it is not marketing. In this context, Google Analytics is a boon to marketing.
direct and digital marketing tools and techniques, or using the latter on their own. Sources: View the Google site, <www.google.com.au>, for Help Resources to learn more
The commentary associated with Figure 1 clarifies the point that, while direct and about Adwords and Adsense use and the metrics behind search engine marketing. See also
Sergey Brin & Larry Page, ‘The anatomy of a large-scale hypertextual web search engine’,
digital marketers are vitally interested in ARPU, they also monitor performance Computer Science Department, Stanford University, <ilpubs.stanford.edu:8090/361/1/1998-8.
on such intervening variables as brand awareness, knowledge, intentions to pdf>, accessed October 2016. For an interesting background reading on Google, see Nicholas
Carr, The Big Switch: Rewiring the World, from Edison to Google, WW Norton & Company:
purchase and satisfaction levels, to name just a few metrics associated with New York, 2009. Search engine shares quoted from Danny Sullivan, ‘Nielsen NetRatings search
marketing communication and post-purchase loyalty. engine ratings’, Search Engine Watch, 22 August 2006. See also Danny Sullivan, ‘How search
engines rank web pages’, Search Engine Watch, 15 March 2007; Albert-László Barabási & Réka
The marketing organisation employing search engine marketing – Google Albert, ‘Emergence of scaling in random networks’, Science, 286(5439), 1999, pp. 509–12.
Adwords specifically – as part of its direct and digital marketing communication
strategy has analytical tools provided by Google available to it. After logging in to Questions
your Google account (you set up ‘My Account’ when creating Adwords groups and ❶ What is search engine marketing, and why is it an important aspect of any
campaigns), you will see three components: Personal information, My services and direct and digital marketing campaign?
Try something new. Here, we are interested in My services, specifically Analytics. ❷ Are there differences between organic and paid quality rankings achieved
On entering the ‘Analytics’ area, notice the ‘Website profiles’ section, which lists on the Google search engine? Why, or why not?
any websites we have set up in order to receive reports. This assumes that you have ❸ Is it necessary for marketers to know how search engines rank web pages?
already set up your website pages to contain the tracking code that Google uses to ❹ Why does Google provide website analytics? How important is this
report on traffic to your site. (See Figure 1 for sample Dashboard output.) information to marketers?
Search engine marketing

The main growth area for online advertising is search engine marketing – sometimes referred to as
search marketing. Search marketing entails promoting a company’s brands through search engines as search marketing
part of its integrated marketing communication strategy. As Marketing in Action 13.1 explains, this Marketing effort to
gain prominence for
marketing activity is designed to use search engine optimisation such that the company’s listing in keyword
a website on search
search output – both natural (or organic) and paid (pay-per-click and cost-per-thousand, CPM) – is engine listings, with
optimised and matches web users’ information needs. Search engine marketing expenditure includes fees the aim of increasing
paid to internet companies to list and/or link their company site domain name to a specific search word website traffic by
attracting visitors who
or phrase (includes paid search revenues). Search categories include: search on keywords
• Paid listings: Text links appear at the top or side of search results for specific keywords. The more a via their favourite
marketer pays, the higher the position the linked text gets. Marketers pay only when a user clicks on search engine, portal
the text link. or directory to this
website.
• Contextual search: Text links appear in an article based on the context of the content, instead of a user-
submitted keyword. Payment occurs only when the link is clicked.
• Paid inclusion: Guarantees that a marketer’s URL is indexed by a search engine. The listing is
determined by the engine’s search algorithms.
• Site optimisation: Website modifications made to ensure indexing by bots and spiders, and which help
a site to be found in a keyword search and lift its rankings in search engine output.7
Google is the pre-eminent search engine throughout the world.8 Like its competitors, Google indexes
websites using various elements of the marketers’ web pages, including images, videos and web-page meta-tags,
such as the following found in the header section of an HTML (hypertext markup language) page and unseen
unless one views the page’s source code:
<meta name=“description” content=“Spring gardening guide for Australia and New Zealand. Information
about vegetable and herb planting, different zones, tomatoes, sunflowers. Green mulch and weeding.”/>
<meta name=“author” content=“XYZ Company”>
9780655702412_CH13.indd 381 3/3/20 11:03 AM

The Googlebot also indexes web pages based on the page title, or text associated with pictures on a web
page, among other aspects. Search engine marketing also involves buying placement for ads on other high-
traffic websites, a matter we discuss in the next section.
At the very least, a website should be easy to use, professional looking and physically attractive.
Ultimately, however, websites must also be useful. When it comes to web surfing and shopping, most
people prefer substance over style and function over bling. Thus, effective websites contain deep and useful
information, interactive tools that help buyers find and evaluate products of interest, links to other related
sites, changing promotional offers, and entertaining features that lend relevant excitement.
Maintaining a top website is a complex and ongoing task. Many organisations find willing contributors
when creating a site, but find it difficult and expensive to maintain their site.
Online advertising
As consumers spend more and more time on the internet, companies are shifting more of their marketing
online advertising dollars to online advertising to build their brands or to attract visitors to their websites.
Advertising that appears
while consumers are Forms of online advertising
browsing the web, The main forms of online advertising are search-related ads, display ads and online classifieds. Online
including display ads,
advertising has become a major medium, with Australia achieving its highest revenues of $6.82 billion
search-related ads,
online classifieds, video for the full financial year ending 30 June 2016.9 Figure 13.3 provides a breakdown of online advertising
advertising and other expenditure in Australia for the year ending 30 June 2016. In New Zealand, online advertising rose to more
forms. than NZ$800 million in 2015.10 The strong growth is mainly attributed to increasing mobile advertising,
and by advertising accompanying online video.11
We refer to the activity of placing online ads through search engines – for example, using Google’s
Adwords and Adsense services – as search-related ads (or contextual advertising). In this form of online
advertising, text-based ads and links appear alongside search engine results on sites such as Google and
Yahoo!7. For example, search Google for ‘3D TVs’. At the top (in a pink box) and side of the resulting
search list under the heading ‘Sponsored links’, you may see ads for advertisers, such as Samsung and
perhaps others. In the organic lists will likely appear retailers ranging from Harvey Norman and JB Hi-Fi
to price-comparison sites such as MyShopping.com.au.
General
display
Search and
$2 469 100 directories
$3 122 400
Classifieds
$1 226 900
Figure 13.3 Online advertising expenditure in Australia, year ending 30 June 2016
Note: Mobile and video advertising are included in these totals:
• ‘General display’ total comprises 45% mobile advertising and 24% video advertising.
• ‘Search’ total includes an element of mobile advertising (43% of $1,961 million, or $843 million).
Source: IAB Australia, ‘Executive Summary’, Online Advertising Expenditure Report – FY 2015–16, 22 August 2016, conducted by
PricewaterhouseCoopers on behalf of IAB Australia.
9780655702412_CH13.indd 382 3/3/20 11:03 AM

Nearly all of Google’s A$100 billion

in global revenues comes from ad sales.12
An advertiser buys search terms from the
search site and pays only if consumers click
through to its site. Search is an always-on kind
of medium. And importantly in today’s tight
economy, the results are easily measured.
Thus, as in many parts of the world, search-
related ads account for more than half of
the total online advertising expenditure in
Australasia, more than any other category
of online advertising. The motor vehicle
industry is often the highest spender in
the ‘General display’ advertising category,
followed by finance, and computers and
communications. Turning to the ‘Online
classified’ advertising category, the real
estate industry is usually the heaviest
Online advertising: Flight Centre employs the web in marketing air travel,
spender, followed by recruitment and then
accommodation, holidays and packages, and more, on its website at <www.
automotive.13 flightcentre.com.au>.
In recent years, search-related advertising Courtesy of Flight Centre
has grown increasingly popular with all
companies in nearly all industries. In companies such as Suncorp, whether we are referring to their
insurance companies – AAMI, Bingle, GIO or JustCarInsurance – or perhaps to their banking
operations, we see that the companies involved are heavily reliant on the web. So, too, are they
heavily reliant on search marketing. Search ‘car insurance Australia’ using Google, Yahoo!7 or Bing,
and you should see AAMI and youi as search output on your computer screen, along with such
competitors as Allianz, RACV and Progressive, among others that now include retailers such as
Woolworths. This is not a coincidence but, rather, part of an orchestrated campaign of bidding for
key words and ensuring that the companies pay the search engines for any click-throughs to the
company’s websites.
Email
Home landline phone connections continue to fall, while mobile phone usage continues to rise.
Nearly one-third of adult Australians do not have a landline at home and rely exclusively on their
mobile phones, and 21 per cent access the internet using only their mobile phones.14 Younger
people are more likely to fall into this category. Many of us have more than one mobile phone, or
even a mobile phone with two SIM (subscriber identity module) cards – one for work and one for
personal use – thereby accounting for the fact that the number of mobile phone subscriptions in
Australia exceeds the size of the population.15 Moreover, we tend to update our mobile phones every
18–24 months, with companies such as Apple and Google leading the way in enticing us to adopt
new phones with features like artificial intelligence (AI), virtual reality (VR) and ever-more-powerful
cameras on top of the many built-in features we already cannot do without. Telstra, Australia’s largest
telecommunications company, collects some 40 per cent of its revenue ($10.4 billion in 2015–16) from
mobile.16
As more and more features are incorporated into mobile phones, marketing organisations are finding
more novel ways to reach out to and hold customers. Marketers of all kinds – from Coca-Cola, Pepsi,
Nike, McDonald’s and Toyota to the local bank, university or supermarket and even vending-machine
9780655702412_CH13.indd 383 3/3/20 11:03 AM

makers – are now integrating mobile phones into their direct and digital marketing strategy.17 Mobile
phone promotions include everything from ring-tone giveaways, mobile games, text messages in contests
and ad-supported content, to retailer announcements of discounts, brand coupons, gift suggestions and
shopper information apps.18
At one time, email was described as the ‘killer app’, and it is still the ‘king’ in comparison with
other forms of digital marketing.19 According to the US Direct Marketing Association, marketers get
a return of $42 on every $1 they spend on email.20 While most companies use email, and many use it
for follow-up customer service, its main use is in business-to-business marketing. Much depends on the
definition used when accounting for expenditure. Here, we employ the Interactive Advertising Bureau’s
definition whereby email includes banner ads, links or advertiser sponsorships that appear in email
newsletters, email marketing campaigns and other commercial email communications, whether text or
HTML based.
spam It is the dark side of email use that has reduced its usefulness in marketing. The explosion of spam –
Unsolicited, unwanted unsolicited, unwanted commercial email messages that clog up our email inboxes – has produced
commercial email
consumer irritation and frustration. Spam may now account for as much as 56 per cent of all email
messages.
sent, with much more around the Christmas holiday period, having dropped from 71 per cent in
2014.21
To address these concerns, most legitimate marketers now practise permission-based, or opt-in, email
marketing, sending email pitches only to customers who ‘opt in’. Others, such as Amazon.com, include long
lists of opt-in boxes for different categories of marketing material. Amazon.com targets opt-in customers
with a limited number of helpful ‘we thought you’d like to know’ messages based on their expressed
preferences and previous purchases. Few customers object and many actually welcome such promotional
messages.
Given its targeting effectiveness and low costs, email can be an outstanding marketing investment when
used correctly. Using email with opt-in customers as a relationship maintenance tool is beyond dispute.
However, it is often used by the unscrupulous despite the enactment of the Australian Spam Act 2003 (Cth)
and the Unsolicited Electronic Messages Act 2007 in New Zealand, which are designed to ensure that marketers
maintain appropriate standards in the use of email.
Social media marketing

As we have discussed since Chapter 1, the popularity of the internet has been spurred on by a rise in
social media the number of social media networks and web communities of interest (also known as
networks (web communities of practice). Using social media might be as simple as posting some messages and promotions
communities of on a brand’s Facebook or Twitter pages or creating brand buzz with videos or images on YouTube, Vine
interest)
Online social
or Pinterest. However, most large companies are now designing full-scale social media efforts that
communities – blogs, blend with and support other elements of a brand’s marketing content strategy and tactics. More than
social networking making scattered efforts and chasing ‘Likes’ and tweets, companies that use social media successfully
websites or even virtual are integrating a broad range of diverse media to create brand-related social sharing, engagement and
worlds – where people
socialise or exchange customer community.
information and For example, a tour group or motoring enthusiasts visiting Europe for the Formula 1 at Monza
opinions. in Italy, and GT3 car racing at the Nürburgring in Germany, might set up a closed (not open to the
public at large) Facebook group for its members to share their experiences by way of comments and
photos. When the tour is completed, the members may post positive comments on the Facebook
pages of a company, such as the Latitude Group, that organised the overseas travel and the tour itself.
Members may even go so far as to contribute reviews of attractions, accommodation and meals to
Tripadvisor.com and similar social media sites. They may share their videos to YouTube and photos
to Pinterest.
9780655702412_CH13.indd 384 3/3/20 11:03 AM

Facebook also caters to business users with its

Workplace service, which has a similar look and feel
to the Facebook we are all more familiar with as it
includes news feeds, group sharing, live chats, and
features that include live videos and emoji reactions.22
This workplace service competes with Microsoft’s
Skype for Business, and LinkedIn.
Although the large online social networks, such as
Facebook, YouTube and Twitter, have grabbed most
of the headlines, a new breed of more-focused niche
networks has recently emerged. These networks cater
to the needs of smaller communities of like-minded
people, making them ideal vehicles for marketers who
want to target special-interest groups. For example,
the largest global mobile-phone and tablet community
of interest, with nearly five million members, is xda-
developers.com; in Australia, many people subscribe
to whirlpool.net.au for information and interaction on
mobile phone plans and ICT generally.
Car companies, such as BMW, rely on such Integrating social media marketing: People often use TripAdvisor to review
attractions, hotels and meals when travelling and to seek the advice of other
communities of interest as Bimmerpost.com, not travellers.
only to pass information on new models to existing TripAdvisor
owners, but also to follow the many interactions
between members on tips, tricks and wanted
features. Many other independent and commercial websites have arisen that give consumers online
places to congregate, socialise and exchange views and information. These days, it seems, almost
everyone wants to be your ‘friend’ on Facebook, wants your endorsement on LinkedIn, or wants you
to check in with Twitter, tune into the day’s hottest videos at YouTube or check out photos on Flickr
or Pinterest. And, of course, wherever consumers congregate, marketers will surely follow. More and
more marketers are now riding the huge social networking wave.
Nevertheless, participating successfully in existing online social networks presents challenges. First,
online social networks are new and results are difficult to measure, and third-party metrics are increasingly
needed.23 Second, such web communities are largely user controlled. The company’s goal is to make the
brand a part of consumers’ conversations and their lives. However, marketers cannot simply muscle their
way into consumers’ online interactions – they need to earn the right to be there.
To avoid the mysteries and challenges of building a presence on existing online social networks, many
companies are now launching their own targeted web communities. For example, consider ESPN’s website.
You cannot buy anything at ESPN.com. Instead, the site creates a vast branded sports community.
Other forms of online interaction

Other forms of online interaction in marketing include online video, content sponsorships, alliances and
affiliate programs, and pass-it-on marketing.
Online video involves posting digital video content on brand websites or on social media sites, such as
YouTube, Facebook, Vine and others. Some videos are made specifically for the web and social media. Such
videos range from ‘how-to’ instructional videos and public relations (PR) pieces to brand promotions and
brand-related entertainment. Other videos are ads that a company makes primarily for television and other
media but posts online before or after an advertising campaign to extend the videos’ reach and impact.
9780655702412_CH13.indd 385 3/3/20 11:03 AM

Good online videos can engage consumers by the tens of millions. The online video audience is soaring,
with much of the population now streaming video.24 Marketers hope that some of their videos will go viral.
viral marketing Viral marketing, or pass-it-on marketing, is the digital version of word-of-mouth marketing, and
(pass-it-on involves creating videos, ads and other marketing content that are so infectious that customers will seek
marketing) them out or pass them along to their friends. Because customers find and pass along the message or
The internet version
of word-of-mouth promotion, viral marketing can be very inexpensive. And when a video or other information comes from a
marketing – websites, friend, the recipient is much more likely to view or read it.
videos, email messages Using content sponsorships, companies gain name exposure on the internet by sponsoring special
or other marketing
content on various websites, such as news or financial information or special-interest topics. Sponsorships
events that are
so infectious that are best placed in carefully targeted sites where they can offer relevant information or service to the
customers will want audience. Internet companies can also develop alliances and affiliate programs, in which they work with
to pass them along to other companies, online and offline, to ‘promote each other’. For example, through its Amazon Associates
friends.
Program, Amazon.com has more than 900 000 affiliates who post Amazon.com banners on their websites.
Interactivity
In what we might regard as more traditional direct marketing, customers asked questions, ordered company
offerings and provided feedback via post, landline telephone and fax. In the digital space we now live in,
customers use the means that companies now provide. These range from website forms to email, and on
to the social media already discussed. However, it must be noted that, firstly, customers interact with each
other, and they interact with companies they deal with and even with their competitors. Next, we look at
each of these modes of interactivity.
Customer-to-customer interaction
customer- Much customer-to-customer interaction occurs on the web between interested parties over a wide
to-customer range of products and subjects. In some cases, the internet provides an excellent means by which consumers
interaction can buy or exchange goods or information directly with one another. For example, eBay and other auction
Interaction whereby
customers can buy or sites offer popular marketspaces for displaying and selling almost anything – from art and antiques, coins
exchange goods or and stamps, and jewellery, to computers and consumer electronics.25 eBay’s customer-to-customer online
information directly trading community is large and embraces more than 164 million active users worldwide.26 (That is more
with one another. Such
than the combined total populations of Australia, Britain, Egypt, New Zealand, South Korea and Turkey.)
interaction may also
involve interchanges of However, it is to be noted that the ‘Buy it now’ category outstrips auctions on eBay.27 In other cases,
information through customers use communities of interest, and turn to these forums and blogs, where they post their thoughts,
internet forums that usually on a narrowly defined topic. Tripadvisor.com is a classic example, where travellers post their reviews
appeal to specific
of places they have visited – from attractions and events, to restaurants and hotels.
special-interest groups.
Many marketers are now tapping into blogs as a medium for reaching carefully targeted consumers.
blog When we consider that blogs can be created in a few minutes, and that the topics are so numerous, it is no
An online journal where wonder that companies seek to tap this form of customer-to-customer interaction.28 However, companies
people post their
thoughts, usually on a also set up their own blogs, and it is estimated there are 138 travel blogs alone in Australia and New Zealand.29
narrowly defined topic. However, the commentaries are not usually as critical as we might find at ProductReview.com.au.30
As a marketing tool, blogs offer some advantages. They can provide a fresh, original, personal and cheap
way to enter into consumer web conversations. However, the blogosphere is cluttered and difficult to control.
Blog journals remain largely a customer-to-customer medium. Although companies can sometimes leverage
blogs to engage in meaningful customer relationships, consumers remain largely in control. Whether or not
they actively participate in the blogosphere, companies should show up, monitor and listen to them.
It can soon be seen that ‘customer-to-customer’ means that online buyers do not just consume product
information – increasingly, they create it. We might state that ‘word of web’ is joining ‘word of mouth’ as
an important buying influence.
9780655702412_CH13.indd 386 3/3/20 11:03 AM

Customer-to-company
interaction
The final online marketing domain is customer-to-company
interaction. The internet has enabled customers to have easier
communication with companies. In the nature of true relationship
management, we see that most companies now invite prospects and
customers to send in suggestions and questions via text messages,
email and company websites. Beyond this, rather than waiting for an
invitation, consumers can search out sellers on the web, learn about
their offers, initiate purchases and give feedback. Using the web,
consumers can even drive transactions with businesses, rather than
the other way around. For example, using Shopbot.com.au, would-be
buyers can find the lowest price for all manner of products.
Customers can also use websites to ask questions, offer
suggestions, lodge complaints or deliver compliments to companies.
On the one hand, mobile phone and broadband users can access
whirlpool.net.au to tap into customer-to-customer interactions and
to see company responses. Those who have complaints often turn Customer-to-company interaction: Notgoodenough.org
allows consumers to put the blowtorch to poor-performing
to websites such as Not Good Enough at <notgoodenough.org> companies and is an example of customer-to-customer
and Product Review <productreview.com.au> to put forward their interaction affecting marketers.
views and comment on the experiences of others. In short, customer- Supplied by BrandAide
to-customer interactions have changed the way marketers listen to

their customers and act on their comments. Customer-to-customer customer-
interactions should never be ignored by marketing organisations. to-company
interaction
Interaction whereby
customers communicate
with companies.

Let’s take a break and think about how you, your friends and ● When you want to watch a YouTube video of your choice,
family interact with companies online and how this influences and you are forced to watch a video commercial – for at
your brand preferences and buying behaviour. least 3 seconds – do you watch this ad? Do you think this is
● Do you use Facebook, Twitter, YouTube or other social media effective online marketing? Why, or why not?
to initiate interaction with companies and/or not-for-profit
organisations?
● If you use Facebook, and you are advised of posts concerning
brands and preferences initiated by companies rather than by
people you know, what is your reaction?
9780655702412_CH13.indd 387 3/3/20 11:03 AM

Student on catalogue marketing – selling through catalogues mailed to a select list of

customers, made available in stores or accessed on the web. Telephone marketing
Learning consists of using the telephone to sell directly to consumers. Direct-response
Centre television marketing has two forms: direct-response advertising (or infomercials)
and home-shopping channels. Kiosks are information and ordering machines that
direct marketers place in stores, airports and other locations. Online marketing
involves online channels that digitally link sellers with consumers.
Reviewing the learning objectives
Let us revisit this chapter’s key concepts. This chapter is the last of three
chapters covering the final marketing mix element – promotion. The previous
❶ Direct and digital marketing adoption in Australia and New Zealand. Have
chapters dealt with advertising, publicity, personal selling and sales promotion.
Australasian retailers been slower than their overseas counterparts to
This chapter investigates the burgeoning field of direct and online marketing, and
adopt and use the internet and web to their full potential in omni-retailing?
its connection with response fulfilment (discussed in Chapter 10).
Examine a selection of global .com domain websites and compare them with
websites in the same retailing categories in regional .com.au and .co.nz
Learning Objective 1. Define direct and digital
domains. (Learning Objectives 1 and 2) (AACSB: Communication; Use of IT;
marketing, and discuss its benefits for consumers
Diverse and Multicultural Environments; Analytical Thinking)
and marketing organisations.
❷ ‘If all companies use direct and digital marketing databases, there is no
Direct and digital marketing consists of direct connections, mostly in real-
need for traditional marketing research!’ This statement was made by a
time, with carefully targeted individual consumers to both obtain an immediate
postgraduate marketing student attending an Australasian university.
response and cultivate lasting customer relationships. Using detailed databases,
The statement may be reframed as a question: ‘Why is marketing research
direct marketers tailor their offers and communications to the needs of narrowly
undertaken, and does data mining tell us everything we need to know
defined segments or even individual buyers.
about our marketing effort?’ Do you agree or disagree with the opening
For buyers, direct marketing is convenient, easy to use and private. It gives
statement? Justify your answer, considering the reframed question, and
buyers ready access to a wealth of products and information, at home and
commence with definitions of each of the terms in the statement. (Learning
around the globe. Direct marketing is also immediate and interactive, allowing
Objectives 1 and 2) (AACSB: Communication; Use of IT; Analytical Thinking)
buyers to create exactly the configuration of information, products or services
❸ Evaluating website performance. It seems that many digital marketing
they desire and then order them on the spot.
organisations use ‘hits’ as a measure when evaluating their website
For sellers, direct marketing is a powerful tool for building customer
performance. Three groups of measures are mentioned in this chapter, and
relationships. Using database marketing, today’s marketers can target small
hits are only one measure within one grouping. Why might online marketers
groups or individual consumers, tailor offers to individual needs and promote
use hits as a performance measure? Should they be using other measures?
these offers through personalised communications. It also offers them a low-cost,
Why, or why not? (Learning Objectives 1 and 2) (AACSB: Communication;
efficient alternative for reaching their markets. As a result of these advantages to
Use of IT; Analytical Thinking)
both buyers and sellers, direct marketing has become the fastest-growing form
➍ Search engine marketing and search engine optimisation. Reflect on
of marketing.
Marketing in Action 13.1. Not all marketing organisations use Google
Adword and Adsense campaigns. Oddly, they also ignore attempts to rise
Learning Objective 2. Examine and discuss direct
in the natural listings (as opposed to paid listings) on search engines.
and digital marketing and interactivity.
How might we assess this latter claim? (Learning Objectives 1 and 2)
The main forms of direct marketing include direct print and reproduction;
(AACSB: Communication; Use of IT; Analytical Thinking)
direct-response television and radio; telemarketing; telesales; and kiosks and
electronic dispensing. We discussed direct selling in Chapter 12. We examine
digital marketing separately and see that the main forms include using a search- Critical thinking exercises
engine optimised website; search engine marketing (SEM); online advertising; ❶ In a small group, design and deliver a direct-response television commercial
social media marketing; and email and other forms online interaction, such as for a national brand not normally associated with this type of promotion.
blogs and videos. Use a product of your own choice. (Learning Objectives 1 and 2) (AACSB:
Internet and mobile marketing are growth areas in marketing expenditure. Communication; Analytical Thinking; Reflective Thinking)
They permit sellers to communicate with buyers – and to deliver many offerings – ❷ Review the Australian government’s Web Content Accessibility Guidelines
in real-time, and to more effectively coordinate response fulfilment through more (WCAG), <www.finance.gov.au/publications/wcag-2-implementation>. Write
traditional channels. Direct print and reproduction includes direct-mail marketing, a report explaining why these guidelines are necessary. Are such guidelines
and consists of the company sending an offer, announcement, reminder or other used in the commercial sector? (Learning Objectives 1 and 2) (AACSB:
item to a person at a specific address. Fast-growing forms of ‘mail delivery’ Communication; Use of IT; Analytical Thinking)
have become popular, such as email and mobile marketing. Some marketers rely
9780655702412_CH13.indd 388 3/3/20 11:03 AM

Mini cases
13.1 Location-based marketing
Is mobility the key?
Nicholas Negroponte, founder and chairman of the One Laptop per Child At one time, the ‘all-in-one’ device might have been thought of as
non-profit association, co-founder and chairman emeritus of MIT’s Media a personal computer bolted to a household appliance such as a fridge
Lab, former IT adviser to world leaders, and author of the bestseller Being or television – a concept we now encapsulate in the term the internet
Digital, points out that, due to the ‘combined forces of convenience, of things. However, such an ‘all-in-one’ device would not have been an
imperative and deregulation’, all manner of media are becoming ‘digitally internet-connected ‘smart hub’ 3D television set, due to the latter’s lack of
driven’. It is true that once a newspaper article is typed into a word mobility. Today, we are more likely to regard this device as a data-enabled
processor its form is bits rather than atoms and it can be transmitted and smartphone with broadband access to the web, or perhaps a similarly
reproduced in many ways – some of which the intellectual property holder enabled tablet PC. Mobility is increasingly the key to successful direct and
might never have imagined. This technological feat applies to photographs, digital marketing. It is also the key for many marketing organisations, which
film, video, voice, data – virtually anything except the human holding the can harness the GPS features of smartphones and tablets and attract mobile
camera or composing the words. The fictional USS Enterprise crews of Star customers to their wares.31
Trek fame (‘Beam me up, Scottie’), Dr Who and his Tardis time machine, ❶ Do you have pay-TV connected? Is it high-definition? Are you able to
Captain Jack Harkness of Torchwood and author Douglas Adams’s equally record your favourite shows and movies? List the features you believe you
fictional characters in The Hitchhiker’s Guide to the Galaxy are thus far the ‘couldn’t live without’ and those that are ‘not value for money’. (Learning
exception to the rule in terms of animate objects becoming bits and then Objective 2) (AACSB: Communication; Use of IT; Reflective Thinking)
being reconstructed again and again. ❷ Do you think the availability of greater bandwidth via fibre-optic
A potted history of communications is very telling of how far humanity has cable to the home and office will lead to more people and companies
come. Humanity developed language in around 10 000 BC. Advertisements interacting and transacting? Or does it simply lead to more video
first appeared in about 3000 BC, with the first textbooks appearing in Egypt streaming? Argue your case one way or the other. (Learning Objective 2)
in 2800 BC. Then came the Chinese printing press in AD 2 and the German (AACSB: Communication; Use of IT; Analytical Thinking; Reflective
Gutenberg press very much later, in 1455. We experienced 200 years of Thinking)
‘industrial revolution’ from about 1750 to the present wherein all manner of ❸ Do you think that MOOCs (Massive Open Online Courses) are the
communications devices were developed, ranging from the first typewriter hit with students that they are with some educationists? See a list
(1798) through to the first telephone (1877), the first computer (ENIAC, of such courses at <mooc-list.com>. (Learning Objective 2) (AACSB:
1946) and on to what we might think of as the ‘all-in-one’ device. Communication; Use of IT; Reflective Thinking)
13.2 Direct and digital marketing

Marketing à go go!
Web streaming of video-on-demand, music-on-demand, streamed movies, So much so that most users now want multiplicity of use from the devices they
sports and television mini-series, as well as voice- and data-on-demand are buy, and they want it all in mobile devices, such as smartphones and tablets.
available in nearly every home and office, and even when people are out and Once the mobile broadband infrastructure is in place, being a marketing
about on the go. This is why telecommunications companies (telcos) such organisation will indeed mean being digital. Such a marketspace will then
as Australia’s Telstra and Optus want to remain in the business of pay-TV see a global market accessible to even the smallest online firm that seeks to
and the US giant AT&T want to be involved in content production, and why fill the gaps in the market. However, ‘having access to’ and ‘gaining’ people
media keiretsus such as News Corp’s News Ltd want to be more involved in as customers are two different things, as every marketer knows.
communications, including social media.32 Your smartphone has already become indispensable. And, in the future,
There are many other such convergences between telecommunications, it will be even more so. Soon, it will be the only thing you will need for
media and TCP/IP (transmission control protocol/internet protocol) devices. locking your door, starting your car or motorbike, turning on the stove or
9780655702412_CH13.indd 389 3/3/20 11:03 AM

dishwasher, paying for purchases or even simply paying your friend the $20 received discount offers that lured them to a café or restaurant because their
you owe him or her. Mobile technologies already allow us to do almost smartphone tipped the marketer off that they were nearby.
anything remotely, right down to monitoring our health. ❶ What mobile applications currently exist and what is on the horizon?
Moreover, smartphones and tablets allow marketers to target services How many of these applications do you or someone you know use?
and promotions directly to us based on our location (see Mini case 13.1 (Learning Objective 1) (AACSB: Communication; Use of IT; Reflective
on location-based marketing). You may have noticed that Qantas and Thinking)
Jetstar customers can simply wave their smartphones under a scanner – no ❷ Are there barriers to adoption of mobile applications? If so, what
ticket, wallet, cash or card required – as they purchased their flight online are they? (Learning Objective 2) (AACSB: Communication; Use of IT;
and had their boarding pass emailed to them. Some customers may have Reflective Thinking)

Evaluating direct and digital marketing
‘Like’ if you agree!
Marketers know that Facebook is a force to be reckoned with, but until of target audience reached via media is interesting, it ignores all of
now they have not been able to easily measure that force and compare it the more in-depth engagement metrics which allow us to assess digital
to traditional media. Whereas traditional media have established metrics, performance in a far richer and more meaningful way. The desire to carve
such as ratings, to measure what marketers are getting for their money, an out more TV budget should not create a dumbed down measurement
entirely new set of metrics – such as click-through rates (CTRs), cost per framework – this will only limit knowledge and hold brands back.
view (CPV) and page impressions – has evolved for online media. (Also ❶ Research marketing expenditure trends in social media marketing as
see Marketing in Action 13.1 and Appendix 3’s Analytic measures 7.1 and well as in other forms of online advertising. Compare these trends with
7.2 for more on these metrics.) Unfortunately, the traditional and the new traditional advertising media expenditures. Develop a presentation
metrics are not directly comparable. illustrating those trends. (AACSB: Communication; Analytical Thinking;
ComScore and Nielsen are two companies attempting to rectify that Reflective Thinking)
situation by developing a rating system based on gross rating points (GRPs) ❷ Visit <comScore.com> and <nielsen.com> to learn more about
to show the power of Facebook as a marketing tool. However, Becca the measures these companies have developed for measuring the
Braithwaite, DigitasLBi director, did not see longevity in the use of this marketing exposure of brands on Facebook. How do these metrics
familiar term with digital media, and commented as follows: 33
differ from those that have been used with regard to measuring online
While GRPs may be a useful part of assessing media performance they advertising impact? (AACSB: Communication; Use of IT; Reflective
are by no means the be-all-and-end-all. While looking at the percentage Thinking)

Are there spam/do not call/privacy issues?
You are marketing manager of a company that markets products purchased list has been obtained from a dubious source associated with a regional
by mothers on the birth of their first child. These products are often unfamiliar government office. You know that such a list can form your database for
to young mothers; previously, they had no need for such items as cloth or many years to come. You will be able to send birthday cards to the babies as
disposable nappies, singlets or bibs. You find that, for a price, you can obtain they grow and thus maintain the relationship formed at birth.
a list of births that gives the names of babies, their parents’ names, postal Should you use such a list? What do you think are the reasons for and
address, email address, and fixed and mobile phone numbers. You think the against using a list of this kind?
9780655702412_CH13.indd 390 3/3/20 11:03 AM

References
1 Australian Bureau of Statistics, Internet Activity, Australia, June 2016, Cat. No. 8153.0, 18 See Lauren Johnson, ‘McDonald’s beefs up advertising strategy with mobile game’,
5 October 2016, <abs.gov.au/ausstats/abs@.nsf/mf/8153.0>, accessed October 2016; Mobile Marketer, 28 March 2013, <mobilemarketer.com/cms/news/advertising/12447.
and ‘New Zealand internet users’, InternetLiveStats, <internetlivestats.com/internet- html>; and Rimma Kats, ‘McDonald’s beefs up mobile efforts via targeted
users/new-zealand>, accessed October 2016. Also see: ‘Sensis social media report May campaign’, Mobile Marketing, 16 August 2013, <mobilemarketer.com/cms/news/
2015’, Sensis, <sensis.com.au/assets/PDFdirectory/Sensis_Social_Media_Report_2015. advertising/13553.html>, accessed October 2016.
pdf>, accessed October 2016; ‘Internet retailer: Top 500 guide’, <top500guide.com/ 19 ‘Social media is the hot new thing, but email is still the king’, Advertising Age,
top-500>, accessed September 2016; ‘Amazon’s online sales dwarf the competition’, 30 September 2013, p. 18.
statista, 7 May 2014, <www.statista.com/chart/2214/10-largest-online-retailers>. 20 See Greg Sterling, ‘Report: 66 percent of email opens on mobile, mostly iOS devices’,
Also see the latest Digital Landscape information by Nielsen and IAB Australia, Marketing Land, 19 November 2014, <http://marketinglandâ€‹.com/report-66-percent-
<digitalmeasurement.nielsen.com/digitalmedialandscape>. email-opens-mobile-devices-108420>; Nora Aufreiter, Julien Boudet & Vivian Weng,
2 See ‘Number of monthly active Facebook users worldwide as of 3rd quarter 2016 (in ‘Why marketers should keep sending you emails’, McKinsey & Company, January 2014,
millions’, statista, <statista.com/statistics/264810/number-of-monthly-active-facebook- <www.mckinsey.com/insights/marketing_sales/why_marketers_should_keep_sending_
users-worldwide>, accessed September 2016; and Patrick Durkin, ‘Facebook infiltrates you_emails>; Suzanne Vranica, ‘You’ve got mail and more is coming’, Wall Street
the office’, Australian Financial Review, 11 October 2016, p. 14. Journal, 14 November 2014, <http://blogs.wsj.com/cmo/2014/11/14/youve-got-mail-
3 See Rachel Brown, ‘Perry, Fischer, Lavigne tapped for proactiv’, WWD, 13 January 2010, and-more-is-coming/>, and ‘5 ways to optimize email marketing ROI’, CMO Essentials,
p. 3; Rahul Parikh, ‘Proactiv’s celebrity shell game’, Salon.com, 28 February 2011, 10 March 2015, <www.cmoessentials.com/5-ways-optimize-email-marketing-
<www.salon.com/2011/02/28/proactiv_celebrity_sham>; ‘Guthy-Renker honored with roi/#sthash.OjGWLbE0.dpbs>.
nine era moxie awards for year’s best direct marketing campaigns’, Marketing Weekly 21 ‘Global spam volume as a percentage of total email traffic from January 2014 to June
News, 19 October 2013, p. 145; and <www.proactiv.com>, accessed September 2015. 2016, by month’, statista, <statista.com/statistics/420391/spam-email-traffic-share>,
4 Stephanie Rosenbloom, ‘The new touch-face of vending machines’, New York Times, accessed October 2016.
25 May 2010. 22 See Patrick Durkin, ‘Facebook infiltrates the office’, Australian Financial Review,
5 See ‘How is the internet evolving?’, Internet Society, <internetsociety.org/internet/how- 11 October 2016, p. 14.
internet-evolving>, accessed October 2016. 23 See Kay Peters, Yubo Chen, Andreas M Kaplan, Bojörn Ognibeni & Koen Pauwels, ‘Social
6 Jill Novak, ‘7Cs website design elements that drive customer traffic’, Marketing Teacher, media metrics – A framework and guidelines for managing social media’, Journal of
<marketingteacher.com/seven-cs>, accessed October 2016. Interactive Marketing, 27(4), 2013, pp. 281–98.
7 The definition of search engine marketing is adapted from the definition contained 24 Linda Moses, ‘Online video ads have higher impact than TV ads’, Adweek, 1 May
in Internet Advertising Bureau, IAB Internet Advertising Revenue Report: An Industry 2013, <www.adweek.com/print/148982>; and ‘comScore releases December 2013
Survey Conducted by PwC and Sponsored by the Interactive Advertising Bureau (IAB), U.S. online video rankings’, 10 January 2014, <www.comscore.com/Insights/Press_
<www.iab.net/insights_research/530422/adrevenuereport>, accessed 7 January 2013. Releases/2014/1/comScore_Releases_December_2013_US_Online_Video_Rankings>.
8 See Alexa, <alexa.com/topsites>, accessed October 2016. 25 The term marketspace was coined by J Rayport & J Sviokla, ‘Managing in marketspace’,
9 ‘Online advertising expenditure report – quarter ended June 2016 (FY 15–16), iab Harvard Business Review, 72(6), 1994, pp. 141–50.
Australia, 22 August 2016, <iabaustralia.com.au/research-and-resources/advertising- 26 ‘Number of eBay’s active users from 1st quarter 2010 to 2nd quarter 2016’, statista,
expenditure/item/11-advertising-expenditure/2160-online-advertising-expenditure- <statista.com/statistics/242235/number-of-ebays-total-active-users>, accessed October
report-quarter-ended-june-2016-fy-15-16>, accessed October 2016. 2016.
10 Chelsea Armitage, ‘Online ad revenue passes $800m in 2015’, NBR, 4 March 2016, 27 Kyle Stock, ‘An auction? Most eBay users don’t have time for that’, 27 May 2013,
<nbr.co.nz/article/online-ad-revenue-passes-800m-2015-ca-185819>, accessed Bloomberg, <bloomberg.com/news/articles/2013-05-26/an-auction-most-ebay-users-
October 2016. dont-have-time-for-that>, accessed October 2016.
11 Max Mason, ‘Australian advertising market to hit $13.5 billion in 2016’, Sydney 28 See ‘Blogging trends and predictions’, Building A Framework, <buildingaframework.
Morning Herald, 4 January 2016, <smh.com.au/business/media-and-marketing/ com/blogging-trends-predictions>, accessed October 2016.
australian-advertising-market-to-hit-135-billion-in-2016-20151220-glrs3i.html>, 29 ‘Top Australian and New Zealand travel blogs for 2016’, Pretraveller, <pretraveller.
accessed October 2016. com/2016/01/03/australian-new-zealand-travel-blogs-2016>, accessed October 2016.
12 Estimate in Australian dollars calculated using exchange rate, A$0.75 : US$1.00, 30 See <productreview.com.au>, accessed October 2016.
from ‘Google’s revenue worldwide from 2002 to 2015’, statista, <statista.com/ 31 See Nicholas Negroponte, Being Digital, Hodder & Stoughton: London, 1995, p. 13.
statistics/266206/googles-annual-global-revenue>, accessed October 2016. 32 See Greg Roumeliotis & Jessica Toonkel, ‘AT&T to buy Tie Warner in $11.2b tie-up’,
13 Internet Advertising Bureau, IAB Internet Advertising Revenue Report, June 2012. Australian Financial Review, 24 October 2016, p. 9.
14 See ‘Australians get mobile’, ACMA, 9 June 2015, <acma.gov.au/theACMA/engage-blogs/ 33 Lara O’Reilly, ‘Facebook has caved to advertisers and is finally letting them buy
engage-blogs/Research-snapshots/Australians-get-mobile>, accessed October 2016. video the way they used to in the 1950s’, Business Insider Australia, 29 July 2015,
15 See ‘Communications report 2014–15’, ACMA, <acma.gov.au/theACMA/Library/ <businessinsider.com.au/facebook-introduces-gross-rating-points-for-video-ad-buying-
Corporate-library/Corporate-publications/communications-report-2014-15>, accessed 2015-7?r=US&IR=T>, accessed October 2016.
October 2016.
16 Max Mason, ‘Telstra looks to 5G future 10 years after NextG launch’, Australian
Financial Review, 11 October 2016, p. 20.
17 See ‘Smartphone-linked vending machines rise as drink makers thirst for sales’, The
Japan Times, 8 August 2016, <japantimes.co.jp/news/2016/09/08/business/corporate-
business/smartphone-linked-vending-machines-rise-drink-makers-thirst-sales/#.V_rcR_
B95jE>, accessed October 2016.
9780655702412_CH13.indd 391 3/3/20 11:03 AM

9780655702412_CH13.indd 392 3/3/20 11:03 AM

SESSION Managers,
7
management
and managerial
sustainable
responsibilities
• Managers and Management
• History module: A brief history of
management's roots
• The managerial environment
• Ethics and social responsibility module:
Managing socially responsibile and ethical
behaviour
9780655702412_CH14.indd 393 3/3/20 11:04 AM

Chapter
14 Managers and management
Anyone who works in an organisation – not just managers – can gain insight into how organisations work
and their boss’s behaviour by studying management.
Assume for a moment that it’s your first day in an introductory physics class. Your instructor asks you
to take out a piece of paper and ‘describe Newton’s second law of motion’. What would your reaction be?
Most students would probably respond with something like ‘How would I know? That’s why I’m taking
this course!’
Now let’s change the situation to the first day in an introductory management class. Your instructor
asks you to write an answer to the question: ‘What traits are needed to be an effective leader?’ When we’ve
asked this question of students on the first day, we find that they’re never at a loss for an answer. Everyone
seems to think they know what makes a good leader.
Our example illustrates a popular myth about the study of management: that it’s just common sense.
Well, it’s not! The study of management is filled with insights, based on extensive research, that are
counterintuitive. To reinforce this point, we open each chapter of this book with a finding from that chapter
that runs counter to common sense.
Let’s begin this chapter by stating a fact: you don’t have to be a manager, or aspire to be a manager,
to gain something from a management course. Formally studying management in a management course
provides a ‘toolkit’ of perspectives and approaches you can draw on to manage different situations or
to understand what managers are doing. So, the more you learn about management, the more you will
understand the managers you work with and how to be a manager yourself.
Learning Objective 1 Tell who managers are and where they work.
Who are managers, and where do they work? pp. 396–99
Learning Learning Objective 2 Define management.
Objectives What is management? p. 399
Learning Objective 3 Describe what managers do.
What do managers do? pp. 400–6
Learning Objective 4 Explain why it’s important to study management.
Why study management? p. 406
Learning Objective 5 Describe the factors that are reshaping and redefining management.
What factors are reshaping and redefining management? pp. 406–10
9780655702412_CH14.indd 394 3/3/20 11:04 AM

Chapter 14 Managers and management 395
LO 1
Tell who managers
are and where they
work.
LO 2
Define management. fact or fiction?
LO 3
Only those who want to be
Describe what
managers do.
managers need to study
management.
LO 4
Explain why it’s
important to study
management.
fiction
LO 5
Describe the factors
that are reshaping
and redefining
management.
9780655702412_CH14.indd 395 3/3/20 11:04 AM

396 Session 7 Managers, management and managerial sustainable responsibilities
Although we’d like to think that all managers are good at what they do, you may have found, through jobs
you’ve had, that this isn’t necessarily the case: managers can be good, or not so good, at what they do – or
even good one day and not so good the next! One thing you need to understand is that all managers have
important jobs to do. In this chapter, we introduce you to managers and management: who they are, where
they work, what management is, what managers do, and why you should spend time studying management.
Finally, we’ll wrap up the chapter by looking at some important factors that are reshaping and redefining
management.
Who are managers, and where do

they work?
There’s no pattern or prototype or standard criteria as to who can be a manager. Managers today can be
under age 18 or over 80. They may be any gender, or from any socioeconomic or cultural background. They
can be found in all industries. They manage entrepreneurial businesses, large corporations, government
agencies, hospitals, museums, schools and not-for-profit enterprises. Some hold top-level management
jobs, while others are supervisors or team leaders. However, all managers share one common element:
organisation they work in an organisational setting. An organisation is a deliberate arrangement of people brought
A systematic together to accomplish some specific purpose. For example, your university or college is an organisation,
arrangement of people
as are the Red Cross, your local supermarket, the Cancer Council, and global companies such as Nestlé,
brought together to
accomplish some Nokia and Nissan. These and all organisations share four common characteristics (see Figure 14.1).
specific purpose
What four characteristics do all
organisations share?
The first characteristic of an organisation is that it has a distinct purpose, which is typically expressed
as a goal or set of goals. For example, Bob Iger, Walt Disney Company’s president and CEO, has said
his company’s goal is to create amazing family entertainment and to provide customers extraordinary
experiences, which will lead to increasing shareholder value.1
Those goals are achieved by the people in an organisation, which is the second common characteristic.
An organisation’s people make decisions and engage in work activities to make the desired goal(s) a reality.
For example, at Disney, many employees work to create the content and experiences that are so important
to the company’s businesses. Others provide supporting services or interact with guests (customers) directly.
The third characteristic is that an organisation is structured in some way that defines and limits the
behaviour of its members. Disney, like most large organisations, has a fairly complex structure with different
businesses, departments and functional areas. Within that structure, rules and regulations might guide what
people can or cannot do, some members will supervise other members, work teams might be formed, and
job descriptions might be created so that organisational members know what they’re supposed to do. That
structure is the setting within which managers manage.
Goals People Structure Operations systems
B
Inputs Outputs
Figure 14.1 Four characteristics of organisations
9780655702412_CH14.indd 396 3/3/20 11:04 AM

The fourth characteristic of organisations is that they have an operational system that transforms inputs non-managerial
into outputs. The system takes inputs – people, technology, money, equipment, materials and information – employees
People who work
and transforms them through various processes, procedures and work activities into finished goods and
directly on a job or
services. Manufacturing organisations turn raw materials into physical goods such as hamburgers, cars task and have no
and mobile phones. Service organisations use raw materials to deliver services to clients, such as dentists responsibility for
providing dental care, mechanics repairing vehicles, and postal services delivering mail. Customers want overseeing the work of
others
value from the goods and services they purchase and use – whether it’s performance characteristics, features
or attributes. So, in order to attract and keep customers, organisations must provide that perceived value by managers
transforming inputs into products and services that customers need or desire and are prepared to pay for. Individuals in an
organisation who direct
How are managers different from the activities of others
non-managerial employees? top managers

Although managers work in organisations, not everyone who works in an organisation is a manager. For Individuals who are
responsible for making
simplicity’s sake, we’ll divide organisational members into two categories: non-managerial employees decisions about the
and managers. Non-managerial employees are people who work directly on a job or task and have direction of the
no responsibility for overseeing the work of others. The employees who help you choose paint at the organisation, and for
establishing policies that
hardware store, who service your car at the garage or who process your university enrolment are all non-
affect all organisational
managerial employees. These non-managerial employees may be referred to by names such as associates, members
team members, contributors or even employee partners. Managers, on the other hand, are individuals in
an organisation who direct and oversee the activities of other people in that organisation so that its goals middle managers
Individuals who are
can be accomplished. A manager’s job isn’t about personal achievement – it’s about helping others to do typically responsible
their work. That may mean coordinating the work of a departmental group, or it might mean supervising for translating goals
a single person. It could involve coordinating the work activities of a team with people from different set by top managers
into specific details and
departments or even people from outside the organisation, such as temporary employees or individuals
tactical plans that lower-
who work for the organisation’s suppliers. This distinction doesn’t mean, however, that managers don’t ever level managers will
work directly on tasks. Some managers do have work duties not directly related to overseeing the activities ensure are carried out
of others. For example, an insurance claims supervisor might process claims in addition
to coordinating the work activities of other claims employees.
What titles do managers have?

Identifying exactly who the managers are in an organisation isn’t difficult,
although they can have a variety of titles. Managers are usually classified as
top, middle or front-line managers, or team leaders (see Figure 14.2). Top
managers are those at or near the top of an organisation. They’re usually
responsible for making decisions about the
direction of the organisation, and for
establishing policies and philosophies
that affect all organisational members.
Top managers typically have titles such
as vice president, president, chancellor,
managing director, chief operating officer,
chief executive officer or chairperson of
the board. Middle managers are those
managers found between the lowest and top Ajiti Banga is an associate product manager at Pocket Gems, a firm in San Francisco that
levels of the organisation. These individuals makes and publishes mobile games such as Pet Tap Hotel and Paradise Cove. Collaborating
often manage other managers, and maybe with multiple teams of engineers and designers, she manages games from initial concept
through development to product launch.
some non-managerial employees, and are
Stephen Lam/Reuters
typically responsible for translating the
9780655702412_CH14.indd 397 3/3/20 11:04 AM

front-line goals set by top managers into specific details and tactical plans. Middle managers may have such titles as
managers department or agency head, project leader, unit chief, district manager, division manager or store manager.
Supervisors responsible
Front-line managers are those individuals responsible for directing the day-to-day activities of non-
for directing the day-
to-day activities of non- managerial employees. Front-line managers are often called supervisors, shift managers, office managers,
managerial employees
Top
managers
Middle
managers
Front-line
managers
scientific Team leaders

management
The use of scientific
methods to define the
‘one best way’ for a job Figure 14.2 Management levels
to be done
FROM THE PAST TO THE PRESENT: 1588–1705–1911–TODAY
Management: Is there one best way to do a job?

The terms management and manager are actually centuries old.2 — workers placed in jobs with little or no concern for matching
One source says that the word manager originated in 1588 to their abilities and aptitudes with the tasks they were
describe one who manages.The specific use of the word to mean required to do.
a person who oversees a business or a public organisation is • The result: worker output was only about one-third of what
believed to have originated in the early part of the 18th century. Taylor thought was possible.
However, used in the way we’re defining it in terms of overseeing • Taylor’s remedy: applying the scientific method to manual shop-
and directing organisational members, management and manager floor jobs. The result: phenomenal increases in worker output
are more appropriately dated to the early 20th century.The word and efficiency – in the range of 200 per cent or more!
management was first popularised by Frederick Winslow Taylor. • Because of his work, Taylor is known as the ‘father’ of scientific
Taylor is a ‘biggie’ in management history, so let’s look at his management.
contributions to how management is practised today.
• Here’s something for you to try: Use scientific management
• In 1911,Taylor’s book Principles of Scientific Management took the
principles to be more efficient. Choose a task you do regularly
business world by storm. His ideas spread in the United States
(e.g. laundry, grocery shopping, studying for exams, etc.).Analyse
and to other countries, where they inspired other theories.
the task by writing down the steps involved in completing it.
• Why? His theory of scientific management argued for the What activities could be combined or eliminated? Find the ‘one
use of scientific methods to define the ‘one best way’ for a job to best way’ to do this task.Try the scientifically managed way! See
be done. if you become more efficient – keeping in mind that it isn’t easy
• As a mechanical engineer in Pennsylvania steel companies,Taylor to change old habits.
was continually appalled by workers’ inefficient work practices.
He observed: Discuss this:
— employees using vastly different techniques to perform the • What would a ‘Taylor’ workplace be like?
same task and often ‘taking it easy’ on the job • How have Taylor’s views contributed to how management is
— few, if any, existing work standards practised today?
9780655702412_CH14.indd 398 3/3/20 11:04 AM

department managers or unit coordinators. In addition to the managers described above, a special category
of lower-level managers has become more common as organisations have moved to using employee work
teams to do work. These managers can best be described as team leaders – that is, individuals who are team leaders
responsible for managing and facilitating the activities of a work team. Team leaders will typically report Individuals who are
responsible for managing
to a front-line manager. and facilitating the
activities of a work team
What is management? management
Management is the process of getting things done, efficiently and effectively, with and through other The process of getting
people. We need to look more closely at some key words in this definition. things done, efficiently
and effectively, with and
A process is a set of ongoing and interrelated activities. In our definition of management, the term through other people
refers to the primary activities or functions that managers perform – functions that we’ll discuss in more
detail in the next section. process
A set of ongoing and
Efficiency is achieved by doing a task correctly (‘doing things right’) and getting the most output from interrelated activities
the least amount of inputs. Because managers deal with scarce inputs – including resources such as people, required to achieve
money and equipment – they’re concerned with the efficient use of those resources. Managers want to particular outcomes.
minimise resource usage and resource costs.
efficiency
Effectiveness is achieved by doing the right things – that is, doing those work tasks that help the Doing things right, or
organisation to reach its goals. Whereas efficiency is concerned with the means of getting things done, getting the most output
effectiveness is concerned with the ends, or the attainment of organisational goals (see Figure 14.3). from the least amount
of inputs
Good management is concerned with attaining goals (effectiveness) and doing so as efficiently as
possible. Poor management is most often due to both inefficiency and ineffectiveness, or to effectiveness effectiveness
achieved without regard for efficiency. Focusing on just effectiveness can waste time, energy and other Doing the right things, or
completing activities so
resources. For example, Hewlett Packard Enterprise (formerly Hewlett-Packard) could focus solely on that organisational goals
effectiveness in producing sophisticated and longer-lasting cartridges for its laser printers. If, however, the are attained
company focused only on effectiveness, it might generate such high labour and input costs that it might
go broke or have to charge such high prices that it couldn’t compete against rival companies. Conversely,
if a call centre focused exclusively on efficiency, it might deal with calls quickly but provide poor service,
leading to dissatisfied customers.
Means Ends
efficiency effectiveness
R G
E O
S A
O L
U
R Low Goals High A
C waste attainment T
E T
A
U I
S N
A M
G E
E N
T
Figure 14.3 Efficiency and effectiveness
9780655702412_CH14.indd 399 3/3/20 11:04 AM

What do managers do?

It’s not a simple matter to describe what managers do because, just as no two organisations are exactly alike,
neither are managers’ jobs. However, managers do share some common job elements, whether they are the
foreperson of a construction company or the CEO of Westpac. Management researchers have proposed
three approaches that help in describing what managers do: functions, roles and skills. Let’s look at each of
these in turn.
What are the four management functions?

According to the functions approach, managers perform certain activities or functions as they direct and
oversee others’ work. The functions approach was first proposed in the early part of the 20th century by a
French industrialist, Henri Fayol, who suggested that all managers perform five management activities: plan,
organise, command, coordinate and control.3 Today, these management functions have been condensed to
four: planning, organising, leading and controlling (see Figure 14.4). Let’s look briefly at each function.
Organisations exist to achieve some purpose. Through planning, managers define that purpose and decide
planning how to achieve it. Planning includes defining goals, establishing strategy and developing plans to coordinate
Includes defining goals, activities. Planning ensures that the work to be done is kept in proper focus and that organisational members
establishing strategy
keep their attention on what is most important.
and developing plans to
coordinate activities Managers are also responsible for arranging and structuring work to accomplish the organisation’s
goals. This function is called organising. Organising includes determining what tasks are to be done and
organising by whom, how tasks are to be grouped, who reports to whom and where decisions are to be made.
Includes determining
what tasks are to be
done, who is to do
them, how the tasks
are to be grouped, who
reports to whom and g
nnin
where decisions are to Pla ining goals, establishing
be made D ef a nd d e v e l o p in g
teg y
s tr a l a n s t o c o o r d i n at e
p
s u b i t ie s
iv
a ct
ure
Or terminin e done,
h ed
De
gan
C on i t o r i n g a c t i v i t i e s t o e n s
ne
M o t hey a r e a c c o m p l i s
h o w ho is t o
ed s
an
is
w it
d
ing
to b
wi ll b e d o n e
g wh at
Achieving the
d
organisation’s
p lanne
g
stated purpose
trollin
do it
as
t
t ha
n
Lead
ing
Di r e c
t in g an d
c oo r
d i n at i n g t h e
wo rk
a c ti v i tie s o f a n
o r ga
nisation’s people
Figure 14.4 Four management functions
9780655702412_CH14.indd 400 3/3/20 11:04 AM

Leading is the part of a manager’s job that involves directing and coordinating the work activities leading
of others. When managers motivate employees, direct the activities of others, select the most effective Includes motivating
employees, directing
communication channel or resolve conflicts among organisational members, they are leading.
the activities of others,
The fourth and final management function is controlling, which involves monitoring, comparing and selecting the most
correcting work performance. After the goals are set, the plans formulated, the structural arrangements effective communication
determined and the people hired, trained and motivated, there has to be some evaluation to see if things channel and resolving
conflicts
are going as planned. Any significant deviations will require that the manager gets the work back on track.
The functions approach is useful for understanding the fundamentals of management. Its continued controlling
popularity is a tribute to its clarity and simplicity. According to Carroll and Gillen, ‘the classical functions The process
of monitoring
provide clear and discrete methods of classifying the thousands of activities that managers carry out and the performance, comparing
techniques they use in terms of the functions they perform for the achievement of goals’.4 To understand it with goals and
how managers perform these functions, let’s consider the roles that managers play in organisations. correcting any significant
deviations
What are management roles?
Our understanding of the roles that managers play in organisations comes from the research conducted
by Henry Mintzberg. In the late 1960s, Mintzberg did an empirical study of five chief executives at work.5
His discoveries challenged long-held notions about the manager’s job. For example, at the time, the
predominant view was that managers were reflective thinkers who carefully and systematically processed
information before making decisions. However, Mintzberg found that the managers he studied had
little time for reflective thinking because they encountered constant interruptions and their activities
often lasted less than nine minutes. Mintzberg also developed a categorisation scheme for defining what
managers do based on the managerial roles they use at work. These managerial roles consist of the managerial roles
specific categories of managerial actions or behaviours expected of a manager. (Think of the different Specific categories of
managerial behaviour;
roles you play – such as student, employee, volunteer, sports team member, sibling and so forth – and the
often grouped
different things you’re expected to do in those roles.) under three primary
Mintzberg concluded that managers perform 10 different but interrelated roles. These roles, as shown headings: interpersonal
in Table 14.1, are grouped around interpersonal relationships, the transfer of information and decision relationships, transfer of
information and decision
making. The interpersonal roles are ones that involve people (subordinates and persons outside the making
organisation) and other duties that are ceremonial and symbolic in nature. The informational roles
involve collecting, receiving and disseminating information. Finally, the decisional roles entail making interpersonal
decisions or choices.
roles
Involve people
Mintzberg’s roles approach complements the functions view of management by offering additional (subordinates and
insight into what managers do. The roles approach demonstrates that as managers perform each function, persons outside the
they interact with a variety of different people and adopt different roles in those relationships. Understanding organisation) and
other duties that are
how the performance of different roles contributes to each managerial function provides a more detailed ceremonial and symbolic
perspective on what successful management entails. For example, a manager engaged in planning activities in nature
might initially adopt the liaison and monitor roles in order to acquire information on which they base their
informational
plans. Once a course of action has been decided, the manager might adopt the leader and disseminator
roles
roles as they communicate the plan to employees. Recently, Mintzberg completed another intensive study Involve collecting,
of managers at work and concluded: ‘Basically, managing is about influencing action. It’s about helping receiving and
organisations and units to get things done, which means action.’6 Based on his observations, Mintzberg disseminating
information
said managers do this in three ways: (1) by managing actions directly (e.g. negotiating contracts, managing
projects, etc.); (2) by managing people who take action (e.g. motivating them, building teams, enhancing decisional roles
the organisation’s culture, etc.); or (3) by managing information that propels people to take action (e.g. Entail making decisions
or choices
using budgets, goals, task delegation, etc.). Mintzberg’s newest study gives us additional insights into the
manager’s job, adding to our understanding of what it is that managers do and how adopting the roles we
have described helps managers to influence action in their organisations.
9780655702412_CH14.indd 401 3/3/20 11:04 AM

Table 14.1 Mintzberg’s managerial roles
Role Description Examples of Identifiable Activities
Interpersonal
Figurehead Symbolic head; obliged to perform a number of routine duties of a Greeting visitors; signing legal documents
legal or social nature
Leader Responsible for the motivation of subordinates; responsible for Performing virtually all activities that involve subordinates
staffing, training and associated duties
Liaison Maintains self-developed network of outside contacts and inform- Acknowledging mail; doing external board work; performing other
ers who provide favours and information activities that involve outsiders
Informational
Monitor Seeks and receives wide variety of internal and external infor- Reading periodicals and reports; maintaining personal contacts
mation to develop thorough understanding of organisation and
environment
Disseminator Transmits information received from outsiders or from subordinates Holding informational meetings; making phone calls to relay
to members of the organisation information
Spokesperson Transmits information to outsiders on organisation’s plans, policies, Holding board meetings; giving information to the media
actions, results, etc.
Decisional
Entrepreneur Searches organisation and its environment for opportunities and Organising strategy and review sessions to develop new programs
initiates ‘improvement projects’ to bring about changes
Disturbance Responsible for corrective action when organisation faces import- Organising strategy and review sessions that involve disturbances
handler ant, unexpected disturbances and crises
Resource allocator Responsible for the allocation of organisational resources of all Scheduling; requesting authorisation; performing any activity that
kinds; making or approving all significant organisational decisions involves budgeting and the programming of subordinates’ work
Negotiator Responsible for representing the organisation at major negotiations Participating in industrial negotiations
Source: Based on H. Mintzberg, The Nature of Managerial Work (New York: Harper & Row, 1973), pp. 93–4.
What characteristics do managers need?

The final way we’ll use to describe what managers do is to look at the characteristics they need in order
to manage. One way to think about managerial characteristics is to think in terms of the competencies
managers need in their positions as important contributors to organisational success. Research in this area
has identified nine managerial competencies: traditional functions (encompassing tasks such as decision
making, short-term planning, goal setting, monitoring, team building, etc.); task orientation (including
elements such as urgency, decisiveness, initiative, etc.); personal orientation (including things such as
compassion, assertiveness, politeness, customer focus, etc.); dependability (involving aspects such as personal
responsibility, trustworthiness, loyalty, professionalism, etc.); open-mindedness (encompassing elements such
as tolerance, adaptability, creative thinking, etc.); emotional control, which includes both resilience and stress
management; communication (including aspects such as listening, oral communication, public presentation,
etc.); developing self and others (including tasks such as performance assessment, self-development, providing
developmental feedback, etc.); and occupational acumen and concerns (involving aspects such as technical
proficiency, being concerned with quality and quantity, financial concern, etc.).7
Another way to think about managerial characteristics is to consider the skills and drive that managers
need to have to perform a managerial role. Robert L. Katz and others have proposed that managers must
possess and use four critical management skills in managing.8
9780655702412_CH14.indd 402 3/3/20 11:04 AM

Conceptual skills are the skills managers use to analyse and diagnose complex situations. They conceptual skills
help managers to see how things fit together and facilitate making good decisions. Interpersonal skills A manager’s ability to
analyse and diagnose
are those skills involved with working well with other people, both individually and in groups. Because
complex situations
managers get things done with and through other people, they must have good interpersonal skills to
communicate, motivate, mentor and delegate. Additionally, all managers need technical skills, which interpersonal
are the job-specific knowledge and techniques needed to perform work tasks. These abilities are based on skills
A manager’s ability to
specialised knowledge or expertise. For top-level managers, these abilities tend to be related to knowledge work with, understand,
of the industry and a general understanding of the organisation’s processes and products. For middle- mentor and motivate
and lower-level managers, these abilities are related to the specialised knowledge required in the areas others, both individually
and in groups
where they work – finance, human resources, marketing, computer systems, manufacturing, information
technology and so forth. Finally, managers need and use political skills to build a power base and establish technical skills
the right connections. Political skills represent the ability to change one’s situation by influencing others Job-specific knowledge
and techniques needed
at work, with the overall objective of attaining valued goals from the situation.9 Organisations are political
to perform work tasks
arenas in which people compete for resources. Managers who have and know how to use political skills tend
to be better at getting resources for their groups than those who don’t. political skills
The importance of different managerial skills changes as managers progress to higher levels of the A manager’s ability to
build a power base
organisation.10 Technical skills have higher importance for a lower-level manager, as they are working close and establish the right
to the physical operations of the organisation. Conceptual skills have higher importance for high-level connections
managers, who require the ability to conceptualise unknown situations and visualise how their decisions
motivation to
will affect the organisation. Interpersonal skills are very important at all levels, because management always
manage
involves working with others. By extension, political skills are also valuable at all managerial levels for An internal force that
acquiring resources and support. drives people to take,
Managers also need the drive or motivation to manage, which is an internal force that drives people enjoy and perform well
in managerial positions
to take, enjoy and perform well in managerial positions, especially in large hierarchical organisations.11
Motivation to manage has six components: (1) attitudes to superiors, (2) desire to engage in competitive
situations, (3) desire to exercise power over subordinates and direct their behaviour, (4) desire to behave
assertively, (5) desire to engage in highly public activities, and (6) desire to organise administrative tasks.
Motivation to manage influences how comfortably and how well individuals perform managerial roles. A
person may have strong technical, interpersonal and conceptual skills, but a weak motivation to manage
would make them unsuited to a managerial role.
Is the manager’s job universal?

So far, we’ve discussed the manager’s job as if it were a generic activity. If management is truly a generic
discipline, then what a manager does should be essentially the same whether they are a top-level executive
or a front-line supervisor, in a corporation or a government agency; in a large corporation or a small
business; or located in Melbourne, Australia, or Melbourne, Florida. Is that the case?
Is a manager a manager no matter where

or what he or she manages?
Level in the organisation

Although a supervisor of the Genius Bar in an Apple Store may not do exactly the same things that Apple’s
CEO Tim Cook does, it doesn’t mean that their jobs are inherently different. The differences are of degree
and emphasis, but not of activity.
As managers move up in the organisation, they do more planning and less direct overseeing of others
(see Figure 14.5). All managers, regardless of level, make decisions. They do planning, organising, leading
9780655702412_CH14.indd 403 3/3/20 11:04 AM

and controlling activities, but the amount of time they

give to each activity isn’t necessarily constant. In addition,
the content of the managerial activities changes with the
manager’s level. For example, as we’ll demonstrate in
Chapter 18, top managers are concerned with designing
the overall organisation’s structure, whereas lower-level
managers focus on designing the jobs of individuals and
work groups.
Size of organisation
Organisational size affects management by influencing the
importance of different managerial roles. Organisational
size can be defined using a number of measures, such as
the number of employees, annual sales or total assets.
For simplicity, we’ll define organisational size according
Extreme biker Hans Rey is the founder of Wheels 4 Life, a non-profit group to the number of employees. According to the Australian
that provides free bicycles for people in need of transportation in developing Bureau of Statistics, a small business is one that employs
countries. Rey, shown here delivering a bike to a boy in Tanzania, manages
his not-for-profit charity in much the same way as do managers in for-profit
between 5 and 19 people, a medium-sized business
organisations. has between 20 and 199 employees, and a large business
Carmen Freeman/ZUMAPRESS/Newscom is one that employs at least 200 people.12 Now to the
question at hand: Is the job of managing a small business
different from that of managing a large one? Some
small business differences appear to exist. For example, as illustrated in Figure 14.6, the small business manager’s most
An independent important role is that of spokesperson. They spend a great deal of time performing outwardly directed
business that employs actions such as meeting with customers, arranging financing with bankers, searching for new opportunities
between 5 and 19
and stimulating change. In contrast, the most important concerns of a manager in a large organisation are
people
directed internally – deciding which organisational units get what available resources and how much of
medium-sized them. Accordingly, the entrepreneurial role – looking for business opportunities and planning activities for
business performance improvement – appears to be least important to managers in large firms, especially among
An independent
business that employs first-level and middle managers.
between 20 and 199 Compared with a manager in a large organisation, a small business manager is more likely to be a
people generalist. Their job will combine the activities of a large corporation’s chief executive with many of the
large business day-to-day activities undertaken by a front-line supervisor. Moreover, the structure and formality that
An independent
business that employs at
least 200 people
Organising
24% Organising Planning
Planning Planning 33% 28%
15% 18% Organising
Controlling 36%
Controlling Controlling
10% Leading 13% 14%
51% Leading Leading
36% 22%
First-level managers Middle managers Top managers
Figure 14.5 Management activities by organisational level

Source: Based on T. A. Mahoney, T. H. Jerdee and S. J. Carroll, ‘The Job(s) of Management’, Industrial Relations, vol. 4, no. 2 (1965), p. 103.
9780655702412_CH14.indd 404 3/3/20 11:04 AM

IMPORTANCE OF ROLES
Roles played by managers Roles played by managers

in small firms in large firms
High
Spokesperson Resource allocator
Liaison
Entrepreneur
Monitor
Figurehead Moderate
Disturbance handler
Leader
Negotiator
Disseminator Entrepreneur
Low
Figure 14.6 Managerial roles in small and large businesses

Source: Based on J. G. P. Paolillo, ‘The Manager’s Self-Assessments of Managerial Roles: Small vs. Large Firms’, American Journal of Small Business,
vol. 8, no. 3 (1984), pp. 58–64.
characterise a manager’s job in a large organisation tend to give way to informality in small firms. Planning
is less likely to be a carefully orchestrated ritual. The organisation’s design will be less complex and
structured, and control in the small business will rely more on direct observation than on sophisticated,
computerised monitoring systems. Again, as with organisational level, we see differences in degree and
emphasis but not in the activities that managers do. Managers in both small and large organisations
perform essentially the same activities, but how they go about those activities and the proportion of time
they spend on each will differ.
Profit versus not-for-profit

An organisation’s profit orientation affects management by determining the focus of organisational
activities on efficiency and effectiveness. Profit is the difference between an organisation’s revenues and
operating costs. Businesses are profit-oriented because they fund their operations using capital that
investors such as company owners, shareholders and financial institutions provide in exchange for a share
of future profits. Businesses generate profits by maximising the revenues they generate from sales (e.g. by
charging higher prices for their products) and/or by minimising their operating costs. If a business cannot
generate sufficient profits, it will eventually become bankrupt, so profit determines the organisation’s
survival. Consequently, managers in profit-oriented businesses focus on efficiency in minimising costs and
effectiveness in generating revenues so as to maximise profits.
Not-for-profit organisations, such as government agencies, schools, hospitals, charities and community
groups, have a different focus on efficiency and effectiveness because they don’t rely on profits for survival.
Not-for-profit organisations use funds provided by governments, sponsors or donors to provide goods and
services such as health care, education and support to members of the community. Managers in not-for-profit
9780655702412_CH14.indd 405 3/3/20 11:04 AM

organisations focus on efficiency in minimising costs and effectiveness in delivering services so as to be able
to help as many members of the community as possible.
Management concepts and national borders

The last generic issue concerns whether management concepts are transferable across national borders.
If managerial concepts were completely generic, they would also apply universally in any country in the
world, regardless of economic, social, political or cultural differences. Studies that have compared managerial
practices among countries haven’t generally supported the universality of management concepts. In
Chapter 15, we’ll examine some specific differences between countries and describe their effect on managing.
At this point, it’s important for you to understand that most of the concepts discussed in the following
chapters primarily apply to Australia, New Zealand, the United States, Canada, Great Britain and other
English-speaking countries. Managers likely will have to modify these concepts if they want to apply them in
India, China, Chile or other countries whose economic, political, social or cultural environments differ from
that of the so-called free-market democracies.
Why study management?

Whatever kind of work you do and whatever kind of career you plan to have, you’ll work in organisations and
either manage or be managed. So, understanding management is important for two reasons. The first reason
is that understanding management will help you to gain insights into the way your boss and fellow employees
behave, which will help you to develop your management skills. Research shows that managers critically
influence an employee’s experience of working in a particular
organisation. The Gallup Organization, which has polled millions
A question of ethics
of employees and tens of thousands of managers, has found that
▸ 26% of new managers feel they’re

unprepared to transition into
the more important variable in employee productivity and loyalty
isn’t pay or benefits or workplace environment: it’s the quality of
management roles.
the relationship between employees and their direct supervisors.14
58%
of new managers don’t receive any
▸ training to help them make the When you understand what management is and how it is practised,
transition. you’re able to make sure that your influence as a manager is positive.
▸ 48% of first-time managers fail in that

transition.
The second reason is that understanding what management is
will help you to differentiate between organisations that are well
Moving to a management position isn’t easy, as these
statistics indicate.13 managed and those that are poorly managed when you’re deciding
who to deal with and who to work for. Organisations that are well
Discuss this:
• Does an organisation have an ethical responsibility to managed develop loyal customers and employees, and find ways to
assist its new managers in their new positions? Why or prosper even in economically challenging times. When you deal
why not? with a well-managed organisation, you’re likely to have a far better
• What could organisations do to make this transition experience of being a customer or an employee. So, the more you
easier?
learn about management, the better choices you’ll make in terms of
the roles and organisations you experience in your career.
What factors are reshaping and

redefining management?
In today’s world, managers are dealing with changing workplaces and workforces, ethical and trust issues,
global economic uncertainties, new priorities for sustainability and changing technology. Managers
everywhere are likely to have to manage in changing circumstances, and the fact is that how managers
manage is changing. Throughout the rest of this book, we’ll be discussing these changes and how they’re
impacting the way managers plan, organise, lead and control. We want to highlight five of these changes:
9780655702412_CH14.indd 406 3/3/20 11:04 AM

the increasing importance of customers, innovation, ethics and social responsibility, social media and
sustainability.
Why are customers important to the

manager’s job?
John Chambers, a former CEO of Cisco Systems, liked to listen to voice mails forwarded to him from
dissatisfied customers. ‘Email would be more efficient,’ he conceded, ‘but I want to hear the emotion, I
want to hear the frustration, I want to hear the caller’s level of comfort with the strategy we’re employing.
I can’t get that through email.’15 A manager like Chambers understands the importance of customers.
Organisations need customers. Without them, most would cease to exist. Yet, focusing on the customer
has long been thought to be the responsibility of marketing people. ‘Let the marketers worry about the
customers’ is how many managers felt. We’re discovering, however, that employee attitudes and behaviours
play a big role in customer satisfaction. Think of the times you’ve been treated poorly (or superbly) by an
employee during a service encounter and how that affected the way you felt about the situation.
Managers are recognising that delivering consistent high-quality customer service is essential for
survival and success in today’s competitive environment and that employees are an important part of that
equation.16 In fact, in developed countries such as Australia, Germany and Japan, more than 70 per cent
of the labour force works in customer service roles such as sales assistants, teachers, bartenders, nurses,
receptionists, financial planners and bank tellers.17 The implication is clear – they must create a customer-
responsive organisation where employees are friendly and courteous, accessible, knowledgeable, prompt in
responding to customer needs and willing to do what’s necessary to please the customer.18
Why is innovation important to the manager’s job?

Success in business today demands innovation. The term innovation means doing things differently,
exploring new territory and taking risks. And innovation isn’t just for high-tech or other technologically
sophisticated organisations; innovative efforts are needed in all types, all levels, all areas and all sizes of
organisations. You’d expect companies such as Apple, Google, Toyota and Instagram to be on a list of
the world’s 50 most innovative companies.19 But
what about the likes of Kickstarter, which created
the crowdfunding phenomenon? The company
is now looking at ways to better encourage
creativity among potential projects and startups,
and is also expanding its business beyond
fundraising into publishing and distribution.
In today’s challenging environment, in-
novation is critical. Managers need to under-
stand what, when, where, how and why it can
be fostered and encouraged throughout their
organisation. In a presentation a few years ago,
a manager in charge of Walmart’s global busi-
ness explained his recipe for success (personal
and organisational): continually look for new
ways to do your job better; that is, be innova-
tive. Managers not only need to be innovative Claire Hobean, previously operations manager for Re-Time Pty Ltd, models the Australian
personally; they must also encourage their em- firm’s innovative Re-Timer glasses. The medical device innovation uses bright light therapy
ployees to be innovative. We’ll share stories of to assist in the treatment of insomnia, jet lag and seasonal affective disorder by helping
reset a person’s natural body clock.
innovative practices and a pproaches throughout
Steve Marcus/Reuters
this book.
9780655702412_CH14.indd 407 3/3/20 11:04 AM

Why are ethics and social responsibility important

to the manager’s job?
Ethics and social responsibility are important to a manager’s job because society expects managers and
organisations to behave in ethical and socially responsible ways. But what does that mean?
Being a socially responsible organisation means going beyond legal economic obligations to act in ways
that are good for society. Since the 1960s, the question of how much social responsibility organisations have
to go beyond those obligations has inspired a lot of debate and discussion. As we’ll explain in more detail
in the Ethics and Social Responsibility module (starting on p. 442), an organisation can take a number of
different positions in defining its social responsibilities. The way in which an organisation manages its
social responsibilities affects the economies, societies and natural environment in which it operates. So,
understanding how an organisation defines its social responsibilities and the way in which it meets them
affects its sustainability and whether it is considered to be acting in an ethical manner.
Why are social media tools important to the

manager’s job?
You probably can’t imagine a time when employees did their work without email or Internet access.
Yet, only 15 years ago, as these communication tools were becoming more common in workplaces,
managers struggled with the challenges of providing guidelines for their use in their organisations.
social media
Forms of electronic Today, the new frontier is social media – forms of electronic communication through which users
communication through create online communities to share ideas, information, personal messages and other content. Social
which users create platforms such as Facebook, Instagram, Twitter, YouTube, LinkedIn and others are used by more than
online communities to
a billion people.20 Employees don’t just use these on their personal time, but also for work purposes.
share ideas, information,
personal messages and That’s why managers need to understand and manage the powers and perils of social media. More
other content and more businesses are turning to social media not just as a way to connect with customers, but
also as a way to manage their human resources
and tap into their innovation and talent. That’s
the potential power of social media. But the
potential peril is in how it’s used. When the
social media platform becomes a way for boastful
employees to brag about their accomplishments,
for managers to publish one-way messages
to employees, or for employees to argue or
complain about something or someone they
don’t like at work, then it has lost its usefulness.
To avoid this, managers need to remember that
social media is a tool that needs to be managed
to be beneficial. In the remainder of the book,
we’ll look at how social media is impacting how
managers manage, especially in the areas of
human resource management, communication,
In January 2013, bushfires ravaged the Tasman Peninsula on the east coast of Tasmania.
Keen to help devastated residents rebuild their homes and lives, Melanie Irons teams and strategy.
established the Tassie Fires – We Can Help Facebook page as a forum for communicating
with the community and organising donations of time, money and resources for bushfire Why is sustainability
victims. Within 18 days the page had attracted 21,000 followers and reached over 1.6 important to the
million people. Irons’ page proved so effective in helping the relief effort, it prompted
Tasmania Police to launch its own social media accounts.21 manager’s job?
Damian White/Fairfax Syndication BMW, the iconic German manufacturer of
high-performance luxury autos, is probably not
9780655702412_CH14.indd 408 3/3/20 11:04 AM

a company that would immediately come to mind when thinking about sustainability. Yet, BMW is
making a huge bet on green, wired cars for those who reside in cities.22 Its all-electric car, called the i3,
is unlike anything that BMW – or any other car manufacturer – has ever made. The car’s weight-saving,
carbon-fibre body is layered with electronic services and smartphone apps ready to make life simpler
and more efficient for the owner and better for the planet. BMW’s top managers recognised that the
company had to add products that would meet the challenges of a changing world. This corporate
action by a well-known global company affirms that sustainability and green management have become
mainstream issues for managers in the 21st century.23
Although ‘sustainability’ means different things to different people, the World Business Council for
Sustainable Development describes a scenario where all Earth’s inhabitants can live well with adequate
resources.24 From a business perspective, sustainability has been defined as a company’s ability to achieve sustainability
its business goals and increase long-term shareholder value by integrating economic, environmental and A company’s ability to
achieve its business goals
social opportunities into its business strategies.25 Sustainability issues are now moving up the business
and increase long-term
agenda. Managers are discovering that running an organisation in a more sustainable way will mean making shareholder value by
informed business decisions based on (1) communicating openly with various stakeholders and understanding integrating economic,
their requirements, and (2) factoring economic, environmental and social aspects into how they pursue environmental and social
opportunities into its
their business goals. Managing for sustainability means managers and organisations need to consider and business strategies
respond strategically to a wide range of environmental and societal challenges and develop new ideas about
how to respond appropriately. It means doing old things in new ways, and doing completely new things.
Managing for sustainability will require fundamental shifts for many organisations and managers about what
they do and how they do it. These shifts are affecting many aspects of management and we’ll explore them
throughout the book in the Managing for Sustainability boxes.
Managers matter!
As you can see, being a manager is both challenging and exciting because what managers do and how
they do it can profoundly affect their organisations and the people within them. Towers Watson (now Willis
M A N A G I N G F O R S U S TA I N A B I L I T Y
Making a positive impact

Organisations today need to manage for sustainability because of events have drawn greater attention to the economic impact of
growing expectations that they will responsibly manage the impact of organisations, such as the ways in which organisations create wealth
their activities on the environments in which they operate. Global and the impact of those activities at local, national and even global
climate change and the depletion of natural resources and natural levels.They have also highlighted the social impacts of organisational
environments have made communities and governments increasingly activities on human rights, labour, health and safety, and the
concerned about the ongoing capacity of our planet to maintain all life. development of communities and regions.
This has focused greater attention on the environmental impact of Communities and governments aren’t just paying more attention
organisations, and on the consumption of natural resources for to these issues. They’re actively trying to influence organisations to
organisational products or activities and the generation of waste and make them operate more sustainably. A study of nearly 6500
emissions that cause environmental degradation. shoppers found that sustainability considerations drove or
The powerful and widespread impacts of the global financial influenced the purchasing decisions of more than half the
crisis of 2007–8 and the subsequent global economic downturn consumers who were interviewed.26 So, organisations need to
have also demonstrated just how profoundly economies and manage sustainably so that they can be more sustainable and
communities can be influenced by organisational actions, and the demonstrate to key stakeholders that they are responsibly managing
importance of managing that impact in a positive manner. These their influence on the environment.
9780655702412_CH14.indd 409 3/3/20 11:04 AM

Towers Watson) found that the way a company manages its people can significantly affect its financial
performance.27 The Gallup Organization, which has polled millions of employees and tens of thousands of
employee managers, has found that the relationship with their manager is the most significant factor in employee
engagement engagement – which is when employees feel connected to, satisfied with and enthusiastic about their
When employees feel
jobs – accounting for at least 70 per cent of an employee’s level of engagement.28 Moreover, the way that
connected to, satisfied
with and enthusiastic organisations and managers treat employees has been shown to affect employees’ stress and wellbeing,
about their jobs including their mental and emotional health.29 So, good management matters a lot!
9780655702412_CH14.indd 410 3/3/20 11:04 AM

Student Learning Objective 4. Explain why it’s important to

study management.
Learning Management is fundamentally about influencing human behaviour in order to
Centre achieve organisational goals. Formally studying management will help you to
build a broader knowledge of what management entails and develop a ‘toolkit’
of approaches you can apply to manage in different situations.
Reviewing the learning objectives Learning Objective 5. Describe the factors that are
reshaping and redefining management.
Learning Objective 1.Tell who managers are and
In today’s world, managers are dealing with changing workplaces, a changing
where they work.
workforce, global economic and political uncertainties, and changing technology.
Managers are individuals who work in an organisation directing and overseeing
Five areas of critical importance to managers are: delivering high-quality
the activities of other people. Managers are usually classified as top, middle or
customer service, fostering innovation, dealing responsibly with ethical issues,
front-line. Organisations, where managers work, have four characteristics: goals,
using social media efficiently and effectively, and recognising how sustainability
people, a deliberate structure and an operations system.
contributes to an organisation’s effectiveness.
Learning Objective 2. Define management.

Management is the process of getting things done, efficiently and effectively,
with and through other people. Efficiency is achieved by ‘doing things right’ –
❶ What is an organisation, and what characteristics do organisations share?
doing a task correctly and getting the most output from the least amount of
➋ How do managers differ from non-managerial employees?
inputs. Effectiveness is achieved by ‘doing the right things’ – by doing those work
➌ In today’s environment, which is more important to organisations –
tasks that help the organisation reach its goals.
efficiency or effectiveness? Explain your choice.
➍ What similarities do you see among the four management functions? Do
Learning Objective 3. Describe what managers do.
you think these functions are related? Explain.
What managers do can be described using three approaches: functions, roles
➎ Using any of the popular business periodicals (such as Australian Financial
and skills/competencies. The functions approach says that managers perform
Review), find examples of managers doing each of the four management
four functions: planning, organising, leading and controlling. Mintzberg’s
functions. Write a description and explain how these are examples of that
roles approach says that what managers do is based on the 10 roles they use
function.
at work, which are grouped around interpersonal relationships, the transfer
➏ Is your course instructor a manager? Discuss in terms of planning, organising,
of information and decision making. The skills/competencies approach looks
leading and controlling. Also discuss using Mintzberg’s managerial roles
at what managers do in terms of the skills and competencies they need and
approach.
use. Four critical management skills are conceptual, interpersonal, technical
➐ Is business management a profession? Why or why not? Do some external
and political. Additional managerial competencies include aspects such as
research in answering this question.
dependability, personal orientation, emotional control, communication and so
➑ Is there one best ‘style’ of management? Why or why not?
forth. All managers plan, organise, lead and control, although how they do these
➒ In what ways can managers at each of the four levels of management
activities and how often they do them may vary according to their level in the
contribute to efficiency and effectiveness?
organisation, whether it is profit or not-for-profit, the size of the organisation and
its geographic location.
9780655702412_CH14.indd 411 3/3/20 11:04 AM

Management Skill Builder

BECOMING POLITICALLY ADEPT
Anyone who has had much work experience knows that organisational politics exists everywhere. That is, people try to influence the distribution of advantages and
disadvantages within their organisation in their favour. Those who understand organisational politics typically thrive. Those who don’t, regardless of how good their
actual job skills are, often suffer by receiving less positive performance reviews, fewer promotions and smaller salary increases. If you want to succeed as a manager, it
helps to be politically adept. Research has shown that people differ in their political skills.30 Those who are politically skilled are more effective in their use of influence
tactics. Political skill also appears to be more effective when the stakes are high. Finally, politically skilled individuals are able to exert their influence without others
detecting it, which is important in being effective so that you’re not labelled as playing politics. A person’s political skill is determined by their networking ability,
interpersonal influence, social astuteness and apparent sincerity.
PERSONAL INVENTORY ASSESSMENT

PERSONAL
P I A INVENTORY
ASSESSMENT
Using influence strategies

Take a look at how well you use influence strategies. This PIA will help you to determine how skilfully you do that and
what you need to work on.
Skill basics things such as learning to say the right things at the right time, paying close
Forget, for a moment, the ethics of politicking and any negative impressions attention to people’s facial expressions, and trying to determine whether
you might have of people who engage in organisational politics. If you want to others have hidden agendas.
become more politically adept in your organisation, follow these steps: • Be sincere. Sincerity is important in getting people to want to associate with
you. Be genuine in what you say and do. And show a genuine interest in
• Develop your networking ability. A good network can be a powerful tool. You
others and their situations.
can begin building a network by getting to know important people in your work
area and the organisation, and then developing relationships with individuals in Practising the skill
positions of power. Volunteer for committees, or offer your help on projects that Do the following:
will be noticed by those in positions of power. Attend important organisational Take each of the components of political skill and spend one week working on it
functions so that you can be seen as a team player and as someone who is as you navigate your life at school and work. Keep a brief set of notes describing
interested in the organisation’s success. Start a file list of individuals that you your experiences – good and bad.
meet, even if it’s only for a brief moment. Then, when you need advice on work,
Were you able to begin developing a network of people you could rely on or
use your connections and network with others throughout the organisation.
connect with for school or work commitments? How did you try to become better
• Work on gaining interpersonal influence. People will listen to you
at influencing those around you? Did you work at communicating better, or at
when they’re comfortable and feel at ease around you. Work on your
developing a good rapport with co-workers or class project team members? Did
communication skills so that you can communicate easily and effectively
you work at developing your social astuteness, maybe by starting to recognise and
with others. Work on developing a good rapport with people in all areas and
interpret people’s facial expressions and the meaning behind those expressions?
at all levels of your organisation. Be open, friendly and willing to pitch in.
Did you make a conscious effort to be more sincere in your relationships with
The amount of interpersonal influence you have will be affected by how well
others, especially those who aren’t close friends? What could you have done
people like you.
differently to be more politically skilled? Once you begin to recognise what is
• Develop your social astuteness. Some people have an innate ability to
involved with political skills, you should find yourself becoming more connected
understand others and to sense what they’re thinking. If you don’t have that
and better able to influence others – that is, you’ll be more politically adept.
ability, you’ll have to work at developing your social astuteness by doing
9780655702412_CH14.indd 412 3/3/20 11:04 AM

Mini cases
14.1 Google: Building a better boss
To be a good manager, manage less!
Google doesn’t do anything halfway. So, when it decided to ‘build a better 1. Provide coaching support when needed. Provide s pecific feedback and
boss’, it did what it does best: look at data.31 Using data from performance have regular one-on-one meetings with employees; offer solutions
reviews, feedback surveys and supporting papers turned in for individuals tailored to each employee’s strengths.
being nominated for top-manager awards, Google tried to find out what 2. Avoid over-managing; let your team be responsible. Give employees
a great boss is and does. The project, dubbed Project Oxygen, examined space to tackle problems themselves, but be available to offer advice.
some 100 variables and ultimately identified eight characteristics or habits 3. Express interest in employees’ wellbeing. Make new team members
of Google’s most effective managers. Here are the ‘big eight’: feel welcome and get to know your employees as people.
• Provide an unambiguous vision of the future. 4. Focus on being productive and on end results. Focus on helping the
• Help individuals to reach their long-term work goals. team achieve its goals by prioritising work and getting rid of obstacles.
• Express interest in employees’ wellbeing. 5. Display good communication skills, especially listening. Learn to listen
• Ensure you have the necessary technical abilities to support employee and to share information; encourage open dialogue and pay attention
efforts. to the team’s concerns.
• Display effective communication skills, especially listening. 6. Help individuals to reach their long-term work goals. Notice employees’
• Provide coaching support when needed. efforts so that they can see how their hard work is furthering their
• Focus on being productive and on end results. careers; appreciate employees’ efforts and make that appreciation
• Avoid over-managing; let your team be responsible. known.
At first glance, these eight attributes seem pretty simplistic and obvious 7. Provide an unambiguous vision of the future. Lead the team, but keep
and you may be wondering why Google spent all this time and effort to everyone involved in developing and working towards the team’s
uncover them. But, as the old saying goes, there was more to this list than vision.
meets the eye. Historically, Google has defined a great boss as one who is 8. Ensure you have the necessary technical abilities to support employee
an outstanding technical specialist and helps employees deal with problems efforts. Understand the challenges facing the team and be able to help
they can’t solve alone. Since the company was founded in 1999, Google team members solve problems.
managers were encouraged to ‘leave people alone. Let the engineers You can say that Project Oxygen breathed new life into Google’s managers.
do their stuff. If they become stuck, they’ll ask their bosses, whose deep Now, the company’s managers aren’t just encouraged to be ‘great’
technical expertise propelled them to management in the first place.’ managers; they know what being a great manager involves. Google has
However, when Laszlo Bock, Google’s vice president for people operations, also used the list as the foundation for management training, as well as
and his team began looking more closely and rank ordering the eight providing individual coaching and performance review sessions. This
items by importance, they were surprised by their findings. At the time, as approach soon paid off: Google had a statistically significant improvement
Bock explained, ‘In the Google context, we’d always believed that to be a in manager quality for 75 per cent of its worst-performing managers.
manager, particularly on the engineering side, you need to be as deep or ❶ Describe the findings of Project Oxygen using the functions approach,
deeper a technical expert than the people who work for you.’ But Project Mintzberg’s roles approach and the skills approach.
Oxygen revealed that technical expertise was ranked number eight (very ➋ Are you surprised at what Google found out about ‘building a better
last) on the list. So, what did Google employees actually want and value in a boss’? Explain your answer.
boss? Here’s the complete list from most important to least important, along ➌ What’s the difference between encouraging managers to be great
with what each characteristic entails: managers and knowing what being a great manager involves?
➍ What could other companies learn from Google’s experiences?
9780655702412_CH14.indd 413 3/3/20 11:04 AM

14.2 Managing to create a better world

Make big dreams come true
When Daniel Flynn began studying project management at university, he is in the execution of that idea and that’s where your focus needs to be.
might have expected it would take a few years to put his new knowledge You’ll be surrounded by people who always ask of you, “But what will
into practice. But then he learned two things that shocked him: (1) there are happen if you fail?” Instead, ask yourself “What if we succeed?” This is
900 million people in the world without access to safe drinking water; and why it’s important to surround yourself with a great team who support each
(2) in Australia, where drinkable water is available free from the tap, people other. The people and culture are the lifeblood of your business. . . Always
spend $600 million a year on bottled water. So, at just 19, Daniel decided start with the thought: “If we had no limitations, we would. . .” Then work
to establish a social enterprise – a company that uses its business activities from there and remind yourself every day of those big objectives.’
to generate ‘profit for purpose’ and create social good in the community. Daniel has also learned a lot about his own strengths, weaknesses and
The result was Thank You Water, a company that sells bottled water in order goals as a manager. ‘My goal is to release people to step up and bring their
to fund safe water projects in developing countries. Within a few years, own dream and passion to what we do. I’m not huge on confrontation – in
the company had also developed Thank You Food, Thank You Body Care the early years that was my greatest weakness. I was always trying to make
and Thank You Baby Products as a way to reach more customers, sell more everyone happy. But if I believe something is possible I won’t give up on it.
products and help more people.32 Impossibility is only someone’s opinion, not a fact.’
From day one, Daniel knew that success would depend on customers By February 2017, Thank You had helped over 545,000 people access
believing that they were making a difference by buying Thank You products. safe water, sanitation and hygiene services, fed over 132,000 people, and
So, the company created Track Your Impact to show customers what they provided maternal and child health services to over 77,000 individuals.
were helping to achieve. Customers download an app from the company’s In recognition of Daniel’s efforts, he was named 2014 Victorian Young
website and enter a unique code provided on each Thank You product. Australian of the Year and 2015 YE Young Entrepreneur of the Year, and
The app then generates detailed information, including GPS coordinates, was an honouree in the 2014 JCI Ten Young Outstanding People of the
about the water, hygiene or food aid project the customer’s purchase World program.
will contribute to. Creating Track Your Impact has helped the company to ❶ How could Daniel and his co-founders at Thank You use technical,
establish trust and credibility with its customers and has improved public human and conceptual skills to help Thank You achieve its business
perceptions about charity reporting. goals and social mission? What managerial competencies might be
Daniel also learned early that management is all about working through important for them? Why?
others. For example, when the company wanted to convince 7-Eleven to ➋ What management roles would Daniel be playing as he (a) had
stock its bottled water it asked customers to lobby 7-Eleven on its behalf weekly video conferences with Thank You’s aid project leaders around
using social media. It paid off. 7-Eleven was so impressed by the campaign, the globe, (b) assessed the feasibility of developing a new Thank You
it stocked Thank You Water in all 600 of its stores across Australia, even product line, and (c) negotiated distribution deals with retailers such as
replacing its own low-priced bottled water. Rather than employ sales Coles and Woolworths?
representatives to promote its products, Thank You invites its customers to ➌ How, if at all, do you think managing a social enterprise would be
be ‘Street Reps’. It provides them with materials to convince their local cafés different from managing a profit-oriented corporation?
and restaurants to stock Thank You products. ➍ What could other managers learn from Daniel and Thank You’s
As the company has grown, Daniel has learned how to run a successful approach?
organisation. He says, ‘A good idea doesn’t guarantee success. . . . The value
References
1 The Walt Disney Company, Letter to Shareholders, 2012 Annual Report, pp. 1–3. 3 H. Fayol, Industrial and General Administration (Paris: Dunod, 1916).
2 From the Past to the Present box based on Dictionary.com Unabridged, based on the 4 S. J. Carroll and D. A. Gillen, ‘Are the Classical Management Functions Useful in
Random House Dictionary, © Random House, Inc. 2009, <http://dictionary.reference. Describing Managerial Work?’, Academy of Management Review, January 1987, p. 48.
com/browse/manage>; Online Etymology Dictionary, <www.etymonline.com>, 5 June 5 H. Mintzberg, The Nature of Managerial Work (New York: Harper & Row, 1973).
2009; P. F. Drucker, Management: Revised Edition (New York: HarperCollins Publishers, 6 ‘What Managers Really Do’, Wall Street Journal, 17 August 2009, p. R2; and H.
2008); and F. W. Taylor, Principles of Scientific Management (New York: Harper, 1911), Mintzberg, Managing (San Francisco: Berrett Koehler, 2009).
p. 44. For other information on Taylor, see S. Wagner-Tsukamoto, ‘An Institutional 7 R. P. Tett, H. A. Guterman, A. Bleier and P. J. Murphy, ‘Development and Content
Economic Reconstruction of Scientific Management: On the Lost Theoretical Logic of Validation of a “Hyperdimensional” Taxonomy of Managerial Competence’, Human
Taylorism’, Academy of Management Review, January 2007, pp. 105–17; R. Kanigel, Performance, vol. 13, no. 3 (2000), pp. 205–51.
The One Best Way: Frederick Winslow Taylor and the Enigma of Efficiency (New York: 8 R. L. Katz, ‘Skills of an Effective Administrator’, Harvard Business Review, September
Viking, 1997); and M. Banta, Taylored Lives: Narrative Productions in the Age of Taylor, 1974, pp. 901–2.
Veblen, and Ford (Chicago: University of Chicago Press, 1993).
9780655702412_CH14.indd 414 3/3/20 11:04 AM

9 G. R. Ferris, D. C. Treadway, P. L. Perrewé, R. L. Brouer, C. Douglas and S. Lux, ‘Political 20 M. J. Piskorski, ‘Social Strategies that Work’, Harvard Business Review, November 2011,
Skill in Organizations’, Journal of Management, June 2007, pp. 290–329. pp. 116–22.
10 R. L. Katz, ‘Skills of an Effective Administrator’, Harvard Business Review, September 21 Wikipedia; M. Maloney, ‘Social Media’s Power to Galvanise’, The Examiner, 3 February
1974, pp. 901–2. 2013; <https://livinglovinghobart.com.au/2013/07/28/meet-mel-irons/>, 28 July 2013,
11 R. L. Katz, ‘Skills of an Effective Administrator’, Harvard Business Review, September accessed 5 October 2017.
1974, pp. 901–2. 22 A. Taylor III, ‘BMW Gets Plugged in’, Fortune, 18 March 2013, pp. 150–6.
12 Australian Bureau of Statistics, Small Business in Australia, 2001, Cat. No. 1321.0 23 This section based on G. Unruh and R. Ettenson, ‘Growing Green’, Harvard Business
(Canberra: Australian Bureau of Statistics, 2002). Review, June 2010, pp. 94–100; G. Zoppo, ‘Corporate Sustainability’, DiversityInc, May
13 A Question of Ethics box based on M. S. Plakhotnik and T. S. Rocco, ‘A Succession 2010, pp. 76–80; KPMG Global Sustainability Services, Sustainability Insights, October
Plan for First-Time Managers’, T&D, December 2011, pp. 42–5; P. Brotherton, ‘New 2007; T. Katsoulakos and Y. Katsoulacos, ‘Integrating Corporate Responsibility Principles
Managers Feeling Lost at Sea’, T&D, June 2011, p. 25; and ‘How Do We Help a New and Stakeholder Approaches into Mainstream Strategy: A Stakeholder-Oriented and
Manager Manage?’, Workforce Management Online, 16 June 2011. Integrative Strategic Management Framework’, Corporate Governance, vol. 7, no. 4
14 K. A. Tucker and V. Allman, ‘Don’t Be a Cat-and-Mouse Manager’, The Gallup (2007), pp. 355–69; and Australian Curriculum Assessment and Reporting Authority,
Organization, <http://gmj.gallup.com>, accessed 9 September 2004. Cross Curriculum Priorities: Sustainability, <www.australiancurriculum.edu.au>,
15 F. F. Reichheld, ‘Lead for Loyalty’, Harvard Business Review, July–August 2001, p. 76. accessed 17 October 2012.
16 See, for example, H. Ernst, W. D. Hoyer, M. Krafft and K. Krieger, ‘Customer Relationship 24 Vision 2050 Report, Overview, <www.wbcsd.org/Overview/About-us/Vision2050>.
Management and Company Performance – The Mediating Role of New Product 25 Symposium on Sustainability – Profiles in Leadership, New York, October 2001.
Performance’, Journal of the Academy of Marketing Science, April 2011, pp. 290–306; 26 S. Bearse, P. Capozucca, L. Favret and B. Lynch, Finding the Green in Today’s Shoppers:
J. P. Dotson and G. M. Allenby, ‘Investigating the Strategic Influence of Customer and Sustainability Trends and New Shopper Insights, <www.gmaonline.org>, accessed
Employee Satisfaction on Firm Financial Performance’, Marketing Science, September– November 2012.
October 2010, pp. 895–908; R. Grewal, M. Chandrashekaran and A. V. Citrin, ‘Customer 27 ‘WorkUSA® 2004/2005: Effective Employees Drive Financial Results’, Watson Wyatt
Satisfaction Heterogeneity and Shareholder Value’, Journal of Marketing Research, Worldwide, Washington, DC.
August 2010, pp. 612–26; M. Riemann, O. Schilke and J. S. Thomas, ‘Customer 28 E. Frauenheim, ‘Managers Don’t Matter’, Workforce Management Online, 6 April 2010;
Relationship Management and Firm Performance: The Mediating Role of Business and K. A. Tucker and V. Allman, ‘Don’t Be a Cat-and-Mouse Manager’, The Gallup
Strategy’, Journal of the Academy of Marketing Science, Summer 2010, pp. 326–46; Organization, <www.brain.gallup.com>, accessed 9 September 2004.
and K. A. Eddleston, D. L. Kidder and B. E. Litzky, ‘Who’s the Boss? Contending with 29 See, for example, K. Sparks, B. Faragher and C. L. Cooper, ‘Well-Being and Occupational
Competing Expectations from Customers and Management’, Academy of Management Health in the 21st Century Workplace’, Journal of Occupational and Organizational
Executive, November 2002, pp. 85–95. Psychology, vol. 74, no. 4 (2001), pp. 489–509; and J. Kuoppala, A. Lamminpää, J. Liira
17 Data from K. A. Eddleston, D. L. Kidder and B. E. Litzky, ‘Who’s the Boss? Contending and H. Vainio, ‘Leadership, Job Well-Being, and Health Effects: A Systematic Review and
with Competing Expectations from Customers and Management’, Academy of a Meta-Analysis’, Journal of Occupational & Environmental Medicine, August 2008,
Management Executive, November 2002, pp. 85–95; and The CIA World Factbook pp. 904–5.
2012. 30 S. Y. Todd, K. J. Harris, R. B. Harris and A. R. Wheeler, ‘Career Success Implications of
18 See, for example, C. B. Blocker, D. J. Flint, M. B. Myers and S. F. Slater, ‘Proactive Political Skill’, Journal of Social Psychology, June 2009, pp. 179–204; G. R. Ferris,
Customer Orientation and Its Role for Creating Customer Value in Global Markets’, D. C. Treadway, P. L. Perrewé, R. L. Brouer, C. Douglas and S. Lux, ‘Political Skill in
Journal of the Academy of Marketing Science, April 2011, pp. 216–33; G. A. Gorry Organizations’, Journal of Management, June 2007, pp. 290–329; K. J. Harris, K.
and R. A. Westbrook, ‘Once More, with Feeling: Empathy and Technology in Customer M. Kacmar, S. Zivnuska and J. D. Shaw, ‘The Impact of Political Skill on Impression
Care’, Business Horizons, March–April 2011, pp. 125–34; M. Dixon, K. Freeman and N. Management Effectiveness’, Journal of Applied Psychology, January 2007, pp. 278–85;
Toman, ‘Stop Trying to Delight Your Customers’, Harvard Business Review, July–August and G. R. Ferris, D. C. Treadway, R. W. Kolodinsky, W. A. Hochwarter, C. J. Kacmar, C.
2010, pp. 116–22; D. M. Mayer, M. G. Ehrhart and B. Schneider, ‘Service Attribute Douglas and D. D. Frink, ‘Development and Validation of the Political Skill Inventory’,
Boundary Conditions of the Service Climate–Customer Satisfaction Link’, Academy Journal of Management, February 2005, pp. 126–52.
of Management Journal, October 2009, pp. 1034–50; B. A. Gutek, M. Groth and B. 31 R. D’Aprix, ‘A Simple Effective Formula for Leadership’, Strategic Communication
Cherry, ‘Achieving Service Success through Relationships and Enhanced Encounters’, Management, May 2011, p. 14; R. Jaish, ‘Pieces of Eight’, e-learning age, May 2011,
Academy of Management Executive, November 2002, pp. 132–44; K. A. Eddleston, D. p. 6; M. L. Stallard, ‘Google’s Project Oxygen: A Case-Study in Connection Culture’,
L. Kidder and B. E. Litzky, ‘Who’s the Boss? Contending with Competing Expectations <www.humanresourcesiq.com>, 25 March 2011; J. Aquino, ‘8 Traits of Stellar
from Customers and Management’, Academy of Management Executive, November Managers, Defined by Googlers’, Business Insider, 15 March 2011; and A. Bryant,
2002, pp. 85–95; S. D. Pugh, J. Dietz, J. W. Wiley and S. M. Brooks, ‘Driving Service ‘Google’s Quest to Build a Better Boss’, New York Times Online, 12 March 2011.
Effectiveness through Employee–Customer Linkages’, Academy of Management 32 Thank You company website, <https://thankyou.co>, accessed 13 March 2017; Social
Executive, November 2002, pp. 73–84; S. D. Pugh, ‘Service with a Smile: Emotional Traders, ‘Social Enterprise Awards’, <http://socialenterpriseawards.com.au>, accessed
Contagion in the Service Encounter’, Academy of Management Journal, October 2001, 4 December 2014; K. White, ‘Where Does the Money Go? Thankyou Group Wants
pp. 1018–27; W. C. Tsai, ‘Determinants and Consequences of Employee Displayed to Track the Impact of Charity Spending’, <www.startupsmart.com.au>, accessed
Positive Emotions’, Journal of Management, vol. 27, no. 4 (2001), pp. 497–512; E. 4 December 2014; ‘Track Your Impact (VIC) – 2014’, <http://anthillonline.com>,
Naumann and D. W. Jackson, Jr, ‘One More Time: How Do You Satisfy Customers?’, accessed 4 December 2014; S. Kimmorley, ‘The Best Advice from 26 Successful Aussie
Business Horizons, vol. 42, no. 3 (1999), pp. 71–6; and M. D. Hartline and O. C. Ferrell, Entrepreneurs for Small Business Owners’, Business Insider, 7 June 2014; S. White,
‘The Management of Customer-Contact Service Employees: An Empirical Investigation’, ‘Meet the Boss – from Student to CEO’, Sydney Morning Herald, 23 May 2014; and M.
Journal of Marketing, October 1996, pp. 52–70. Bleby, ‘Piling on the Social Pressures’, BRW, 18–24 July 2013, pp. 47–9.
19 Fast Company Staff, ‘World’s 50 Most Innovative Companies’, Fast Company, March
2015, pp. 66 ff.
9780655702412_CH14.indd 415 3/3/20 11:04 AM

History module: A brief history of
management’s roots
Our theories about management advance as we develop new ideas, apply them, and evaluate the
outcomes. In Chapters 14 to 25, our From the Past to the Present box will highlight a key person and
their contributions to contemporary management concepts. In this module, you’ll find an annotated
timeline that discusses key milestones in the development of management theory. We finish the module
by discussing how managers can choose between different theories and approaches for working out
which ones might be most suitable to apply to their organisations.
HM.1 Identify some historical examples of management practices.

Early management (3000 BCE–1776) p. 417
Learning HM.2 D
escribe the behavioural, classical, quantitative and contemporary approaches to
Objectives management.
Behavioural approach (late 1700s–1950s) pp. 418–21
HM.3 Explain how managers can determine which approaches to management they should use.
Choosing between management approaches p. 422
9780655702412_CH14A.indd 416 3/3/20 11:07 AM

History module 417
HM. 1
Early management (3000 BCE–1776) Identify some historical
Management has been practised for a long time. Organised endeavours directed by examples of
people responsible for planning, organising, leading and controlling activities have management practices.
existed for thousands of years. Regardless of what these individuals were called, someone
had to perform those functions.
• 3000 BCE–1776 Late 1700s–1950s 1911–1947 1940s–1950s 1960s–present

Early Management
management Behavioural Approach
approach Classical Approaches
approaches Quantitative Approach
approach Contemporary Approaches
approaches
3000–2500 BCE
The Egyptian pyramids are proof that projects of tremendous scope, employing
Stephen Studd/Getty Images
tens of thousands of people, were completed in ancient times.1 It took more

than 100,000 workers some 20 years to construct a single pyramid. Someone
had to plan what was to be done, organise people and materials to do it, make
sure those workers got the work done, and impose some controls to ensure
that everything was done as planned.The people who did that were managers.
1400s
At the arsenal of Venice, warships were floated along the canals, and at each stop,
materials and riggings were added to the ship.2 Sounds a lot like a car ‘floating’
along an assembly line, doesn’t it? In addition, the Venetians used warehouse and
inventory systems to keep track of materials, human resource management
functions to manage the labour force (including wine breaks), and an accounting
Fotosearch/Stringer/Getty Images
Antonio Natale/Getty Images
system to keep track of revenues and costs.
1776
In this year, Adam Smith’s Wealth of Nations was published. In it, he argued the
economic advantages of the division of labour (or job specialisation) – that
is, breaking down jobs into narrow, repetitive tasks. Division of labour dramatically
increased individual productivity. Job specialisation continues to be a popular way to
determine how work gets done in organisations. However, as you’ll see in
Chapter 18, it does have its drawbacks.
1780s–mid-1800s
The Industrial Revolution may be the most important pre-20th-century
Archive Photos/Getty Images
influence on management.Why? Because with the industrial age came the birth
of the corporation.With large, efficient factories pumping out products,
someone needed to forecast demand, make sure adequate supplies of materials
were available, assign tasks to workers, and so on. Again, that someone was
managers! It was indeed a historical event for two reasons: (1) because of all the
organisational aspects (hierarchy, control, job specialisation, and so on) that
became a part of the way work was done; and (2) because management had
become a necessary component to ensure the success of the enterprise.
9780655702412_CH14A.indd 417 3/3/20 11:07 AM

418 Marketing and Management Defined, explained and applied
HM. 2
Describe the Behavioural approach (late 1700s–1950s)
behavioural, classical, The behavioural approach to management focused on the actions of workers. How do
quantitative and you motivate and lead employees in order to get high levels of performance?
contemporary
approaches to
management.
3000 BCE–1776 • Late 1700s–1950s 1911–1947 1940s–1950s 1960s–present
Early management Behavioural approach Classical approaches Quantitative approach Contemporary approaches
Late 1700s–early 1900s

Managers get things done by working with people. Several early management writers recognised how
Ken Welsh/ZUMA Press/Newscom
important people are to an organisation’s success.3 For example, Robert Owen, who was concerned
about deplorable working conditions, proposed an idealistic workplace. Hugo Munsterberg, a pioneer in
the field of industrial psychology, suggested using psychological tests for employee selection, learning
theory concepts for employee training and studies of human behaviour for employee motivation. Mary
Parker Follett was one of the first to recognise that organisations could be viewed from the point of
view of both individual and group behaviour. She thought that organisations should be based on a group
ethic rather than on individualism.
1924–mid-1930s
The Hawthorne studies, a series of studies that provided new insights into individual and group behaviour,
Hawthorne Digital Collection, Hawthorne
Works Museum and Archives, Morton
were without question the most important contribution to the behavioural approach to management.4
Conducted at the Hawthorne (Cicero, Illinois) Works of the Western Electric Company, the studies were
initially designed as a scientific management experiment. Company engineers wanted to see the effect of
various lighting levels on worker productivity. Using control and experimental groups of workers, they
expected to find that individual output in the experimental group would be directly related to the intensity
of the light. However, much to their surprise, they found that productivity in both groups varied with the level
of lighting. Not able to explain it, the engineers called in Harvard professor Elton Mayo.Thus began a
relationship that lasted until 1932 and encompassed numerous experiments on the behaviour of people at
work.What were some of their conclusions? Group pressures can significantly affect individual productivity,
and people behave differently when they’re being observed. Scholars generally agree that the Hawthorne
College
studies had a dramatic impact on management beliefs about the role of people in organisations and led to a
new emphasis on the human behaviour factor in managing organisations.
1930s–1950s
The human relations movement is important to management history because its supporters never
wavered from their commitment to making management practices more humane. Proponents of this
movement uniformly believed in the importance of employee satisfaction – a satisfied worker was
believed to be a productive worker.5 So, they offered suggestions such as employee participation, praise
and being nice to people to increase employee satisfaction. For example, Abraham Maslow, a humanistic
psychologist, developed a well-known theory of employee motivation based upon a hierarchy of five
needs. He proposed that once a need was substantially satisfied, it no longer served to motivate
behaviour. Douglas McGregor developed Theory X and Theory Y assumptions, which related to a
manager’s beliefs about an employee’s motivation to work. Even though both Maslow’s and McGregor’s
theories were never fully supported by research, they’re important because they represent the
foundation from which contemporary motivation theories were developed. Both are described more
fully in Chapter 21.
1960s–present
An organisation’s people continue to be an important focus of management research.The field of study
that researches the actions (behaviours) of people at work is called organisational behaviour (OB).
OB researchers do empirical research on human behaviour in organisations. Much of what managers do
today when managing people – motivating, leading, building trust, working with a team, managing conflict
and so on – has come out of OB research.These topics are explored in depth in later chapters.
Imtmphoto/Shutterstock
9780655702412_CH14A.indd 418 3/3/20 11:07 AM

History module 419
Classical approaches (1911–1947)

Beginning around the turn of the 20th century, the discipline of management began to evolve as a unified body of
knowledge. Rules and principles were developed that could be taught and used in a variety of settings. These early
management proponents were called classical theorists.
1911
3000 BCE–1776 Late 1700s–1950s • 1911–1947 1940s–1950s 1960s–present

That’s the year Frederick W.Taylor’s Principles of Scientific Management was

published. His groundbreaking book described a theory of scientific
management – the use of scientific methods to determine the ‘one best way’
for a job to be done. His theories were widely accepted and used by managers
around the world and Taylor became known as the ‘father’ of scientific
management.6 (Taylor’s work is profiled in Chapter 14’s From the Past to the
Present box.) Other major contributors to scientific management were Frank and
Lillian Gilbreth (early proponents of time-and-motion studies and parents of the
large family described in the original book Cheaper by the Dozen) and Henry
© Bettmann/CORBIS
Gantt (whose work on scheduling charts was the foundation for today’s project
management).
1916–1947
Unlike Taylor who focused on an individual production worker’s job, Henri Fayol
and Max Weber looked at organisational practices by focusing on what managers
do and what constituted good management.This approach is known as general
administrative theory. Fayol was introduced in Chapter 14 as the person who
first identified five management functions. He also identified 14 principles of
management – fundamental rules of management that could be applied to all
organisations.7 (See below for a list of these 14 principles.) Weber is known for
Hulton Archive/Getty Images
his description and analysis of bureaucracy, which he believed was an ideal, rational
form of organisation structure, especially for large organisations. In Chapter 18,
we elaborate on these two important management pioneers.
Fayol’s 14 Principles of management

1 Division of Work. This principle is the same as Adam Smith’s ‘division of labour’. (to management) or decentralised (to subordinates) is a question of proper
Specialisation increases output by making employees more efficient. proportion.The task is to find the optimum degree of centralisation for each
2 Authority. Managers must be able to give orders. Authority gives them this right. situation.
Along with authority, however, goes responsibility.Whenever authority is exercised, 9 Scalar Chain. The line of authority from top management to the lowest ranks
responsibility arises. represents the scalar chain. Communications should follow this chain. However, if
3 Discipline. Employees must obey and respect the rules that govern the organisation. following the chain creates delays, cross-communications can be allowed if agreed
Good discipline is the result of effective leadership, a clear understanding between to by all parties and if superiors are kept informed. Also called chain of command.
management and workers regarding the organisation’s rules, and the judicious use of 10 Order. People and materials should be in the right place at the right time.
penalties for infractions of the rules.
11 Equity. Managers should be kind and fair to their subordinates.
4 Unity of Command. Every employee should receive orders from only one
12 Stability of Tenure of Personnel. High employee turnover is inefficient.
superior.
Management should provide orderly personnel planning and ensure that
5 Unity of Direction. Each group of organisational activities that have the same replacements are available to fill vacancies.
objective should be directed by one manager using one plan.
13 Initiative. Employees who are allowed to originate and carry out plans will exert
6 Subordination of Individual Interests to the General Interest. The high levels of effort.
interests of any one employee or group of employees should not take precedence
over the interests of the organisation as a whole. 14 Esprit de Corps. Promoting team spirit will build harmony and unity within the
organisation.
7 Remuneration. Workers must be paid a fair wage for their services.
8 Centralisation. Centralisation refers to the degree to which subordinates
are involved in decision making.Whether decision making is centralised
9780655702412_CH14A.indd 419 3/3/20 11:07 AM

Quantitative approach (1940s–1950s)

The quantitative approach, which focuses on the application of statistics, optimisation models, information
models, computer simulations and other quantitative techniques to management activities, provided tools for
managers to make their jobs easier.
3000 BCE–1776 Late 1700s–1950s 1911–1947 • 1940s–1950s 1960s–present

1940s
The quantitative approach to management – which is the use of quantitative
techniques to improve decision making – evolved from mathematical and statistical
solutions developed for military problems during World War II. After the war was
over, many of these techniques used for military problems were applied to
businesses.8 For example, one group of military officers, dubbed the ‘Whiz Kids’, joined
Ford Motor Company in the mid-1940s and immediately began using statistical
methods to improve decision making at Ford.
Bert Hardy/Getty Images
1950s
After World War II, Japanese organisations enthusiastically embraced the concepts
espoused by a small group of quality experts, the most famous
being W. Edwards Deming (left) and Joseph M. Duran. As these Japanese manufacturers
began beating US competitors in quality comparisons,Western managers soon took a
more serious look at Deming’s and Juran’s ideas.9 Their ideas became the basis for
total quality management (TQM), which is a management philosophy devoted to
continual improvement and responding to customer needs and expectations.
AP Photo/Richard Drew
9780655702412_CH14A.indd 420 3/3/20 11:07 AM

History module 421
Contemporary approaches (1960s–present)

Most of the early approaches to management focused on managers’ concerns inside the organisation. Starting in
the 1960s, management researchers began to look at what was happening in the external environment outside
the organisation.
3000 BCE–1776 Late 1700s–1950s 1911–1947 1940s–1950s • 1960s–present

1960s
Early management theorists proposed management
principles that they generally assumed to be universally applicable.
Later research found exceptions to many of these principles.The
contingency approach (or situational approach) says that
organisations, employees and situations are different and require
different ways of managing. A good way to describe contingen-
cy is ‘if . . . then’. If this is the way my situation is, then this is the
best way for me to manage in this situation. One of the earliest
contingency studies was done by Fred Fiedler and looked at what
style of leadership was most effective in what situation.10 Popular
contingency variables have been found to include organisation size,
the routineness of task technology, environmental uncertainty and
individual differences.
It was also in the 1960s that management researchers began to

Environment look more carefully at systems theory and how it related to
organisations.11 A system is a set of interrelated and
interdependent parts arranged in a manner that produces a
Organisation unified whole. As we explain in Chapters 14 and 15, organisations
Transformation function as open systems, which means they are influenced by and
Inputs process Outputs interact with their environment (see Figure HM.1). A manager has
to manage all parts of the system in order to achieve established
Raw materials Employees’ work Products and services goals.
Human resources activities Financial results
Capital Management activities Information
Technology Technology and Human results
Information operations methods
Feedback
Environment
Figure HM.1 Organisation as an open system
1980s–present
Although the dawn of the information age is said to have begun
with Samuel Morse’s telegraph in 1837, the most dramatic changes
in information technology have occurred in the latter part of the
20th century and early 21st century and have directly affected the
manager’s job.12 Managers now may manage employees who are
working from home or from halfway around the world. An
organisation’s computing resources used to be mainframe
computers locked away in temperature-controlled rooms and only
accessed by the experts. Now, practically everyone in an
organisation is connected – wired or wireless – with devices no
larger than the palm of the hand. Just like the impact of the
Industrial Revolution in the 1700s on the emergence of
Image Source/Getty Images
management, the information age has brought dramatic changes

that continue to influence the way organisations are managed.
9780655702412_CH14A.indd 421 3/3/20 11:07 AM

HM. 3 Choosing between management approaches

Explain how managers
can determine which
approaches to
manage-ment they
should use. With so many ideas about management to choose from, how do we know which are the best
ones to use? As we’ll explain and illustrate throughout this book, one approach is to use
evidence-based management, which is the making of decisions based on hard facts about
which ideas really work.13 Management scholars conduct rigorous empirical research to
determine how well our theories of management fit, apply to and enhance everyday
organisational practice. So, by understanding how these ideas are tested and developed, you
will be able to decide which approaches are most likely to be successful. By understanding how
management research has been done, you’ll also understand how evidence is generated about
what works and what doesn’t. This means, as a manager, you’ll know what sort of evidence you
need to look for in order to help you make decisions. You’ll also be able to practise evidence-
based management using the best available evidence.
However, as contingency theory shows us, which management ideas will work best in a
given situation will depend partly on the situation. What works well for a small service
organisation might not work so well for a large multinational manufacturing operation. By
developing a clear and detailed understanding of the circumstances we face, we can better
determine which approaches are most suitable, appropriate and likely to be effective. This will
tell us the aspects of the situation that will determine which approaches we could consider. For
example, is this a ‘people’ problem? A structural problem? A cultural problem? Maybe it’s all
three! But it will also help us to determine, as we noted above, whether the approaches we are
considering have been tested in a situation like ours, and what the evidence suggests about
whether they will work if we try to use them.
contingency approach (or general administrative theory Industrial Revolution scientific management
situational approach) Descriptions of what managers The advent of machine power, The use of the scientific
An approach to management do and what constitutes good mass production and efficient method to define the one best
that says that individual management practice. transportation begun in the late way for a job to be done.
organisations, employees and 18th century in Great Britain.
situations are different and Hawthorne studies systems theory
require different ways of Research done in the late organisational behaviour (OB) A view of organisations as sets
managing. 1920s and early 1930s The field of study that of interrelated parts that
devised by Western Electric researches the actions function together to achieve a
division of labour (or job industrial engineers to examine (behaviours) of people at work. common purpose.
specialisation) the effect of different work
The breakdown of jobs into environment changes on worker principles of management total quality management
narrow repetitive tasks. productivity, which led to a new Fayol’s fundamental or universal (TQM)
emphasis on the human factor principles of management A managerial philosophy
evidence-based management in the functioning of practice. devoted to continual
Making decisions based on organisations and the improvement and responding to
evidence. attainment of their goals. quantitative approach customer needs and
The use of quantitative expectations.
techniques to improve decision
making.
9780655702412_CH14A.indd 422 3/3/20 11:07 AM

History module 423
References
1 C. S. George, Jr, The History of Management Thought, 2nd edn (Upper Saddle River, NJ: Academy of Management Review, January 2007, pp. 105–17; R. Kanigel, The One Best
Prentice Hall, 1972), Way: Frederick Winslow Taylor and the Enigma of Efficiency (New York: Viking, 1997);
p. 4. and M. Banta, Taylored Lives: Narrative Productions in the Age of Taylor, Veblen, and
2 C. S. George, Jr, The History of Management Thought, 2nd edn (Upper Saddle River, NJ: Ford (Chicago: University of Chicago Press, 1993).
Prentice Hall, 1972), pp. 35–41. 7 H. Fayol, Industrial and General Administration (Paris: Dunod, 1916);
3 R. A. Owen, A New View of Society (New York: E. Bliss and White, 1825); H. M. Weber, The Theory of Social and Economic Organizations, ed. T. Parsons, trans. A.
Munsterberg, Psychology and Industrial Efficiency (Boston: Houghton Mifflin, M. Henderson and T. Parsons (New York: Free Press, 1947); and M. Lounsbury and
1913); and M. P. Follett, The New State: Group Organization the Solution of Popular E. J. Carberry, ‘From King to Court Jester? Weber’s Fall from Grace in Organizational
Government (London: Longmans, Green, 1918). Theory’, Organization Studies, vol. 26, no. 4 (2005), pp. 501–25.
4 E. Mayo, The Human Problems of an Industrial Civilization (New York: Macmillan, 8 P. Rosenzweig, ‘Robert S. McNamara and the Evolution of Management’, Harvard
1933); and F. J. Roethlisberger and W. J. Dickson, Management and the Worker Business Review, December 2010, pp. 86–93; and C. C. Holt, ‘Learning How to Plan
(Cambridge, MA: Harvard University Press, 1939). Also see G. W. Yunker, ‘An Production, Inventories, and Work Force’, Operations Research, January–February
Explanation of Positive and Negative Hawthorne Effects: Evidence from the Relay 2002, pp. 96–9.
Assembly Test Room and Bank Wiring Observation Room Studies’, paper presented 9 T. A. Stewart, ‘A Conversation with Joseph Juran’, Fortune, 11 January 1999, pp.
at the Academy of Management Annual Meeting, August 1993, Atlanta, Georgia; S. 168–70; J. R. Hackman and R. Wageman, ‘Total Quality Management: Empirical,
R. Jones, ‘Was There a Hawthorne Effect?’, American Sociological Review, November Conceptual, and Practical Issues’, Administrative Science Quarterly, June 1995, pp.
1992, 309–42; B. Krone, ‘Total Quality Management: An American Odyssey’, The Bureaucrat,
pp. 451–68; and S. R. G. Jones, ‘Worker Interdependence and Output: The Hawthorne Fall 1990,
Studies Reevaluated’, American Sociological Review, April 1990, pp. 176–90; J. A. pp. 35–8; and A. Gabor, The Man Who Discovered Quality (New York: Random House,
Sonnenfeld, ‘Shedding Light on the Hawthorne Studies’, Journal of Occupational 1990).
Behavior, April 1985, pp. 111–30; B. Rice, ‘The Hawthorne Defect: Persistence of a 10 F. E. Fiedler, A Theory of Leadership Effectiveness (New York: McGraw-Hill, 1967).
Flawed Theory’, Psychology Today, February 1982, pp. 70–4; R. H. Franke and J. Kaul, 11 C. I. Barnard, The Functions of the Executive (Cambridge, MA: Harvard University Press,
‘The Hawthorne Experiments: First Statistical Interpretations’, American Sociological 1938); and K. B. DeGreene, Sociotechnical Systems: Factors in Analysis, Design, and
Review, October 1978, pp. 623–43; and A. Carey, ‘The Hawthorne Studies: A Radical Management (Upper Saddle River, NJ: Prentice Hall, 1973), p. 13.
Criticism’, American Sociological Review, June 1967, pp. 403–16. 12 ‘Information Age: People, Information & Technology – An Exhibition at the National
5 A. Maslow, ‘A Theory of Human Motivation’, Psychological Review, July 1943, pp. Museum of American History’, Smithsonian Institution, <http://photo2.si.edu/infoage/
370–96; see also A. Maslow, Motivation and Personality (New York: Harper & Row, infoage.html>, 11 June 2009; and P. F. Drucker, Management, Revised Edition (New
1954); and D. McGregor, The Human Side of Enterprise (New York: McGraw-Hill, 1960). York: HarperCollins Publishers, 2008).
6 F. W. Taylor, Principles of Scientific Management (New York: Harper, 1911), p. 44. For 13 J. Pfeffer and R. I. Sutton, ‘Evidence-Based Management’, Harvard Business Review,
other information on Taylor, see S. Wagner-Tsukamoto, ‘An Institutional Economic January 2006, pp. 63–74.
Reconstruction of Scientific Management: On the Lost Theoretical Logic of Taylorism’,
9780655702412_CH14A.indd 423 3/3/20 11:07 AM

Chapter
15 The managerial environment
In our globalised and interconnected world, global events can affect managers and organisations
everywhere, no matter how large or small. For example, when Hurricanes Irma and Maria struck the
Caribbean and southeastern United States in 2017, they devastated homes and businesses in Puerto Rico
but created opportunities for tourism-related businesses in other tropical countries.1 Likewise, the 2007–8
global financial crisis (GFC) created challenges for all types of organisations, from small owner-operator
businesses to national governments and global organisations such as the International Monetary Fund.
In today’s turbulent and ‘connected’ world, environmental changes can have widespread and far-reaching
impacts, so managers need to be aware of the impact of the external environment on their organisation.
No successful organisation, or its managers, can operate without understanding and dealing with the
dynamic environment in which it operates. One of the biggest mistakes managers make today is failing to
adapt to the changing world. As one executive said regarding the economic crisis: ‘I have learned more about
management and leadership during the past six months than I had in the previous ten years.’2 Organisations
that are bound by tradition and don’t (or refuse to) change are less and less likely to survive the turbulence
in today’s world. To better understand this, we need to look at the important external environmental forces
that are impacting the way organisations are managed today.
In this chapter, we examine the two components of the external environment: the general environment
that affects all organisations, and the specific environment of each individual organisation. We then
consider how changing environments influence managers and organisations. We finish with a discussion of
organisational cultures and how it helps organisations to deal with their environments.
Learning Objective 1 Explain what the external environment is and why it’s important.
What is the external environment of an organisation? pp. 426–32
Learning Learning Objective 2 Discuss how the external environment affects managers.
Objectives How does the external environment affect managers? pp. 432–34
Learning Objective 3 Define organisational culture, and explain why it’s important.
What is organisational culture, and why is it important? pp. 434–35
Learning Objective 4 Describe how organisational culture affects managers.
How does organisational culture affect managers? pp. 435–36
9780655702412_CH15.indd 424 3/3/20 11:05 AM

Chapter 15 The managerial environment 425
LO 1
Explain what the
external environment
is and why it’s
important.
fact or fiction?
LO 2
Discuss how the
external environment
affects managers.
Global events only affect

LO 3
global companies.
Define
organisational
culture, and explain
why it’s important.
fiction
LO 4
Describe how
organisational
culture affects
managers.
9780655702412_CH15.indd 425 3/3/20 11:05 AM

What is the external environment

external of an organisation?
organisational The external organisational environment consists of the factors, forces, situations, events and
environment conditions outside the organisation’s boundaries that can potentially affect it.3 The external environment
The forces and
is made up of two components: the general environment and the specific environment (see Figure 15.1).
conditions outside
the organisation’s
boundaries that can What is the general environment of an organisation?
potentially affect it The general environment consists of the broad sociocultural, technological, economic, political/
legal and global conditions in the society in which the organisation operates.4 Changes in any dimension
general
environment of the general environment will eventually affect all organisations, typically by influencing their specific
The sociocultural, environments. As the dimensions of the general environment reflect major societal trends, a single
technological, economic, organisation’s ability to directly affect them is very limited.
political/legal and global
The sociocultural dimension of the general environment includes the cultural characteristics
conditions in the society
in which the organisation and demographic conditions of the society in which the organisation operates.5 Cultural characteristics
operates include the customs, values, tastes, attitudes and behaviours in a particular society. Demographic
conditions are the physical characteristics of the population, such as gender, average age, level of
sociocultural
dimension of education, geographic dispersal, income and household composition. Sociocultural conditions also include
the general the racial and ethnic characteristics of the population. We define race as the biological heritage (including
environment physical characteristics such as one’s skin colour and associated traits) that people use to identify themselves.
The cultural Ethnicity is related to race, but it refers to social traits – such as one’s cultural background or allegiance –
characteristics and
demographic conditions that are shared by a human population.
of the society in
which the organisation
operates
General environment
cultural Technological Economic
characteristics
The customs, values,
tastes, attitudes
Specific environment
and behaviours in a
particular society
demographic Customers Suppliers

conditions
The physical
characteristics of the
Competitors Regulators
population, such as
gender, average age, Organisation
level of education,
geographic dispersal, Strategic Interest
income and household partners groups
composition
Employees,
labour markets
race
and unions
Social groupings of
people based on
physical and biological
characteristics Political/Legal Sociocultural
ethnicity Global
Social groupings of
people based on cultural
characteristics and Figure 15.1 The external organisational environment
traditions
9780655702412_CH15.indd 426 3/3/20 11:05 AM

Sociocultural elements determine the products, services and types of organisational behaviour that are
valued in a society. For example, changing cultural values about global warming have created a demand
for products and services that reduce greenhouse emissions. Demographic characteristics define the size
and attributes of the population, influencing the demand for products and services and the type of labour
available for staffing organisations. For example, the proportions of people at certain stages in human
life cycles can constrain decisions and actions taken by managers of businesses, governments, educational
institutions and other organisations. Consider these demographic predictions for the future:
• Recent analysis of birth rates shows that more than 80 per cent of babies being born worldwide are
from Africa and Asia.6
• India will be the youngest country by 2020; the median age will be 29 years.7
• By 2050, it’s predicted that China will have more people aged 65 and older than the rest of the
world combined.8
• For most of human history, individuals over the age of 65 have never exceeded 3–4 per cent of a
country’s population. By 2050, however, this number could potentially reach 25 per cent, on average.9
Just imagine how these population trends are likely to impact global organisations and the way managers
manage.
Sociocultural elements also affect workplace diversity. Workforce diversity refers to ways in which workforce
people in a workforce are similar to and different from one another. This includes diversity in gender, race, diversity
Ways in which people in
ethnicity, physical abilities, mental health, sexual orientation and gender identity, socioeconomic background
a workforce are similar
(social class and income-related factors), functional or professional speciality, physical attractiveness, obesity/ to and different from
thinness, job seniority or intellectual abilities. Increasing diversity in societies and workplaces raises a number one another in terms of
of issues for managers and organisations. For example, in Australia today, women comprise 46.4 per cent of gender, age, race, sexual
orientation, ethnicity,
the workforce.11 Yet, organisations still face gender diversity issues such as the gender pay gap, career start
cultural background,
and progress, and misconceptions about whether women perform their jobs as well as men do. Similarly, and physical abilities and
many LGBTIQ people — lesbian, gay, bisexual, transgender, intersex and queer people — experience disabilities
homophobic attitudes in their workplaces, ranging from indifference and intolerance to anger, contempt
and fear.12 Although a recent study found that 50
per cent of surveyed Australian workplaces were
free from homophobia, 50 per cent of respondents
said that, within the previous year, they had heard
homophobic remarks in their workplace and one
in seven respondents said that they had personally
experienced homophobia-related harassment while
at work.13 Another recent study found that 60 per
cent of LGBTIQ people in Australia experience
verbal homophobic abuse in the workplace, while
20 per cent experience physical violence.14 On
a more positive note, however, research has also
found that when LGBTIQ staff are able to be
‘openly out’, organisational productivity increases
by between 5 and 30 per cent and retention rates
improve by 10 per cent.15
Ability and disability are another common As the Baby Boomer generation reaches retirement age, their attitudes,
behaviours and economic power are creating new business opportunities for
form of diversity in today’s organisations. Nearly
travel companies. There are now as many Baby Boomers aged between 50 and
20 per cent of the Australian population have 70 taking overseas holidays as people aged between 20 and 30. As they account
a physical disability that affects their mobility, for one-third of all spending by households, they present a lucrative potential
communication, or ability to care for themselves, or market for airlines, cruise companies and travel planners.10
Altafulla/Shutterstock/Pearson Education Ltd
their participation in education and employment.16
9780655702412_CH15.indd 427 3/3/20 11:05 AM

Mental health conditions such as depression, anxiety and post-traumatic stress disorder are also widespread;
the World Health Organization estimates that 300 million people worldwide are affected by depression.17
By law, managers must provide accommodations for physical and mental health conditions so that
individuals with disabilities can perform their jobs (see Chapter 20). But such accommodations also need
to be perceived as equitable by those who don’t have disabilities. Managing diversity is often a balancing
act, but it’s important for managers and organisations to explore the strengths that all types of employees
bring to an organisation and the barriers they face in contributing fully to organisational efforts. We’ll keep
technological exploring this issue throughout the book in the Managing for Diversity feature.
dimension of The technological dimension of the general environment comprises the knowledge, tools
the general and methods used to convert resources (e.g. raw materials, information and labour) into products and
environment
services.18 This dimension includes technological and scientific advancements in society at large, as well
The knowledge, tools
and methods used to as specific industries.19 Technological advancements generally relate to changes in product or process
convert resources into technologies. Product technological changes lead to the development of entirely new goods and services, or
products and services to refinements in the features and capabilities of existing products. For example, new solar cell technologies
economic have led to the development of a notebook computer bag that uses solar energy to recharge your notebook,
dimension of mobile or iPod while you walk!20 Process technological changes alter how organisations operate. For
the general example, the barcode readers used at supermarket checkouts have changed inventory management because
environment they instantly update inventory systems to reorder products that have been sold.21
The general economic
health of the country in The economic dimension of the general environment relates to the general economic health
which the organisation of the country in which the organisation operates.22 This dimension includes the type of economic system
operates that’s in effect, the country’s current economic conditions and its economic cycles. Economic systems can
vary from capitalist to socialist. In a capitalist economy, individuals or corporations own the means
capitalist
economy of production and market forces operate; by contrast, in a socialist economy, a central government
An economic system owns the means of production and plans all economic activity.23 Most national economies combine some
in which individuals or elements of each form. For example, Australia and New Zealand are mostly capitalist economies but their
corporations own the
governments do have some market control. The People’s Republic of China is closer to the socialist end of
means of production
and market forces the spectrum but is becoming more capitalist.24
operate Current economic conditions include elements such as the current interest rates, levels of inflation
and levels of unemployment. These elements affect organisations by influencing costs, prices and demand
socialist economy
An economic system for products and services. Economic conditions cycle through periods of growth and decline. The speed
in which a central and strength of economic cycles differs for different industry segments and for the general economy, so
government owns the understanding which stage of the cycle current conditions reflect and how quickly that might change is
means of production
and plans all economic very important for effective planning.25 Moreover, in today’s globally interconnected world, managers need
activity to understand economic conditions in specific individual countries and how those conditions might affect
other economic systems, because – as the GFC has demonstrated – the consequences can be powerful and
political/legal
wide-ranging.
dimension of
the general The political/legal dimension of the general environment consists of the legal and
environment governmental systems within which an organisation operates.26 This includes the general conditions and
The legal and stability of the political system, government regulation of organisational behaviour, and the impact of
governmental systems government spending on the economic environment.27 Regulation affects managerial planning and decision
within which an
organisation operates, making by determining the choices available to managers and forcing organisations to behave in ways that
including the general reflect societal values and preferences. For example, federal, state and local governments pass legislation
conditions and stability that dictates how organisations must handle issues such as work health and safety, environmental protection,
of the political system,
competition, consumer protection and product safety, import and export activities, and employment
government regulation
and government practices. Government spending also influences the opportunities and threats faced by organisations. For
spending example, if governments increase spending on pensions, retailers benefit from pensioners having higher
9780655702412_CH15.indd 428 3/3/20 11:05 AM

discretionary incomes. However, if governments reduce spending on infrastructure, then this reduces
business opportunities in the construction industry.
The global dimension of the general environment consists of factors that operate across global dimension
national boundaries. The global dimension includes events or changes that originate in foreign countries of the general
(such as the GFC) as well as physical and institutional forces of an international scale, such as global warming environment
Factors that operate
and the Internet. International forces may affect organisations directly, or exert an indirect influence by across national
affecting sociocultural, technological and economic trends.28 boundaries
Global forces are increasingly influential because advances in transportation and communications
technology have essentially eliminated geographic borders as boundaries to organisational activity, meaning
any organisation can become a global player.29 Organisations are considered global if they exchange goods
and services with consumers in other countries, if they use managerial and technical employee talent from
other countries, or if they use financial sources and resources outside their home country, which is known
as financial globalisation.30 Global operation means that organisations have to adapt to local conditions in
each country and to worldwide influences. Consequently, managers need to understand how global forces
influence every geographic region in which they operate, how forces differ in each geographic location and
the implications of those differences.
All countries have different values, morals, customs, political and economic systems, and laws, all of
which can affect how a business is managed. For example, laws about industrial espionage, restraint of trade,
working conditions and the rights of workers may vary considerably in different countries.
The most important and challenging differences for managers to understand, however, are those
related to a country’s social context or culture. Managers need to understand societal issues that might
affect business operations in another country and recognise that organisational success can come from
a variety of managerial practices. One way to understand differences in cultural environments is to
analyse the dimensions of national culture. Geert Hofstede developed one of the most widely referenced
approaches for analysing cultural variations when he surveyed more than 116,000 IBM employees in 40
countries about their work-related values. He found that managers and employees vary on five dimensions
of national culture.31 Hofstede’s work has provided the basic framework for differentiating among national
Global
cultures and has since been extended by the Global Leadership and Organizational Behavior
Leadership and
Effectiveness (GLOBE) research program, an ongoing cross-cultural investigation of leadership Organizational
and national culture. Using data from more than 17,000 managers in 62 societies around the world, the Behavior
GLOBE research team (led by Robert House) has identified nine dimensions on which national cultures Effectiveness
differ.32 The GLOBE studies confirm that Hofstede’s dimensions are still valid, and extend his research by (GLOBE)
providing an expanded and updated measure of countries’ cultural differences (see Table 15.1).
research program
A program that studies
cross-cultural leadership
What is the specific environment of an organisation? behaviours
An organisation’s specific environment consists of the organisations, groups and individuals with whom
specific
it interacts as it conducts its business.33 Factors in the specific environment have a direct and immediate
environment
effect on the organisation’s operations and performance. For most organisations the specific environment The organisations,
includes customers, suppliers, competitors, industry regulators and government agencies, employees and groups and individuals
labour markets, interest groups and strategic partners. The specific environment is often described in terms with whom an
organisation interacts as
of stakeholders — anyone who affects or is affected by the achievement of the organisation’s objectives.34
it conducts its business
Managers of high-performing companies tend to consider the interests of all major stakeholder groups as
they make decisions, because this can provide improved predictability of environmental changes, more stakeholders
Anyone who affects
successful innovations, greater degree of trust among stakeholders, and greater organisational flexibility
or is affected by the
to reduce the impact of change.35 So, understanding who an organisation’s stakeholders are, and how they achievement of the
contribute to its specific environment, is important. organisation’s objectives
9780655702412_CH15.indd 429 3/3/20 11:05 AM

Table 15.1 Dimensions of national culture developed by Hofstede and the Global Leadership
and Organizational Behavior Effectiveness (GLOBE) research program
Cultures high Cultures low

Dimension Definition in dimension in dimension
Power distance The degree to which members of a society expect power to be unequally shared. Russia Denmark
(Hofstede) Spain Netherlands
Thailand South Africa
Uncertainty avoidance A society’s reliance on social norms and procedures to alleviate the unpredictability of Austria Russia
(Hofstede) future events. Denmark Hungary
Germany Bolivia
Individualism/collectivism The degree to which individuals are encouraged by societal institutions to be Greece Denmark
(Hofstede) integrated. Hungary Singapore
Germany Japan
Quantity of life versus The degree to which values such as assertiveness, the acquisition of money and Japan Sweden
quality of material goods and competition (quantity of life) are considered more important than Mexico Norway
life the degree to which people value relationships and show sensitivity and concern for Greece Chile
(Hofstede) the welfare of others (quality of life).
Long-term versus short- The degree to which people look to the future and value thrift and persistence (long- China United States
term orientation term orientation) as opposed to valuing the past and present and emphasising respect Japan Indonesia
(Hofstede) for tradition and fulfilling social obligations (short-term orientation). Russia
Assertiveness The extent to which a society encourages people to be tough, confrontational, assertive Spain Sweden
(GLOBE) and competitive versus modest and tender. United States New Zealand
Greece Switzerland
Future orientation The extent to which a society encourages and rewards future-oriented behaviour such Denmark Russia
(GLOBE) as planning, investing in the future and delaying gratification. Canada Argentina
Netherlands Poland
Gender differentiation The extent to which a society maximises gender role differences. South Korea Sweden
(GLOBE) Egypt Denmark
Morocco Slovenia
Source: Based on G. Hofstede, ‘Motivation, Leadership and Organization: Do American Theories Apply Abroad?’, Organizational Dynamics, Summer 1980, pp. 42–63; and G. Hofstede, ‘Cultural
Constraints in Management Theories’, Academy of Management Executive, vol. 7 (1993), pp. 81–7.
customers Customers are the people and organisations that acquire goods or services from the organisation,
People and organisations usually in exchange for money.36 Customer needs and wants influence the type of products that an
that acquire goods
organisation makes, the quality of those products and the prices for which they are sold. For example, a
or services from the
organisation customer who buys a lot of the organisation’s output would be able to demand lower prices, more attractive
financing terms, and customised products and services because the organisation would concede to their
requests rather than lose their business.
suppliers Suppliers are companies and individuals who provide the inputs that organisations use to conduct their
Companies and operations.37 Inputs might include material or physical resources, human resources, financial resources,
individuals who
informational resources and business services.38 Suppliers determine the quality, availability and cost of
provide the inputs that
organisations use to inputs, which makes them a major influence on an organisation’s product and service quality, production
conduct their operations capacity, competitiveness and profitability. Suppliers who control valuable inputs have lots of influence
over organisations and can essentially set their own business terms. For example, the Organization of the
Petroleum Exporting Countries (OPEC) coordinates and stabilises the petroleum prices charged by its 14
member countries. Since OPEC members control approximately 75 per cent of the world’s oil reserves, the
competitors organisation effectively determines the world price for petroleum.39
Individuals and An organisation’s competitors are the individuals and organisations with whom it competes
organisations with
for resources.40 They include government agencies and departments competing for funding from tax
whom an organisation
competes for resources revenues; charities competing for donations, volunteers and clients; and employers competing for the
9780655702412_CH15.indd 430 3/3/20 11:05 AM

best staff, the most advanced technology or the best strategic partners.41 But the most common form of employees
competition experienced by businesses is competing for customer dollars against other organisations in Individuals who labour
on behalf of the
the same industry or type of business that offer products which customers see as acceptable alternatives
organisation in exchange
to those offered by the organisation. For example, when a customer is hungry they value food, which they for payment
can get by eating at a restaurant or buying groceries from a supermarket and preparing their own meal. If
labour market
a restaurant manager understands that they are competing for customer dollars against the supermarket
The pool of people
as well as against other restaurants, then they can determine how to compete more effectively, such as employable by the
by offering quicker meals than customers could get from other restaurants or from cooking at home. organisation
Competitors obviously influence the products and prices that organisations can offer, but they also unions
influence the costs and availability of supplies, access to distribution channels and profitability. Employee associations
Employees are those individuals who labour on behalf of the organisation in exchange for payment. that negotiate pay and
Since employees provide the knowledge, skills, manual effort and creativity that support organisational conditions and take
industrial action on
operations, they are obviously critical to organisational performance. behalf of their members
The labour market or labour supply is the pool of people employable by the organisation.42 The
strategic partners
balance between supply and demand for labour affects organisational performance by influencing costs and
Organisations that work
organisational capacity.43 For example, if demand for a particular type of employee outstrips supply, then together for mutual
the market rate for those workers goes up and increases labour costs for the organisations that employ benefit
them. If the knowledge and skills of those workers are critical to organisational products and services, then regulators
the availability of those workers will determine production capacity. People and organisations
Unions are employee associations. Unions negotiate pay and conditions with employers on behalf of that create and enforce
their members. Unions may also affect organisations by taking industrial action on behalf of members. This rules and regulations
to protect consumers,
might include arranging work stoppages, calling strikes or even taking employers to court. workers and society as
Strategic partners are organisations that work together for mutual benefit.44 By working closely with a whole
strategic partners such as competitors, suppliers or customers, organisations can combine resources, share
sharing economy
ideas, learn from each other and spread risks. However, collaborating with partners also creates a risk that An economic
partners can learn each other’s trade secrets and even become competitive rivals.45 Consequently, organisations environment in which
must manage relationships with strategic partners carefully to ensure they can work closely enough to be asset owners share
with other individuals
effective but also protect themselves from risk. through a peer-to-
Regulators are people and organisations that create and enforce regulations to protect consumers, workers peer service, for a set
and society as a whole.46 Regulators affect organisations by enforcing the ‘rules of the game’ for operating fee, their underutilised
physical assets or their
knowledge, expertise,
skills or time
Connecting up to do more with less

You have probably heard of Airbnb, Uber, Zipcar and Zilok – com- headsets, Oculus Rift systems, or expensive cameras and produc-
panies that are part of a fast-growing phenomenon called the shar- tion companies, studios and individuals looking to lease their unused
ing economy. The sharing economy is an economic environ- equipment for short time periods.50 The concept behind the shar-
ment in which asset owners ‘rent out’ their underutilised knowledge, ing economy (or collaborative consumption) is putting underuti-
expertise, skills, time or physical assets (such as a home, car, clothing, lised assets to good use. But it also has powerful implications for
tools or other physical assets) to consumers who need those assets sustainability. Making more productive use of existing assets en-
but who don’t want to, or can’t afford to, purchase them.48 For ex- hances environmental sustainability by minimising waste and reduc-
ample, Zilok is a service through which individuals lend and borrow ing the need to use resources to make new assets. Leasing assets
expensive household items, such as cameras, musical instruments, also enhances financial sustainability, because asset owners can gen-
kitchenware, etc., for a fee.49 A new startup called KitSplit has set up erate new payoffs from previous expenditures and asset leasers
a sharing arrangement between customers looking for sophisticat- don’t need to purchase expensive assets they may only need
ed, high-end, creative-type equipment such as drones, Google Glass occasionally.
9780655702412_CH15.indd 431 3/3/20 11:05 AM

in a particular society. An organisation’s specific

environment might require interactions with a number
of different regulatory bodies, such as work health and
safety agencies, police, workplace standards boards and
consumer affairs.47 This can require a lot of time and
energy.
Interest groups influence business activities
in specific areas, such as environmental impact and
ethical conduct.51 Interest groups are organised to
serve the interests of their members and are generally
organised around a geographic locality, a specific social
issue, or an industry or a profession. For example, the
Australian Medical Association is a professional body
Software developers and designers from communities throughout the world
are valuable strategic partners for Yahoo!. The company builds relationships that liaises with universities, hospitals and governments
with these computer experts by staging hacking events, like the one shown about issues that affect the medical profession. Interest
here in Bangalore, India, that may result in technological innovations. groups usually attempt to influence organisational
Manjunath Kiran/AFP/Getty Images behaviour by negotiating directly with organisations or
by lobbying governments and local residents to exert
interest groups
pressure. For example, environmental conservation
Groups organised to
serve the interests groups that wish to prevent residential development of natural areas might pressure local government
of their members by bodies to stop the development by canvassing signatures from local residents for a petition.
influencing business
activities in specific
areas, such as How does the external environment
environmental impact
and ethical conduct affect managers?
There are two main ways in which the external environment affects managers. One way is by affecting what
environmental
uncertainty managers can do and how they can facilitate organisational operations and the achievement of organisational
How well managers can goals. As we discussed in Chapter 14, organisations function as open systems, which means that, as they take
understand or predict inputs (such as materials, financial resources and labour) and use organisational processes to transform them
the changes and trends into the outputs they provide to customers and clients (such as goods and services), they are influenced by
in the environments
affecting their and interact with their environment. As we’ve explained in the chapter so far, environmental factors can
organisations therefore affect the inputs the organisation can access, the outputs it can generate and the processes it can
use to do so.
dynamism
The rate and The other way that the external environment affects managers is by creating uncertainty.52
predictability of change Environmental uncertainty refers to how well managers can understand or predict the
in the elements of changes and trends in the environments affecting their organisations. It is determined by
an organisation’s
environmental dynamism, environmental complexity and resource availability. Dynamism is the
environment
rate and predictability of change in the elements of the organisation’s environment. In dynamic
environmental environments, changes occur quickly. In stable environments, the rate of environmental change is
complexity slow. Environmental complexity is determined by the number of external factors affecting the
The number of external
factors affecting the organisation. In simple environments, organisations are affected by few factors, whereas organisations
organisation and the in complex environments are influenced by many factors. Resource availability refers to the
extent of their influence abundance of critical resources in an organisation’s external environment. When environments
resource are simple, resources are plentiful and change is slow, environmental uncertainty is low. When
availability environments are complex and dynamic and resources are scarce, environmental uncertainty is high.
The abundance of For example, Zippo Manufacturing, best known for its Zippo cigarette lighters, faces a relatively
critical resources in an certain environment.53 There are few competitors and little technological change. The main external
organisation’s external
environment
concern for the company is probably the declining trend in tobacco usage. In contrast, the music
9780655702412_CH15.indd 432 3/3/20 11:05 AM

industry faces a dynamic (highly uncertain and unpredictable) environment. Digital formats, apps and
music downloading sites have turned the industry upside down and brought high levels of uncertainty.
Figure 15.2 illustrates how environmental uncertainty influences managers. Each of the four cells in
the figure represents different combinations of degree of complexity and degree of change. Cell 1 (stable–
simple environment) represents the lowest level of environmental uncertainty, and cell 4 (dynamic–complex
environment) the highest. Not surprisingly, managers have the greatest influence on organisational
Degree of Change
Stable Dynamic
Cell 1 Cell 2
Stable and predictable environment Dynamic and unpredictable environment
Few components in environment Few components in environment
Simple
Components are somewhat similar Components are somewhat similar but

Degree of Complexity
and remain basically the same are continually changing

Minimal need for sophisticated Minimal need for sophisticated
knowledge of components knowledge of components
Cell 3 Cell 4
Stable and predictable environment Dynamic and unpredictable environment
Complex
Many components in environment Many components in environment

Components are not similar to one Components are not similar to one another
another and remain basically the same and are continually changing
High need for sophisticated High need for sophisticated
knowledge of components knowledge of components
Figure 15.2 Environmental uncertainty matrix
How much can managers really affect outcomes?

In Chapter 14, we stressed how important managers are to organ- According to this view, an organisation’s performance is influenced
isational success. But how much can managers really affect the out- by factors over which managers have little control, such as the
comes achieved by their organisations? economy, customers, governmental policies, competitors’ actions,
The dominant view in management theory is that managers are industry conditions, and decisions made by previous managers. This
directly responsible for their organisation’s success or failure. This view is labelled ‘symbolic’ because it’s based on the belief that man-
perspective is called the omnipotent view of management. Differ- agers symbolise control and influence by developing plans, making
ences in an organisation’s performance are assumed to be due to decisions and engaging in other managerial activities to make sense
the decisions and actions of its managers. In this view, someone has out of random, confusing and ambiguous situations. However, the
to be held accountable when organisations perform poorly, regard- actual part that managers play in organisational success or failure is
less of the reasons, and that someone is the manager. Of course, limited.
when things go well, managers also get the credit – even if they had In reality, managers are neither all-powerful nor helpless. But
little to do with achieving the positive outcomes. This view also ex- their decisions and actions are constrained. External constraints
plains turnover among sports coaches, who are considered the come from the organisation’s external environment, and internal
‘managers’ of their teams. Coaches whose teams lose more games constraints come from the organisation’s culture.
than they win are usually fired and replaced by new coaches who Discuss this:
are expected to correct the poor performance. • How are these two perspectives on management similar?
In contrast, others have argued that much of an organisation’s Different?
success or failure is due to external forces outside managers’ con-
• Are today’s managers considered omnipotent? In the
trol. This perspective is called the symbolic view of management.
organisations you work for, or know well, what is considered to
The symbolic view says that a manager’s ability to affect perfor-
be within a manager’s control? What is not?
mance outcomes is influenced and constrained by external factors.
9780655702412_CH15.indd 433 3/3/20 11:05 AM

outcomes in cell 1 and the least in cell 4. Because uncertainty is a threat to an organisation’s effectiveness,
managers try to minimise it. Generally speaking, the more uncertainty there is in an organisation’s external
environment, the more attention managers must pay to monitoring conditions and spotting emerging
trends. The degree of uncertainty also determines the importance of being able to respond quickly to new
information and new circumstances. To deal with their organisational environments, managers must be able
to determine what is occurring, how it is relevant to the opportunities and threats faced by the organisation,
and how the organisation should react.
What is organisational culture,

and why is it important?
organisational Organisational culture has been described as the shared values, principles, traditions and ways of doing
culture things that influence how organisational members act. We can think of an organisation’s culture as its
The shared values,
personality – the ways of thinking and behaving that are unique to this organisation and different from
principles, traditions and
ways of doing things other organisations.54 An organisation’s culture defines how it interacts with its environment as it deals with
that influence the way two key issues: handling environmental opportunities and threats so that it can survive and prosper; and
organisational members integrating and managing its people, structure and activities to keep the organisation together.55
act
Research suggests there are seven dimensions that describe an organisation’s culture.56 These dimensions
(shown in Figure 15.3) range from low to high, meaning it’s not very typical of the culture (low) or is very
typical of the culture (high). Describing an organisation using these seven dimensions gives a composite
picture of its culture. In many organisations, one cultural dimension is often emphasised more than the
others and essentially shapes the organisation’s personality and the way its members work. For example,
at Sony Corporation the focus is product innovation (innovation and risk taking). The company ‘lives
Degree to which
employees are expected
to exhibit precision,
analysis and attention
to detail
Degree to which Degree to which
employees are managers focus on results
encouraged to be or outcomes rather than
innovative and on how these outcomes
to take risks Attention to
are achieved
detail
Innovation and Outcome

risk taking orientation
Organisational
culture People
Stability
orientation
Degree to which
Degree to which management decisions
organisational Team take into account the
decisions and actions Aggressiveness effects on people in
emphasise maintaining orientation
the organisation
the status quo
Degree to which
Degree to which work is organised
employees are aggressive around teams rather
and competitive rather than individuals
than cooperative
Figure 15.3 Dimensions of organisational culture
9780655702412_CH15.indd 434 3/3/20 11:05 AM

and breathes’ new product development, and employees’ work

behaviours support that goal. In contrast, EY (formerly Ernst & A question of ethics
Young) has made its employees a central part of its culture (people
Reconciling your personal values with the cultural values of
orientation) and shows this through the way it treats them.
your organisation can be challenging. For example, imagine
An organisation’s culture usually reflects the vision or mission of you are the manager of a customer service team for an Inter-
its founders. The founders establish the early culture by projecting net service provider. You believe the hallmark of good busi-
an image of what the organisation should be and what its values are. ness is providing good value for customers.Your company has
developed two new service packages for customers: Package A
The small size of most new organisations also helps the founders
and Package B. Your team has been instructed to convince
impose their vision on all organisation members. Employees ‘learn’ customers to convert from their existing package to Package
an organisation’s culture in a number of ways. The most common A.You know that Package B provides better value for money
ways are stories, rituals, material symbols and language. for this customer group but that Package A is more profit-
able for the company.
Organisational stories typically contain a narrative of
Discuss this:
significant events or people, including such things as the
• What is the ethical dilemma you face?
organisation’s founders, rule breaking, reactions to past mistakes • What are your options in this situation? Is there any way
and so on.57 To help employees learn the culture, organisational you can accommodate your personal values AND the
stories anchor the present in the past, provide explanations and organisation’s priorities?
legitimacy for current practices, exemplify what is important to
the organisation, and provide compelling pictures of its goals.58
Corporate rituals are repetitive sequences of activities that express and reinforce the important values
and goals of the organisation.59 Material symbols or artefacts communicate an organisation’s personality.60
When you walk into different organisations, you get a ‘feel’ for what type of work environment it is –
formal or casual, fun or serious. The layout of an organisation’s facilities, how employees dress, the types
of cars provided to top executives, and the availability of corporate aircraft are examples of material
symbols. Others include the size of offices, the elegance of furnishings, and reserved parking spaces for
certain employees. Material symbols convey to employees who is important and the kinds of behaviour
(e.g. risk-taking, conservative, authoritarian, participative, individualistic and so on) that are expected and
appropriate. Many organisations and units within organisations use language as a way to identify and unite
members of a culture. By learning this language, members attest to their acceptance of the culture and their
willingness to help preserve it. Over time, organisations often develop unique terms to describe equipment,
key personnel, suppliers, customers, processes or products related to their business. New employees are
frequently overwhelmed with acronyms and jargon that, after a short period of time, become a natural part
of their language. Once learned, this language acts as a common denominator that bonds members. An
organisation’s culture, then, results from the interaction between the founders’ biases and assumptions and
what the first employees learn subsequently from their own experiences.
How does organisational culture

affect managers?
Organisational culture establishes the internal environment of the organisation by defining for managers
and employees what is important, what defines ‘good’ behaviour, what it takes to get ahead, and so on.
It also acts as a form of control system to promote the behaviours that the organisation wants and to
discourage those that it doesn’t want. As shown in Table 15.2, managers’ decisions are influenced by the
culture in which they operate.
The stronger a culture becomes, the more it affects and aligns the way managers and employees behave. strong cultures
Organisational cultures
Strong cultures are those in which the key values are deeply held and widely shared; the more employees
in which the key values
who accept the organisation’s key values and the greater their commitment to those values, the stronger are deeply held and
the culture is. Cultural values can have a very strong influence on behaviour in organisations even when widely shared
9780655702412_CH15.indd 435 3/3/20 11:05 AM

Table 15.2 Managerial decisions affected by organisational culture

Planning
• The degree of risk that plans should contain

• Whether plans should be developed by individuals or teams
• The degree of environmental scanning in which management will engage
Organising
• How much autonomy should be designed into employees’ jobs

• Whether tasks should be done by individuals or in teams
• The degree to which department managers interact with each other
Leading
• The degree to which managers are concerned with increasing employee job satisfaction
• What leadership styles are appropriate
• Whether all disagreements – even constructive ones – should be eliminated
Controlling
• Whether to impose external controls or to allow employees to control their own actions
• What criteria should be emphasised in employee performance evaluations
• What repercussions will occur from exceeding one’s budget
they’re not explicit. For example, you won’t find the following values written down, but each comes from
a real organisation:
• Look busy even if you’re not.
• If you take risks and fail around here, you’ll pay dearly for it.
• We make our product only as good as the competition forces us to.
• What made us successful in the past will make us successful in the future.
M A N AG I N G F O R D I V E R S I T Y
The paradox of diversity

When organisations bring in diverse individuals and socialise because of their unique strengths, yet their diverse behaviours
them into the culture, a paradox is created.61 Managers want the and strengths are likely to diminish in strong cultures as people
new employees to accept the organisation’s core cultural values attempt to fit in.
so that they don’t have a difficult time fitting in or being accepted. A manager’s challenge is to balance two conflicting goals: to
At the same time, managers want to openly acknowledge, em- encourage employees to accept the organisation’s dominant val-
brace and support the diverse perspectives and ideas that the ues, and to encourage employees to accept differences. As the
new employees bring to the workplace. external environment changes and brings about change in an or-
Strong organisational cultures pressure employees to con- ganisation, managers need to remember the importance of
form, and the range of acceptable values and behaviours is limit- keeping diversity alive.
ed –hence the paradox. Organisations hire diverse individuals
Since organisations and their environments vary so much, there is no such thing as the ‘right’ culture for
an organisation to have. But we do suggest that with so much complexity and change occurring inside and
outside organisations, a culture that promotes flexibility and willingness to change will become even more
critical to organisational success in years to come.
9780655702412_CH15.indd 436 3/3/20 11:05 AM

Student organisation’s culture defines how it interacts with its environment as it deals
with two key issues: handling environmental opportunities and threats so that it
Learning can survive and prosper; and integrating and managing its people, structure and
Centre activities to keep the organisation together. Cultures are assessed using seven
dimensions: attention to detail, outcome orientation, people orientation, team
orientation, aggressiveness, stability, and innovation and risk taking. The culture
comes from the founders but is learned by employees through stories, rituals,
Reviewing the learning objectives material symbols and language.
Learning Objective 1. Explain what the external Learning Objective 4. Describe how organisational
environment is and why it’s important. culture affects managers.
The external organisational environment consists of the forces and conditions Organisational culture affects managers in two ways: through its effect on what
outside the organisation’s boundaries that can potentially affect it. The external employees do and how they behave, and through its effect on what managers
environment is made up of two components: the general environment and the do as they plan, organise, lead and control. Strong cultures – those in which
specific environment. The general environment consists of the broad sociocultural, the key values are deeply held and widely shared – have more of an impact on
technological, economic, political/legal and global conditions in the society in how organisations are structured and the way work is done. Managers can focus
which the organisation operates. An organisation’s specific environment consists organisational cultures on particular outcomes through employee selection and
of the organisations, groups and individuals, also known as stakeholders, with training, organisational and authority structures, leadership, and the evaluation
whom it interacts as it conducts its business. For most organisations the specific systems and rewards used to manage the performance of organisational
environment includes customers, suppliers, competitors, industry regulators members.
and government agencies, employees and labour markets, interest groups and
strategic partners.
Learning Objective 2. Discuss how the external ❶ How much impact do managers actually have on an organisation’s success
environment affects managers. or failure?
The external environment affects managers by influencing the way the ❷ Describe the five components of the general environment. Why is it
organisation operates to achieve its objectives and the degree of environmental important for managers to understand these components?
uncertainty it faces. Organisations function as open systems, which means ❸ Why is it important for managers to pay attention to demographic trends
that they are influenced by and interact with their environment, and that and shifts?
environmental forces influence the inputs the organisation can access, the ❹ What is environmental uncertainty? What impact does it have on managers
outputs it can generate and the processes it can use to do so. So, the external and organisations? Find two examples in current business periodicals that
environment directly affects what managers can do and how they facilitate illustrate how environmental uncertainty affects organisations.
organisational operations and the achievement of organisational goals. ❺ ‘Businesses are built on relationships.’ What do you think this statement
‘Environmental uncertainty’ refers to how well managers can understand or means? What are the implications for managing the external environment?
predict the changes and trends in the environments affecting their organisation. ❻ Is organisational culture an asset to an organisation? Explain. Can it ever be
It’s determined by environmental dynamism, environmental complexity and a liability? Explain.
resource availability. When environments are simple, resources are plentiful ❼ How is an organisation’s culture formed and maintained?
and change is slow, environmental uncertainty is low. When environments are ❽ Discuss the impact of a strong culture on organisations and managers.
complex and dynamic and resources are scarce, environmental uncertainty is ❾ Pick two organisations that you interact with frequently (as an employee or
high. The more uncertainty there is in an organisation’s external environment, as a customer) and assess their culture according to the dimensions shown
the more important it is that managers monitor conditions, spot emerging in Figure 15.3.
trends, and respond quickly to new information and new circumstances.
Learning Objective 3. Define organisational culture,

and explain why it’s important.
An organisation’s culture is the system of shared values, principles, traditions
and ways of doing things that influence how organisational members act. An
9780655702412_CH15.indd 437 3/3/20 11:05 AM


UNDERSTANDING CULTURE
An organisation’s culture is a system of shared meaning. When you understand your organisation’s culture, you know whether it encourages teamwork, rewards innovation
or stifles initiative. When interviewing for a job, the more accurate a manager is at assessing the culture, the more likely they are to find a good person–organisation fit.
And once inside an organisation, understanding the culture allows managers to know what behaviours are likely to be rewarded and which are likely to be punished.62

PERSONAL
P I A INVENTORY
ASSESSMENT
Company culture assessment

Want to know what a company’s culture is like? This PIA will show you what’s involved with assessing a company’s culture.
Skill basics • Look at the organisation’s human resources manual. Are there formal
Organisational cultures differ. So do individuals. The better you are able to match rules and regulations? If so, how detailed are they? What do they cover?
your personal preferences to an organisation’s culture, the more likely you are to • Ask questions of the people you meet. The most valid and reliable
find satisfaction in your work, the less likely you are to leave, and the greater the information tends to come from asking the same questions of many
probability that you will receive positive performance evaluations. people (to see how closely their responses align). Questions that will give
The ability to read an organisation’s culture can be a valuable skill. For you insights into organisational processes and practices might include:
example, if you’re looking for a job, you’ll want to choose an employer whose What’s the background of the founders? What’s the background of the
culture is compatible with your values and in which you’ll feel comfortable. If current senior managers? What are these managers’ functional specialties,
you can accurately assess a potential employer’s culture before you make your and were they promoted from within or hired from outside? How does
job decision, you may be able to save yourself a lot of grief and reduce the the organisation integrate new employees? Is there a formal orientation
likelihood of making a poor choice. Similarly, you’ll undoubtedly have business program? Are there formal employee training programs and, if so, how are
transactions with numerous organisations during your professional career, they structured? How does your boss define their job success? How would
such as when selling a product or service, negotiating a contract, arranging a you define fairness in terms of reward allocations? Can you identify some
joint work project, or merely seeking out who controls certain decisions in an people here who are on the ‘fast track’? What do you think has put them
organisation. The ability to assess another organisation’s culture can be a definite on the fast track? Can you identify someone in the organisation who seems
plus in successfully performing those pursuits. to be considered a deviant, and how has the organisation responded to
For the sake of simplicity, we’re going to look at this skill from the perspective this person? Can you describe a decision that someone made that was well
of a job applicant. We’ll assume that you’re interviewing for a job, although these received? Can you describe a decision that didn’t work out well, and what
skills are generalisable to many situations. Here’s a list of things you can do to were the consequences for that decision maker? Could you describe a crisis
help learn about an organisation’s culture. or critical event that has occurred recently in the organisation, and how did
• Do background work. Get the names of former employees from friends or top management respond?
acquaintances, and talk with them. Also talk with members of professional trade Practising the skill
associations to which the organisation’s employees belong and with executive Read through the scenario and follow the directions at the end of it.
recruiters who deal with the organisation. Look for clues in stories told in annual After spending your first three years after university as a freelance graphic
reports and other organisational literature, and check out the organisation’s designer, you’re looking at pursuing a job as an account executive at a graphic
website for evidence of high turnover or recent management shake-ups. design firm. You feel that the scope of assignments and potential for technical
• Observe the physical surroundings. Pay attention to signs, posters, pictures, training far exceed what you’d be capable of on your own, and you’re looking to
photos, style of dress (e.g. formal or casual), office furnishings and workspace expand your skills and meet a brand-new set of challenges. However, you want
arrangements. to make sure you ‘fit’ into the organisation where you’re going to be spending
• Make notes about the people you met. Who did you meet? How did they more than eight hours every workday.
expect to be addressed? Write a brief paper describing how you would find a place where you’ll be
• How would you characterise the style of the people you met? Are they happy and where your style and personality will be appreciated.
formal? Casual? Serious? Jovial? Communicative? Reticent about providing
information?
9780655702412_CH15.indd 438 3/3/20 11:05 AM

Mini cases
15.1 Tragedy in fashion
Cheap fashion, but at what price?
In April 2013, more than 1100 workers perished when the Rana Plaza machinery used in China, their edge in the fashion industry has always been
building collapsed in Dhaka, Bangladesh.63 The collapse is now considered basic, simply constructed clothing.
the deadliest disaster in the history of the clothing industry, and the tragic loss Working conditions for factory employees in developing countries have
of life at this specific garment factory has focused world attention on the fashion long been less than desirable. Explosions and fires have been a continual
industry. Says one outspoken critic, ‘What happened in Bangladesh is a game- problem, as have other unsafe work conditions. (Unfortunately, this isn’t just
changer because of the gravity of the situation and tremendous loss of life.’ a problem of the retail fashion industry.) Workplace protections are expensive,
Rock-bottom labour costs enticed global clothing giants to Bangladesh which doesn’t work with consumers hooked on fashionable ‘cheap’ clothing.
during the mid-2000s. Many of the retailers that have relied on these Now public policy and governmental groups around the world are
factories are known for cheap, ‘fast’ apparel: Kmart, Big W, Target, Cotton turning up the heat on Bangladesh to reform its employment standards,
On, Forever New and Best & Less. The concept of fashion trends has changed and are pressuring global retailers to monitor their sourcing standards more
over the last two decades. Where fashion used to be ‘good’ for an entire carefully. Recently, several of the world’s largest apparel companies agreed
season, now fashion styles, colours and shapes change rapidly, seemingly to a significant plan to help fund fire safety and building improvements. Part
overnight. Retailers such as Zara have hooked customers on fast fashion – of this five-year agreement is to not hire/use manufacturers whose clothing
that is, clothes that go from concept and design to store racks in a matter of factories fail to meet safety standards. Well-known Australian retailers
weeks – and clothing has become a sort of ‘single-serving disposable item’. who have signed on include Kmart, Target, Forever New and Cotton On.
Now consumers want new and different items almost continuously. There’s The Bangladeshi government has also pledged to raise wages for garment
a ‘constant, ceaseless rotation through looks and styles’. For companies workers and to fix employment laws, making it easier for workers to form
selling many articles of clothing for $20 and less, this means their costs unions. Consumers are also rethinking the cost of fast fashion. In a recent
need to be tightly controlled. worldwide study of 12,500 people in 16 countries, 73 per cent of Australians
As the fashion industry’s emphasis changed, Bangladesh’s importance surveyed said they were willing to pay more for ethically produced clothes.
to the global clothing trade rose. In fact, in six years, it rose from the eighth ❶ Which components of the external environment might be most
top clothing exporter to the third (after China and Italy). Bangladeshi important for managers in clothing retail to know about? Why?
factory owners and the government were fully aware of the importance of ❷ According to the case, what external trends do managers in clothing
this industry to the country; however, meeting industry demands placed a retail chains have to deal with? How do you think these trends might
significant strain on the operations system behind this fast, cheap fashion. constrain decisions made by managers in clothing retail chains?
Hasty expansion of factory capacity, lax governmental enforcement of ➌ What stakeholders do you think might be most important to clothing retail
permits and approvals, and a focus on keeping costs as low as possible companies? What interests might these stakeholders have?
have become the focus of factory work culture in this developing country. ➍ Personal moral issue: Would you pay a higher price for ‘ethical’
Because garment factories in Bangladesh tend to lack the more sophisticated clothing? Why or why not? Discuss.
15.2 Getting a boost

Creating a can-do culture from the ground up
When Janine Allis opened her first store, she had no idea that Boost Juice growing it.’ Boost Juice was built on a ‘can-do’ organisational culture from
would become an international success.64 In fact, she founded the business the very beginning. Jeff and Janine had only established two stores when
to solve a simple problem: she couldn’t find healthy snacks to buy for her they negotiated an agreement with Westfield Shopping Centres to open 18
family when out shopping. During a trip to the United States with her husband Boost stores in shopping centres across Australia. Pulling it off required a very
Jeff, she encountered juice and smoothie bars and realised she wanted to start a positive attitude and established two of Boost’s core values: ‘never take no
business that offered healthy, good-for-you products. And so the Boost concept for an answer’ and ‘don’t try to do it – do it!’
was born. The next challenge was to grow the organisation, which required finding
When the first store opened, Janine threw herself in at the deep end, people who understood the Boost philosophy and could put it into practice.
developing Boost’s business plan, operational processes and cultural values ‘Once you’ve put the right people in place, everything is easy,’ Janine says.
from the ground up. Literally. She recalls: ‘I ran it, scrubbed the floors ‘If they don’t have the right cultural fit, forget it.’ Finding like-minded
and really learnt the business. It meant I was continually developing and individuals was particularly crucial to the company’s success because Boost
9780655702412_CH15.indd 439 3/3/20 11:05 AM

15.2 Getting a boost continued

operates under a franchise model. Franchisees, referred to as partners in the own organisation to find out first-hand how well Boost employees live the
Boost culture, buy the rights to open and operate a Boost store using the company’s values in their day-to-day dealings with customers.
company’s brand and operating procedures. Janine needed to be sure that The Boost recipe for success has certainly paid off, and the company
the people establishing Boost stores would operate them with the same now has more than 400 stores in 12 countries around the world. Janine still
philosophy, values and emphasis on quality that she had herself. To ensure believes that success is about having a positive attitude and the support
that franchisees operate as ‘part of the Boost family’, Janine operates with of great people. ‘To be successful you need to surround yourself personally
a very transparent approach. She and her franchisees share their profit and and professionally with only the best people, with the best values,’ she says.
loss figures with each other every month, and talk together about ways to ‘Think positive and positive things happen.’ But a can-do attitude also needs
improve the bottom line. ‘We actually tell people at the start, “If you don’t to be matched by a ‘will do’ work ethic because, as Janine frankly admits, ‘If
want to share your figures on profit and loss, you’re getting into the wrong I did not work the 60–80 hours a week at Boost [to establish the company],
company.”’ I would not have been successful.’
Another pillar of the Boost culture is Janine’s belief that success stems ❶ What are Boost Juice’s corporate values? How do you think these
from understanding what the customer wants and giving it to them. More values influence the way employees do their work?
specifically, as Janine puts it, ‘[We] ensure we are giving them what they ❷ Using the company’s corporate values, describe its organisational
want, and not just what we think they want or what we want to give culture. Which elements would you say are emphasised?
them.’ Consequently, Boost teams are trained to be ‘110% focused on ➌ How is Boost Juice’s corporate culture maintained?
the customer’. The company continuously researches customer wants and ➍ ‘The right culture with the right values will always produce the best
their perceptions of Boost by conducting focus groups and encouraging performance.’ Do you agree with this statement? Why or why not?
customers to provide feedback. Janine has even worked undercover in her
References
1 A. King, ‘2017: The Year in Extreme Weather’, The Conversation, <https://theconversation 15 B. Cleary, ‘Half of Australia’s Gay Community Are Afraid to “Come out of the Closet”
.com/>, accessed 2 January 2018. at Work . . . and Two Thirds of Workplaces Are Homophobic’, Daily Mail Australia, 29
2 J. Robinson, ‘What Leaders Must Do Next’, The Gallup Management Journal Online, 11 September 2016.
June 2009. 16 Australian Bureau of Statistics, Disability, Australia, 2009, Cat. No. 4446.0 (Canberra:
3 Based on S. Robbins, R. Bergman, I. Stagg and M. Coulter, Management, 5th edn Australian Bureau of Statistics, 2011).
(Sydney: Pearson, 2009), p. 83; D. Samson and R. L. Daft, Management, 3rd Asia Pacific 17 World Health Organization, Depression, 2017, <www.who.int/mediacentre/factsheets/
edn (Melbourne: Cengage, 2009), p. 91; and M. A. Hitt, J. S. Black, L. W. Porter and D. fs369/en/>, accessed 2 January 2018.
Hanson, Management (Sydney: Pearson, 2007), p. 75. 18 Based on C. Williams and A. McWilliams, MGMT (Melbourne: Cengage, 2010), p. 50; and
4 This section based on S. Robbins, R. Bergman, I. Stagg and M. Coulter, Management, P. Davidson, A. Simon, P. Woods and R. W. Griffin, Management, 4th Australasian edn
5th edn (Sydney: Pearson, 2009), p. 85; K. Bartol, M. Tein, G. Matthews and B. Sharma, (Brisbane: John Wiley & Sons, 2006), p. 146.
Management: A Pacific Rim Focus, 5th edn (Sydney: McGraw-Hill, 2008), p. 77; and M. 19 D. Samson and R. L. Daft, Management, 3rd Asia Pacific edn (Melbourne: Cengage,
A. Hitt, J. S. Black, L. W. Porter and D. Hanson, Management (Sydney: Pearson, 2007), 2009), p. 94.
p. 75. 20 K. Walters, ‘Who Wants to Be a Style Icon?’, BRW, 9–15 April 2009, p. 38.
5 This section based on M. A. Hitt, J. S. Black, L. W. Porter and D. Hanson, Management 21 P. Davidson, A. Simon, P. Woods and R.W. Griffin, Management, 4th Australasian edn
(Sydney: Pearson, 2007), pp. 76–7; S. Robbins, R. Bergman, I. Stagg and M. Coulter, (Brisbane: John Wiley & Sons, 2006), p. 148.
Management, 5th edn (Sydney: Pearson, 2009), pp. 87–99; and P. Davidson, A. 22 D. Samson and R. L. Daft, Management, 3rd Asia Pacific edn (Melbourne: Cengage,
Simon, P. Woods and R. W. Griffin, Management, 4th Australasian edn (Brisbane: John 2009), p. 96.
Wiley & Sons, 2006), p. 148. 23 K. Bartol, M. Tein, G. Matthews and B. Sharma, Management: A Pacific Rim Focus, 5th
6 S. Cardwell, ‘Where Do Babies Come from?’, Newsweek, 19 October 2009, p. 56. edn (Sydney: McGraw-Hill, 2008), p. 78.
7 G. Shivakumar, ‘India Is Set to Become the Youngest Country by 2020’, The Hindu, 17 24 Based on S. Robbins, R. Bergman, I. Stagg and M. Coulter, Management, 5th edn
April 2013. (Sydney: Pearson, 2009), p. 142; and K. Bartol, M. Tein, G. Matthews and B. Sharma,
8 Y. Hori, J-P. Lehmann, T. Ma Kam Wah and V. Wang, ‘Facing up to the Demographic Management: A Pacific Rim Focus, 5th edn (Sydney: McGraw-Hill, 2008), p. 78.
Dilemma’, Strategy and Business, Spring 2010; and E. E. Gordon, ‘Job Meltdown or 25 This section based on M. A. Hitt, J. S. Black, L. W. Porter and D. Hanson, Management
Talent Crunch?’, Training, January 2010, p. 10. (Sydney: Pearson, 2007), p. 82.
9 M. Chand and R. L. Tung, ‘The Aging of the World’s Population and Its Effects on Global 26 K. Bartol, M. Tein, G. Matthews and B. Sharma, Management: A Pacific Rim Focus, 5th
Business’, Academy of Management Perspectives, November 2014, pp. 409–29. edn (Sydney: McGraw-Hill, 2008), p. 7.
10 ‘Cashed up and Ready to Spend’, The Age, 28 August 2014, p. 3. 27 Based on S. Robbins, R. Bergman, I. Stagg and M. Coulter, Management, 5th edn
11 Workforce Gender Equality Agency, Gender Workplace Statistics at a Glance (Canberra: (Sydney: Pearson, 2009), p. 87; and
Workforce Gender Equality Agency, 2017). D. Samson and R. L. Daft, Management, 3rd Asia Pacific edn (Melbourne: Cengage,
12 L. Dowling, K. Eastaughffe, U. Harkin and S. Argent, Addressing Homophobia in the 2009), p. 98.
Workplace (Brisbane: PFLAG Brisbane Incorporated, 2012). 28 Based on D. Samson and R. L. Daft, Management, 3rd Asia Pacific edn (Melbourne:
13 B. Cleary, ‘Half of Australia’s Gay Community Are Afraid to “Come out of the Closet” Cengage, 2009), p. 92.
at Work . . . and Two Thirds of Workplaces Are Homophobic’, Daily Mail Australia, 29 29 P. Davidson, A. Simon, P. Woods and R. W. Griffin, Management, 4th Australasian edn
September 2016. (Brisbane: John Wiley & Sons, 2006), p. 150.
14 T. Ong, ‘Workplace Discrimination: Half of LGBTI Australians Hide Sexuality at Work, 30 E. Beinhocker, I. Davis and L. Mendonca, ‘The 10 Trends You Have to Watch’, Harvard
Report Finds’, ABC News, 28 September 2016. Business Review, July–August 2009, pp. 55–60.
9780655702412_CH15.indd 440 3/3/20 11:05 AM

31 G. Hofstede, ‘The GLOBE Debate: Back to Relevance’, Journal of International Business 54 G. Hofstede, Culture’s Consequences: International Differences in Work-Related Values
Studies, November 2010, pp. 1339–46; G. Hofstede, ‘The Cultural Relativity of (Newbury Park, CA: Sage, 1980).
Organizational Practices and Theories’, Journal of International Business Studies, Fall 55 E. H. Schein, Organizational Culture and Leadership (San Francisco: Jossey Bass, 1985).
1983, pp. 75–89; and G. Hofstede, Culture Consequences: International Differences in 56 J. A. Chatman and K. A. Jehn, ‘Assessing the Relationship between Industry
Work-Related Values (Beverly Hills, CA: Sage Publications, 1980), pp. 25–6. Characteristics and Organizational Culture: How Different Can You Be?’, Academy of
32 R. J. House, N. R. Quigley and M. S. deLuque, ‘Insights from Project GLOBE: Extending Management Journal, June 1994, pp. 522–53; and C. A. O’Reilly III, J. Chatman and
Advertising Research through a Contemporary Framework’, International Journal of D. F. Caldwell, ‘People and Organizational Culture: A Profile Comparison Approach to
Advertising, vol. 29, no. 1 (2010), pp. 111–39; R. R. McRae, A. Terracciano, A. Realo Assessing Person–Organization Fit’, Academy of Management Journal, September
and J. Allik, ‘Interpreting GLOBE Societal Practices Scale’, Journal of Cross-Cultural 1991, pp. 487–516.
Psychology, November 2008, pp. 805–10; J. S. Chhokar, F. C. Brodbeck and R. J. House, 57 P. Guber, ‘The Four Truths of the Storyteller’, Harvard Business Review, December 2007,
Culture and Leadership across the World: The GLOBE Book of In-Depth Studies of 25 pp. 53–9; S. Denning, ‘Telling Tales’, Harvard Business Review, May 2004, pp. 122–9;
Societies (Philadelphia, PA: Lawrence Erlbaum Associates, 2007); and R. J. House, P. J. T. Terez, ‘The Business of Storytelling’, Workforce, May 2002, pp. 22–4; J. Forman,
Hanges, M. Javidan, P. W. Dorfman and V. Gupta, Culture, Leadership and Organizations: ‘When Stories Create an Organization’s Future’, Strategy and Business, Second Quarter
The GLOBE Study of 62 Societies (Thousand Oaks, CA: Sage Publications, 2004). 1999, pp. 6–9; C. H. Deutsch, ‘The Parables of Corporate Culture’, New York Times,
33 J. Campling, D. Poole, R. Wiesner and J. R. Schermerhorn, Management, 2nd Asia Pacific 13 October 1991, p. F25; and D. M. Boje, ‘The Storytelling Organization: A Study of
edn (Brisbane: John Wiley & Sons, 2006), p. 36. Story Performance in an Office-Supply Firm’, Administrative Science Quarterly, March
34 R. E. Freeman, Strategic Management: A Stakeholder Approach (Boston: Pitman/ 1991, pp. 106–26.
Ballinger, 1984). 58 S. Denning, ‘Telling Tales’, Harvard Business Review, May 2004, pp. 122–9; and
35 S. L. Berman, R. A. Phillips and A. C. Wicks, ‘Resource Dependence, Managerial A. M. Pettigrew, ‘On Studying Organizational Cultures’, Administrative Science
Discretion and Stakeholder Performance’, Academy of Management Proceedings, Quarterly, December 1979, p. 576.
Best Conference Paper, August 2005; A. J. Hillman and G. D. Keim, ‘Shareholder 59 D. Drickhamer, ‘Straight to the Heart’, Industry Week, October 2003, pp. 36–8.
Value, Stakeholder Management and Social Issues: What’s the Bottom Line?’, 60 E. H. Schein, ‘Organizational Culture’, American Psychologist, February 1990,
Strategic Management Journal, March 2001, pp. 125–39; J. S. Harrison and R. E. pp. 109–19.
Freeman, ‘Stakeholders, Social Responsibility and Performance: Empirical Evidence 61 Managing for Diversity box based on C. Lindsay, ‘Paradoxes of Organizational Diversity:
and Theoretical Perspectives’, Academy of Management Journal, July 1999, Living within the Paradoxes’, in L. R. Jauch and J. L. Wall (eds), Proceedings of the
pp. 479–87; and J. Kotter and J. Heskett, Corporate Culture and Performance (New 50th Academy of Management Conference (San Francisco, 1990), pp. 374–8.
York: The Free Press, 1992). 62 Based on A. L. Wilkins, ‘The Culture Audit: A Tool for Understanding Organizations’,
36 Based on P. Davidson, A. Simon, P. Woods and R. W. Griffin, Management, 4th Organizational Dynamics, Autumn 1983, pp. 24–38; H. M. Trice and J. M. Beyer, The
Australasian edn (Brisbane: John Wiley & Sons, 2006), p. 152; and K. Bartol, M. Tein, Culture of Work Organizations (Upper Saddle River, NJ: Prentice Hall, 1993), pp. 358–62;
G. Matthews and B. Sharma, Management: A Pacific Rim Focus, 5th edn (Sydney: and D. M. Cable, L. Aiman-Smith, P. W. Mulvey and J. R. Edwards, ‘The Sources and
McGraw-Hill, 2008), p. 80. Accuracy of Job Applicants’ Beliefs about Organizational Culture’, Academy of
37 D. Samson and R. L. Daft, Management, 3rd Asia Pacific edn (Melbourne: Cengage, Management Journal, December 2000, pp. 1076–85.
2009), p. 99. 63 S. Banjoy and C. Passariello, ‘Promises in Bangladesh’, Wall Street Journal, 14 May
38 C. Williams and A. McWilliams, MGMT (Melbourne: Cengage, 2010), p. 53. 2013, pp. B1+; S. Greenhouse and J. Yardley, ‘Global Retailers Join Safety Plan for
39 ‘Our Mission’, Organization of the Petroleum Exporting Countries, <www.opec Bangladesh’, New York Times, 13 May 2013; A. Zimmerman and N. Shah, ‘Taste for
.org>, accessed 23 November 2010; ‘OPEC Share of World Crude Oil Reserves Cheap Clothes Fed Bangladesh Boom’, Wall Street Journal, 13 May 2013, pp. B1+; S.
2009’, Organization of the Petroleum Exporting Countries, <www.opec.org>, Zain Al-Mahmood, ‘Bangladesh to Raise Workers’ Pay’, Wall Street Journal, 13 May
accessed 23 November 2010; and ‘Member Countries’ Organization of the 2013, p. B4; J. Ali Manik and J. Yardley, ‘17 Days in Darkness, A Cry of “Save Me” and
Petroleum Exporting Countries, <www.opec.org/opec_web/en/about_us/25.htm>, Joy’, New York Times, 10 May 2013; S. Greenhouse, ‘Retailers Are Pressed on Safety at
accessed 2 January 2018 Factories’, New York Times, 10 May 2013; J. O’Donnell and C. Macleod, ‘Bangladesh
40 P. Davidson, A. Simon, P. Woods and R. W. Griffin, Management, 4th Australasian edn Fire Adds Pressure on Retailers’, USA Today, 10 May 2013, pp. 1B+; S. Zain Al-
(Brisbane: John Wiley & Sons, 2006), p. 151. Mahmood, K. Chu and S. Banjo, ‘Bangladesh Shuts 3 Factories of Top Exporter’, Wall
41 P. Davidson, A. Simon, P. Woods and R. W. Griffin, Management, 4th Australasian edn Street Journal, 10 May 2013, p. A8; S. Clifford, ‘Some Retailers Say More about Their
(Brisbane: John Wiley & Sons, 2006), p. 151. Clothing’s Origins’, New York Times, 8 May 2013; K. Chu, ‘Tough Options for Apparel
42 K. Bartol, M. Tein, G. Matthews and B. Sharma, Management: A Pacific Rim Focus, 5th Retailers’, Wall Street Journal, 8 May 2013, pp. B1+; ‘Clothing Retailers Evaluate
edn (Sydney: McGraw-Hill, 2008), p. 81. Moral Choices in Contracting Work to Bangladesh’, <www.globalethics.org>, 6 May
43 Based on M. A. Hitt, J. S. Black, L. W. Porter and D. Hanson, Management (Sydney: 2013; S. Wright and F. Hossain, ‘Pressure on Bangladesh, Retailers to Fix Factories’,
Pearson, 2007), p. 92. <www.sfgate.com>, 4 May 2013; S. Zain Al-Mahmood, C. Passariello and P. Rana,
44 P. Davidson, A. Simon, P. Woods and R. W. Griffin, Management, 4th Australasian edn ‘The Global Garment Trail: From Bangladesh to a Mall Near You’, Wall Street Journal,
(Brisbane: John Wiley & Sons, 2006), p. 153. 4–5 May 2013, pp. A1+; M. Mosk, ‘Big Retailers Reassess Practices after Bangladesh
45 G. Hamel, ‘Competition for Competence and Inter-partner Learning within Building Collapse’, <abcnews.go.com>, 3 May 2013; H. Malcolm, ‘Worker Safety Gains
International Strategic Alliances’, Strategic Management Journal, Summer Special Steam’, USA Today, 2 May 2013, p. 2B; E. L. Cline, ‘Ethical Fashion: Is the Tragedy in
Issue, 1991, pp. 83–103. Bangladesh a Final Straw?’, <www.npr.org>, 2 May 2013; M. Davies, ‘Can Bangladesh
46 C. Williams and A. McWilliams, MGMT (Melbourne: Cengage, 2010), p. 54. Clothing Factory Disasters Be Prevented?’, <www.bbc.co.uk>, 2 May 2013; S.
47 K. Bartol, M. Tein, G. Matthews and B. Sharma, Management: A Pacific Rim Focus, Greenhouse, ‘Bangladesh Fears an Exodus of Apparel Firms’, New York Times, 2 May
5th edn (Sydney: McGraw-Hill, 2008), p. 83. 2013; D. Bobkoff, ‘Would You Pay a Higher Price for Ethical Clothing?’, <www
48 T. Meelen and K. Frenken, ‘Stop Saying Uber Is Part of the Sharing Economy’, Fast .npr.org>, 1 May 2013; S. Zain Al-Mahmood, ‘Doomed Factories Raced to Fill Orders’,
Company, 14 January 2015; and ‘The Rise of the Sharing Economy’, The Economist, Wall Street Journal, 30 April 2013, pp. A1+; ‘Deadly Bangladesh Collapse Focuses
9 March 2013. Spotlight on Ethics and Demand for Cheap Goods’, <www.globalethics.org>, 29 April
49 ‘Airbnb, Snapgoods and 12 More Pioneers of the “Share Economy”’, Forbes, 23 June 2013; M. T. Anderson, ‘Clothed in Misery’, New York Times, 29 April 2013; R. L. Brown,
2014, <http://us.zilok.com/support/explanation/>, accessed 2 January 2018. ‘Q&A: Who Ultimately Bears Responsibility for Bangladesh Factory Disasters’, <www
50 N. Ungerleider, ‘This “Airbnb for Creative Equipment” Will Rent You Drones, Oculus .csmonitor.com>, 25 April 2013; J. Ali Manik, S. Greenhouse and J. Yardley, ‘Western
Rifts, Google Glass, More’, Fast Company, 6 March 2015. Firms Feel Pressure as Toll Rises in Bangladesh’, New York Times, 25 April 2013; and
51 P. Davidson, A. Simon, P. Woods and R. W. Griffin, Management, 4th Australasian edn S. Whyte, ‘Support for Unethical Clothing Wears Thin’, Sydney Morning Herald, 4 July
(Brisbane: John Wiley & Sons, 2006), p. 153. 2013.
52 This section based on K. Bartol, M. Tein, G. Matthews and B. Sharma, Management: 64 J. Allis, ‘Janine’s Success Story’, <www.boostjuice.com.au>, accessed 21 December
A Pacific Rim Focus, 5th edn (Sydney: McGraw-Hill, 2008), p. 86; and C. Williams and 2014; J. Allis, ‘Janine’s Philosophy’, <www.boostjuice.com.au>, accessed 21 December
A. McWilliams, MGMT (Melbourne: Cengage, 2010), p. 45. 2014; J. Allis, ‘About Boost Juice’, <www.boostjuice.com.au>, accessed 21 December
53 J. R. Hagerty, ‘Zippos Preps for a Post-Smoker World’, Wall Street Journal, 8 March 2014.
2011, p. B1.
9780655702412_CH15.indd 441 3/3/20 11:05 AM

Ethics and social responsibility
module: Managing socially responsible
and ethical behaviour
Ethics and social responsibility are important to a manager’ s job because society expects managers and
organisations to behave in ethical and socially responsible ways. In fact, many people make decisions
about which organisations they will work for,1 and even invest in,2 based on how socially responsible
those organisations are. In this module, we examine ways to define an organisation’s social responsibilities
and to encourage ethical behaviour by organisations and their members.
ESRM.1 Explain how organisations can define their social responsibilities.

How do organisations define their social responsibilities? p. 443
Learning ESRM.2 Review the arguments for and against social responsibility.
Objectives Should organisations be socially responsible? pp. 443–44
ESRM.3 Discuss the approaches that managers can use to define ethical courses of action.
How can managers identify the ethical thing to do? pp. 444–45
ESRM.4 Discuss factors that influence ethical and unethical behaviour.
What factors influence ethical and unethical behaviour? pp. 446–47
ESRM.5 Review methods that managers can use to encourage ethical behaviour.
How can managers encourage ethical behaviour? pp. 447–49
9780655702412_CH15A.indd 442 3/3/20 11:06 AM

Ethics and social responsibility module 443
How do organisations define their ESRM. 1

Explain how
social responsibilities? organisations can define
their social
When we talk about social responsibility — also known as corporate social responsibility (CSR) — we mean responsibilities.
an organisation’s intentions to go beyond its legal and economic obligations to act in ways that are good
for society. There are three main stances an organisation can take about its social responsibilities: (1)
meeting social obligations, (2) being socially responsive or (3) being socially responsible.
Organisations that meet social obligations define their social responsibilities only in terms of doing
what the law requires or what is necessary to meet their economic goals. For example, they might minimise
waste emissions to meet national pollution standards, but only because the law says they must. The social
obligation stance corresponds with the purely economic or classical view that management’s only social
responsibility is to maximise profits. But the scandals and backlashes that erupt when companies do
sacrifice social good for profits have produced the socioeconomic view of social responsibility, which
holds that management’s responsibility goes beyond making profits to include protecting and improving
society’s welfare.3 How far an organisation takes these responsibilities depends on whether it’s being
socially responsive or socially responsible.
Organisations that are socially responsive engage in social actions because there is demand for
them and even social pressure to provide them. Managers in these companies are guided by social norms
and values and make practical, market-oriented decisions about their actions.4 A company that packages
its products using recycled paper is being socially responsive because environmentalists have demanded
such actions.
Organisations that are socially responsible engage in social actions because they are actively trying to
have a positive impact on society, either by minimising harm (e.g. by reducing carbon emissions) or by
doing something positive for society (e.g. providing paid leave for employees who do volunteer work).
Should organisations be socially ESRM. 2

Review the arguments
responsible? for and against social
responsibility.
Good arguments can be made for and against businesses being socially responsible (see Figure
ESRM.1). Numerous studies have found that social involvement positively affects a company’s economic
performance.6 However, no generalisable conclusions can be made because the relationship is affected
by various contextual factors such as company size, industry, economic
conditions and regulatory environment.7 It’s also not clear whether social
involvement causes higher economic performance or whether companies
with high profits can then afford the ‘luxury’ of being socially involved.8 In
fact, one review found that if the flawed empirical analyses in these studies
were ‘corrected’, social responsibility had a neutral impact on a company’s
financial performance.9 Another found that participating in social issues not
related to the organisation’s primary stakeholders had a negative effect on
shareholder value.10 Despite all these concerns, after re-analysing several
studies, other researchers concluded that managers can afford to be (and Enterprises such as STREAT are highly socially
should be) socially responsible.11 responsible because they engage in business activities
in order to have positive social impacts. STREAT
The more relevant consideration for today’s organisations may be that
operates cafes around Melbourne to provide training
those that aren’t at least socially responsive will find it increasingly hard to and work experience for up to 250 disadvantaged
obtain and keep the support of customers and employees. They may also young people each year to help them become ‘job
find themselves overtaken by more socially involved rivals. So, the final ready’, employable and independent.5
Angela Wylie/Fairfax
answer may be that organisations should be socially responsible because
they can’t afford not to be!
9780655702412_CH15A.indd 443 3/3/20 11:06 AM

FOR AGAINST
Public expectations
Public opinion now supports businesses pursuing
economic and social goals.
Long-run profits
Socially responsible companies tend to have Violation of
more secure long-run profits. profit maximisation
Business is being socially
Ethical obligation responsible only when
Businesses should be socially responsible because it pursues its economic
responsible actions are the right thing to do. interests.
Public image Dilution
Businesses can create a favourable public image of purpose
by pursuing social goals. Pursuing social
goals dilutes
Better environment business’s primary
Business involvement can help solve difficult purpose – economic
social problems. productivity.
Discouragement of further Costs
governmental regulation Many socially
By becoming socially responsible, businesses responsible actions don’t
can expect less government regulation. cover their costs
Balance of responsibility and power and someone must
Businesses have a lot of power and an equally pay those costs.
large amount of responsibility is needed to Too much power
balance against that power. Businesses have a lot
Shareholder interests of power already;
Social responsibility will improve a business’s if they pursue social
share price in the long run. goals, they will have
even more.
Possession of resources
Businesses have the resources to support public Lack of skills
and charitable projects that need assistance. Business leaders lack
the necessary skills to
Superiority of prevention over cures address social issues.
Businesses should address social problems
before they become serious and costly to correct. Lack of accountability
There are no direct
lines of accountability
for social actions.
Figure ESRM.1 Arguments for and against social responsibility

Source: S. P. Robbins and M. Coulter, Management, 13th edn, © 2016, p. 154. Reprinted and electronically reproduced by permission of Pearson
Education, Inc., New York.
How can managers identify the ethical

ESRM. 3
thing to do?
Discuss the approaches However organisations define their social responsibilities, they are still expected to operate ethically.
that managers can use Deciding how to behave ethically involves three steps: (1) defining the dilemma or ‘problem’ you are
to define ethical trying to solve; (2) identifying the stakeholders affected by the decision being made; and (3) using ethical
courses of action.
principles to determine how to behave ethically towards them. To illustrate, let’s consider the following
situation.
9780655702412_CH15A.indd 444 3/3/20 11:06 AM

Your organisation has a clear policy not to compensate employees for overtime. Last weekend, several
members of the team you manage worked all weekend to complete an important project. Would it be
unethical to tell these employees that they can take two ‘sick’ days to make up for their lost weekend?12
Step one is to determine the dilemma or ‘problem’. In this scenario the ‘problem’ is that team
members have worked overtime without being rewarded for their extra efforts. The dilemma is whether
to tell those team members to claim ‘sick’ days as compensation for the overtime worked.
Step two is to identify the stakeholders affected by this decision. In this scenario the stakeholders
are the team members who worked over the weekend and would get the sick days, the other team
members who didn’t work over the weekend and so wouldn’t get the sick days, the other employees
in the organisation who weren’t compensated for working overtime, and the managers of those other
employees.
Step three is to apply ethical principles to determine which course of action, if any, would be the most
ethical. Ethics commonly refers to a set of rules or principles that defines right and wrong conduct.13 In
this section, we discuss three main views of ethical behaviour and explain how managers can apply each
perspective to determine the most ethical action to take.14
Ethical perspectives
The utilitarian view of ethics defines ethical behaviour solely on the basis of outcomes or consequences.
The goal of utilitarianism is to provide the greatest good for the greatest number. The utilitarian view of
this dilemma would consider whether telling your team members to take the extra sick days created the
greatest good for the greatest number. If you did so, you would be creating good for the employees who
worked over the weekend but not for any of the other stakeholders. This option clearly isn’t creating the
greatest good for the greatest number, so you shouldn’t do it.
The rights view of ethics defines ethical behaviour as behaviour that respects and protects people’s
individual liberties and privileges, including the rights to privacy, freedom of conscience, free speech and
due process. The goal of the rights view is to avoid interfering with the rights of others who might be
affected by the decision. To apply the rights view of ethics to this situation, you would need to determine
whether a course of action compromises anyone’s individual rights and freedoms and to discard it if it
does. But it all depends on what rights you consider. If, for example, you consider that every employee
has a right to be treated equally, it would be ethical to tell employees they could take the extra sick days
only if that maintained everyone’s right to equal treatment. In this situation, not everyone is being treated
equally: some are being compensated for overtime and others are not. So, it wouldn’t be ethical to give
out the extra sick days.
The justice view of ethics focuses on choosing actions that fulfil principles of procedural, distributive
and compensatory justice. Procedural justice requires that decision processes need to be consented to
by those affected and to be administered impartially. In this case, employees who will be affected by
your decision to award extra sick days haven’t consented to this process, so it doesn’t have procedural
justice. Distributive justice requires that rewards and punishments be distributed equitably and based
on performance. In this case, it would mean that everyone who worked overtime should get extra sick
days. Since they won’t, that’s not distributive justice. Compensatory justice requires that if distributive
or procedural justice is compromised, those injured by the inequitable distribution of rewards should be
compensated. But, in fact, you would be creating an unequal distribution because only the people who
worked over that weekend would get the extra sick days. So, according to the justice view, you shouldn’t
award the extra sick days.
9780655702412_CH15A.indd 445 3/3/20 11:06 AM

What factors influence ethical

and unethical behaviour?
ESRM. 4 How people behave when they face an ethical dilemma is influenced by their stage of moral development,
Discuss factors that
influence ethical and their personal characteristics, their ethical principles, the intensity of the issue, the organisation’s structure
unethical behaviour. and its culture (see Figure ESRM.2).
The stage of a person’s moral development will influence how they evaluate ethical options and their
reasoning about what they should do and why. Research indicates that as people develop their moral
judgment, they change the way they determine the ‘right’ thing to do.15 Initially, they may define the
‘right’ course of action as the one that best serves their own self-interest by helping them to meet the
expectations of authority figures, avoid getting punished for doing the ‘wrong’ thing or get rewarded
for doing the ‘right’ thing. As their moral judgment develops, they define what is ‘right’ according to
what other people think, whether these are the views of family members or role models, or the views of
society that are defined in rules and law. People with highly developed moral judgment determine the
‘right’ thing to do by using guiding principles they adopt for themselves, which may be universally held
principles of rights and justice or their own personal ethical principles.
A person’s stage of moral development will also determine whether they perceive that there even is an
ethical dilemma to resolve. Consider the following situation.
These days, companies can capture data about people any time they access a website, post on social
media, do a search or purchase something online. But some companies have taken their use of such
digital information into some pretty grey areas. Facebook, for example, manipulated news feeds of more
than half a million randomly selected users to see how emotions spread on social media. Google, Yahoo,
Amazon and others also manipulate and analyse this data, all under the guise of ‘improving the user
experience’.16
Ethical
dilemma
Issue characteristics
Issue intensity
Personal characteristics
Stage of moral development
Individual characteristics
Ethical principles
Organisational
characteristics
Organisational culture
Organisational structure
Un ha
vi l
ha ica
r
be
ou
et vio
be Eth
hi ur
ca
l
Figure ESRM.2 Factors that affect ethical and unethical behaviour
9780655702412_CH15A.indd 446 3/3/20 11:06 AM

For some people, the potential uses and abuses of big data raise big ethical questions. Is it ethical to
‘race to the bottom of the brainstem’ and use technology to manipulate how people feel?17 Others have
argued, however, that the technology of data analytics itself is ‘ethics-free’; it’s how the technology is used
that ethical concerns lie.18
Characteristics such as an individual’s personality also affect how they handle ethical dilemmas. For
example, studies have found that a person’s levels of empathy and narcissism affect their likelihood of
engaging in ethical decision making and that each of the Big Five personality variables (agreeableness,
conscientiousness, emotional stability, extroversion and openness to experience) influences how people
behave as ethical leaders.19
As we noted earlier, the specific ethical principles a person uses will also influence what they define
as ‘ethical’ behaviour. For example, many Asian cultures subscribe to Confucian ethics. Confucian ethics
define morally acceptable behaviour as characterised by compassion for fellow human beings (ren),
moral righteousness (yi), observing correct etiquette and protocols when taking action (li), wisdom and
trustworthiness. Moreover, Confucian ethics emphasise harmony, social relationships and obligations,
reciprocity and a focus on what’s best for society rather than what’s in the best interests of an individual
person.20 So, a person holding Confucian ethical values would hold very different views of ethical
behaviour than, say, a person adopting utilitarian ethical principles.
The intensity of the issue is another influence on how people deal with ethical dilemmas. Issue
intensity is determined by six characteristics:21
• the amount of harm (or good) that is caused by the action
• how many people will be affected
• the likelihood that the action will actually cause the harm or good we expect
• how much time we expect will occur before the consequences of the action are felt
• the degree of consensus that the action is wrong
• how closely connected the decision maker feels to the people who are affected.
How closely involved
The stronger each of these characteristics is, the more intense the issue will be. or affected a person
The organisation’s structure can influence how people handle ethical dilemmas by influencing the is by an ethical issue
type of dilemmas they face and the guidance they have in dealing with them. Formal organisational affects how they will
handle it. For example,
structures for assigning roles and responsibilities, managing performance and allocating rewards affect a decision about laying
whether people make ethical choices by influencing the incentives and rewards for behaving in an ethical off local staff has
manner.22 We explain more about how this occurs in Chapter 18. more intensity than a
decision to lay off staff
Organisational culture affects how people handle ethical dilemmas because, as we noted in Chapter 15,
who work in other
the culture defines how people should behave. If the culture emphasises ‘winning at all costs’, then countries.
individuals are more likely to engage in unethical behaviour. Conversely, if the culture stresses ethical Chris Lenfert /Shutterstock
values and behaviours, then employees are more likely to make ethical choices.
How can managers encourage ethical

behaviour?
Managers can encourage ethical behaviour by hiring employees with high ethical standards but they can
also foster ethical actions by establishing codes of ethics, leading by example, providing ethics training,
and implementing protective mechanisms for employees who face ethical dilemmas.
Codes of ethics ESRM. 5

Review methods that
Codes of ethics are popular tools for attempting to reduce ambiguity about what’s ethical and what’s managers can use to
not.23 A code of ethics is a formal document that states an organisation’s primary values and the ethical encourage ethical
rules it expects managers and non-managerial employees to follow. Ideally, these codes should be specific behaviour.
9780655702412_CH15A.indd 447 3/3/20 11:06 AM

enough to guide organisational members in what they’re supposed to do, yet loose enough to allow for
freedom of judgment. Research shows that 97 per cent of organisations with more than 10,000 employees
have written codes of ethics. Even in smaller organisations, nearly 93 per cent have them.24
Developing a code of ethics for an organisation that operates in multiple countries and cultural
systems is complex. Because ethical principles differ in different countries, managers need to understand
how views of ethical behaviour might differ, and how to deal with those differences. Moreover, they must
also decide whose view of ‘ethical’ behaviour should determine organisational actions. For example, when
managers encounter practices that are ethical in the local culture but unethical according to their home
country, they have to decide whether to adopt the ethical principles of the local culture or apply those of
their home country.
The effectiveness of codes of ethics depends heavily on whether management supports them
and ingrains them into the corporate culture, and how individuals who break the codes are treated.25
If management considers them to be important, regularly reaffirms their content, follows the rules
themselves and publicly reprimands rule breakers, ethics codes can be a strong foundation for an effective
corporate ethics program.26
Ethical leadership
As a manager, what you do is far more important than what you say in getting employees to act ethically.
For example, if managers take company resources for their personal use, or give some employees special
favours, they imply that such behaviour is acceptable for everyone. Managers also set the tone by their
reward and punishment practices. When an employee is rewarded for achieving impressive results in an
ethically questionable manner, it indicates to others that those ways are acceptable. When an employee
does something unethical, managers must discipline the offender and publicise the fact by making the
outcome visible to everyone in the organisation. This practice sends a message that doing wrong has a
price and it’s not in employees’ best interests to act unethically! (See Figure ESRM.3 for suggestions on
being an ethical leader.)
Ethics training
Many organisations use ethics training programs to encourage ethical behaviour. For example, Yahoo!
has developed an animated and interactive ethics training module that explains the company’s code of
conduct, provides resources to help employees understand it, and outlines scenarios that employees
might face that require ethical judgment.27 Critics of ethics training programs argue that people establish
their individual value systems when they’re young, so these are set before they become organisational
members. However, several studies have shown that values can be learned after early childhood, that
teaching ethical problem solving can make an actual difference in ethical behaviours,28 that training has
increased individuals’ level of moral development,29 and that ethics training increases awareness of ethical
issues in business.30
• Be a good role model by being ethical and honest.

• Tell the truth always.
• Don’t hide or manipulate information.
• Be willing to admit your failures.
• Share your personal values by regularly communicating them to employees.
• Stress the organisation’s or team’s important shared values.
• Use the reward system to hold everyone accountable to the values.
Figure ESRM.3 Being an ethical leader
9780655702412_CH15A.indd 448 3/3/20 11:06 AM

Formal protective mechanisms

Formal protective mechanisms that protect and guide employees dealing with ethical dilemmas
help encourage and improve ethical behaviour. For example, an appointed ethics officer can
help employees who face a dilemma to talk out the situation they face and the options they
have, and may even champion the most ethical alternatives. Ethics hotlines and protection
for people who do ‘blow the whistle’ (whistle-blowers) on unethical practices help identify
unethical behaviour and signal that the organisation is really committed to ethical conduct.
Organisational rules and policies can guide ethical behaviour, but they can’t cover every
situation that requires ethical judgment.32 Fundamentally, improving ethical conduct in any
organisation relies on all employees, managers and non-managerial employees developing
their skills in making ethical choices. Here are some strategies you can use to make more
ethical choices.
• Know your organisation’s policy on ethics. This policy will help you to clarify what is
permissible and the managerial discretion you have. It becomes YOUR code of How an organisation treats
ethics. whistle-blowers sends an
important signal about its
• Understand the ethics policy. Just having the policy in your hand doesn’t guarantee emphasis on ethical behaviour.31
that it will achieve what it’s intended to do. You need to fully understand it. If the Toni Hoffman was ignored, then
policy doesn’t exist, or doesn’t cover the situation you face, you can still take ostracised, at Bundaberg Hospital
in Queensland for blowing the
several steps before you deal with the ethical dilemma.
whistle on Dr Jayant Patel for
• Think before you act. Ask yourself, ‘Why am I going to do what I’m about to do? Is performing unnecessary surgery,
my reason valid? falsifying medical records and
being criminally careless in surgical
• Will my action injure someone? Would I disclose to my boss or my family what I’m practices. However, a formal
going to do?’ Remember, it’s your behaviour and your actions. You need to make inquiry into Patel’s behaviour
sure that you’re not doing something that will jeopardise your role as a manager, found that Hoffman’s actions had
prevented further tragedies.
your organisation or your reputation.
Lyndon Mechielsen/Newspix © News Ltd
• Ask yourself what-if questions. Use the following questions to help shape your
actions: ‘What if I make the wrong decision? What will happen to me? To my job?
What if my actions were described, in detail, on the local TV news or in the
newspaper? Would it bother or embarrass me or those around me? What if I get caught
doing something unethical? Am I prepared to deal with the consequences?’
• Seek opinions from others. You can also ask for advice from other managers. Maybe they’ve
been in a similar situation and can share the benefit of their experience. Or maybe they can
just listen and act as a sounding board for you.
• Do what you truly believe is right. You have a conscience, and you are responsible for your
behaviour. Whatever you do, if you truly believe it was the right action to take, then what
others say is immaterial. You need to be true to your own internal ethical standards. Ask
yourself: ‘Can I live with what I’ve done?’
9780655702412_CH15A.indd 449 3/3/20 11:06 AM

code of ethics ethics social obligations socially responsive

A formal document that states A set of rules or principles that When a business engages in When a business engages in
an organisation’s primary defines right and wrong social actions because of its social actions in response to
values and the ethical rules it conduct. obligation to meet certain some popular social need.
expects managers and economic and legal
non-managerial employees to narcissism responsibilities. whistle-blower
follow. The degree to which people A person who raises a concern
focus on themselves and their social responsibility about wrongdoing by an
empathy own interests ahead of those A business’s intentions, organisation or a group of
The ability to understand other of other people. beyond its legal and economic people within it.
people’s needs. obligations, to do the right
things and act in ways that are
good for society.
9780655702412_CH15A.indd 450 3/3/20 11:06 AM

References
1 R. Sroufe and D. Ramos, ‘MBA Program Trends and Best Practices in Teaching 14 This section based on G. F. Cavanaugh, D. J. Moberg and M. Valasquez, ‘The Ethics of
Sustainability: Live Project Courses’, Decision Sciences Journal of Innovative Education, Organizational Politics’, Academy of Management Journal, June 1981, pp. 363–74;
September 2011, pp. 349–69. and M. A. Hitt, J. S. Black, L. W. Porter and D. Hanson, Management (Sydney: Pearson,
2 Responsible Investment Association Australasia, ‘What Is Responsible 2007), pp. 153–6.
Investment?’, <www.responsibleinvestment.org>, accessed 22 February 2013. 15 This section based on L. K. Treviño, G. R. Weaver and S. J. Reynolds, ‘Behavioral Ethics
3 See, for example, N. A. Ibrahim, J. P. Angelidis and D. P. Howell, ‘The Corporate Social in Organizations: A Review’, Journal of Management, December 2006, pp. 951–90;
Responsiveness Orientation of Hospital Directors: Does Occupational Background and S. Robbins, R. Bergman, I. Stagg and M. Coulter, Management, 6th edn (Sydney:
Make a Difference?’, Health Care Management Review, Spring 2000, pp. 85–92. Pearson, 2012), p. 181.
4 See, for example, D. J. Wood, ‘Corporate Social Performance Revisited’, Academy of 16 V. Goel, ‘Facebook Tinkers with Users’ Emotions in News Feed Experiment, Stirring
Management Review, October 1991, pp. 703–8; and S. L. Wartick and P. L. Cochran, Outcry’, New York Times Online, 29 June 2014.
‘The Evolution of the Corporate Social Performance Model’, Academy of Management 17 A. Cooper, ‘What Is “Brain Hacking”? Tech Insiders on Why You Should Care’, 60
Review, October 1985, p. 763. Minutes, 9 April 2017.
5 ‘STREAT: Opening up Investment for all with STREAT’s Newest Venture’, Social 18 S. Robbins, M. Coulter and D. A. Decenzo, Fundamentals of Management, 10th edn
Enterprise Awards, <http://socialenterpriseawards.com.au/streat/>, accessed 19 (Boston: Pearson, 2017), p. 72.
November 2017. 19 T. A. Brown, J. A. Sautter, L. Littvay, A. C. Sautter and B. Bearners, ‘Ethics and Personality:
6 See, for example, R. Lacy and P. A. Kennett-Hensel, ‘Longitudinal Effects of Corporate Empathy and Narcissism as Moderators of Ethical Decision Making in Business Students’,
Social Responsibility on Customer Relationships’, Journal of Business Ethics, December Journal of Education for Business, vol. 85, no. 4 (2010), pp. 203–8; and K. Kalshoven,
2010, pp. 581–97; S. Arendt and M. Brettel, ‘Understanding the Influence of Corporate D. N. Den Hartog and A. H. B. De Hoogh, ‘Ethical Leader Behavior and Big Five Factors of
Social Responsibility on Corporate Identity, Image and Firm Performance’, Management Personality’, Journal of Business Ethics, May 2011, pp. 349–66.
Decision, vol. 48, no. 10 (2010), pp. 1469–92; J. Peloza, ‘The Challenge of Measuring 20 Explanation of Confucian ethics based on P. K. Ip, ‘Is Confucianism Good for Business
Financial Impacts from Investments in Corporate Social Performance’, Journal of Ethics in China?’, Journal of Business Ethics, September 2009, pp. 463–76.
Management, December 2009, pp. 1518–41; J. D. Margolis and H. Anger Elfenbein, 21 Explanation based on S. Robbins, R. Bergman, I. Stagg and M. Coulter, Management,
‘Do Well by Doing Good? Don’t Count on It’, Harvard Business Review, January 6th edn (Sydney: Pearson, 2012), pp. 185–6.
2008, pp. 19–20; M. L. Barnett, ‘Stakeholder Influence Capacity and the Variability 22 H. S. James, ‘Reinforcing Ethical Decision Making through Organisational Structure’,
of Financial Returns to Corporate Social Responsibility’, Academy of Management Journal of Business Ethics, November 2000, pp. 43–58.
Review, July 2007, pp. 794–816; D. O. Neubaum and S. A. Zahra, ‘Institutional 23 D. H. Schepers, ‘Setting Global Standards: Guidelines for Creating Codes of Conduct
Ownership and Corporate Social Performance: The Moderating Effects of Investment in Multinational Corporations’, Business and Society, December 2003, p. 496; and
Horizon, Activism and Coordination’, Journal of Management, February 2006, B. R. Gaummitz and J. C. Lere, ‘Contents of Codes of Ethics of Professional Business
pp. 108–31; B. A. Waddock and S. B. Graves, ‘The Corporate Social Performance– Organizations in the United States’, Journal of Business Ethics, January 2002, pp. 35–49.
Financial Performance Link’, Strategic Management Journal, April 1997, pp. 303–19; 24 M. Weinstein, ‘Survey Says: Ethics Training Works’, Training, November 2005, p. 15.
J. B. McGuire, A. Sundgren and T. Schneeweis, ‘Corporate Social Responsibility and 25 T. F. Shea, ‘Employees’ Report Card on Supervisors’ Ethics: No Improvement’, HR
Firm Financial Performance’, Academy of Management Journal, December 1988, Magazine, April 2002, p. 29.
pp. 854–72; K. Aupperle, A. B. Carroll and J. D. Hatfield, ‘An Empirical Examination of 26 See also A. G. Peace, J. Weber, K. S. Hartzel and J. Nightingale, ‘Ethical Issues in
the Relationship between Corporate Social Responsibility and Profitability’, Academy eBusiness: A Proposal for Creating the eBusiness Principles’, Business and Society
of Management Journal, June 1985, pp. 446–63; and P. Cochran and R. A. Wood, Review, Spring 2002, pp. 41–60.
‘Corporate Social Responsibility and Financial Performance’, Academy of Management 27 E. Finkel, ‘Yahoo Takes New “Road” on Ethics Training’, Workforce Management
Journal, March 1984, pp. 42–56. Online, July 2010.
7 J. Peloza, ‘The Challenge of Measuring Financial Impacts from Investments in Corporate 28 T. A. Gavin, ‘Ethics Education’, Internal Auditor, April 1989, pp. 54–7.
Social Performance’, Journal of Management, December 2009, pp. 1518–41. 29 L. Myyry and K. Helkama, ‘The Role of Value Priorities and Professional Ethics Training
8 B. Seifert, S. A. Morris and B. R. Bartkus, ‘Having, Giving and Getting: Slack Resources, in Moral Sensitivity’, Journal of Moral Education, vol. 31, no. 1 (2002), pp. 35–50;
Corporate Philanthropy and Firm Financial Performance’, Business & Society, June and W. Penn and B. D. Collier, ‘Current Research in Moral Development as a Decision
2004, pp. 135–61; and J. B. McGuire, A. Sundgren and T. Schneeweis, ‘Corporate Social Support System’, Journal of Business Ethics, January 1985, pp. 131–6.
Responsibility and Firm Financial Performance’, Academy of Management Journal, 30 J. A. Byrne, ‘After Enron: The Ideal Corporation’, BusinessWeek, 19 August 2002,
December 1988, pp. 854–72. pp. 68–71; D. Rice and C. Dreilinger, ‘Rights and Wrongs of Ethics Training’, Training &
9 A. McWilliams and D. Siegel, ‘Corporate Social Responsibility and Financial Development Journal, May 1990, pp. 103–9; and J. Weber, ‘Measuring the Impact of
Performance: Correlation or Misspecification?’, Strategic Management Journal, June Teaching Ethics to Future Managers: A Review, Assessment and Recommendations’,
2000, pp. 603–9. Journal of Business Ethics, April 1990, pp. 182–90.
10 A. J. Hillman and G. D. Keim, ‘Shareholder Value, Stakeholder Management and Social 31 Based on H. Thomas, ‘Jayant Patel Whistleblower “Treated Like a Leper” by Queensland
Issues: What’s the Bottom Line?’, Strategic Management Journal, vol. 22 (2001), Health’, The Australian, 16 December 2011; and R. Sandall, ‘Doctor Death in
pp. 125–39. Bundaberg’, Quadrant, December 2005.
11 M. Orlitzky, F. L. Schmidt and S. L. Rynes, ‘Corporate Social and Financial Performance’, 32 X. Deroy and S. Clegg, ‘When Events Interact with Business Ethics’, Organization, vol.
Organization Studies, vol. 24, no. 3 (2003), pp. 403–41. 18, no. 5 (2011), pp. 637–53.
12 This example based on J. F. Viega, T. D. Golden and K. Dechant, ‘Why Managers Bend
Company Rules’, Academy of Management Executive, May 2004, pp. 84–90.
13 S. A. DiPiazza, ‘Ethics in Action’, Executive Excellence, January 2002, pp. 15–16.
9780655702412_CH15A.indd 451 3/3/20 11:06 AM

9780655702412_CH15A.indd 452 3/3/20 11:06 AM

SESSION Managing the
8
business
• Foundations of planning
• Foundations of decision making
9780655702412_CH16.indd 453 3/3/20 11:07 AM

Chapter
16 Foundations of planning
We have long heard that the future is unpredictable. No matter how well you plan, there’s always the
unexpected. For managers it might be a sudden recession, a new and innovative product from a competitor,
the loss of a key customer or a key employee, or the breakdown of a long-established business model. This
logic has led many to conclude that planning is a waste of time. Well, it’s not. Planning isn’t, and doesn’t
need to be, rigid. For example, flexible planning that includes multiple scenarios can prepare managers for
a variety of situations.
As we learned earlier in Chapter 14, organisations have a purpose, people and a structure that supports
and enables those people to carry out that purpose. So, managers must develop goals, plans and strategies
for how best to achieve that purpose. However, sometimes after evaluating the outcomes of those plans
and strategies, managers have to change direction as conditions change. This chapter presents the basics of
planning. You’ll learn what planning is, how managers use strategic management, and how they set goals
and establish plans. Finally, we’ll look at some of the contemporary planning issues managers face.
Learning Objective 1 Discuss the nature and purposes of planning.

What is planning, and why do managers need to plan? pp. 456–58
Learning Learning Objective 2 Explain what managers do in the strategic management process.
Objectives What do managers need to know about strategic management? pp. 459–62
Learning Objective 3 Discuss contemporary issues in planning.
What contemporary planning issues do managers face? pp. 463–64
9780655702412_CH16.indd 454 3/3/20 11:07 AM

Chapter 16 Foundations of planning 455
LO 1
Discuss the nature
and purposes of
planning. fact or fiction?
LO 2
Explain what
Planning is a waste of time,
managers do
in the strategic
management
because no one can predict
process.
the future.
LO 3
Discuss
contemporary issues
fiction
in planning.
9780655702412_CH16.indd 455 3/3/20 11:07 AM

456 Session 8 Managing the business
What is planning, and why

do managers need to plan?
All managers plan.
Planning is often called the primary management function because it establishes the basis for all the
other things managers do as they organise, lead and control. As we said in Chapter 14, planning involves
defining the organisation’s objectives or goals, establishing an overall strategy for achieving those goals, and
developing a comprehensive hierarchy of plans to integrate and coordinate activities. It’s concerned with
ends (what is to be done) as well as with means (how it’s to be done).
Planning can be further defined in terms of whether it’s formal or informal. All managers plan,
even if it’s only informally. In informal planning, very little, if anything, is written down. What is to
be accomplished is in the heads of one or a few people. Furthermore, the organisation’s goals are
rarely verbalised. Informal planning generally describes the planning that takes place in many smaller
businesses. The owner–manager has an idea of where they want to go and how they expect to get there.
The planning is general and lacks continuity. Of course, you’ll see informal planning in some large
organisations, while some small businesses will have sophisticated formal plans.
When we use the term planning in this book, we’re referring to formal planning. Formal planning
means (1) defining specific goals covering a specific time period, (2) writing down these goals and making
them available to organisation members, and (3) using these goals to develop specific plans that clearly
define the path the organisation will take to get from where it is to where it wants to be.
Why should managers formally plan?

How does McDonald’s – with over 34,500 restaurants in 119 countries serving nearly 68 million
customers every day – do what it does, and do it well and consistently? The key is its Plan to
Win, which is built on three components: operational excellence, being the leader in marketing and
continual product innovation. McDonald’s managers – from corporate to individual stores – know
that planning is vital to the company’s continued success.
There are at least four reasons why managers should plan (see Figure 16.1). First, planning establishes
coordinated effort. It gives direction to managers and non-managerial employees. When all organisational
members understand where the organisation is going and what they must contribute to reach the goals,
they can begin to coordinate their activities, thus fostering teamwork and cooperation. On the other hand,
not planning can cause organisational members or work units to work against one another and keep the
organisation from moving efficiently towards its goals.
Second, planning reduces uncertainty by forcing managers to look ahead, anticipate change, consider
the impact of change and develop appropriate responses. It also clarifies the consequences of the actions
managers might take in response to change. Planning, then, is precisely what managers need in a changing
environment.
Third, planning reduces overlapping and wasteful activities. Coordinating efforts and responsibilities
before the fact is likely to uncover waste and redundancy. Furthermore, when means and ends are clear,
inefficiencies become obvious.
Finally, planning establishes the goals or standards that facilitate control. If organisational members aren’t
sure what they’re working towards, how can they assess whether they’ve achieved it? When managers plan,
they develop goals and plans. When they control, they see whether the plans have been carried out and the
goals met. If significant deviations are identified, corrective action can be taken. Without planning, there
are no goals against which to measure or evaluate work efforts.
9780655702412_CH16.indd 456 3/3/20 11:07 AM

es in the envir
f chang onm
ause o ent
Bec
Set the standards Provide

to facilitate control direction
Managers
engage in
planning to:
Minimise waste Reduce the impact

and redundancy of change
Figure 16.1 Reasons for planning
What are some criticisms of formal planning,

and how should managers respond?
It makes sense for an organisation to establish goals and direction, but critics have challenged some of the
basic assumptions of planning.1
Criticism: Planning may create rigidity. Formal planning efforts can lock an organisation
into specific goals to be achieved within specific timetables. Such goals may have been set
under the assumption that the environment wouldn’t change. Forcing a course of action
when the environment is random and unpredictable can be a recipe for disaster.
Manager’s response: Managers need to remain f lexible and not be tied to a course of
action simply because it’s the plan.
Criticism: Formal plans can’t replace intuition and creativity. Successful organisations are
typically the result of someone’s vision, but these visions have a tendency to become
formalised as they evolve. If formal planning efforts reduce the vision to a programmed
routine, that too can lead to disaster.
Manager’s response: Planning should enhance and support intuition and creativity, not
replace it.
Criticism: Planning focuses managers’ attention on today’s competition, not on tomorrow’s survival.
Formal planning, especially strategic planning (which we’ll discuss shortly), has a tendency to
focus on how best to capitalise on existing business opportunities within the industry.
Managers may not look at ways to re-create or reinvent the industry.
Manager’s response: When managers plan, they should be open to forging into
uncharted waters if there are untapped opportunities.
Criticism: Formal planning reinforces success, which may lead to failure. You may have heard
people say that success breeds success. After all, if it’s not broken, don’t fix it. Right? Well
9780655702412_CH16.indd 457 3/3/20 11:07 AM

Planning for a more sustainable future

The benefits of formal planning are especially relevant to managing for decisions based on a supplier’s sustainability efforts. As sustainability
sustainability: manager for Focus Press, a Sydney-based printing company, Louise
• Formal planning processes help managers and employees to develop Pastro witnessed this first hand. ‘Sustainability has crept up the list of
a shared understanding of the organisation’s sustainability goals and supplier requirements,’ she recalled.‘People used to buy print based on
priorities. price, quality, service and those sorts of things, but in the past few years
• By enabling coordinated effort, formal planning helps organisational we’ve seen a change … over 90 per cent of tender request documents
members to work together to manage the impact of the have some sort of question related to environmental impact.’
organisation’s activities. Other organisations, such as footwear manufacturer Okabashi,
• By improving the organisation’s capacity to deal with change, formal have found that planning around sustainability provides advantages
planning helps organisational members to deal more effectively with over rival companies. Unlike other footwear manufacturers, Okabashi
issues that can affect sustainability outcomes. makes shoes using a soy-based material that can be reused.This means
• By reducing overlapping and wasteful activities, formal planning helps the materials from any shoes that don’t meet quality standards can be
the organisation to use resources in a more sustainable manner. repurposed to make new shoes, which actually last longer than ones
• By establishing the goals and standards that facilitate control, formal made without recycled material. Minimising waste in this way has
planning helps organisations to continuously monitor and improve helped the company to reduce its business costs and enhance
their handling of sustainability issues. sustainability, and also to improve productivity. For example, it was
But there’s one more benefit to formal planning for sustainability recently able to fill an order for 30,000 pairs of sandals in only three
and that is helping the organisation to be more competitive. 2 Many weeks!3.
organisations are finding that customers are increasingly making
maybe not! Success may, in fact, breed failure in an uncertain environment. It’s hard to
change or discard successful plans—to leave the comfort of what works for the uncertainty
(and anxiety) of the unknown.
Manager’s response: Managers may need to face that unknown and be open to doing
things in new ways to be even more successful.
Does formal planning improve organisational

performance?
DOES it PAY to PLAN?
Does it pay to plan? Or have the critics of planning won the debate? Let’s look at the evidence.
Contrary to what the critics of planning say, the evidence generally supports the position that organisations
should have formal plans. Although most studies that have looked at the relationship between planning and
performance have shown generally positive relationships, we can’t say that organisations that formally plan
always outperform those that don’t.4 But what can we conclude?
● Formal planning generally means higher profits, higher return on assets and other positive
financial results.
● The quality of the planning process and the appropriate implementation of the plan probably
contribute more to high performance than does the extent of planning.
● In those organisations where formal planning didn’t lead to higher performance, the
environment—for example, governmental regulations, unforeseen economic challenges and so
forth—was often to blame. Why? Because managers have fewer viable alternatives.
One important aspect of an organisation’s formal planning is strategic planning, which managers do as
part of the strategic management process.
9780655702412_CH16.indd 458 3/3/20 11:07 AM

What do managers need to know

about strategic management?
What is strategic management?
Strategic management is what managers do to develop an organisation’s strategies. What are an strategic
organisation’s strategies? They’re the plans for how the organisation will do what it’s in business to do, management
What managers
how it will compete successfully, and how it will attract and satisfy its customers in order to achieve its goals.
do to develop an
organisation’s strategies
Why is strategic management important?
Strategic management is important because it can make a difference in how well an organisation performs. strategies
Why do some businesses succeed and others fail, even when faced with the same environmental Plans for how the
organisation will do
conditions? Research has found a generally positive relationship between strategic planning and what it’s in business to
performance.5 Those companies that strategically plan appear to have better financial results than do, how it will compete
those organisations that don’t. successfully, and how it
will attract its customers
Another reason why strategic planning is important has to do with the fact that managers in
in order to achieve its
organisations of all types and sizes face continually changing situations (recall our discussion in Chapter 15). goals
They cope with this uncertainty by using the strategic management process to examine relevant factors
in planning future actions.
Finally, strategic management is important
because organisations are complex and diverse, and each
part needs to work together to achieve the organisation’s
goals. Strategic management helps organisations do
this. For example, with more than 414,000 employees
worldwide working in various countries, sectors and
functional areas, IBM uses strategic management to
help coordinate and focus employees’ efforts on what
is important.6
Strategic management isn’t just for business
organisations. Even organisations such as government
agencies, hospitals, educational institutions and
social agencies need it. For example, the skyrocketing
costs of a university education, competition from
for-profit companies offering alternative educational Zhang Xin, co-founder and CEO of SOHO China, poses in front of
environments, state budgets being slashed because of skyscrapers the firm built in Beijing. Xin and her husband started SOHO with
declining revenues, and cutbacks in financial support a narrowly focused and highly successful strategy of developing commercial
for students and research have led many university real estate in prime locations in Beijing and Shanghai that features architecture
reflecting the spirit of a changing modern China.
administrators to assess their institution’s aspirations Ton Koene/ZUMApress/Newscom
and identify a market niche in which they can survive
and prosper.
What are the steps in the strategic management strategic

process? management
The strategic management process (see Figure 16.2) is a six-step process that encompasses strategy process
planning, implementation and evaluation. The first four steps describe the planning that must take place, A six-step process
that encompasses
but implementation and evaluation are just as important! Even the best strategies can fail if managers don’t
strategy planning,
implement or evaluate them properly. Strategies need to be formulated for all levels in the organisation: implementation and
corporate, competitive and functional. evaluation
9780655702412_CH16.indd 459 3/3/20 11:07 AM

External analysis
• Opportunities
• Threats
Identify the
organisation's Formulate Implement Evaluate
current mission, goals SWOT analysis strategies strategies results
and strategies
Internal analysis
• Strengths
• Weaknesses
Figure 16.2 The strategic management process
Customers: Who are the firm’s customers?
Markets: Where does the firm compete geographically?
Concern for survival,

Is the firm committed to growth and financial stability?
growth and profitability:
Philosophy: What are the firm’s basic beliefs, values and ethical priorities?
How responsive is the firm to societal and
Concern for public image:
environmental concerns?
Products or services: What are the firm’s main products or services?
Technology: Is the firm technologically current?
Self-concept: What are the firm’s main competitive advantages and

core competencies?
Concern for employees: Are employees a valuable asset of the firm?
Figure 16.3 Components of a mission statement

Source: S. P. Robbins and M. Coulter, Management, 13th edn, © 2016, p. 238. Reprinted and electronically reproduced by permission of
Pearson Education, Inc., New York.
STEP 1: Identifying the organisation’s current mission, goals and strategies. Every
mission organisation needs a mission – a statement of its purpose. Defining the mission forces
A statement of an managers to identify what it’s in business to do. For example, the mission of the
organisation’s purpose
National Heart Foundation of Australia is to ‘reduce suffering and death from heart,
stroke and blood vessel disease in Australia’. This statement provides a clue to what
this organisation sees as its purpose. What should a mission statement include?
Figure 16.3 describes some typical components.
It’s also important for managers to identify current goals and strategies. Why? So they
have a basis for assessing whether those goals and strategies need to be changed.
STEP 2: Doing an external analysis. We discussed the external environment in Chapter 15.
Analysing that environment is a critical step in the strategic management process.
opportunities
Positive trends in the Managers do an external analysis so that they know, for example, what the competition
external environment is doing, what pending legislation might affect the organisation, or what the labour
supply is like in locations where it operates. In an external analysis, managers should
threats
Negative trends in the examine all components of the organisation’s general and specific environments to see
external environment the trends and changes.
9780655702412_CH16.indd 460 3/3/20 11:07 AM

Once they’ve analysed the environment, managers need to pinpoint opportunities resources
that the organisation can exploit and threats that it must counteract or buffer against. An organisation’s assets
that it uses to develop,
Opportunities are positive trends in the external environment; threats are negative manufacture and
trends. deliver products to its
STEP 3: Doing an internal analysis. Now we move to the internal analysis, which provides customers
important information about an organisation’s specific resources and capabilities. An
capabilities
organisation’s resources are the assets – financial, physical, human and intangible – An organisation’s skills
that it uses to develop, manufacture and deliver products to its customers. They’re and abilities in doing the
‘what’ the organisation has. On the other hand, its capabilities are the skills and work activities needed in
its business
abilities needed to do the work activities in its business – ‘how’ it does its work. The
main value-creating capabilities of the organisation are known as its core
core
competencies.7 Both resources and core competencies determine the organisation’s competencies
competitive weapons. The main value-creating
After completing an internal analysis, managers should be able to identify capabilities of an
organisational strengths and weaknesses. Any activities the organisation does well or any organisation
unique resources that it has are called strengths. Weaknesses are activities the strengths
organisation doesn’t do well or resources it needs but doesn’t possess. Any activities the
The combined external and internal analyses are called the SWOT analysis organisation does well
or any unique resources
S because it’s an analysis of the organisation’s strengths, weaknesses, opportunities and that it has
W threats. After completing the SWOT analysis, managers are ready to formulate
weaknesses
O appropriate strategies – that is, strategies that (1) exploit an organisation’s strengths and
external opportunities, (2) buffer or protect the organisation from external threats, or
Activities the
T (3) correct critical weaknesses.
organisation doesn’t
do well or resources
STEP 4: Formulating strategies. As managers formulate strategies, they should consider the it needs but doesn’t
realities of the external environment and their available resources and capabilities so possess
they can then design strategies that will help an organisation achieve its goals. Managers SWOT analysis
typically formulate three main types of strategies: corporate, competitive and functional The combined external
(see Table 16.1). and internal analyses
A corporate strategy is an organisational strategy that specifies what businesses
corporate
a company is in, or wants to be in, and what it wants to do with those businesses. It’s strategy
based on the mission and goals of the organisation and the roles that each business unit An organisational
of the organisation will play. A competitive strategy is one that details how the strategy that specifies
what businesses a
organisation will compete in its business(es) to gain and maintain a competitive
company is in, or wants
advantage. Every organisation has resources (assets) and capabilities (how work gets to be in, and what it
done), but some organisations are more successful than others. The reason is that only wants to do with those
some organisations are able to effectively exploit their resources and to develop the core businesses
competencies that provide a competitive advantage. Market instabilities, new competitive
technologies and other changes can challenge managers’ attempts at creating a strategy
long-term, sustainable competitive advantage. However, by using strategic management, An organisational
strategy for how
managers can better position their organisation to get a sustainable competitive
an organisation
advantage. Functional strategies are the strategies used by an organisation’s various will compete in its
functional departments to support the competitive strategy. business(es)
STEP 5: Implementing strategies. Once strategies are formulated, they must be implemented.
functional
No matter how effectively an organisation has planned its strategies, performance will
strategy
suffer if the strategies aren’t implemented properly. Strategy used in an
STEP 6: Evaluating results. The final step in the strategic management process is evaluating organisation’s various
results. How effective have the strategies been at helping the organisation reach its functional departments
to support the
goals? What adjustments are necessary: Do assets need to be acquired or sold? Does
competitive strategy
the organisation need to be reorganised? and so forth.
9780655702412_CH16.indd 461 3/3/20 11:07 AM

Table 16.1 Strategic options
Type of strategy Focus Strategic options Implementation options Example

Corporate strategy What business the organisation Growth: expand the number Concentration: focuses on the Metcash (owner of the IGA
is in of markets served or products primary line of business and in- supermarket group) increases its
offered, either through its creases the number of products supermarket network to 1270
current business(es) or through offered or markets served in this stores.
new business(es). primary business.
Vertical integration: becoming Farm Pride Foods (egg producer)

its own supplier (to control expands into egg-based food
inputs) or its own distributor (to products and becomes own egg
control outputs). supplier.
Horizontal integration: Apple acquires Beddit, produc-

combining with rivals through ers of sleep-tracking technology.
acquisition or merger.
Diversification: establishing op- Mission Australia diversifies

erations in additional industries. from employment services into
the provision of child care and
affordable housing.
Stability: keep doing what the Offering current products and Business Mentor Services
organisation is currently doing. services, continuing to service Tasmania maintains core focus
existing markets and maintain- on providing mentoring services
ing market share. to business owners.
Renewal: address declining Retrenchment: cut costs and re- Alcoa sells four non-core busi-
performance. structure operations in the short ness units and imposes a salary
term or in a limited number of and hiring freeze.
organisational areas.
Turnaround: cut costs and Nokia sacks 10% of its work-

restructure operations over the force, shuts down factories and
longer term and in many organi- closes research laboratories.
sational areas.
Competitive strategy How the organisation will Cost leadership strategy: attract Minimise costs so as to be able Aldi attempts to offer the low-
compete in its business(es) to and retain customers by offering to offer the lowest prices. est prices on grocery items.
gain and maintain a competitive the lowest prices.
advantage
Differentiation strategy: attract Develop unique product Driza-Bone manufactures water-

and retain customers by offering features and benefits that proof jackets and coats specially
unique products. customers value highly enough designed for horse riders that
to pay premium prices. include special features to
secure the sleeves, cover the
saddle and stop the coat from
flapping while riding.
Focus strategy: compete in a Offer products and services Lush targets consumers who
narrow segment or niche rather valued by customers in a niche want products that minimise
than in the broad market. market that rival companies environmental degradation by
don’t service. offering bath, shower, hair and
body products made without
palm oil or animal products.
Functional strategies How functional departments Control costs to support a cost Focus on efficiency and minimis- McDonald’s employs teenagers
support the competitive strategy leadership strategy. ing wastage. in order to minimise labour
costs.
Provide unique value to Focus on creating new and Frontline Recruitment increases
customers. different benefits that customers staff training to improve service
value. to customers.
Sources: N. Argyres and A. M. McGahan, ‘Introduction: Michael Porter’s Competitive Strategy’, Academy of Management Executive, May 2002, pp. 41–2; N. Argyres and A. M. McGahan,
‘An Interview with Michael Porter’, Academy of Management Executive, May 2002, pp. 43–52; N. Ahmed, ‘Working it Out’, AFRBoss, December–January 2010, pp. 17–19; N. Hooper, ‘On a
Mission’, AFRBoss, December–January 2010, p. 31; J. Lindhe, ‘Peter Davis – Frontline Recruitment’, BRW, 28 July 2009, p. 23; L. Gettler, ‘Sunny Side Up’, BRW, 9–15 April 2009, p. 43; L. D.
Fisher, ‘Wealth of Experience’, BRW, 8–14 July 2010, pp. 36–7; ‘Driza-Bone’, Wikipedia, accessed 26 August 2010; L. Battersby, ‘Nokia to Cut 10 000 Jobs’, The Age, 16 June 2012; and B.
Carson, ‘Apple Just Bought a Company that Tracks Your Sleep, Business Insider Australia, 10 May 2017.
9780655702412_CH16.indd 462 3/3/20 11:07 AM

What contemporary planning issues

do managers face?
We conclude this chapter by addressing two contemporary issues in planning. Specifically, we’re going to
look at planning effectively in dynamic environments and then at how managers can use environmental
scanning, especially competitive intelligence. environmental
scanning
How can managers plan effectively in An analysis of the
external environment,
dynamic environments? which involves screening
large amounts of
Dynamic environments = planning challenges information to detect
emerging trends
competitive
As we saw in Chapter 15, the external environment is continually changing. How, then, can managers
intelligence
effectively plan? We’ve already discussed uncertain environments as one of the contingency factors that A type of environmental
affect the types of plans managers develop. Because dynamic environments are more the norm than the scanning that gives
exception, let’s look at how managers can effectively plan in such environments. managers accurate
information about
In an uncertain environment, managers should develop plans that are specific, but flexible.
competitors
Although this may seem contradictory, it’s not. To be useful, plans need some specificity, but they
shouldn’t be set in stone. Managers need to recognise that
planning is an ongoing process. The plans serve as a road map,
although the destination may change due to dynamic market
conditions. Managers should be ready to change directions if
environmental conditions warrant. This flexibility is particularly
important as plans are implemented. Managers need to stay alert
to environmental changes that may impact implementation
and respond as needed. Keep in mind, also, that even when
the environment is highly uncertain, it’s important to continue
formal planning in order to see any effect on organisational
performance. It’s the persistence in planning that contributes to
significant performance improvement. Why? It seems that, as
with most activities, managers ‘learn to plan’ and the quality of
their planning improves when they continue to do it.9 Finally,
make the organisational hierarchy flatter to effectively plan
in dynamic environments. A flatter hierarchy means lower
organisational levels can set goals and develop plans because
organisations have little time for goals and plans to flow down
from the top. Managers should teach their employees how to
set goals and to plan, and then trust them to do it.
Companies such as Hyundai monitor a constant stream of data

How can managers use about their operations in order to identify and resolve issues
environmental scanning? as quickly as possible. Information about part shipments to
suppliers identifies potential supply issues. Camera feeds from
A manager’s analysis of the external environment may be improved
factory floors provide real-time information about production
by environmental scanning, which involves screening large processes and help managers identify competitor spies or signs
amounts of information to detect emerging trends. One of the of industrial disputes. Meanwhile, updates on R&D activities
fastest-growing forms of environmental scanning is competitive help managers adjust schedules for the development and
release of new products.8
intelligence, which is accurate information about competitors
123rf.com
that allows managers to anticipate competitors’ actions rather than
9780655702412_CH16.indd 463 3/3/20 11:07 AM

merely react to them.10 It seeks basic information about competitors:

Who are they? What are they doing? How will what they’re doing
You have been asked to take over the planning process for affect us?
the development of a new factory. The factory will
Many who study competitive intelligence suggest that much of
manufacture one of your company’s biggest-selling products
and is expected to create 200 jobs in the local community, the competitor-related information managers need in order to make
which is currently experiencing high unemployment. The crucial strategic decisions is available and accessible to the public.11
plan needs to be completed by the end of June so that the In other words, competitive intelligence isn’t organisational
construction costs can be included in the budget for the
next financial year. If the plan isn’t finalised by June,
espionage. Advertisements, promotional materials, press releases,
construction will be delayed by at least a year. reports filed with government agencies, annual reports, webpages,
When you review the schedule for consulting with Facebook pages, newspaper reports, information on the Internet
stakeholders about the new development, you realise that a and industry studies are readily accessible sources of information.
local residents group has been left off the schedule. You ask
Specific information on an industry and associated organisations is
the previous manager why they didn’t include the residents
group in the consultation plan. The manager replies that the increasingly available through electronic databases. Managers can
residents weren’t consulted because the time frame for literally tap into this wealth of competitive information by purchasing
completing the construction plan was tight. If the residents access to databases. Attending trade shows and debriefing your own
raised concerns that would require changes to the
development plans, the company might miss the deadline to sales staff can also be good sources of information on competitors.
have the plan completed by the end of June. In addition, many organisations even regularly buy competitors’
Discuss this:
products and ask their own employees to evaluate them as a way to
• What, if anything, would be unethical about deliberately learn about new technical innovations.12
excluding some stakeholders from a planning process? In a changing global business environment, environmental
• How can managers balance the need to address scanning and obtaining competitive intelligence can be quite
stakeholder concerns with the need to meet planning complex, especially when information must be gathered from
deadlines?
around the world. However, managers could subscribe to news
services that review newspapers and magazines from around the
globe and provide summaries to client companies.
Managers do need to be careful about the way information, especially competitive intelligence,
is gathered so as to prevent any concerns about whether it’s legal or ethical. Difficult decisions about
competitive intelligence arise because often there’s a fine line between what’s considered legal and ethical
and what’s considered legal but unethical. Although the top manager at one competitive intelligence firm
contends that 99.9 per cent of intelligence gathering is legal, there’s no question that some people or
companies will go to any lengths – some unethical – to get information about competitors.13
How can managers use benchmarking?

benchmarking Environmental scanning and the gathering of competitor intelligence can also assist benchmarking,
The search for best which is the search for the best practices among competitors or non-competitors that lead to their superior
practices among
performance. The basic idea of benchmarking is that managers can improve quality by analysing and then
competitors or non-
competitors that copying the methods of the leaders in various fields. In 1979, Xerox undertook what is widely regarded
lead to their superior as the first benchmarking effort in the United States. Xerox’s managers couldn’t figure out how Japanese
performance manufacturers could sell medium-sized copiers in the United States for considerably less than Xerox’s
production costs. So the company’s head of manufacturing took a team to Japan to make a detailed study
of its competition’s costs and processes. The team got most of their information from Xerox’s own joint
venture partner, Fuji-Xerox, which knew its competition well. What the team found was shocking. Their
Japanese rivals were light-years ahead of Xerox in efficiency. Benchmarking those efficiencies was the
beginning of Xerox’s recovery in the copier field. Today, many organisations use benchmarking practices
to establish new goals and plans for improving their organisation. For example, Southwest Airlines in the
United States studied Indy 500 pit crews, who can change a race car’s tyre in under 15 seconds, to see how
their gate crews could make their gate turnaround times even faster.14
9780655702412_CH16.indd 464 3/3/20 11:07 AM

Student Learning Objective 3. Discuss contemporary issues

in planning.
Learning One contemporary planning issue is planning in dynamic environments, which
Centre usually means developing plans that are specific but flexible. Also, it’s important
to continue planning even when the environment is highly uncertain. Finally,
because there’s little time in a dynamic environment for goals and plans to flow
down from the top, lower organisational levels should be allowed to set goals
Reviewing the learning objectives and develop plans. Another contemporary planning issue is using environmental
scanning to help do a better analysis of the external environment. One form of
Learning Objective 1. Discuss the nature and
environmental scanning, competitive intelligence, can be especially helpful in
purposes of planning.
finding out what competitors are doing.
As the primary management function, planning establishes the basis for all the
other things that managers do. The planning we’re concerned with is formal
planning; that is, specific goals covering a specific time period are defined and
written down, and specific plans are developed to make sure those goals are met.
❶ Contrast formal with informal planning.
There are four reasons why managers should plan: (1) it establishes coordinated
➋ Discuss why planning is beneficial.
efforts; (2) it reduces uncertainty; (3) it reduces overlapping and wasteful
➌ Describe in detail the six-step strategic management process.
activities; and (4) it establishes the goals or standards that are used in controlling
➍ What is a SWOT analysis, and why is it important to managers?
work. Although criticisms have been directed at planning, the evidence generally
➎ ‘Organisations that fail to plan are planning to fail.’ Do you agree or disagree
supports the position that organisations benefit from formal planning.
with this statement? Explain your position.
➏ ‘The primary means of sustaining a competitive advantage is to adjust faster
Learning Objective 2. Explain what managers do in
to the environment than your competitors do.’ Do you agree or disagree
the strategic management process.
with this statement? Explain your position.
Managers develop the organisation’s strategies in the strategic management ➐ Do a personal SWOT analysis. Assess your personal strengths and
process, which is a six-step process encompassing strategy planning, weaknesses (skills, talents, abilities). What are you good at? What are you
implementation and evaluation. The six steps are as follows: (1) identify the not so good at? What do you enjoy doing? Not enjoy doing? Then, identify
organisation’s current mission, goals and strategies; (2) do an external analysis; career opportunities and threats by researching job prospects in the industry
(3) do an internal analysis; steps 2 and 3 together are called SWOT analysis; (4) you’re interested in. Look at trends and projections. Once you have all this
formulate strategies; (5) implement strategies; and (6) evaluate results. The end information, write a specific career action plan. Outline five-year career
result of this process is a set of corporate, competitive and functional strategies that goals and what you need to do to achieve those goals.
allow the organisation to do what it’s in business to do and to achieve its goals. Six ➑ ‘The concept of competitive advantage is as important for not-for-profit
strategic weapons are important in today’s environment: customer service, organisations as it is for for-profit organisations.’ Do you agree or disagree
employee skills and loyalty, innovation, quality, social media and big data. with this statement? Explain, using examples to make your case.
9780655702412_CH16.indd 465 3/3/20 11:07 AM


BEING A GOOD GOAL SETTER
It’s been said that if you don’t know where you’re going, any road will get you there. It has also been said that the shortest distance between two points is a straight
line. These two ‘adages’ emphasise the importance of goals. Managers are typically judged on their ability to achieve goals. If individuals or units in the organisation
lack goals, there can be no direction or unity of effort. So, successful managers are good at setting their own goals and helping others set them.

PERSONAL
P I A INVENTORY
ASSESSMENT
Tolerance of ambiguity scale

Managers often have to deal with ambiguous situations, which can make planning very challenging. In this PIA, you’ll
assess your level of tolerance for ambiguity.
Skill basics Feedback should be both self-generated and supervisor-generated. It should

In addition to your own focus on goals, employees should have a clear also be frequent and recurring.
understanding of what they’re attempting to accomplish. Managers have the • Link rewards to goal attainment. It’s natural for employees to ask, ‘What’s in
responsibility to help employees with this understanding as they set work goals. it for me?’ Linking rewards to the achievement of goals will help answer that
question.15
You can be more effective at setting goals if you use the following eight
suggestions. Practising the skill
• Identify an employee’s key job tasks. Goal setting begins by defining what it Read through the scenario and follow the directions at the end of it.
is that you want your employees to accomplish. The best source for this You worked your way through university while working part-time as a shelf
information is each employee’s job description. stacker at the Food Town supermarket chain. You liked working in the food
• Establish measurable, specific and challenging goals for each key task. industry, and when you graduated, you accepted a position with Food Town as a
Identify the level of performance expected of each employee. Specify the management trainee. Three years have passed and you’ve gained experience in
target towards which the employee is working. the supermarket industry and in operating a large store. Several months ago, you
• Specify the deadlines for each goal. Putting deadlines on each goal reduces received a promotion to store manager at one of the chain’s locations. One of the
ambiguity. Deadlines, however, shouldn’t be set arbitrarily. Rather, they need things you’ve liked about Food Town is that it gives store managers a great deal
to be realistic given the tasks to be completed. of autonomy in running their stores. The company provides very general
• Allow the employee to participate actively. When employees participate in guidelines to its managers. Top management is concerned with the bottom line;
goal setting, they’re more likely to accept the goals. However, it must be for the most part, how you get there is up to you. Now that you’re finally a store
sincere participation. That is, employees must perceive that you are truly manager, you want to establish an MBO-type program in your store. You like the
seeking their input, not just going through the motions. idea that everyone should have clear goals to work towards and then be
• Prioritise goals. When you give someone more than one goal, it’s important evaluated against those goals.
to rank the goals in order of importance. The purpose of prioritising is to Your store employs 70 people, but most employees work only 20 to 30 hours
encourage the employee to take action and expend effort on each goal in per week. You have six people reporting to you: an assistant manager; a
proportion to its importance. weekend manager; and grocery, fresh produce, meat and bakery managers. The
• Rate goals for difficulty and importance. Goal setting shouldn’t encourage only highly skilled jobs belong to the butchers who have strict training and
people to choose easy goals. Instead, goals should be rated for their difficulty regulatory guidelines. Other less-skilled jobs include cashier, shelf stacker and
and importance. When goals are rated, individuals can be given credit for maintenance worker.
trying difficult goals, even if they don’t fully achieve them.
Describe in detail how you would go about setting goals in your new position.
• Build in feedback mechanisms to assess goal progress. Feedback lets
Include examples of goals for the jobs of butcher, cashier and bakery manager.
employees know whether their level of effort is sufficient to attain the goal.
9780655702412_CH16.indd 466 3/3/20 11:07 AM

Mini cases
16.1 Less is more
New challenges = new opportunities
Successful strategic management requires that organisations and for showering, in the garden and in the kitchen. To achieve its second goal,
managers can turn potential threats into opportunities. And that’s what Unilever is mapping out the water and climate risks in its supply chains,
Unilever is planning to do as it deals with water scarcity.16 Water scarcity is which will help the company understand more precisely where and how
fast becoming a critical issue for people, communities and organisations water scarcity could affect its operations. It is also working with agricultural
around the world. Consumer demand for water has doubled between suppliers to help them improve their irrigation equipment and techniques so
1950 and 2015 and is expected to double again by 2030. By that time, 4 that they use water more efficiently in crop production. Unilever has also
billion people around the world will be living in water-stressed regions. focused on improving water efficiency in its manufacturing operations and
Dealing with water scarcity forces consumers to make tradeoffs about the factories, through creating community stewardship programs in key factory
ways they use their time, energy and, yes, water. For example, in developing locations. To achieve its third goal, Unilever is working with national
countries where water isn’t available in the home, women must be the governments to support the systemic change needed to achieve more
‘water managers’ for their households and spend time c ollecting, storing sustainable water supplies. This includes investments in water infrastructure,
and rationing water. These responsibilities affect their health and safety, changes to water pricing, and the use of water metering to improve the
their wellbeing, and their opportunities for education and employment. quality and quantity of water supplies.
For Unilever, water scarcity is a critical issue because it will directly Some of Unilever’s plans have already begun to pay off. By 2015, the
affect the company’s sustainability. As a global manufacturing company. water usage of Unilever factories was 19 million fewer cubic metres than it
Unilever produces home care, personal care, food and drink, and water- had been in 2008, which equates to saving 2.5 litres of water for every
purifying products used by over 2.5 billion consumers every day. These person on the planet. By 2016, the company’s water impact per consumer
product categories use over 90 per cent of the water consumed in the use of its products was 7 per cent lower than it had been in 2010. By 2017,
home. So, water scarcity could, on the one hand, limit the use of Unilever’s Unilever had produced hand-washing detergents that used half as much
products. But rather than see this as a threat to the company’s future, water for rinsing clothes as other products. It had also successfully build a
Unilever has set itself three new goals: (1) develop innovative new products Hygiene Centre in a slum area of Mumbai, in India, which provided safe
that help consumers in water-scarce regions; (2) reduce water usage in the drinking water and laundry facilities for over 1500 people as a pay-per-use
company’s own operations and supply chains; and (3) foster social change service by recirculating water used for bathing, hand washing and laundry
around the infrastructure for, and availability and use of, domestic water. to flush toilets.
In pursuit of its first goal, the company has set itself the target of ❶ How does this case study illustrate strategic management?
halving the water used by consumers of Unilever products by 2020 by ➋ Which strategic options is Unilever pursuing? Do you think it is pursuing
accelerating innovative development of new products that use domestic them successfully?
water more effectively. In the US, for example, domestic water usage ➌ What types of plans is Unilever using to deal with water scarcity?
averages 550 litres per day (compared to 90 litres a day in China) so the ➍ How might Unilever use benchmarking to evaluate its performance in
company has focused on developing new products that reduce water usage achieving its goals?
16.2 Spy games

Bad intelligence?
What started as a high-profile corporate espionage case turned into an Renault’s chief operating officer, Patrick Pélata, launched a four-month
enormously confusing, bewildering and embarrassing mess for French car internal investigation that led the company to conclude that ‘it was the
maker Renault SA and its top executives. The story began in August of
17
target of a system organised to collect economic, technological and stra-
2010 when several top executives received an anonymous tip accusing a tegic information to serve interests abroad’. A company spokesperson
senior Renault executive of negotiating a bribe – supposedly for information also said that the company’s compliance committee was alerted to possi-
related to the cost of the company’s electric car. According to CEO Carlos ble unethical practices involving three employees. Renault then lodged a
Ghosn, this information was critical economic data that could give compet- criminal complaint of ‘organised industrial espionage, corruption, breach
itors insight into the car’s technology and costs. of trust, theft and concealment’ and dismissed three executives who
9780655702412_CH16.indd 467 3/3/20 11:07 AM

16.2 Spy games continued

worked on its electric car program for allegedly leaking information in for the company to pay out 200,000 euros (A$300,000) to obscure firms for
exchange for money. Ghosn said the company’s actions were taken to ‘imprecise purposes’ in connection with the investigation into the alleged
protect the company. He declared on a French evening news program on espionage. The audit committee also concluded that the three Renault man-
23 January 2011 that Renault had plenty of proof and was absolutely agers accused of spying had been fired without being given an opportunity
certain that the three employees had passed company secrets to outside to respond to the allegations.
sources. The affair also caused tension with Beijing after then-French At a specially called meeting, the board took the following actions:
president Nicolas Sarkozy ordered an investigation into whether China accepted the resignation of Patrick Pélata, Renault’s chief operating officer;
was involved in the espionage. But the story takes an interesting twist dismissed the head of human resources, the head of the legal department
here, as the three men had asserted their innocence from the beginning and the secretary general; fired three security officials, including Dominique
and repeatedly denied any wrongdoing. Gevrey; asked for a complete redesign of the company’s security depart-
Doubts began to surface about the alleged spying when the Paris state ment, hiring expert consultants from around the world; reinstated one of
prosecutor dismissed charges against the three fired executives for lack of the wrongfully terminated employees and reached settlements with the
evidence. That’s because the three were, in fact, innocent. Renault, for the other two; and called for the creation of a company ethics committee and a
first time, began suggesting that the company may have been ‘tricked’ into restructuring of its compliance committee.
bringing the allegations against the men. Then, French prosecutors began ❶ What does this case indicate about the risks organisations face from
trying to figure out whether someone had engineered the entire affair as a corporate spying? Which do you think was more damaging for Renault:
way to defraud the company. The French police hadn’t found any foreign the loss of competitive intelligence about its electric car, or the way the
accounts into which the three executives were said to have deposited their company handled the situation?
spying proceeds, but they did find accounts in Spain and Dubai holding ➋ What do you think were the stated goals of Renault’s investigation into
some of the money that Renault had given Dominique Gevrey, an employee the bribery allegations? Do you think the stated goals were the real
in Renault’s security department who led the internal inquiry against his goals? Why or why not?
three colleagues. He was arrested while trying to board a flight to Guinea, in ➌ Imagine you were responsible for developing a plan for handling
West Africa, and accused of concocting the spying allegations. investigations of bribery or other forms of misconduct. What would be
The audit committee of Renault’s board of directors also launched an the breadth, time frame, specificity and use frequency of your plan?
investigation. It concluded that executives had committed a series of mis- ➍ How would you plan to handle investigations of this type to ensure
steps after the company received the anonymous espionage tip. One was that people accused of wrongdoing are treated as if they are ‘innocent
that the security department’s investigation was deliberately hidden from until proven guilty’? (Hint: See the material in Chapter 19 about
Renault’s board and audit committee. It also said that it had been a mistake investigating workplace bullying.)
References
1 M. C. Mankins and R. Steele, ‘Stop Making Plans – Start Making Decisions’, Harvard 479–92; J. A. Pearce II, E. B. Freeman and R. B. Robinson, Jr, ‘The Tenuous Link between
Business Review, January 2006, pp. 76–84; L. Bossidy and R. Charan, Execution: The Formal Strategic Planning and Financial Performance’, Academy of Management
Discipline of Getting Things Done (New York: Crown/Random House, 2002); P. Roberts, Review, October 1987, pp. 658–75; L. C. Rhyne, ‘Contrasting Planning Systems in
‘The Art of Getting Things Done’, Fast Company, June 2000, p. 162; H. Mintzberg, The High, Medium and Low Performance Companies’, Journal of Management Studies,
Rise and Fall of Strategic Planning (New York: Free Press, 1994); G. Hamel and C. K. July 1987, pp. 363–85; and J. A. Pearce II, K. K. Robbins and R. B. Robinson, Jr, ‘The
Prahalad, Competing for the Future (Boston: Harvard Business School Press, 1994); and Impact of Grand Strategy and Planning Formality on Financial Performance’, Strategic
D. Miller, ‘The Architecture of Simplicity’, Academy of Management Review, January Management Journal, March–April 1987, pp. 125–34.
1993, pp. 116–38. 5 M. Gruber, F. Heinemann, M. Brettel and S. Hungeling, ‘Configurations of Res and
2 J. Garner, ‘Get Your Business Carbon Ready’, BRW, 14 June 2012. Capabilities and their Performance Implications: An Exploratory Study on Technology
3 C. Guillot, ‘How One CEO Finds Competitive Advantage through Sustainability’, Chief Ventures’, Strategic Management Journal, December 2010, pp. 1337–56; T. H.
Executive, 11 July 2017. Poister, ‘The Future of Strategic Planning in the Public Sector: Linking Strategic
4 See, for example, F. Delmar and S. Shane, ‘Does Business Planning Facilitate the Management and Performance’, Public Administration Review, December 2010, pp.
Development of New Ventures?’, Strategic Management Journal, December 2003, S246–54; J. González-Benito and I. Suárez-González, ‘A Study of the Role Played by
pp. 1165–85; R. M. Grant, ‘Strategic Planning in a Turbulent Environment: Evidence Manufacturing Strategic Objectives and Capabilities in Understanding the Relationship
from the Oil Majors’, Strategic Management Journal, June 2003, pp. 491–517; P. between Porter’s Generic Strategies and Business Performance’, British Journal of
J. Brews and M. R. Hunt, ‘Learning to Plan and Planning to Learn: Resolving the Management, vol. 21 (2010), pp. 1027–43; J. A. Parnell and E. B. Dent, ‘The Role of
Planning School/Learning School Debate’, Strategic Management Journal, vol. 20 Luck in the Strategy–Performance Relationship’, Management Decision, vol. 47, no.
(December 1999), pp. 889–913; C. C. Miller and L. B. Cardinal, ‘Strategic Planning 6 (2009), pp. 1000–21; H. J. Cho and V. Pucik, ‘Relationship between Innovativeness,
and Firm Performance: A Synthesis of More than Two Decades of Research’, Academy Quality, Growth, Profitability and Market Value’, Strategic Management Journal, June
of Management Journal, March 1994, pp. 1649–85; N. Capon, J. U. Farley and J. M. 2005, pp. 555–75; W. F. Joyce, ‘What Really Works’, Organizational Dynamics, May
Hulbert, ‘Strategic Planning and Financial Performance: More Evidence’, Journal of 2005, pp. 118–29; M. A. Roberto, ‘Strategic Decision-Making Processes’, Group &
Management Studies, January 1994, pp. 22–38; D. K. Sinha, ‘The Contribution of Organization Management, December 2004, pp. 625–58; A. Carmeli and A. Tischler,
Formal Planning to Decisions’, Strategic Management Journal, October 1990, pp. ‘The Relationships between Intangible Organizational Elements and Organizational
9780655702412_CH16.indd 468 3/3/20 11:07 AM

Performance’, Strategic Management Journal, December 2004, pp. 1257–78; D. J. World, May 2002, pp. 20–1; and C. Britton, ‘Deconstructing Advertising: What Your
Ketchen, C. C. Snow and V. L. Street, ‘Improving Firm Performance by Matching Strategic Competitor’s Advertising Can Tell You about Their Strategy’, Competitive Intelligence,
Decision-Making Processes to Competitive Dynamics’, Academy of Management January–February 2002, pp. 15–19.
Executive, November 2004, pp. 29–43; E. H. Bowman and C. E. Helfat, ‘Does Corporate 12 C. Hausman, ‘Business-Ethics News Featured in World-Press Reports’, Ethics Newsline,
Strategy Matter?’, Strategic Management Journal, vol. 22 (2001), pp. 1–23; P. J. Brews 14 March 2011; and L. Weathersby, ‘Take This Job and ***** It’, Fortune, 7 January
and M. R. Hunt, ‘Learning to Plan and Planning to Learn: Resolving the Planning 2002, p. 122.
School–Learning School Debate’, Strategic Management Journal, vol. 20 (1999), 13 K. Western, ‘Ethical Spying’, Business Ethics, September–October 1995, pp. 22–3.
pp. 889–913; D. J. Ketchen, Jr, J. B. Thomas and R. R. McDaniel, Jr, ‘Process, Content 14 A. Taylor III, ‘Double Duty’, Fortune, 7 March 2005, pp. 104–10.
and Context; Synergistic Effects on Performance’, Journal of Management, vol. 22, 15 Based on E. A. Locke and G. P. Latham, Goal-Setting: A Motivational Technique that
no. 2 (1996), pp. 231–57; C. C. Miller and L. B. Cardinal, ‘Strategic Planning and Works! (Upper Saddle River, NJ: Prentice Hall, 1984); and E. A. Locke and G. P. Latham,
Firm Performance: A Synthesis of More than Two Decades of Research’, Academy of ‘Building a Practically Useful Theory of Goal Setting and Task Motivation’, American
Management Journal, December 1994, pp. 1649–65; and N. Capon, J. U. Farley and J. Psychologist, September 2002, pp. 705–17.
M. Hulbert, ‘Strategic Planning and Financial Performance: More Evidence’, Journal of 16 Unilever, ‘The Sustainable Living Plan’, <https://www.unilever.com/>, accessed 19
Management Studies, January 1994, pp. 105–10. March 2017; Unilever, ‘Water Use’, <https://www.unilever.com/>, accessed 26 October
6 ‘Forbes: The World’s Biggest Companies: 2017 Ranking’, Forbes, <www.forbes.com/ 2017; and Unilever, ‘Change Consumer Behaviour’, <https://www.unilever.com/>,
companies/ibm/>, accessed 13 August 2017. accessed 26 October 2017.
7 C. K. Prahalad and G. Hamel, ‘The Core Competence of the Corporation’, Harvard 17 A. Fredin, ‘The Unexpected Cost of Staying Silent’, Strategic Finance, April 2012, pp.
Business Review, May–June 1990, pp. 79–91. 53–9; D. Meinert, ‘Whistle-Blowers: Threat or Asset?’, HR Magazine, April 2011, pp.
8 Taylor III, ‘Hyundai Smokes the Competition’, Fortune, 18 January 2010, pp. 62–71. 27–32; S. Moffett, ‘Renault’s No. 2 Executive Quits: Pelata to Take Lesser Post at
9 P. J. Brews and M. R. Hunt, ‘Learning to Plan and Planning to Learn: Resolving the Nissan Alliance as He, Others Absorb Blame for Bogus Espionage Debacle’, Wall Street
Planning School/Learning School Debate’, Strategic Management Journal, vol. 20 Journal, 12 April 2011, p. B1; J. Reed and J. Thompson, ‘Renault’s Pélata To Go over Spy
(December 1999), pp. 889–913. Scandal’, Financial Times Online, 11 April 2011; B. Crumley, ‘An Apology and a New
10 See, for example, P. Tarraf and R. Molz, ‘Competitive Intelligence’, SAM Advanced Suspect in the Renault Spying Debacle’, Time.com, 16 March 2011; S. Moffett, ‘France
Management Journal, Autumn 2006, pp. 24–34; W. M. Fitzpatrick, ‘Uncovering Trade Criticizes Renault’, Wall Street Journal, 16 March 2011, p. B3; D. Gauthier-Villars, ‘Police
Secrets: The Legal and Ethical Conundrum of Creative Competitive Intelligence’, Probe if Renault Was Victim of Fraud in Spy Case’, Wall Street Journal, 14 March 2011,
SAM Advanced Management Journal, Summer 2003, pp. 4–12; L. Lavelle, ‘The Case p. B1; A. Jones and J. S. Lublin, ‘Firms Revisit Whistleblowing’, Wall Street Journal, 14
of the Corporate Spy’, BusinessWeek, 26 November 2001, pp. 56–8; C. Britton, March 2011, p. B5; ‘Renault Security Held in Spy Case’, Wall Street Journal Online, 11
‘Deconstructing Advertising: What Your Competitor’s Advertising Can Tell You about March 2011; M. Saltmarsh, ‘Doubt Cast on Renault Spying Charges’, New York Times
Their Strategy’, Competitive Intelligence, January/February 2002, pp. 15–19; and L. Online, 4 March 2011; S. Moffett, ‘Ghosn: Spy Risks Were Too Big to Ignore’, Wall Street
Smith, ‘Business Intelligence Progress in Jeopardy’, InformationWeek, 4 March 2002, Journal, 11 February 2011, p. B8; S. Moffett, ‘Renault Manager Sues Firm’, Wall Street
p. 74. Journal, 19 January 2011, p. B3; D. Jolly, ‘Renault Espionage Gained No Key Secrets,
11 S. Greenbard, ‘New Heights in Business Intelligence’, Business Finance, March 2002, Official Says’, New York Times Online, 8 January 2011; and D. Pearson, ‘Renault Probes
pp. 41–6; K. A. Zimmermann, ‘The Democratization of Business Intelligence’, KN Ethics Complaint’, Wall Street Journal, 6 January 2011, p. B3.
9780655702412_CH16.indd 469 3/3/20 11:07 AM

Chapter
17 Foundations of decision making
It’s tempting to conclude that managers, especially those in the upper ranks of organisations, have developed
finely tuned decision skills; that they have learned to avoid many common mistakes. However, the evidence
suggests otherwise. Studies have found that executives frequently make the same mistakes that many of
us make in our daily decisions. For example, they’ll stick with a bad decision rather than admit it was a
mistake. In order to save face and attempt to demonstrate belief in their earlier decision, they’ll commit
further resources to a losing cause. They’re also likely to selectively choose their options by seeking out
information that reaffirms their past choices and discounting information that contradicts them.
Managers at all organisational levels and in all areas make a lot of decisions – routine and non-routine;
minor and major. The overall quality of those decisions plays a big part in determining an organisation’s
success or failure. To be a successful manager – and a valued employee – you need to know about decision
making. In this chapter, we’ll look at types of decisions and how decisions should be made. But we’ll
also consider some common biases and errors that can undermine the quality of decisions and discuss
contemporary issues facing managerial decision makers.
Learning Objective 1 Describe the decision-making process.

How do managers make decisions? pp. 472–77
Learning Learning Objective 2 Discuss group decision making.
Objectives How do groups make decisions? pp. 477–80
Learning Objective 3 Discuss contemporary issues in managerial decision making.
What contemporary decision-making issues do managers face? pp. 480–83
9780655702412_CH17.indd 470 3/3/20 11:08 AM

Chapter 17 Foundations of decision making 471
LO 1
Describe the
decision-making
process. fact or fiction?
LO 2
The best managers are exempt
Discuss group
decision making.
from making common
decision-making mistakes.
fiction
LO 3
Discuss
contemporary
issues in managerial
decision making.
9780655702412_CH17.indd 471 3/3/20 11:08 AM

How do managers make decisions?

Decision making is typically described as choosing among alternatives, but this view is overly simplistic.
Why? Because decision making is a process, not a simple act of choosing among alternatives. Figure 17.1
decision-making illustrates the decision-making process as a set of eight steps that begins with identifying a problem;
process it moves through selecting an alternative that can alleviate the problem and concludes with evaluating
A set of eight steps
the decision’s effectiveness. This process is as applicable to your decision about what you’re going to do
that includes identifying
a problem, selecting a on your summer holidays as it is to the decisions Dean and Gill Belle are making as they shape their café’s
solution and evaluating future (see Mini case 17.1). The process can also be used to describe both individual and group decisions.
the effectiveness of the Let’s take a closer look at the process in order to understand what each step entails by using a simple
solution
example most of us can relate to – the decision to buy a car.
What defines a decision problem?

problem Step 1. The decision-making process begins with the identification of a problem or, more specifically,
A discrepancy between a discrepancy between an existing and a desired state of affairs.1 Take the case of a sales manager for
an existing and a desired
state of affairs
Cadbury. The manager is on the road a lot and spent nearly $6000 on repairs to her car over the past
few years. Now her car has a blown engine and cost estimates indicate it’s not economical to repair.
Furthermore, convenient public transportation is unavailable. So, we have a problem – a discrepancy
between the manager’s need to have a car that works and the fact that her current one doesn’t.
Identifying problems is IMPORTANT . . . and

CHALLENGING!2
In our example, a blown engine is a clear signal to the manager that she needs a new car, but few
problems are that obvious. In the real world, most problems don’t come with neon signs identifying them
as such. And problem identification is subjective. A manager who mistakenly solves the wrong problem
perfectly is just as likely to perform poorly as the manager who fails to identify the right problem and
does nothing. So, how do managers become aware that they have a problem? They have to make a
comparison between current reality and some standard, which can be (1) past performance, (2) previously
set goals, or (3) the performance of some other unit within the organisation or in other organisations. In
our car-buying example, the standard is previous performance – a car that runs.
What is relevant in the decision-making process?

decision criteria Step 2. Once a manager has identified a problem that needs attention, the decision criteria that
Factors that are relevant will be important in solving the problem must be identified. In our vehicle-buying example, the sales
in a decision
manager assesses the factors that are relevant in her decision, which might include criteria such as price,
Identification Identification Allocation Development Analysis Selection Implementation

of a of decision of weights of of of an of the
problem criteria to criteria alternatives alternatives alternative alternative
Evaluation
of
decision
effectiveness
Figure 17.1 The decision-making process
9780655702412_CH17.indd 472 3/3/20 11:08 AM

model (two-door or four-door), size (compact or intermediate),

manufacturer (French, Japanese, South Korean, German,
American), optional equipment (navigation system, side-impact
protection, leather interior) and fuel efficiency. These criteria
reflect what she thinks is relevant in her decision. Every decision
maker has criteria – whether explicitly stated or not – that guide
their decision making. Note that in this step in the decision-
making process, what’s not identified is as important as what is. If
the sales manager doesn’t consider colour to be a criterion, then
it won’t influence her choice of car. If a decision maker doesn’t
identify a particular factor in this second step, it’s treated as
irrelevant.
The steps involved in buying a vehicle provide a good example of
How does the decision maker the decision-making process. For this young woman, the process
starts with the first step of identifying the problem of needing a
weight the criteria and analyse car so that she can perform her job and ends with the last step in
alternatives? the process of evaluating the results of her decision.
Kzenon/Shutterstock
Decision criteria aren’t all equally important.3 It’s necessary,
therefore, to allocate weights to the items listed in step 2 in order
to give them their relative priority in the decision (step 3). A
simple approach is to give the most important criterion a weight of 10 and then assign weights to the
rest against that standard. Thus, in comparison to a criterion that you gave a 5, the highest-rated factor
is twice as important. The idea is to use your personal preferences to assign priorities to the relevant
criteria in your decision as well as to indicate their degree of importance by assigning a weight to each.
Table 17.1 lists the criteria and weights that our manager developed for her vehicle replacement decision.
Price is the most important criterion in her decision, with performance and handling having low weights.
Then the decision maker lists the alternatives that could succeed in resolving the problem (step 4).
No attempt is made in this step to evaluate these alternatives, only to list them.4 Let’s assume that our
manager has identified six cars as viable choices: Ford Focus, Hyundai Elantra, Volkswagen Golf, Toyota
Prius, Mazda 3 and Toyota Camry.
Once the alternatives have been identified, the decision maker must critically analyse each one
(step 5). Each alternative is evaluated by appraising it against the criteria. The strengths and weaknesses
of each alternative become evident as they’re compared with the criteria and weights established in steps
2 and 3. Table 17.2 shows the assessed values that the manager put on each of her six alternatives after she
had test-driven each car. Keep in mind that the ratings shown in Table 17.2 are based on the assessment
made by the sales manager. Again, we’re using a scale of 1 to 10. Some assessments can be achieved in a
relatively objective fashion. For example, the purchase price represents the best price the manager can
Table 17.1 Important criteria and weights in a

car-buying decision
Criterion Weight
Price 10
Interior comfort 8
Durability 5
Fuel efficiency 5
Performance 3
Handling 1
9780655702412_CH17.indd 473 3/3/20 11:08 AM

Table 17.2 Assessment of possible car alternatives
Interior
Alternatives Initial Price Comfort Durability Fuel efficiency Performance Handling Total
Ford Focus 9 6 5 6 8 6 40
Hyundai Elantra 8 5 6 6 4 6 35
Volkswagen Golf 5 6 9 10 7 7 44
Toyota Prius 10 5 6 4 3 3 31
Mazda 3 4 8 7 6 8 9 42
Toyota Camry 6 5 10 10 6 6 43
Table 17.3 Evaluation of car alternatives: Assessment criteria × criteria weight
Initial
Price Interior Comfort Durability Performance Handling
Alternatives [10] [8] [5] Fuel efficiency [3] [1] Total
Ford Focus 9 90 6 48 5 25 6 30 8 24 6 6 223
Hyundai Elantra 8 80 5 40 6 30 6 30 4 12 6 6 198
Volkswagen Golf 5 50 6 48 9 45 10 50 7 21 7 7 221
Toyota Prius 10 100 5 40 6 30 4 20 3 9 3 3 202
Mazda 3 4 40 8 64 7 35 6 30 8 24 9 9 202
Toyota Camry 6 60 5 40 10 50 10 50 6 18 6 6 224
get from local dealers, and consumer magazines report data from owners on fuel efficiency. However, the
assessment of handling is clearly a personal judgment.
Most decisions contain judgments.

Judgments are reflected in the criteria chosen in step 2, the weights given to the criteria and the evaluation
of alternatives. The influence of personal judgment explains why two car buyers with the same amount
of money may look at two totally distinct sets of alternatives, or even look at the same alternatives and
rate them differently.
Table 17.2 shows only an assessment of the six alternatives against the decision criteria; it doesn’t
reflect the weighting done in step 3. If one choice had scored 10 on every criterion, you wouldn’t need
to consider the weights. Similarly, if the weights were all equal – that is, all the criteria were equally
important to you – each alternative would be evaluated merely by summing up the appropriate lines
in Table 17.2. For example, the Ford Focus would have a score of 40, and the Toyota Camry a score
of 43. If you multiply each alternative assessment against its weight, you get the figures in Table 17.3.
For example, the Hyundai Elantra scored a 30 on durability, which was determined by multiplying the
weight given to durability [5] by the manager’s appraisal of Elantra on this criterion [6]. The sum of these
scores represents an evaluation of each alternative against the previously established criteria and weights.
Notice that the weighting of the criteria has changed the ranking of alternatives in our example. The
Volkswagen Golf, for example, has gone from first to third. Looking at the analysis, both initial price and
interior comfort worked against the Volkswagen.
9780655702412_CH17.indd 474 3/3/20 11:08 AM

What determines the best choice?

Step 6 is the critical act of choosing the best alternative from among those assessed. Since we determined
all the pertinent factors in the decision, weighted them appropriately, and identified and assessed the
viable alternatives, this step is fairly simple. We merely have to choose the alternative that generated
the highest score in step 5. In our vehicle example (Table 17.3), the manager would choose the Toyota
Camry. On the basis of the criteria identified, the weights given to the criteria and her assessment of each
car on the criteria, the Toyota Camry scored highest [224 points] and, thus, became the best alternative.
What happens in decision implementation?

Although the choice process is completed in the previous step, the decision may still fail if it’s not
implemented properly (step 7). Therefore, this step, decision implementation, involves putting the decision
decision into action. If others will be affected by the decision, implementation also includes conveying implementation
Putting a decision into
the decision to those affected and getting their commitment to it.5
action
What is the last step in the decision process?

In the last step in the decision-making process, managers appraise the outcome of the decision to see
whether the problem was resolved. Did the alternative chosen in step 6 and implemented in step 7
accomplish the desired result? For our sales manager, that means does she have a car that works reliably?
Evaluating the results of a decision is part of the managerial control process, which we’ll discuss in
Chapter 24.
What common errors are committed in the

decision-making process?
When managers make decisions, they use their own particular style, and may use ‘rules of thumb’, or
heuristics, to simplify their decision making.6 Rules of thumb can be useful because they help make heuristics
sense of complex, uncertain and ambiguous information. However, they may lead to errors and biases in Judgmental shortcuts or
‘rules of thumb’ used to
processing and evaluating information. Figure 17.2 identifies 12 common decision errors and biases that
simplify decision making
managers make. Let’s look briefly at each.7
Deciding how to ‘go green’

Managing for sustainability means that managers need to the messages are sent, and how they are received by customers,
incorporate sustainability considerations into all organisational also affects the calculation of carbon emission. For example, an
decisions. But making such decisions can be much more complicated email that is filtered or auto-deleted by a spam filter has a carbon
than you might think! For example, imagine that a manager wanted footprint of about 0.3 grams. If the email is opened, read, forwarded
to know whether it would be more environmentally sustainable to or replied to, this can add another 4 grams of carbon. If the email
use email or direct mail to reach customers.8 They would first have also has an attachment, that can add another 20 grams. In contrast,
to define what they actually want to achieve by making the sending ‘snail mail’ emits carbon in the production of the paper and
organisation ‘more environmentally sustainable’. Does this mean the envelope, in printing the message, in collecting, carrying and
‘minimising carbon emissions’? ‘Reducing waste generation’? Both? delivering the letter to the addressee, and in opening and reading
Assuming the manager wants to reduce the organisation’s the letter.
carbon emissions, they then need to evaluate the carbon emissions So, as you can see, managing for sustainability requires that
for both email and direct mail. If they just calculated the carbon managers think carefully about what decisions to make, and how
required to create the message using word processing software, they make those decisions!
they might find the two options are roughly comparable. But how
9780655702412_CH17.indd 475 3/3/20 11:08 AM

‘The initial reports about this problem suggested ‘I thought this task would be
that it was caused by X. We have some updated difficult and now that I see
reports but I’m still sure X is the cause.’ what’s involved I see there are
lots of challenges.’
Anchoring
effect
‘I’ll choose option A because we
can implement that sooner than
we could implement option B.’ Immediate Selective ‘I thought option A was the cheapest
gratification perception and this report confirms it.’
effect bias
‘The important thing to

‘These figures look
consider is that option
accurate to me. I don’t Overconfidence Confirmation A will improve morale.
need to check them.’ bias bias The costs of option A
are less important.’
Hindsight Decision-making errors and biases Framing

‘I always knew she bias bias
was going to turn out ‘He’s been working for
to be the best choice us for ages but I
for team leader.’ wouldn‘t say he was
Availability reliable because he was
Self-serving
bias late for work last week.’
‘The first customer bought their

Sunk costs Representation ‘This is the same situation we faced
products from us because I gave them
last time we had to change our
a really convincing presentation. The error bias accounting processes. Of course last
second customer didn’t purchase
time was because of tax changes
from us because their existing supplier
and this time it’s because we have
gave them a massive discount.’ Randomness adopted a new accounting method,
bias but it‘s still the same situation.’
‘That IT system is more user friendly than
ours but we spent a lot of money on our ‘Last time it rained our share price dropped. It’s
system so we’ll keep using it.’ raining today so our share price will probably drop.’
Figure 17.2 Common decision-making errors and biases
Which of these are YOU guilty of when

making decisions?
When decision makers tend to think they know more than they do or hold unrealistically positive
views of themselves and their performance, they’re exhibiting the overconfidence bias. The immediate
gratification bias describes decision makers who tend to want immediate rewards and to avoid immediate
costs. For these individuals, decision choices that provide quick payoffs are more appealing than those
in the future. The anchoring effect describes when decision makers fixate on initial information as a
starting point and then, once set, fail to adequately adjust for subsequent information. When decision
makers selectively organise and interpret events based on their biased perceptions, they’re using the
selective perception bias. Decision makers who exhibit the confirmation bias tend to accept at face value
information that confirms their preconceived views and are critical and sceptical of information that
challenges these views. The framing bias is when decision makers draw attention to specific aspects
of a situation while at the same time downplaying or omitting other aspects. The availability bias is
when decision makers tend to remember events that are the most recent and vivid in their memory,
distorting their ability to recall events in an objective manner. Managers exhibiting the representation
9780655702412_CH17.indd 476 3/3/20 11:08 AM

bias assess the likelihood of an event based on how closely it resembles other events or sets of events,
seeing identical situations where they don’t exist. The randomness bias describes when decision makers
try to create meaning out of random events. They do this because most decision makers have difficulty
dealing with chance, even though random events happen to everyone and there’s nothing that can be
done to predict them. The sunk costs error is when decision makers forget that current choices can’t
correct the past. Instead of ignoring sunk costs, they can’t forget them. Decision makers who are quick
to take credit for their successes and to blame failure on outside factors are exhibiting the self-serving
bias. Finally, the hindsight bias is the tendency for decision makers to falsely believe that they would have
accurately predicted the outcome of an event once that outcome is actually known.
Managers can avoid the negative effects of these decision errors and biases by being aware of them
and then not using them! Beyond that, managers also should pay attention to ‘how’ they make decisions
and try to identify the heuristics they typically use and critically evaluate how appropriate those are.
Finally, managers might want to ask those around them to help identify weaknesses in their decision-
making style and try to improve on them.
How do groups make decisions?

Work teams are common at Amazon.
Jeff Bezos, founder and CEO, uses a ‘two pizza’ philosophy
– that is, a team should be small
enough that it can be fed with two pizzas.9
Do managers make a lot of decisions in groups? You bet they do! Many decisions in organisations,
especially important decisions that have far-reaching effects on organisational activities and people, are
typically made in groups. It’s a rare organisation that doesn’t at some time use committees, task forces,
review panels, work teams or similar groups as vehicles for making decisions. Why? In many cases, these
groups represent the people who will be most affected by the decisions being made. Because of their
expertise, these people are often best qualified to make decisions that affect them.
Studies tell us that managers spend a significant portion of their time in meetings. Undoubtedly, a
large portion of that time is involved with defining problems, arriving at solutions to those problems and
determining the means for implementing the solutions. It’s possible, in fact, for groups to be assigned any
of the eight steps in the decision-making process.
What are the advantages and disadvantages of

group decision making?
Decisions can be made by individuals or by groups – each approach has its own set of strengths and
neither is ideal for all situations.
Advantages of group decisions over individual decisions

● More complete information.10
● Diversity of experiences and perspectives brought to the decision process.11
● More alternatives generated due to greater quantity and diversity of information, especially
when group members represent different specialties.
9780655702412_CH17.indd 477 3/3/20 11:08 AM

● Increased acceptance of a solution by having people who will be affected by a certain solution and
who will help to implement it participate in the decision.12
● Increased legitimacy because the group decision-making process is consistent with democratic
ideals, and decisions made by groups may be perceived as more legitimate than those made by
a single person, which can appear autocratic and arbitrary.
Disadvantages of group decision making

● Time-consuming – assembling the group, getting decisions made.
● Minority domination can unduly inf luence the final decision because group members are never
perfectly equal – they differ in rank, experience, knowledge about the problem, inf luence on
other members, verbal skills, assertiveness, etc.13
● Ambiguous responsibility. Group members share responsibility BUT who is actually responsible
for final outcome?14 Individual decision – it’s clear. Group decision – it’s not.
● Pressures to conform. Have you ever been in a group where your views didn’t match the group’s
consensus views and you remained silent? Maybe others felt the same way and also remained
groupthink silent. This is what Irving Janis called groupthink, a form of conformity in which group
When a group exerts members withhold deviant, minority or unpopular views in order to give the appearance of
extensive pressure on
agreement.15
an individual to withhold
their different views in Groupthink applies to a situation in which a group’s ability to appraise alternatives objectively and
order to appear to be in arrive at a quality decision is jeopardised. When groupthink occurs, the group stresses conformity and
agreement an illusion of unanimity is pervasive. Group members rationalise any resistance to the assumptions they
have made, and those members who have doubts or hold differing points of view withhold them in order
to avoid deviating from what appears to be group consensus. If someone doesn’t speak, it’s assumed that
they are in full accord with the rest of the group.
Groups may also deter individuals from critically appraising unusual, minority or unpopular views by
applying direct pressure on any member who expresses doubts about any of the group’s shared views or
who questions the validity of arguments favoured by the majority. As a result, when groupthink occurs
it can cause an individual’s mental efficiency, reality testing and moral judgment to deteriorate. It also
undermines critical thinking in the group and eventually harms the quality of the final decision.
The value of diversity in decision making

Making good decisions is tough! Managers continuously make that white participants participating in racially diverse decision
decisions: for example, developing new products, establishing groups raised more facts, made fewer factual errors and were
weekly or monthly goals, implementing an advertising campaign, more amenable to discussion of race-related issues when they
reassigning an employee to a different work group, resolving a were members of a diverse group than when their group was
customer’s complaint or purchasing new tablets for sales reps. racially homogeneous.
One important suggestion for making better decisions is to tap Even though diversity in decision making can be valuable,
into the diversity of the work group.16 Drawing on diverse there are drawbacks. The lack of a common perspective usually
employees can prove valuable to a manager’s decision making. means that more time is spent discussing the issues.
Diverse employees can provide fresh perspectives on issues, Communication may be a problem, particularly if language
offer differing interpretations on how a problem is defined and barriers are present. In addition, seeking out diverse opinions can
may be more open to trying new ideas. Diverse employees can make the decision-making process more complex, confusing and
be more creative in generating alternatives and more flexible in ambiguous.And with multiple perspectives on the decision, it may
resolving issues. Getting input from diverse sources also increases be difficult to reach a single agreement or to agree on specific
the likelihood that creative and unique solutions will be actions.Although these drawbacks are valid concerns, the value of
generated. Finally, studies show that group diversity actually diversity in decision making outweighs the potential disadvantages.
improves decision processes. For example, research has found
9780655702412_CH17.indd 478 3/3/20 11:08 AM

Several research studies have found that groupthink really hinders decision making, finding that
groupthink symptoms were associated with poorer-quality decision outcomes. However, groupthink can
be minimised if the group is cohesive, fosters open discussion and has an impartial leader who seeks input
from all members.17
When are groups most effective?

Whether groups are more effective than individuals at making decisions depends on the criteria used
for defining effectiveness, such as accuracy, speed, creativity and acceptance. Group decisions tend to be
more accurate. On average, groups tend to make better decisions than individuals, although groupthink
may occur.18 However, if decision effectiveness is defined in terms of speed, individuals are superior. If
creativity is important, groups tend to be more effective than individuals. And if effectiveness means the
degree of acceptance the final solution achieves, the nod again goes to the group.
The effectiveness of group decision making is also influenced by the size of the group. The larger the
group, the greater the opportunity for heterogeneous representation. On the other hand, a larger group
requires more coordination and more time to allow all members to contribute. This means that groups
probably shouldn’t be too large: a minimum of five to a maximum of about 15 members is best. Groups of
five to seven individuals appear to be the most effective. (Remember Amazon’s ‘two-pizza’ rule!) Because
five and seven are odd numbers, decision deadlocks are avoided. You can’t consider effectiveness without
also assessing efficiency. Groups almost always stack up as a poor second in efficiency to the individual
decision maker. With few exceptions, group decision making consumes more work hours than does
individual decision making.
Bottom line on groups or individuals:

Do increases in effectiveness offset losses
in efficiency?
How can you improve group decision making?

Make group decisions more creative by brainstorming, employing the nominal group technique, and/or
having electronic meetings.
What is brainstorming?
Brainstorming is a relatively simple idea-generating process that specifically encourages any and all brainstorming
alternatives while withholding criticism of those alternatives.19 In a typical brainstorming session, a half- An idea-generating
process that encourages
dozen to a dozen people sit around a table. Of course, technology is changing where that ‘table’ is. The
alternatives while
group leader states the problem in a clear manner that is understood by all participants. Members then withholding criticism
shout out, offer up or fire off as many alternatives as they can in a given time. No criticism is allowed, and
all the alternatives are recorded for later discussion and analysis.20
How does the nominal group technique work?

The nominal group technique helps groups arrive at a preferred solution by restricting discussion nominal group
during the decision-making process.21 Group members must be present, as in a traditional committee technique
A decision-making
meeting, but they’re required to operate independently. They secretly write a list of general problem
technique in which
areas or potential solutions to a problem. The chief advantage of this technique is that it permits the group members are
group to meet formally but doesn’t restrict independent thinking or lead to groupthink, as can often physically present but
happen in a traditional interacting group.22 operate independently
9780655702412_CH17.indd 479 3/3/20 11:08 AM

How can electronic meetings enhance group decision making?

Another approach to group decision making blends the nominal group technique with information
electronic technology and is called the electronic meeting.
meeting Once the technology is in place, the concept is simple. Electronic meetings are conducted using
A type of nominal group
software platforms that allow participants to log into the meeting via computer.23 This allows people to
technique in which
participants are linked attend the meeting in person or virtually via the Internet. Participants are presented with issues or topics
by computer and use for discussion and type their responses on their computers. Individual comments, as well as aggregate
software platforms to votes, are then displayed to the whole group.
facilitate, record and
The main advantages of electronic meetings are anonymity, honesty, productivity and speed.24
review discussion
Participants can anonymously type any message they want and it will flash on the screen for all to see
with a keystroke. It allows people to be brutally honest with no penalty. It’s fast – chitchat is eliminated,
discussions don’t digress, and many participants can ‘talk’ at once without interrupting the others. It
also enhances productivity by automatically generating records of discussions, enabling more structured
meetings and increasing group member participation.
Electronic meetings are significantly faster and much cheaper than traditional face-to-face meetings.25
However, as with all other forms of group activities, electronic meetings have some drawbacks. Those
who type quickly can outshine those who may be verbally eloquent but lousy typists; those with the best
ideas don’t get credit for them; linear conversations break down; and the process lacks the informational
richness and non-verbal communication of face-to-face oral communication.26 However, group decision
making is likely to include extensive usage of electronic meetings.27
A variation of the electronic meeting is the videoconference. Using technology to link different
locations, people can have face-to-face meetings even when they’re thousands of kilometres apart. This
capability enhances feedback among the members, saves countless hours of business travel, and ultimately
saves companies such as Nestlé and Logitech hundreds of thousands of dollars. As a result, they’re more
effective in their meetings and have increased the efficiency with which decisions are made.28
What contemporary decision-making

issues do managers face?
Bad decisions can cost millions.
Today’s business world revolves around making decisions, often risky ones, usually with incomplete
or inadequate information, and under intense time pressure. Most managers make one decision after
another; and as if that weren’t challenging enough, more is at stake than ever before since bad decisions
can cost millions. We’re going to look at three important issues – national culture, creativity and design
thinking, and big data – that managers face in today’s fast-moving and global world.
How does national culture affect managers’

decision making?
Research shows that, to some extent, decision-making practices differ from country to country.29 The
way decisions are made – whether by group, by team members, participatively or autocratically by an
individual manager – and the degree of risk a decision maker is willing to take are just two examples of
decision variables that reflect a country’s cultural environment. For example, in India, power distance
and uncertainty avoidance (see Chapter 15) are high. There, only very senior-level managers make
9780655702412_CH17.indd 480 3/3/20 11:08 AM

decisions, and they’re likely to make safe ones. In contrast,

in Sweden, power distance and uncertainty avoidance are
low. Swedish managers aren’t afraid to make risky decisions.
Senior managers in Sweden also push decisions down to
lower levels. They encourage lower-level managers and
employees to take part in decisions that affect them. In
countries such as Egypt, where time pressures are low,
managers make decisions at a slower and more deliberate
pace than is the usual case in Australia. And in Italy, where
history and traditions are valued, managers tend to rely on
tried and proven alternatives to resolve problems.
Decision making in Japan is much more group oriented
than in countries such as Australia and the United States.30
The Japanese value conformity and cooperation. Before These senior managers of Mitsubishi Motors, a multinational car
making decisions, Japanese CEOs collect a large amount manufacturer based in Tokyo, Japan, take a long-term perspective in
of information, which is then used in consensus-forming making decisions rather than focusing on short-term results. In Japan,
where conformity and cooperation are valued, managers adapt their
group decisions called ringisei. Because employees in
decisions to their country’s group-oriented culture.
Japanese organisations have high job security, managerial Bloomberg/Getty Images
decisions take a long-term perspective rather than focusing
on short-term profits, as is often the practice in Australia.
Senior managers in France and Germany also adapt their decision styles to their countries’ ringisei
cultures. In France, for example, autocratic decision making is widely practised, and managers avoid Japanese consensus-
risks. Managerial styles in Germany reflect the German culture’s concern for structure and order. forming group decisions
Consequently, German organisations generally operate under extensive rules and regulations. Managers
have well-defined responsibilities and accept that decisions must go through channels.
As managers deal with employees from diverse cultures, they need to recognise common and
accepted behaviour when asking them to make decisions. Some individuals may not be as comfortable
as others with being closely involved in decision making, or they may not be willing to experiment
with something radically different. Managers who accommodate the diversity in decision-making
philosophies and practices can expect a high payoff if they capture the perspectives and strengths that a
diverse workforce offers.
Learn to unleash YOUR creativity.
Why are creativity and design thinking important

in decision making?
A decision maker needs creativity: the ability to produce novel and useful ideas. These ideas are creativity
different from what’s been done before but are also appropriate to the problem or opportunity presented. The ability to produce
novel and useful ideas
Why is creativity important to decision making? It allows the decision maker to appraise and understand
the problem more fully, including ‘seeing’ problems others can’t see. However, creativity’s most obvious
value is in helping the decision maker identify all viable alternatives.
Most people have creative potential that they can use when confronted with a decision-making
problem. But to unleash that potential, they have to get out of the psychological ruts most of us get
into and learn how to think about a problem in different ways. We discuss a range of techniques for
stimulating creativity and creative thinking in Chapter 25.
9780655702412_CH17.indd 481 3/3/20 11:08 AM

Apple – a great example of how

design thinking benefits an
organisation.
Understanding design thinking

The way managers approach decision making – using a
rational and analytical mindset in identifying problems,
coming up with alternatives, evaluating alternatives
and choosing one of those alternatives – may not
be best and certainly not the only choice in today’s
Design thinking leads the strategic decisions of Jack Dorsey, co-founder environment. That’s where design thinking comes in.
of Twitter and CEO of Square, a mobile payments processor for
smartphones and tablets. Dorsey used observation and inquiry in
Design thinking has been described as ‘approaching
deciding to start a company based on the idea that people needed an management problems as designers approach design
easy way to make payments in person. problems.’31 More organisations are beginning to
Bloomberg/Getty Images recognise how design thinking can benefit them.32 For
example, Apple has long been celebrated for its design
thinking. Jonathan ‘Jony’ Ive, who was behind some of
design thinking Apple’s most successful products, including the iPod and iPhone, said of Apple’s design approach: ‘We
Approaching try to develop products that seem somehow inevitable. That leave you with the sense that that’s the only
management problems
possible solution that makes sense.’33
in the same way that
designers approach While many managers don’t deal specifically with product or process design decisions, they still make
design problems decisions about work issues that arise, and design thinking can help them be better decision makers.
What can the design thinking approach teach managers about making better decisions? Well, it begins
with the first step of identifying problems. Design thinking says that managers should look at problem
identification collaboratively and integratively with the goal of gaining a deep understanding of the
situation. They should look not only at the rational aspects, but also at the emotional elements. Then,
invariably, design thinking would influence how managers identify and evaluate alternatives. ‘A traditional
manager (educated in a business school, of course) would take the options that have been presented and
analyse them based on deductive reasoning and then select the one with the highest net present value.
However, using design thinking, a manager would say, ‘What is something completely new that would be
lovely if it existed but doesn’t now?’34 Design thinking means opening up your perspective and gaining
insights by using observation and inquiry skills, and not relying simply on rational analysis. We’re not
saying that rational analysis isn’t needed; we are saying that more is needed in making effective decisions,
especially in today’s world.
Big data is changing the way managers

make decisions.
Big data understood

big data
The vast amount of Each day, human beings generate 2.5 quintillion bytes of data about where they are, what they are doing
quantifiable information and who they are with.35 Big data is the vast amount of quantifiable information that can be analysed
that can be analysed by by highly sophisticated data processing. Not surprisingly, businesses and governments are increasingly
highly sophisticated data focused on big data – collecting, analysing and generating insights from a wide range of data sources so as
processing
9780655702412_CH17.indd 482 3/3/20 11:08 AM

to improve business performance. Through mobile phone data, GPS locaters, call centre transcripts, social
media posts and uploaded photos and videos, organisations can develop detailed profiles about people’s
behaviour, attitudes and preferences. Making the most of it, though, depends on how organisations use
data to improve their decision making, businesses and relationships with customers.
● It’s not just businesses that are exploiting big data. A team of San Francisco researchers was
able to predict the magnitude of a disease outbreak halfway around the world by analysing
phone patterns from mobile phone usage.36
What does big data have to do with decision making? A lot, as you can imagine. With this type of
data at hand, decision makers have very powerful tools to help them make decisions. Perhaps the most
common use of big data is to generate new insights into what the organisation’s customers want, do and
like. Woolworths uses big data to better match its customers and products.37 By combining accident data
from its insurance business with transaction data from its shopper loyalty program, Woolworths was
able to determine the insurance risks of certain types of shoppers. The company found, for example,
that customers who consumed a lot of red meat and milk were much better ‘risks’ for car insurance than
people who ate lots of pasta, drank spirits and refilled their petrol tank at night, leading Woolworths to
tailor its insurance products to the risk profile of customers.
Big data can also be used to improve organisational decision making about how to recruit and who to
hire. For example, one company analysed data from almost 100,000 employees and learned the following:
● Casual workers who complete online application forms using Firefox or Chrome as their
Internet browser perform better and have lower turnover than people who use Internet
Explorer.
● People with a criminal record are better call centre employees than people without one.
However, experts caution that collecting and analysing data for data’s sake is wasted effort. Managers
need to really examine and evaluate how big data might contribute to their decision making before
jumping in with both feet. For most organisations, whether big data enhances decisions and business
performance will depend on how they incorporate it into their decision-making processes, understanding
why the data picture looks as it does and what is really important for the decision being made. As one
expert warns: ‘Collecting consumer data, making sense of it and then implementing the findings into
business strategy are three different things!’ To determine how best to use big data, organisations need
to decide:
● what questions, problems and hypotheses they need to address to create more value and
improve their operations
● the data needed to answer those questions, and where and how it can be acquired
● how data will be analysed, and how complex the analysis should be
● how analytical insights will be developed into strategic recommendations for action and how
recommendations will be prioritised
● whether the investment required to acquire, analyse and develop recommendations from big
data provides enough value to be worth the cost and effort.
9780655702412_CH17.indd 483 3/3/20 11:08 AM

Student individuals may not be as comfortable as others with being closely involved
in decision making, or they may not be willing to experiment with something
Learning radically different. Also, managers need to be creative in their decision making
Centre because creativity allows them to appraise and understand the problem more
fully, including ‘seeing’ problems that others can’t see. Design thinking also
influences the way that managers approach decision making, especially in terms
of identifying problems and how they identify and evaluate alternatives. Finally,
Reviewing the learning objectives big data is changing what and how decisions are made, but managers need to
evaluate how big data might contribute to their decision making.
Learning Objective 1. Describe the decision-making
process.
The decision-making process consists of eight steps: (1) identify a problem, Discussion questions
(2) identify decision criteria, (3) weight the criteria, (4) develop alternatives, ❶ Why is decision making often described as the essence of a manager’s job?
(5) analyse alternatives, (6) select alternative, (7) implement alternative, and ➋ Describe the eight steps in the decision-making process.
(8) evaluate decision effectiveness. As managers make decisions, they may use ➌ We all bring biases to the decisions we make. What would be the drawbacks
heuristics to simplify the process, which can lead to errors and biases in their of having biases? Could there be any advantages to having biases? Explain.
decision making. The 12 common decision-making errors and biases include What are the implications for managerial decision making?
overconfidence, immediate gratification, anchoring, selective perception, ➍ ‘Because managers have so many powerful decision-making tools to use,
confirmation, framing, availability, representation, randomness, sunk costs, self- they should be able to make more rational decisions.’ Do you agree or
serving bias and hindsight. disagree with this statement? Why?
➎ Is there a difference between wrong decisions and bad decisions? Why do
Learning Objective 2. Discuss group decision good managers sometimes make wrong decisions? Bad decisions? How
making. might managers improve their decision-making skills?
Groups offer certain advantages when making decisions: more complete ➏ Explain how a manager might deal with making decisions under conditions
information, more alternatives, increased acceptance of a solution and greater of uncertainty.
legitimacy. On the other hand, groups are time-consuming, can be dominated by ➐ Why do you think organisations have increased the use of groups for making
a minority, create pressures to conform and cloud responsibility. Three ways of decisions? When would you recommend using groups to make decisions?
improving group decision making are brainstorming (utilising an idea-generating ➑ Find two examples each of procedures, rules and policies. Bring your
process that specifically encourages any and all alternatives while withholding examples to class and be prepared to share them.
any criticism of those alternatives), the nominal group technique (a technique ➒ Google ‘dumbest moments in business’ and find the most current version of
that restricts discussion during the decision-making process) and electronic this list. Choose three of the examples and describe what happened. What’s
meetings (the most recent approach to group decision making, which blends the your reaction to each example? How could the managers in each have made
nominal group technique with sophisticated computer technology). better decisions?
Learning Objective 3. Discuss contemporary issues

in managerial decision making.
As managers deal with employees from diverse cultures, they need to recognise
common and accepted behaviour when asking them to make decisions. Some
9780655702412_CH17.indd 484 3/3/20 11:08 AM


BEING A CREATIVE DECISION MAKER
Many decisions that managers make are routine, so they can fall back on experience and ‘what’s worked in the past’. But other decisions – especially those made by
upper-level managers – are unique and haven’t been confronted before. The uniqueness and variety of problems that managers face demand creativity – the ability
to produce novel and useful ideas. If managers are to successfully progress upward in an organisation, they’ll find an increasing need to develop creative decisions.
Creativity is partly a frame of mind. You need to expand your mind’s capabilities – that is, open yourself up to new ideas. Every individual has the ability to improve his
or her creativity, but many people simply don’t try to develop that ability.

PERSONAL
P I A INVENTORY
ASSESSMENT
Problem solving, creativity and innovation

Making decisions is all about solving problems. Do this PIA and find out about your level of creativity and innovation in problem solving.
Skill basics • Believe in finding a workable solution. Like believing in yourself, you also
Creativity is a skill you can develop. Here are some suggestions for how you can need to believe in your ideas. If you don’t think you can find a solution, you
do this: probably won’t.
• Brainstorm with others. Creativity isn’t an isolated activity. Bouncing ideas
• Think of yourself as creative. Research shows that if you think you can’t be
off others creates a synergistic effect.
creative, you won’t be. Believing in your ability to be creative is the first step
• Turn creative ideas into action. Coming up with creative ideas is only part
in becoming more creative.38
of the process. Once the ideas are generated, they must be implemented.
• Pay attention to your intuition. Every individual has a subconscious mind that
Keeping great ideas in your mind, or on papers that no one will read, does
works well. Sometimes answers will come to you when you least expect them.
little to expand your creative abilities.
Listen to that ‘inner voice’. In fact, most creative people will keep a notepad
near their bed and write down ideas when the thoughts come to them. Practising the skill
• Move away from your comfort zone. Every individual has a comfort zone in Read through the scenario and follow the direction at the end of it.
which certainty exists. But creativity and the known often don’t mix. To be Every time the phone rings, your stomach clenches and your palms start to
creative, you need to move away from the status quo and focus your mind sweat. And it’s no wonder! As sales manager for Brinkers, a machine tool parts
on something new. manufacturer, you’re besieged by calls from customers who are upset about
• Determine what you want to do. This includes such things as taking time to late deliveries. Your boss, Carter Hererra, acts as both production manager
understand a problem before beginning to try to resolve it, getting all the and scheduler. Every time your sales representatives negotiate a sale, it’s up
facts in mind and trying to identify the most important facts. to Carter to determine whether production can actually meet the delivery date
• Think outside the box. Use analogies whenever possible. (For example, could the customer specifies. And Carter invariably says, ‘No problem.’ The good thing
you approach your problem like a fish out of water and look at what the fish about this is that you make a lot of initial sales. The bad news is that production
does to cope? Or can you use the things you have to do to find your way when hardly ever meets the shipment dates that Carter authorises. And he doesn’t
it’s foggy to help you solve your problem?) Use different problem-solving seem to be all that concerned about the aftermath of late deliveries. He says, ‘Our
strategies such as verbal, visual, mathematical or theatrical strategies. Look at customers know they’re getting outstanding quality at a great price. Just let them
your problem from a different perspective, or ask yourself what someone else, try to match that anywhere. It can’t be done. So even if they have to wait a couple
like your grandmother, might do if faced with the same situation. of extra days or weeks, they’re still getting the best deal they can.’ Somehow the
• Look for ways to do things better. This may involve trying consciously to be customers don’t see it that way, and they let you know that they’re dissatisfied.
original, not worrying about looking foolish, keeping an open mind, being Then it’s up to you to try to soothe the relationship. You know this problem has
alert to odd or puzzling facts, thinking of unconventional ways to use objects to be taken care of, but what possible solutions are there? After all, how are you
and the environment, discarding usual or habitual ways of doing things and going to keep from making your manager mad or making the customers mad?
striving for objectivity by being as critical of your own ideas as you would Break into groups of three. Assume you’re the sales manager. What creative
those of someone else. solutions can your group come up with to deal with this problem?
• Find several right answers. Being creative means continuing to look for
other solutions even when you think you have solved the problem. A better,
more creative solution just might be found.
9780655702412_CH17.indd 485 3/3/20 11:08 AM

Mini cases
17.1 Going greener
Better decision = better business
When Dean and Gill Belle took over the Mansfield Regional Produce Store, live music evenings. To create the right ambience, Dean and Gill decided to
they faced an important question: how could they upgrade the premises to replace the building’s incandescent light globes with compact fluorescents
make it more environmentally sustainable while still maintaining its historic that could be dimmed. At the time, dimmable fluorescent lights were new
charm? The answer turned out to be: with a lot of careful decisions!39 on the market and expensive to purchase, so buying the 10 globes that
The Mansfield Regional Produce store is a busy café located in the would be needed to light the space required was a significant investment.
main street of Mansfield, Victoria. It’s easily identifiable by the three bright Dean and Gill investigated different options online, but found that ‘it can be
yellow umbrellas that shade the café tables out the front. The building a challenge to calculate capital outlay versus the return, when you have to
was originally built in 1895 to be an auction room, and its high cathedral consider cash flow. That can be a hard calculation to make, without all the
ceilings and exposed rafters are part of its historical and rustic charm. But information at your fingertips.’ Especially when it turned out that the globes
when Dean and Gill took over the store in 2007, they realised its historic didn’t last anything like as long as the 2000 hours that were estimated.
charms also needed a serious upgrade! The concrete floor, high ceilings and Ironically, cooling also became an issue as the refrigeration unit in the
lack of ceiling insulation meant the building was difficult to heat in winter cool room was old and constantly being repaired. Luckily, ‘a new mechanic,
and uncomfortably hot in summer. The kitchen had only one stove and a with more training, helped us understand that upgrading to a new, more
bathroom-style exhaust fan, which soon proved inadequate when the café efficient model would be more cost effective than continually patching the
became popular very quickly. Using ‘a bit of common sense’, Google, and old unit’. When the pair also needed to replace the café’s hot water system,
restaurant and catering industry magazines, Dean and Gill began to search they asked others in the industry for advice and made careful calculations of
for some solutions. their hot water needs, the available space and the cost of different systems.
The first priority was replacing the kitchen exhaust fans to improve As they recalled, ‘It was frustrating – trying to make an informed decision.
ventilation for the kitchen and make the premises compliant with In the end we just had to make a call!’ Fortunately, their decisions not only
regulations. But the solution to one problem created another. In winter, the made the café more energy efficient, but also helped it to expand and thrive.
fans sucked cold air through gaps in the café’s windows, creating a cold draft ❶ List some of the decision criteria you think Dean and Gill used in their
for customers. Using an infrared thermometer gun, Dean took temperature decision making. Are there any other criteria they could have used to
measurements to map the cold airflow, then stopped the draughts using help them make better decisions?
draught stoppers and by taping over the window frames. ➋ How do you think they weighted the criteria? Which ones were they
When the roof cladding needed replacing, Dean and Gill took the likely to consider of more importance? Which ones might they have
opportunity to also insulate the ceiling to reduce energy wastage and considered less important?
heat loss. They decided to install a thin skin of insulation because, as they ➌ Would Dean and Gill’s decision-making conditions have been
recalled, ‘We had limited time available and a limited budget, and there characterised by certainty, risk or uncertainty? Explain.
were many factors involved in the decision . . . but [looking back] we didn’t ➍ What do Dean and Gill’s experiences indicate about the challenges of
have the information we needed to make a properly informed choice.’ trying to engage in rational decision making?
Other big decisions taught them additional lessons about the challenges
of making fully informed choices. The café hosts monthly Bracket and Jam
17.2 Dramatic decisions

Decision making is always a matter of perspective
On 12 January 2016, Essendon Football Club was rocked by a ruling from and repair of damaged tissue; it is also, according to World Anti-Doping
the Court of Arbitration for Sport (CAS) that 34 past and present Essendon Authority (WADA) guidelines, an unregulated substance prohibited for
players had been found guilty of using a banned substance. The decision use in competition. Fuelling the drama of the announcement, the CAS
ended three years of investigations by the CAS, the Australian Football ruling directly contradicted the findings of the AFL Anti-Doping Tribunal’s
League (AFL) and the Australian Sports Anti-Doping Authority (ASADA) investigation of the matter. How could two tribunals arrive at to two such
into the club’s use of Thymosin Beta-4 (TB4). TB4 is a naturally occurring different answers to the same question? Because they used different
peptide that supports the health of cells, including the regeneration decision criteria.40
9780655702412_CH17.indd 486 3/3/20 11:08 AM

17.2 Dramatic decisions continued

To conclude that Essendon players were administered TB4 by the club as had signed a consent form for the injection of TB4, and had been secretive
part of its supplement program, the AFL Anti-Doping Tribunal required that and deceptive about their supplementation regime by failing to disclose the
ASADA prove three indispensable links in a chain of evidence: (1) that TB4 injections received to club coaches and the club doctor, and failing to record
was procured from Chinese sources; (2) that South Yarra pharmacist Nima the injection on the doping control forms. According to the CAS tribunal,
Alavi-Moghadam compounded the substance and provided it to Essendon’s players had no reason to be secretive about use of a substance that was
sport scientist, Stephen Dank; and (3) that the substance was injected into openly approved for use within professional sport. According to ASADA
each player. ASADA didn’t rely upon direct evidence of doped athletes, or of chief executive Ben McDevitt, ‘At best, the players did not ask the questions,
witnesses. (It accepted this evidence, but ruled it out as unreliable.) Instead, or the people, they should have. At worst, they were complicit in a culture
it relied upon evidence such as emails, interviews, text messages and of secrecy and concealment.’ In its ruling, the CAS panel concluded that
invoices. ASADA was unable to demonstrate that the substance received the desire of the players to gain a competitive advantage led them to be
was indeed TB4, due to inadequacies in Essendon’s record keeping about insufficiently careful as to the substances they allowed into their bodies.
the supplement program’s administration, and to the lack of laboratory test- Following the CAS ruling that players took the banned substance in 2012,
ing and certification of a shipment received from China. Consequently, it all of Essendon’s active players were suspended by the AFL for the 2016
was impossible for ASADA to prove the second and third links in the tribu- season.
nal’s chain of evidence. The tribunal determined that Dank did purchase ❶ When deciding whether Essendon players used TB4, was the CAS
TB4, but wasn’t ‘comfortably satisfied’ that the substance was administered dealing with a structured problem or an unstructured problem? Would
to players as part of the supplement program. you describe this as a programmed decision or an unprogrammed
In contrast, CAS’s decision criteria followed a ‘strands in the cable’ decision?
argument, whereby all relevant forms of evidence deemed reliable and ➋ Which aspects of the investigations into Essendon’s use of TB4
credible were considered cumulatively. This included evidence originally were influenced by uncertainty? How do you think that uncertainty
presented by ASADA to the AFL tribunal, along with additional testimony influenced the decision processes and the decision outcomes?
of qualified medical and science experts and the results of frozen urine ➌ Which decision biases could have influenced the Essendon players’
samples from two players that indicated the existence of abnormally high decisions about participating in the supplement program?
levels of TB4. The CAS didn’t have to identify the source of the product, as ➍ How might groupthink have influenced decisions at Essendon Football
other ‘strands in the cable’ provided sufficient evidence to indicate that TB4 Club about the acceptability of using TB4?
was administered to players. This included evidence that Essendon players
References
1 See, for example, A. Nagurney, J. Dong and P. L. Mokhtarian, ‘Multicriteria Network 8 Information in this section taken from K. Messer, ‘Comparing Direct Mail vs. Email Carbon
Equilibrium Modeling with Variable Weights for Decision-Making in the Information Age Footprints’, LinkedIn, <https://www.linkedin.com/>, 7 September 2014, accessed 19 March
with Applications to the Telecommuting and Teleshopping’, Journal of Economic Dynamics 2017.
and Control, August 2002, pp. 1629–50. 9 A. Deutschman, ‘Inside the Mind of Jeff Bezos’, Fast Company, August 2004, pp. 50–8.
2 J. Flinchbaugh, ‘Surfacing Problems Daily: Advice for Building a Problem-Solving 10 See, for example, S. Schulz-Hardt, A. Mojzisch, F. C. Brodbeck, R. Kerschreiter and D.
Culture’, Industry Week, April 2011, p. 12; ‘Business Analysis Training Helps Leaders Frey, ‘Group Decision Making in Hidden Profile Situations: Dissent as a Facilitator for
Achieve an Enterprise-Wide Perspective’, Leader to Leader, Fall 2010, pp. 63–5; D. Decision Quality’, Journal of Personality and Social Psychology, December 2006, pp.
Okes, ‘Common Problems with Basic Problem Solving’, Quality, September 2010, pp. 1080–3; and C. K. W. DeDreu and M. A. West, ‘Minority Dissent and Team Innovation:
36–40; and J. Sawyer, ‘Problem-Solving Success Tips’, Business and Economic Review, The Importance of Participation in Decision Making’, Journal of Applied Psychology,
April–June 2002, pp. 23–4. December 2001, pp. 1191–201.
3 See J. Figueira and B. Ray, ‘Determining the Weights of Criteria in the ELECTRE Type of 11 S. Mohammed, ‘Toward an Understanding of Cognitive Consensus in a Group Decision-
Methods with a Revised Simons’ Procedure’, European Journal of Operational Research, Making Context’, Journal of Applied Behavioral Science, December 2001, p. 408.
1 June 2002, pp. 317–26. 12 M. J. Fambrough and S. A. Comerford, ‘The Changing Epistemological Assumptions of
4 For example, see M. Elliott, ‘Breakthrough Thinking’, IIE Solution, October 2001, pp. Group Theory’, Journal of Applied Behavioral Science, September 2006, pp. 330–49.
22–5; and B. Fazlollahi and R. Vahidov, ‘A Method for Generation of Alternatives by 13 R. A. Meyers, D. E. Brashers and J. Hanner, ‘Majority–Minority Influence: Identifying
Decision Support Systems’, Journal of Management Information Systems, Fall 2001, pp. Argumentative Patterns and Predicting Argument–Outcome Links’, Journal of
229–50. Communication, Autumn 2000, pp. 3–30.
5 D. Miller, Q. Hope, R. Eisenstat, N. Foote and J. Galbraith, ‘The Problem of Solutions: 14 See, for example, T. Horton, ‘Groupthink in the Boardroom’, Directors and Boards,
Balancing Clients and Capabilities’, Business Horizons, March–April 2002, pp. 3–12. Winter 2002, p. 9.
6 E. Teach, ‘Avoiding Decision Traps’, CFO, June 2004, pp. 97–9; and D. Kahneman and A. 15 I. L. Janis, Groupthink (Boston: Houghton Mifflin, 1982). See also J. Chapman, ‘Anxiety
Tversky, ‘Judgment under Uncertainty: Heuristics and Biases’, Science, vol. 185 (1974), pp. and Defective Decision Making: An Elaboration of the Groupthink Mode’, Management
1124–31. Decision, October 2006, pp. 1391–404.
7 Information for this section taken from S. P. Robbins, Decide & Conquer (Upper Saddle 16 Managing for Diversity box based on N. J. Adler (ed.), International Dimensions of
River, NJ: Financial Times/Prentice Hall, 2004). Organizational Behavior, 4th edn (Cincinnati, OH: South-Western College Publishing,
2001); B. C. McDonald and D. Hutcheson, ‘Dealing with Diversity is Key to Tapping
9780655702412_CH17.indd 487 3/3/20 11:08 AM

Talent’, Atlanta Business Chronicle, 18 December 1998, pp. 45A+; P. M. Elsass and 30 J. de Haan, M. Yamamoto and G. Lovink, ‘Production Planning in Japan: Rediscovering
L. M. Graves, ‘Demographic Diversity in Decision-Making Groups: The Experience Lost Experiences or New Insights’, International Journal of Production Economics, 6
of Women and People of Color’, Academy of Management Review, October 1997, May 2001, pp. 101–9.
pp. 946–73; and S. R. Sommers, ‘On Racial Diversity and Group Decision Making: 31 D. Dunne and R. Martin, ‘Design Thinking and How It Will Change Management
Identifying Multiple Effects of Racial Composition on Jury Deliberations’, Journal of Education: An Interview and Discussion’, Academy of Management Learning &
Personality and Social Psychology, October 2006, pp. 597–612. Education, December 2006, p. 512.
17 See, for example, T. W. Costello and S. S. Zalkind (eds), Psychology in Administration: A 32 M. Korn and R. E. Silverman, ‘Forget B-School, D-School is Hot’, Wall Street Journal, 7
Research Orientation (Upper Saddle River, NJ: Prentice Hall, 1963), pp. 429–30; R. A. June 2012, pp. B1+; R. Martin and J. Euchner, ‘Design Thinking’, Research Technology
Cooke and J. A. Kernaghan, ‘Estimating the Difference between Group versus Individual Management, May/June 2012, pp. 10–14; T. Larsen and T. Fisher, ‘Design Thinking: A
Performance on Problem Solving Tasks’, Group and Organization Studies, September Solution to Fracture-Critical Systems’, DMI News & Views, May 2012, p. 31; T. Berno,
1987, pp. 319–42; and L. K. Michaelsen, W. E. Watson and R. H. Black, ‘A Realistic Test ‘Design Thinking versus Creative Intelligence’, DMI News & Views, May 2012, p. 28; J.
of Individual versus Group Consensus Decision Making’, Journal of Applied Psychology, Liedtka and T. Ogilvie, ‘Helping Business Managers Discover Their Appetite for Design
October 1989, pp. 834–9. See also J. Hollenbeck, D. R. Ilgen, J. A. Colquitt and A. Thinking’, Design Management Review, March 2012, pp. 6–13; and T. Brown, ‘Strategy
Ellis, ‘Gender Composition, Situational Strength and Team Decision-Making Accuracy: by Design’, Fast Company, June 2005, pp. 52–4.
A Criterion Decomposition Approach’, Organizational Behavior and Human Decision 33 C. Guglielmo, ‘Apple Loop: The Week in Review’, Forbes.com, 25 May 2012, p. 2.
Processes, May 2002, pp. 445–75. 34 D. Dunne and R. Martin, ‘Design Thinking and How It Will Change Management
18 See, for example, L. K. Michaelsen, W. E. Watson and R. H. Black, ‘A Realistic Test of Education: An Interview and Discussion’, Academy of Management Learning &
Individual versus Group Consensus Decision Making’, Journal of Applied Psychology, Education, December 2006, p. 514.
October 1989, pp. 834–9; and P. W. Pease, M. Beiser and M. E. Tubbs, ‘Framing Effects 35 C. Fitzsimmons, ‘Big Data? Big Deal’, BRW, 10–16 October 2013, pp. 14–22; F. Smith,
and Choice Shifts in Group Decision Making’, Organizational Behavior and Human ‘Moneyball—Recruitment’s Next Big Thing’, BRW, 6–12 June 2013, pp. 35–7; and J.
Decision Processes, October 1993, pp. 149–65. Lindhe, ‘Numbers Meet Entertainment’, BRW, 4–10 July 2013, pp. 47–9.
19 J. Wagstaff, ‘Brainstorming Requires Drinks’, Far Eastern Economic Review, 2 May 2002, 36 ‘Big Data, Big Impact: New Possibilities for International Development’, World Economic
p. 34. Forum, weforum.org, 2012.
20 T. Kelley, ‘Six Ways to Kill a Brainstormer’, Across the Board, March–April 2002, p. 12. 37 C. Fitzsimmons, ‘Big Data? Big Deal’, BRW, 10–16 October 2013, pp. 14–22; F. Smith,
21 K. L. Dowling and R. D. St. Louis, ‘Asynchronous Implementation of the Nominal Group ‘Moneyball—Recruitment’s Next Big Thing’, BRW, 6–12 June 2013, pp. 35–7; and J.
Technique: Is It Effective’, Decision Support Systems, October 2000, pp. 229–48. Lindhe, ‘Numbers Meet Entertainment’, BRW, 4–10 July 2013, pp. 47–9.
22 See also B. Andersen and T. Fagerhaug, ‘The Nominal Group Technique’, Quality 38 Based on J. V. Anderson, ‘Mind Mapping: A Tool for Creative Thinking’, Business
Progress, February 2000, p. 144. Horizons, January–February 1993, pp. 42–6; and T. Proctor, Creative Problem Solving
23 ‘Electronic Meeting System’, <https://www.investopedia.com/terms/e/electronic- for Managers (New York: Routledge, 2005).
meeting-system.asp>, accessed 8 January 2018; and A. Roman, ‘A Guide to Electronic 39 Business Victoria, ‘Sustainability a Factor in Business Growth’, <www.business.vic.
Meeting Systems’, Convene, 20 August 2014 gov.au/>, accessed 18 August 2017; Mansfield Regional Produce Store, <http://
24 J. Burdett, ‘Changing Channels: Using the Electronic Meeting System to Increase Equity in theproducestore.com.au/>, accessed 14 October 2017; and Explore Australia,
Decision Making’, Information Technology, Learning and Performance Journal, Fall 2000, ‘Mansfield Regional Produce Store’, 2010, <www.exploreaustralia.net.au/Victoria/
pp. 3–12; and D. Gross and C. Gross, ‘Impact of an Electronic Meeting System on the Group High-Country/>, accessed 14 October 2017.
Decision-Making Process’, Computer Informatics Nursing, January–February 2005, pp. 46–51. 40 Case based on D. Kane, ‘Essendon CAS Verdict: Why Decision to Reverse AFL Tribunal’s
25 ‘Fear of Flying’, Business Europe, 3 October 2001, p. 2. Bombers Decision Was Mystifying’, Sydney Morning Herald, 15 January 2016; M.
26 D. Gross and C. Gross, ‘Impact of an Electronic Meeting System on the Group Decision- Football, ‘A Critique of the Essendon CAS Verdict (Part 1)’, The Roar, 17 January 2016;
Making Process’, Computer Informatics Nursing, January–February 2005, pp. 46–51. Court of Arbitration for Sport, CAS 2015/A/4059 World Anti-Doping Agency v. Thomas
27 M. Roberti, ‘Meet Me on the Web’, Fortune: Tech Supplement, Winter 2002, p. 10. Bellchambers et al., Australian Football League, Australian Sports Anti-Doping Authority,
28 See also J. A. Hoxmeier and K. A. Kozar, ‘Electronic Meetings and Subsequent Meeting <www.tas-cas.org/fileadmin/user_upload/Arbitral_Award_WADA_ESSENDON.
Behavior: Systems as Agents of Change’, Journal of Applied Management Studies, pdf/>, accessed 26 June 2017; J. Niall, ‘WADA Finds “Abnormally” High TB4 Levels
December 2000, pp. 177–95. in Essendon Players’, The Age, 6 August 2015; E. Brimer, ‘CAS Panel Finds “Strands
29 See, for example, P. Berthon, L. F. Pitt and M. T. Ewing, ‘Corollaries of the Collective: The in the Cable” Sufficiently Strong to Overturn the AFL Anti-Doping Tribunal’s Decision’,
Influence of Organizational Culture and Memory Development on Perceived Decision- CommBar, <www.commbarmatters.com.au/>, 25 February 2016, accessed 26 June
Making Context’, Academy of Marketing Science Journal, Spring 2001, pp. 135–50. 2017.
9780655702412_CH17.indd 488 3/3/20 11:08 AM

SESSION Managing the
9
organisation
and individual
• Organisational structure and design
• Foundations of individual behaviour
9780655702412_CH18.indd 489 3/3/20 11:09 AM

Chapter
18 Organisational structure
and design
People commonly assume that bureaucracies – or mechanistic structures – are inefficient. Critics claim these
organisations are slow, rule-bound and have too much ‘red tape’. The media makes you think bureaucracies
are extinct – replaced by empowered teams and loosely structured and adaptive organisations. Although
many organisations today do look like that, the truth is that bureaucracies are still alive and well. Most
medium-sized and large organisations are structured as a bureaucracy because its traits – specialisation,
formal rules and regulations, clear chain of command and departmentalisation – help to structure people
and tasks efficiently.
Welcome to the fascinating world of organisation structure and design in the 21st century! In this
chapter, we present the basics of organising. We define the concepts and their key components and explain
how managers use these to create a structured environment in which organisational members can do their
work efficiently and effectively. Once the organisation’s goals, plans and strategies are in place, managers
must develop a structure that will best facilitate the attainment of those goals.
Learning Objective 1 Describe six key elements in organisational design.

What are the six key elements in organisational design? pp. 492–501
Learning Learning Objective 2 Compare and contrast the mechanistic and organic organisational
Objectives forms.
How is a mechanistic organisation different from an organic
organisation? pp. 501–3
Learning Objective 3 Compare and contrast traditional and contemporary organisational
designs.
What are some common organisational designs? pp. 503–8
Learning Objective 4 Discuss the design challenges faced by today’s organisations.
What are today’s organisational design challenges? pp. 508–13
9780655702412_CH18.indd 490 3/3/20 11:09 AM

Chapter 18 Organisational structure and design 491
LO 1
Describe six
key elements in
organisational
design.
LO 2
fact or fiction?
Compare and
contrast the
mechanistic
and organic
organisational
forms.
Bureaucracies are inefficient.

LO 3
Compare and
contrast traditional
and contemporary
organisational
designs.
fiction
LO 4
Discuss the
design challenges
faced by today’s
organisations.
9780655702412_CH18.indd 491 3/3/20 11:09 AM

492 Session 9 Managing the organisation and individual
What are the six key elements

in organisational design?
Organising is all about getting work done efficiently and effectively. Recall from Chapter 14 that we defined
organising organising as the function of management that determines how work will be arranged and undertaken
The function of to achieve the organisation’s goals. Decisions about what tasks will be done, and by whom, create the
management
organisation’s structure. When managers develop or change the organisation’s structure, they’re engaging
that creates the
organisation’s structure in organisation design. This process involves making decisions about how specialised jobs should be,
the rules to guide employees’ behaviours and at what level decisions are to be made. Although organisation
organisation design decisions are typically made by top-level managers, it’s important for everyone involved to understand
design
When managers the process because each of us works in some type of organisation structure, and we need to know how
develop or change the and why things get done. In addition, given the changing environment and the need for organisations to
organisation’s structure adapt, you should understand what tomorrow’s structures may look like as those will be the settings you’ll
be working in or using in your own business.
Few topics in management have undergone as much change in the past few years as that of organising
and organisational structure. Managers are reevaluating traditional approaches and exploring new structural
designs that best support and facilitate employees doing the organisation’s work – designs that can achieve
efficiency but are also flexible.
The basic concepts of organisation design formulated by classic management writers such as Henri
work
specialisation Fayol and Max Weber offered structural principles for managers to follow. (Rewind: History Module,
Dividing work activities p. 416.) Over 90 years have passed since many of those principles were originally proposed. Given that
into separate job tasks; length of time and all the changes that have taken place, you would think that those principles would
also called division of be mostly worthless today. Surprisingly, they’re not. They still provide valuable insights into designing
labour
effective and efficient organisations. Of course, since then we’ve also gained a great deal of knowledge
over the years about how to build on their ideas. In the following sections, we discuss the six basic elements
of organisational structure: work specialisation, departmentalisation, authority and responsibility, span of
control, centralisation versus decentralisation, and formalisation.
What is work
specialisation?
Traditional view
Work specialisation is dividing work activities
into separate job tasks. (That’s why it’s also known
as division of labour.) Individual employees
‘specialise’ in doing part of an activity, rather than
the entire activity, in order to increase work output.
Work specialisation allows organisations to
efficiently use the diversity of skills that workers
have. In most organisations, some tasks require
highly developed skills; others can be performed
by employees with lower skill levels. Work
specialisation makes efficient use of the diversity of
skills that workers have, because tasks and rewards
A cardiac surgeon finishes a surgical procedure and hands over to other members of
the medical team to stitch and staple the patient. Hospitals use work specialisation are allocated according to worker skills. Low-skill
in dividing job activities as an organising mechanism that helps employees boost their tasks are performed by low-skill workers, while
productivity and makes efficient use of workers’ diverse skills. more sophisticated tasks are performed by higher-
Franck Boston/Shutterstock
skilled employees. Higher-skilled workers usually
9780655702412_CH18.indd 492 3/3/20 11:09 AM

earn higher wages, so using them only for tasks that require their higher skills is also financially efficient.
This explains why you rarely find a cardiac surgeon closing up a patient after surgery. Once the surgeon
has finished the surgery, student doctors who are learning open-heart surgery stitch and staple the patient.
This way, the surgeon and student doctors each contribute the best of their knowledge and skills, and by
delegating the tasks that don’t require the surgeon’s expertise to other doctors the surgeon can save time
and energy for other patients.
Early proponents of work specialisation believed that it could lead to great increases in productivity. At
the beginning of the 20th century, that generalisation was reasonable. Because specialisation wasn’t widely
practised, its introduction almost always generated higher productivity. For example, when Henry Ford
used the division of labour to implement assembly lines for the Model T Ford, it reduced the production
time for each car from 106 hours to 6 hours.1
Today’s view
Most managers today see work specialisation as an important organising mechanism because it helps
employees be more efficient. For example, McDonald’s uses high specialisation to get its products made
and delivered to customers efficiently. However, managers also have to recognise the limitations of
specialisation. At some point, the routine and repetitive nature of work that results from division of labour
causes boredom, fatigue, stress, low productivity, poor quality, increased absenteeism and high turnover,
and exceeds the economic advantages (see Figure 18.1).2 So, managers have to think carefully about how
they can design jobs to allow employees to focus on what they are good at without getting bored and
demotivated. We talk more about this in Chapter 21 when we consider how job design can affect motivation.
What is departmentalisation?
Traditional view
Early management writers argued that after deciding what job tasks will be done by whom, common work
activities needed to be grouped back together so that work was done in a coordinated and integrated
High
Impact from
human
diseconomies
Productivity
Impact from
economies
of specialisation
Low
Low High
Work specialisation
Figure 18.1 Economies and diseconomies of work
9780655702412_CH18.indd 493 3/3/20 11:09 AM

Table 18.1 Types of departmentalisation

Functional Groups employees based on work performed (e.g. engineering, accounting, information systems,
human resources)
Product Groups employees based on major product areas in the corporation (e.g. women’s footwear, men’s
footwear, apparel and accessories)
Customer Groups employees based on customers’ problems and needs (e.g. wholesale, retail, government)
Geographic Groups employees based on location served (e.g. Victoria, New South Wales, Western Australia)
Process Groups employees based on the basis of work or customer flow (e.g. testing, payment)
departmentalisation way. How jobs are grouped together is called departmentalisation. There are five common forms
How jobs are grouped (see Table 18.1), although an organisation may use its own unique classification. No single method of
together
departmentalisation was advocated by the early writers. The method or methods used would reflect the
grouping that best contributed to the attainment of the goals of the organisation and the individual units.
How are activities grouped?

functional 1 One of the most popular ways to group activities is by functions performed, or functional
departmentalisation departmentalisation. A manager might organise the workplace by separating engineering,
Grouping activities by
accounting, information systems, human resources and purchasing specialists into departments.
functions performed
Functional departmentalisation can be used in all types of organisations. Only the functions change to
reflect the organisation’s objectives and activities. The main advantage of functional departmentalisation
is the achievement of economies of scale by placing people with common skills and specialisations into
common units.
product 2 Product departmentalisation focuses attention on major product areas in the corporation. Each
departmentalisation product is under the authority of a senior manager who is a specialist in, and is responsible for, everything
Grouping activities by major
having to do with their product line. One company that uses product departmentalisation is Nike. Its
product areas
structure is based on its varied product lines, which include athletic and dress/casual footwear, sports
apparel and accessories, and performance equipment. If an organisation’s activities were service related
rather than product related, each service would be autonomously grouped. The advantage of product
grouping is that it increases accountability for product performance, because all activities related to a
specific product are under the direction of a single manager.
3 The particular type of customer an organisation seeks to reach can also dictate employee grouping.
The sales activities in an office supply firm, for example, can be divided into three departments
that serve retail, wholesale and government customers. A large law firm can segment its staff on the
customer basis of whether it serves corporate or individual clients. The assumption underlying customer
departmentalisation departmentalisation is that customers in each department have a common set of problems and
Grouping activities by
needs that can best be met by specialists.
customer
4 Another way to departmentalise is on the basis of geography or territory – geographic
geographic departmentalisation. If an organisation’s customers are scattered over a large geographic area,
departmentalisation this form of departmentalisation can be valuable because it provides the flexibility needed to deal
Grouping activities on
with diverse environments. Geographic departmentalisation means each department can focus on
the basis of geography or
territory the conditions and operational requirements suited to its own area, improving responsiveness to local
conditions. For example, the organisation structure of Coca-Cola reflects the company’s operations in
two broad geographic areas – the North American sector and the international sector (which includes
the Pacific Rim, the European Community, Northeast Europe, Africa and Latin America).
9780655702412_CH18.indd 494 3/3/20 11:09 AM

5 The final form of departmentalisation is called process departmentalisation, which groups activities process
on the basis of work or customer flow – like that found in many government offices or in health-care departmentalisation
Grouping activities on
clinics. Units are organised around common skills needed to complete a certain process. If you have ever
the basis of work or
been to a hospital for a medical procedure, you’ve probably experienced process departmentalisation. customer flow
Separate departments handle admissions, the collection of tissue samples such as blood and bone marrow,
the surgery itself and post-operative recovery, and patients ‘flow’ through the various departments in
sequence.
Today’s view
Most large organisations continue to use most or all of the departmental groups suggested by the early
management writers. Black & Decker, for example, organises its divisions along functional lines, its
manufacturing units around processes, its sales around geographic regions, and its sales regions around
customer groupings. However, many organisations use cross-functional teams, which are teams made cross-functional
up of individuals from various departments and that cross traditional departmental lines. These teams have teams
been especially useful as tasks have become more complex and diverse skills are needed to accomplish Teams made up of
individuals from various
them.3 departments and
Also, today’s competitive environment has refocused the attention of management on its customers. that cross traditional
To better monitor the needs of customers and to be able to respond to changes in those needs, many departmental lines
organisations are giving greater emphasis to customer departmentalisation.
What are authority and responsibility?

Authority refers to the rights inherent in a managerial position to give orders and expect the orders to authority
be obeyed. Authority was a major concept discussed by the early management writers as they viewed it as The rights inherent in a
managerial position to
the glue that held an organisation together.4 It was delegated downwards to lower-level managers, giving
give orders and expect
them certain rights while prescribing certain limits within which to operate. Each management position the orders to be obeyed
had specific inherent rights that incumbents acquired from the position’s rank or title. Authority, therefore,
is related to one’s position within an organisation and has nothing to do with the personal characteristics
of an individual manager. When a position of authority is vacated, the person who has left the position no
longer has any authority. The authority remains with the position and its new incumbent.
responsibility
When managers delegate authority, they must allocate commensurate responsibility. That is, when An obligation to
employees are given rights, they also assume a corresponding obligation to perform. And they’ll be held perform assigned duties
accountable for their performance! Allocating authority without responsibility and accountability creates
opportunities for abuse. Likewise, no one should be held responsible or accountable for something over
which they have no authority.
Authority comes from the position,

not the person.
chain of
command
The line of authority
What are the different types of authority relationships? extending from upper
To understand authority and responsibility, you also have to be familiar with the chain of command, organisational levels
the line of authority extending from upper organisational levels to lower levels, which clarifies who reports to lower levels, which
clarifies who reports to
to whom. Managers need to consider the chain of command when organising work because it helps
whom
employees with questions such as ‘Who do I report to?’ or ‘Who do I go to if I have a problem?’ The early
line authority
management writers distinguished between two forms of authority: line authority and staff authority. Line
Authority that entitles
authority entitles a manager to direct the work of an employee. It’s the employer–employee authority a manager to direct the
relationship that extends from the top of the organisation to the lowest echelon, according to the chain work of an employee
9780655702412_CH18.indd 495 3/3/20 11:09 AM

of command. Line authority relationships

are depicted in organisational charts, as
shown in Figure 18.2. As a link in the chain of
command, a manager with line authority has
the right to direct the work of employees and
to make certain decisions without consulting
anyone. Of course, in the chain of command,
every manager is also subject to the direction
of their superior.
Keep in mind that sometimes the term
line is used to differentiate line managers from
staff managers. In this context, line refers to
managers whose organisational function
contributes directly to the achievement of
organisational objectives. In a manufacturing
firm, line managers are typically in the
production and sales functions, whereas
managers in human resources and payroll
are considered staff managers with staff
authority. Whether a manager’s function
Harley-Davidson uses cross-functional teams from the conception and design of is classified as line or staff depends on the
its motorcycles to their production and product launch. Harley’s teams of buyers,
organisation’s objectives.
suppliers, marketers, operations personnel, engineers and employees from other
departments work together to provide customers with quality products. As organisations grow larger and more
© H. Mark Weidman Photography/Alamy complex, line managers may find that they
don’t have the time, expertise or resources to
organisational
chart
A pictorial illustration
of an organisational Chief executive
structure. officer
Executive Managing Executive

director director director
Director Director Director Director Director
Region Region Region Region Region

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

A B C D E F G
Figure 18.2 Chain of command and line authority
9780655702412_CH18.indd 496 3/3/20 11:09 AM

Executive
director
Line authority
Assistant to the
executive director
Staff authority
Director of Director of Director of Other

human operations purchasing directors
resources
Unit 1 Unit 2
Manager Manager
Human Human
Other Operations Purchasing Operations Purchasing Other
resources resources
Figure 18.3 Line versus staff authority
get their jobs done effectively. In response, they create staff authority functions to support, assist, advise staff authority
and generally reduce some of their informational burdens. For example, the hospital administrator who Positions with some
authority that have been
is overburdened with administrative tasks might create a new staff position – administrative assistant – to
created to support,
provide support and perform simple tasks. Figure 18.3 illustrates line and staff authority. assist and advise those
holding line authority
What is unity of command?
An employee who has to report to two or more bosses might have to cope with conflicting demands or
priorities.5 Accordingly, the early writers believed that each employee should report to only one manager, a
term called unity of command. In those rare instances when the unity of command had to be violated, a unity of command
clear separation of activities and a supervisor responsible for each was always explicitly designated. Structure in which each
employee reports to
only one manager
One boss or more?
Unity of command was logical when organisations were relatively simple. Under some circumstances, it’s
still sound advice and organisations continue to adhere to it. But advances in technology, for example, now
allow access to organisational information that was once accessible only to top managers. And employees
can interact with anyone else in the organisation without going through the formal chain of command.
Thus, in some instances, strict adherence to unity of command creates a degree of inflexibility that hinders
an organisation’s performance.
Today’s view
The early management writers assumed that the rights inherent in an individual’s formal position in an
organisation were the sole source of influence, and they believed that managers were all-powerful. This
assumption might have been true 60 – even 30 – years ago. Organisations were simpler then. Staff was
less important. Managers were only minimally dependent on technical specialists. Under such conditions,
influence is the same as authority. And the higher a manager’s position in the organisation, the more
influence they had. However, those conditions no longer exist. Researchers and practitioners of management
9780655702412_CH18.indd 497 3/3/20 11:09 AM

now recognise that you don’t have to be a manager to have power and that power isn’t perfectly correlated
with an individual’s level in the organisation.
Authority is an important concept in organisations, but an exclusive focus on authority produces a
narrow, unrealistic view of influence. Today, we recognise that authority is only one element in the larger concept
of power.
How do authority and power differ?

Authority and power are often considered the same thing, but they’re not. Authority is a right. Its legitimacy
power is based on an authority figure’s position in the organisation. Authority goes with the job. Power, on the
An individual’s capacity other hand, refers to an individual’s capacity to influence decisions. Authority is part of the larger concept
to influence decisions
of power. That is, the formal rights that come with an individual’s position in the organisation are just one
means by which they can affect the decision process.
Figure 18.4 visually depicts the difference between authority and power. The two-dimensional
arrangement of boxes in part A portrays authority. The area in which the authority applies is defined by the
horizontal dimension. Each horizontal grouping represents a functional area. The influence an individual
holds in the organisation is defined by the vertical dimension in the structure. The higher they are in the
organisation, the greater their authority.
Power, on the other hand, is a three-dimensional concept (the cone in part B of Figure 18.4). It includes
not only the functional and hierarchical dimensions but also a third dimension called centrality. Although
A. Authority
Chief executive
officer
Research and Human

Finance Accounting Marketing Production
development resources
B. Power
Authority
level
The power core

Finance
Accounting Human
resources
Marketing
Research and
Production
development
Function
Figure 18.4 Authority versus power
9780655702412_CH18.indd 498 3/3/20 11:09 AM

Table 18.2 Types of power

Coercive power Power based on fear.
Reward power Power based on the ability to distribute something that others value.
Legitimate power Power based on an individual’s position in the formal hierarchy.
Expert power Power based on an individual’s expertise, special skill or knowledge.
Referent power Power based on identification with a person who has desirable resources or personal traits.
authority is defined by an individual’s vertical position in the hierarchy, power is made up of both their
vertical position and their distance from the organisation’s power core or centre.
Think of the cone in Figure 18.4 as an organisation. The centre of the cone is the power core.
The closer you are to the power core, the more influence you have on decisions. The existence of a
power core is, in fact, the only difference between parts A and B in the figure. The vertical hierarchy
dimension in part A is merely the individual’s level on the outer edge of the cone. The top of the cone
corresponds to the top of the hierarchy, the middle of the cone to the middle of the hierarchy, and so
on. Similarly, the functional groups in part A become wedges in the cone. Each wedge represents a
functional area.
The cone analogy explicitly acknowledges two facts: (1) the higher an individual moves in an
organisation (an increase in authority), the closer they move to the power core; and (2) it’s not necessary
to have authority in order to wield power because an individual can move horizontally inward towards the
span of control
power core without moving up. For example, assistants often are powerful in a company even though they The number of
have little authority. As gatekeepers for their bosses, these assistants have considerable influence over who employees a manager
gets to see their bosses and when. Furthermore, because they’re regularly relied upon to pass information can efficiently and
on to their bosses, they have some control over what their bosses hear. It’s not unusual for a $105,000-a-year effectively supervise
middle manager to tread carefully in order not to upset
the boss’s $45,000-a-year administrative assistant. This is
because the assistant has power. They may be low in the
authority hierarchy but close to the power core.
Likewise, low-ranking employees who have relatives,
friends or associates in high places might also be close to
the power core. So, too, are employees with scarce and
important skills. The lowly production engineer with
20 years’ experience in a company might be the only
one in the firm who knows the inner workings of all
the old production machinery. When pieces of this old
equipment break down, only this engineer understands
how to fix them. Suddenly, the engineer’s influence is
much greater than it would appear from their level in
the vertical hierarchy. What do these examples tell us
about power? They indicate that power can come from
different areas. French and Raven identified five sources, As the head of the national Women’s Australian Football League, Nicole
or bases, of power: coercive, reward, legitimate, expert Livingstone (shown here with Giants players Alicia Eva and Jessica Dal
and referent.6 We summarise them in Table 18.2. Pos) has expert power as an experienced sports administrator, legitimate
power as the CEO of the league, and referent power as a three-time
Olympic swimming medallist. She is leading the Women’s AFL towards
What is span of control? growth and financial sustainability by leveraging her experiences as an
Span of control refers to the number of employees elite athlete, sports commentator and former member of the Australian
reporting to a manager. It determines how closely a Olympic Committee.7
Ben Rushton/AAP
manager can monitor employees.8 The question of how
9780655702412_CH18.indd 499 3/3/20 11:09 AM

many employees a manager can efficiently and effectively supervise received a great deal of attention from
early management writers. Although they came to no consensus on a specific number, most favoured small
spans – typically, no more than six workers – in order to maintain close control.9 However, several writers
did acknowledge level in the organisation as a contingency variable. They argued that as a manager rises in
an organisation, they have to deal with a greater number of unstructured problems, so top managers need
a smaller span than do middle managers, and middle managers require a smaller span than do supervisors.
Over the last few decades, however, we’ve seen some change in theories about effective spans of control.10
Today’s view
Many organisations are increasing their spans of control by reducing the number of managers they
employ and making each remaining manager responsible for overseeing more employees. This has
meant they can reduce the number of managerial staff in their organisations and reduce costs. For this
reason, reducing managerial staff and increasing spans of control is a common strategy for dealing with
economic downturns. The span of control is increasingly being determined by looking at contingency
factors.
How many people can I manage effectively

and efficiently?
The most effective and efficient span depends on contingency factors such as:
• employee experience and training (the more they have, the larger the span)
• similarity of employee tasks (the more similarity, the larger the span)
• complexity of those tasks (the more complex, the smaller the span)
• physical proximity of employees (the closer the proximity, the larger the span)
• amount and type of standardised procedures (the more standardised, the larger the span)
• sophistication of the organisation’s management information system (the more sophisticated, the
larger the span)
• strength of the organisation’s value system (the stronger the value system, the larger the span)
• preferred managing style of the manager11 (personal preference of more or fewer employees to
manage).
How do centralisation and

decentralisation differ?
Traditional view
One of the questions that needs to be answered when organising is: ‘At what level are decisions made?’
centralisation Centralisation is the degree to which decision making takes place at upper levels of the organisation.
The degree to which Decentralisation is the degree to which lower-level managers provide input or actually make decisions.
decision making takes
Centralisation–decentralisation isn’t an either–or concept. Rather, it’s a matter of degree. What we mean is
place at upper levels of
the organisation that no organisation is completely centralised or completely decentralised. Few, if any, organisations could
effectively function if all their decisions were made by a select few people (centralisation) or if all decisions
decentralisation were pushed down to the level closest to the problems (decentralisation). Let’s look, then, at how the early
The degree to which
lower-level managers management writers viewed centralisation, as well as at how it exists today.
provide input or actually Early management writers proposed that centralisation in an organisation depended on the situation.12
make decisions Their goal was the optimum and efficient use of employees. Traditional organisations were structured in
a pyramid, with power and authority concentrated near the top of the organisation. Given this structure,
9780655702412_CH18.indd 500 3/3/20 11:09 AM

historically, centralised decisions were the most prominent, but

organisations today have become more complex and responsive to A question of ethics
dynamic changes in their environments. As such, many managers You manage a team that handles all of the recruitment
believe that decisions need to be made by those individuals closest to processes for your organisation.You were told in a
the problems, regardless of their organisational level. management meeting last week that your team is going to
be relocated interstate and incorporated into another
Today’s view department. Because the company wants to be able to
monitor your team’s performance more closely, the move
Today, managers often choose the amount of centralisation or will also mean you and your team will now report to a new
decentralisation that will allow them to best implement their decisions department head. For competitive reasons the organisation
and achieve organisational goals.13 What works in one organisation, won’t be announcing these plans for another month.
however, won’t necessarily work in another, so managers must One of your employees has just told you they have heard
that the team won’t be part of their current department
determine the amount of decentralisation for each organisation
‘for much longer’. Rumour has it that the team will be made
and the work units within it. Decentralisation means empowering redundant, and your employee wants to know if they are
employees and delegating to them the authority to make decisions likely to lose their current job and should start looking for
on those things that affect their work and to change the way that they new employment.
think about work. But it also means training employees effectively in Discuss this:
how to handle those new responsibilities and ensuring that they clearly • What ethical issues might arise when an organisation
wants to restructure its operations?
understand what they have authority to do and how to do it well.
• What are the implications for (a) managers, and
What is formalisation? (b) employees?
Traditional view
Formalisation refers to how standardised an organisation’s jobs are and the extent to which employee formalisation
behaviour is guided by rules and procedures. Highly formalised organisations have explicit job descriptions, How standardised an
organisation’s jobs are
numerous organisational rules and clearly defined procedures covering work processes. Employees have and the extent to which
little discretion over what’s done, when it’s done and how it’s done. However, where formalisation is low, employee behaviour
employees have more discretion in how they do their work. Early management writers expected organisations is guided by rules and
to be fairly formalised, as formalisation went hand-in-hand with bureaucratic-style organisations. procedures
Today’s view
Although some formalisation is necessary for consistency and control, many organisations today rely less
on strict rules and standardisation to guide and regulate employee behaviour.
Considering there are numerous situations where rules may be too restrictive, many organisations have
allowed employees some latitude, giving them sufficient autonomy to make those decisions that they feel
are best under the circumstances. It doesn’t mean throwing out all organisational rules because there will
always be rules that are important for employees to follow – and these rules should be explained so that
employees understand why it’s important to adhere to them. But for other rules, employees may be given
some leeway.14
How is a mechanistic organisation

different from an organic
organisation?
Figure 18.5 describes two organisational forms.15 The mechanistic organisation (or bureaucracy) was mechanistic
the natural result of combining the six elements of structure. Adhering to the chain-of-command principle organisation
A structure that’s
ensured the existence of a formal hierarchy of authority, with each person controlled and supervised
high in specialisation,
by one superior. Keeping the span of control small at increasingly higher levels in the organisation formalisation and
created tall, impersonal structures. As the distance between the top and the bottom of the organisation centralisation
9780655702412_CH18.indd 501 3/3/20 11:09 AM

expanded, top management would increasingly

impose rules and regulations. Because top managers
couldn’t control lower-level activities through direct
observation and ensure the use of standard practices,
they substituted rules and regulations. The early
management writers’ belief in a high degree of work
specialisation created jobs that were simple, routine
and standardised. Further specialisation through the
use of departmentalisation increased impersonality
and the need for multiple layers of management
to coordinate the specialised departments. Many
universities, government departments and public
sector agencies use mechanistic structures to help
For emergency service organisations, mechanistic structures enhance
control, coordination and consistency. Emergency situations are usually them coordinate large numbers of employees and
chaotic and if people are injured or property is on fire, quick responses ensure consistent operation.
are critical. Mechanistic structures can help by clearly defining areas of The organic organisation is a highly adaptive
responsibility, establishing direct chains of command, and providing detailed
form that is as loose and flexible as the mechanistic
procedures for handling complex circumstances.
© NSW State Emergency Service organisation is rigid and stable. Rather than having
standardised jobs and regulations, the organic
organisation’s loose structure allows it to change
organic rapidly as required.16
It has division of labour, but the jobs people do aren’t standardised. Employees
organisation tend to be professionals who are technically proficient and trained to handle diverse problems. They
A structure that’s need few formal rules and little direct supervision because their training has instilled in them standards
low in specialisation, of professional conduct. For example, surveyors don’t need to be given procedures on how to locate
formalisation and
centralisation a property boundary; professional standards guide their behaviour. The organic organisation is low in
centralisation so that the professional can respond quickly to problems and because top-level managers
cannot be expected to possess the expertise to make the necessary decisions.
ORGANIC
MECHANISTIC
Rigid hierarchical relationships Collaboration (both vertical and horizontal)

Fixed duties Adaptable duties
Many rules Few rules
Formalised communication channels Informal communication
Centralised decision authority Decentralised decision authority
Taller structures Flatter structures
Figure 18.5 Mechanistic versus organic organisations
9780655702412_CH18.indd 502 3/3/20 11:09 AM

How does technology affect organisation design?

• Initial research on Technology → Structure done by Joan • More recent studies also have shown that organisations adapt their
Woodward.22 structures to their technology depending on how routine their
• Woodward, a British management scholar, studied small technology is for transforming inputs into outputs.
manufacturing firms in southern England to determine the extent • More routine technology, more likely to have mechanistic structure
to which structural design elements were related to organisational • More non-routine technology, more likely to have organic structure
success.23
Discuss this:
• No consistent pattern found UNTIL firms divided into three
• Why is (a) mechanistic structure more appropriate for an
distinct technologies that had increasing levels of complexity and
organisation with routine technology, and (b) organic structure
sophistication.
more appropriate for an organisation with non-routine technology?
— Least complex and sophisticated: Unit production – the
• Does Woodward’s framework (see Table 18.3) still apply to today’s
production of items in units or small batches
organisations? Why or why not?
— Mass production – large-batch manufacturing
— Most complex and sophisticated: process
production – continuous-process production
• One of the earliest contingency studies.
• Woodward’s answer to the ‘it depends on’ question: Appropriate
organisational design depends on what the organisation’s
technology is.
Table 18.3 Woodward’s findings on technology and structure
Unit production Mass production Process production

Low vertical differentiation Moderate vertical differentiation High vertical differentiation
Structural characteristics: Low horizontal differentiation High horizontal differentiation Low horizontal differentiation
Low formalisation High formalisation Low formalisation
Most effective structure: Organic Mechanistic Organic
What are some common

organisational designs? unit production
In making structural decisions, managers have some common designs from which to choose: traditional and The production of items
more contemporary. Let’s look at some of them. in units or small batches
mass production
What traditional organisational designs can Large-batch
managers use? manufacturing
When designing a structure, managers may choose one of the traditional organisational designs. These process
structures – simple, functional, divisional and matrix – tend to be more mechanistic in nature. (See Table 18.4 production
for a summary of the strengths and weaknesses of each.) Continuous flow or
process production
What is the simple structure? simple structure
Most companies start as entrepreneurial ventures using a simple structure, which is an organisational An organisational
design with low departmentalisation, wide spans of control, authority centralised in a single person and design with low
little formalisation.17 The simple structure is most widely used in smaller businesses and its strengths should departmentalisation,
wide spans of control,
be obvious. It’s fast, flexible and inexpensive to maintain, and accountability is clear. However, it becomes
authority centralised in
increasingly inadequate as an organisation grows, because its few policies or rules to guide operations and a single person and little
its high centralisation result in information overload at the top. As size increases, decision making slows formalisation
9780655702412_CH18.indd 503 3/3/20 11:09 AM

Table 18.4 Traditional organisation designs

Simple structure
• Strengths: fast; flexible; inexpensive to maintain; clear accountability.
• Weaknesses: not appropriate as organisation grows; reliance on one person is risky.
Functional structure
• Strengths: cost-saving advantages from specialisation (economies of scale, minimal duplication of people and equipment);
employees are grouped with others who have similar tasks.
• Weaknesses: pursuit of functional goals can cause managers to lose sight of what’s best for the overall organisation; functional
specialists become insulated and have little understanding of what other units are doing.
Divisional structure
• S trengths: focuses on results – division managers are responsible for what happens to their products and services.
• Weaknesses: duplication of activities and resources increases costs and reduces efficiency.
Matrix structure
• Strengths: provides excellent coordination.
• Weaknesses: dual lines of reporting create conflict and confusion.
and can eventually come to a standstill as the single executive tries to continue making all the decisions. If
the structure isn’t changed and adapted to its size, the firm can lose momentum and is likely eventually to
fail. The simple structure’s other weakness is that it’s risky: everything depends on one person. If anything
happens to the owner–manager, the organisation’s information and decision-making centre is lost.
As employees are added, however, most small businesses don’t remain as simple structures. The structure
tends to become more specialised and formalised. Rules and regulations are introduced, work becomes
specialised, departments are created, levels of management are added and the organisation becomes
increasingly bureaucratic. Two of the most popular bureaucratic design options grew out of functional and
product departmentalisations and are called the functional and divisional structures.
functional What is the functional structure?

structure A functional structure is an organisational design that groups similar or related occupational specialties
An organisational design
together. You can think of this structure as functional departmentalisation applied to the entire organisation.
that groups similar or
related occupational For example, a fashion design company might be organised around the functions of creative design, finance,
specialties together manufacturing, sales and marketing, and human resources.
Structure and sustainability

An organisation’s structure affects every aspect of its operations, In contrast, corporate structures – such as those used by publicly
from the selection of leaders and goals to the way day-to-day tasks listed companies – are led by an executive leadership team and a
are performed. Structure is therefore important to sustainability. board of directors and typically use more complex organisational
But different structures affect sustainability in different ways.18 designs to accommodate their larger size, greater resources and
Simple structures centralise decision making with the business broader (even global) scope. Such complexity can both help and
owners. When used in family businesses, they typically operate as hinder organisational efforts to increase sustainability. Larger size,
‘lean and mean’ organisations and with a long-term orientation greater resources and broader reach all increase the organisation’s
towards the future. These attributes can enhance sustainability by capacity to enhance sustainability by increasing the scope of initiatives
generating an operational focus on efficiency and minimising wastage it can pursue and providing the flexibility to develop different
and establishing a top-down focus on sustainability issues in decision approaches to suit the needs of different functional areas or divisions.
processes. However, they can also create challenges if the organisation However, large size and structural complexity can also complicate the
has insufficient resources to support sustainability initiatives or when alignment of organisational activities necessary for enhancing
decision makers hold conflicting beliefs about the importance of efficiency and monitoring sustainability outcomes.
sustainability.
9780655702412_CH18.indd 504 3/3/20 11:09 AM

The strength of the functional structure lies in the advantages that accrue from work specialisation.
Putting like specialties together results in economies of scale, minimises duplication of personnel and
equipment, and makes employees feel comfortable and satisfied because it gives them the opportunity to
talk the same language as their peers. The most obvious weakness of the functional structure, however, is
that the organisation frequently loses sight of its best interests in the pursuit of functional goals. No one
function is totally responsible for results, so members within individual functions become insulated and
have little understanding of what people in other functions are doing.
What is the divisional structure?

The divisional structure is an organisational structure made up of separate business units or divisions.19 divisional
In this structure, each division has limited autonomy, with a division manager who has authority over structure
An organisational
their unit and is responsible for performance. In divisional structures, however, the parent corporation
structure made up of
typically acts as an external overseer to coordinate and control the various divisions, and often provides separate business units
support services such as financial and legal. Health-care giant Johnson & Johnson, for example, has three or divisions
divisions: pharmaceuticals, medical devices and diagnostics, and consumer products. In addition, it has
several subsidiaries that also manufacture and market diverse health-care products.
The chief advantage of the divisional structure is that it focuses on results. Division managers have full
responsibility for a product or service. The divisional structure also frees the headquarters staff from being
concerned with day-to-day operating details so that they can pay attention to long-term and strategic planning.
The main disadvantage of the divisional structure is duplication of activities and resources. Each division, for
example, may have a marketing research department. If there weren’t any divisions, all of an organisation’s
marketing research might be centralised and done for a fraction of the cost that divisionalisation requires.
Thus, the divisional form’s duplication of functions increases the organisation’s costs and reduces efficiency.
What are matrix structures?

The matrix structure combines functional and divisional structures to enhance horizontal coordination matrix structure
and the sharing of information.20 One unique aspect of this design is that it creates a dual chain of command, A structure in which
specialists from different
since employees in a matrix organisation have two managers – their functional area manager and their functional departments
project manager – who share authority (see Figure 18.6). To work effectively, both managers have to are assigned to work on
communicate regularly, coordinate work demands on employees and resolve conflicts together. projects led by a project
The primary strength of the matrix structure is that by creating two intersecting communication manager
structures, it increases information flows for decision making. The main disadvantages are the confusion
it creates and its propensity to foster power struggles. When you dispense with the chain of command and
unity of command principles, you significantly increase ambiguity. Confusion can arise over who reports to
whom. The confusion and ambiguity, in turn, are what trigger the power struggles.
What contemporary organisational designs

can managers use?
Lean. Flexible. Innovative.

Managers are finding that the traditional designs often aren’t appropriate for today’s increasingly
dynamic and complex environment. Instead, organisations need to be lean, flexible and
innovative – that is, more organic. So, managers are finding creative ways to structure and organise
work by using designs such as team-based structures, project structures and boundaryless structures.21
(See Table 18.5 for a summary of these designs.)
What are team structures? team structure

A structure in which the
Larry Page and Sergey Brin, co-founders of Google, have created a corporate structure that ‘tackles most entire organisation is
big projects in small, tightly focused teams’.22 A team structure is one in which the entire organisation made up of work teams
9780655702412_CH18.indd 505 3/3/20 11:09 AM

Design Contract Human

Manufacturing Purchasing Accounting
engineering administration resources
Alpha Design Manufacturing Contract Purchasing Accounting Human

project group group group group group resources group
Beta Design Manufacturing Contract Purchasing Accounting Human

Gamma Design Manufacturing Contract Purchasing Accounting Human

Omega Design Manufacturing Contract Purchasing Accounting Human

Figure 18.6 Sample matrix structure
Table 18.5 Contemporary organisation designs

Team structure
• What it is: a structure in which the entire organisation is made up of work groups or teams.
• Advantages: employees are more involved and empowered; reduced barriers among functional areas.
• Disadvantages: no clear chain of command; pressure on teams to perform.
Project structure
• W hat it is: a structure in which employees continuously work on projects – as one project is completed, employees move on to
the next project.
• Advantages: fluid and flexible design that can respond to environmental changes; faster decision making.
• Disadvantages: complexity of assigning people to projects; task and personality conflicts.
Boundaryless structure
• W hat it is: a structure that is not defined by or limited to artificial horizontal, vertical or external boundaries; includes virtual and
network types of organisations.
• Advantages: highly flexible and responsive; utilises talent wherever it’s found.
• Disadvantages: lack of control; communication difficulties.
is made up of work teams that do the organisation’s work.23 In this structure, employee empowerment is
crucial because there is no line of managerial authority from top to bottom. Rather, employee teams design
and do work in the way they think is best, but are also held responsible for all work performance results in
their respective areas. In large organisations, the team structure complements what is typically a functional
or divisional structure. This allows the organisation to have the efficiency of a bureaucracy while providing
the flexibility of teams. For example, companies such as Amazon, Boeing, Louis Vuitton, Motorola and
Heinz make extensive use of employee teams to improve productivity.
9780655702412_CH18.indd 506 3/3/20 11:09 AM

Although team structures have been positive, simply arranging employees into teams isn’t enough.
Employees must be trained to work on teams, receive cross-functional skills training and be compensated
accordingly. Without a properly implemented team-based pay plan, many of the benefits of a team structure
may be lost.24 We’ll cover teams more thoroughly in Chapter 23.
What are project structures?

A project structure organises employees to work continuously on projects. A project structure has no project structure
formal departments where employees return at the completion of a project. Instead, employees take their A structure in which
employees continuously
specific skills, abilities and experiences to other projects. Also, all work in project structures is performed
work on projects
by teams of employees. For example, at Fox Production Services, part of Fox Studios Australia, production
teams form, disband and form again as the work requires. Employees ‘join’ teams because they bring
needed skills and abilities to the production of that movie or television program.25 Project structures tend
to be more flexible organisational designs. The main advantage is that employees can be deployed rapidly to
respond to environmental changes. Also, there’s no departmentalisation or rigid organisational hierarchy to
slow down making decisions or taking action. In this structure, managers serve as facilitators, mentors and
coaches. They eliminate or minimise organisational obstacles and ensure that teams have the resources they
need to complete their work effectively and efficiently. The two main disadvantages of the project structure
are the complexity of assigning people to projects and the inevitable task and personality conflicts that arise.
What is a boundaryless organisation?

Another contemporary organisational design is the boundaryless organisation, which is an organisation boundaryless
whose design isn’t defined by, or limited to, the horizontal, vertical or external boundaries imposed by a organisation
An organisation whose
predefined structure.26 Former GE chairman Jack Welch coined the term because he wanted to eliminate
design isn’t defined by,
vertical and horizontal boundaries within GE and break down external barriers between the company and or limited to, boundaries
its customers and suppliers. Although the idea of eliminating boundaries may seem odd, many of today’s imposed by a predefined
most successful organisations are finding that they can operate most effectively by remaining flexible and structure
unstructured: that the ideal structure for them is not rigid, bounded and predefined.27
What do we mean by ‘boundaries’? There are two types: (1) internal – the horizontal ones imposed
by work specialisation and departmentalisation, and the vertical ones that separate employees into
organisational levels and hierarchies; and (2) external – the boundaries that separate the organisation from
its customers, suppliers and other stakeholders. To minimise or eliminate these boundaries, managers might
use virtual or network structural designs.
A virtual organisation consists of a small core of full-time employees and outside specialists hired virtual
temporarily as needed to work on projects.28 An example is when Second Life, a company that created organisation
an online virtual world, was building its software. Founder Philip Rosedale hired programmers from An organisation that
consists of a small core
around the world and divided up the work into about 1600 individual tasks, ‘from setting up databases to of full-time employees
fixing bugs’. The inspiration for this structural approach comes from the film industry. There, people are and outside specialists
essentially ‘free agents’ who move from project to project applying their skills – directing, talent casting, hired temporarily as
needed to work on
costuming, makeup, set design and so forth – as needed.
projects
Another structural option for managers wanting to minimise or eliminate organisational boundaries is a
network organisation, which is one that uses its own employees to do some work activities and networks network
of outside suppliers to provide other needed product components or work processes.29 Manufacturing organisation
An organisation that
firms sometimes call this organisational form a modular organisation.30 This structural approach allows
uses its own employees
organisations to concentrate on what they do best by contracting out other activities to companies that do to do some work
those activities best. Many companies are using such an approach for certain organisational work activities. activities and networks
For example, the head of development for Boeing’s 787 aircraft manages thousands of employees and some of outside suppliers to
provide other needed
100 suppliers at more than 100 sites in different countries.31 Sweden’s Ericsson contracts its manufacturing product components or
and even some of its research and development to more cost-effective contractors in New Delhi, Singapore, work processes
California and other global locations.32
9780655702412_CH18.indd 507 3/3/20 11:09 AM

MANAGING FOR DIVERSITY
Sourcing diversity
Building a boundaryless organisation requires that organisations than they may find in their local labour market. In addition to
can build networks of external suppliers with the knowledge and overcoming local skill shortages and the need to import workers
skills needed to complement the organisation’s strengths. One with desirable skills, crowdsourcing can also provide access to
way to do this is crowdsourcing – outsourcing work to freelancers people from a wider range of cultural backgrounds. It also creates
using online marketplaces such as Upwork and Freelancer. 33 more flexibility for organisations to accommodate people’s
Crowdsourcing allows organisations to find suppliers whose diverse career plans and preferences, because contractors can
expertise best matches the organisation’s needs. But source work matching their skill set and choose which specific
crowdsourcing can also have benefits for workforce diversity. It projects they want to work on. However, organisations need to
provides an opportunity to find subject matter experts and consider carefully when and how they use crowdsourcing, as it
leaders in their field wherever in the world they are located.This may not suit people with cultural preferences for organisational
means organisations can access a more diverse range of suppliers structures that are more hierarchical, formalised and centralised.
What are today’s organisational

design challenges?
Changing the way work is done
As managers look for organisational designs that will best support and facilitate employees doing their work
efficiently and effectively, there are certain challenges they must contend with. These include managing
global structural issues, building a learning organisation, designing flexible work arrangements and keeping
employees connected.
How do you keep employees connected?

Many organisational design concepts were developed during the 20th century, when work tasks were fairly
predictable and constant, most jobs were full-time and continued indefinitely, and work was done at an employer’s
place of business under a manager’s supervision.34 That’s not what it’s like in many organisations today, as you
saw in our preceding discussion of virtual and network organisations. A major structural design challenge for
managers is finding a way to keep widely dispersed and mobile employees connected to the organisation.
How do you delegate effectively?

delegation Delegation is the assignment of authority to another person to carry out specific activities. It allows an
Assigning authority to employee to make decisions – that is, it’s a shift of decision-making authority from one organisational level
another person to carry
to another lower one (see Figure 18.7). Delegation, however, shouldn’t be confused with participation. In
out specific activities
participative decision making, authority is shared. With delegation, employees make decisions on their own.
As a manager, you need to delegate to be effective in your job. Many new and inexperienced managers
try to do everything themselves because they lack confidence in their employees or are fearful that they’ll
be criticised for their employees’ mistakes. But you simply can’t do everything yourself, so it’s important to
develop skills in delegating effectively. If you, as a manager, dump tasks on an employee without clarifying
the exact job to be done, the range of the employee’s discretion, the expected level of performance, the time
frame in which the tasks are to be completed and similar concerns, you are abdicating responsibility and
inviting trouble.35 So, you need to determine how much to delegate, how to delegate it, and how to put
controls in place to prevent and correct any problems.
How much authority should managers delegate? Should they keep authority centralised, delegating
only the minimal amount to complete the delegated duties? What contingency factors should be considered
9780655702412_CH18.indd 508 3/3/20 11:09 AM

Top
managers
Authority
Middle
managers
Front-line
managers
Non-managerial
employees
Effective delegation pushes authority down

vertically through the ranks of an organisation.
Figure 18.7 Effective delegation
in determining the degree to which authority is delegated? Table 18.6 presents the most widely cited
contingency factors to provide some guidance in making these determinations.
Assuming that delegation is in order, how do you delegate? A number of methods have been suggested
for differentiating the effective delegator from the ineffective one.36
• Clarify the assignment. First, determine what is to be delegated and to whom. Identify the person who
is most capable of doing the task and then determine whether they have the time and motivation to
do the job. Then provide clear information on what’s being delegated, the results you expect, and any
time or performance expectations you hold. Unless the project entails an overriding need to adhere
to specific methods, you should ask the employee only to provide the desired results. That is, get
agreement on what is to be done and the results expected, but let the employee decide how the work
is to be completed. By focusing on goals and allowing the employee the freedom to use their own
Table 18.6 Contingency factors in delegation

• T he size of the organisation. The larger the organisation, the greater the number of decisions that have to be made. Because
top managers in an organisation have only so much time and can obtain only so much information, in larger organisations they
become increasingly dependent on the decision making of lower-level managers. Therefore, managers in large organisations resort
to increased delegation.
• T he importance of the duty or decision. The more important a duty or decision (as expressed in terms of cost and impact on the
future of an organisation), the less likely it is to be delegated. For example, a department head may be delegated authority to
make expenditures up to $7500, and division heads up to $50,000.
• Task complexity. The more complex the task, the more difficult it is for top management to possess current and sufficient technical
information to make effective decisions. Complex tasks require greater expertise, and decisions about them should be delegated to
the people who have the necessary technical knowledge.
• Organisational culture. If management has confidence and trust in employees, the culture will support a greater degree of delega-
tion. However, if top management doesn’t have confidence in the abilities of lower-level managers, it will delegate authority only
when absolutely necessary. In such instances, as little authority as possible is delegated.
• Q
ualities of employees. A final contingency consideration is the qualities of employees. Delegation requires employees with the
skills, abilities and motivation to accept authority and act on it. If these are lacking, top management will be reluctant to relinquish
authority.
9780655702412_CH18.indd 509 3/3/20 11:09 AM

judgment as to how those goals are to be achieved, you increase trust between you and the employee,
improve the employee’s motivation and enhance accountability for results.
• Specify employees’ range of discretion. Every act of delegation comes with constraints. You’re delegating
the authority to act on certain issues within certain parameters. You need to specify what those
parameters are so that employees know, in no uncertain terms, the range of their discretion. You and
your employees will then have the same idea of the limits to their authority and how far they can go
without further approval.
• Allow employees to participate. One of the best ways to decide how much authority will be necessary
is to allow employees who will be held accountable for the tasks to participate in that decision.
Be aware, however, that some employees might be personally motivated to expand their authority
beyond what they need and beyond what they are capable of handling. Allowing such people too
much participation in deciding what tasks they should take on and how much authority they must
have to complete those tasks can undermine the effectiveness of the delegation process.
• Inform others that delegation has occurred. Anyone else who is likely to be affected by the delegation act,
inside or outside the organisation, also needs to be informed about what has been delegated and how
much authority has been granted. Essentially, you need to convey what has been delegated (the task
and amount of authority) and to whom, so that people know that the person has the responsibility
and authority to deal with the issue. Failure to inform others makes conflict likely and decreases the
chances that your employees will be able to accomplish the delegated act efficiently.
• Establish feedback controls. To delegate without instituting feedback controls is inviting problems. You
should expect and accept some mistakes by your employees. Mistakes are part of delegation. They’re
often good learning experiences for employees as long as their costs aren’t excessive. To ensure that the
costs of mistakes don’t exceed the value of the learning, you need to put adequate controls in place.
It’s also possible that employees will misuse the discretion they have been given. Controls to monitor
employees’ progress increase the likelihood that important problems will be identified early and that
the task will be completed on time and to the desired specification. Ideally, these controls should be
determined at the time of initial assignment. Agree on a specific time for completion of the task, and then
set progress dates by which employees will report on how well they are doing and on any major problems
that have surfaced. These controls can be supplemented with periodic spot checks to ensure that authority
guidelines aren’t being abused, organisation policies are being followed, proper procedures are being met,
and the like. Remember, though, that if the controls are too constraining, employees will be deprived of
the opportunity to build self-confidence. As a result, much of the motivational aspect of delegation may
be lost. A well-designed control system, which we will elaborate on in more detail in Chapter 24, permits
your employees to make small mistakes but quickly alerts you when big mistakes are imminent.
How do global differences affect organisational

structure?
Are there global differences in organisational structures? Are Australian organisations structured
like those in the United States? Are German organisations structured like those in France or Mexico?
Given the global nature of today’s business environment, this is an issue with which managers need to
be familiar. Researchers have concluded that the structures and strategies of organisations worldwide are
similar, ‘while the behavior within them is maintaining its cultural uniqueness’.37 What does this mean
for designing effective and efficient structures? When designing or changing structure, managers may
need to think about the cultural implications of certain design elements. For example, one study showed
that formalisation – rules and bureaucratic mechanisms – may be more important in less economically
developed countries and less important in more economically developed countries where employees may
have higher levels of professional education and skills.38 Other structural design elements may be affected
by cultural differences as well.
9780655702412_CH18.indd 510 3/3/20 11:09 AM

How do you build a learning organisation?

Doing business in an intensely competitive global environment, British retailer Tesco realised how important
it was for its stores to run well behind the scenes. And it does so using a proven ‘tool’ called Tesco in a Box,
which promotes consistency in operations as well as being a way to share innovations. Tesco is an example
of a learning organisation, an organisation that has developed the capacity to continuously learn, adapt learning
and change.39 The concept of a learning organisation doesn’t involve a specific organisational design per se, organisation
but instead describes an organisational mind-set or philosophy that has significant design implications. In a An organisation that has
developed the capacity
learning organisation, employees are practising knowledge management by continually acquiring and sharing to continuously learn,
new knowledge and are willing to apply that knowledge in making decisions or performing their work. Some adapt and change
organisational design theorists even go so far as to say that an organisation’s ability to learn, and to apply that
learning as they perform the organisation’s work, may be the only sustainable source of competitive advantage.
What would a learning organisation look like? As you can see in Figure 18.8, the important characteristics
of a learning organisation revolve around (1) organisational design, (2) information sharing, (3) leadership,
and (4) culture.
● What types of organisational design elements would be necessary for learning to take place? In
a learning organisation, it’s critical for members to share information and collaborate on work
activities throughout the entire organisation – across different functional specialties and even
at different organisational levels – through minimising or eliminating the existing structural and
physical boundaries. In this type of boundaryless environment, employees are free to work together
and collaborate in doing the organisation’s work the best way they can, and to learn from each
other. Because of this need to collaborate, teams also tend to be an important feature of a learning
organisation’s structural design. Employees work in teams on whatever activities need to be done,
and these employee teams are empowered to make decisions about doing their work or resolving
issues. Empowered employees and teams have little need for ‘bosses’ who direct and control. Instead,
managers serve as facilitators, supporters and advocates for employee teams.
● Learning can’t take place without information. For a learning organisation to ‘learn’, information
must be shared among members; that is, organisational employees must engage in knowledge
management by sharing information openly, in a timely manner, and as accurately as possible. Because
Organisational design
• Boundaryless
• Teams
• Empowerment
Organisational culture
Information sharing
• Strong mutual relationships
THE LEARNING • Open
• Sense of community
ORGANISATION • Timely
• Caring
• Accurate
• Trust
Leadership
• Shared vision
• Collaboration
Figure 18.8 Characteristics of a learning organisation

Sources: Based on P. M. Senge, The Fifth Discipline: The Art and Practice of Learning Organizations (New York: Doubleday, 1990); and R. M. Hodgetts, F. Luthans and S. M. Lee, ‘New Paradigm
Organizations: From Total Quality to Learning to World Class’, Organizational Dynamics, Winter 1994, pp. 4–19.
9780655702412_CH18.indd 511 3/3/20 11:09 AM

few structural and physical barriers exist in a learning organisation, the environment is conducive to
open communication and extensive information sharing.
● Leadership plays an important role as an organisation moves towards becoming a learning
organisation. What should leaders do in a learning organisation? One of their most important
functions is facilitating the creation of a shared vision for the organisation’s future and then keeping
organisational members working towards that vision. In addition, leaders should support and
encourage the collaborative environment that’s critical to learning. Without strong and committed
leadership throughout the organisation, it would be extremely difficult to be a learning organisation.
● The organisation’s culture is important to being a learning organisation. In a learning culture,
everyone agrees on a shared vision and recognises the inherent interrelationships among the
organisation’s processes, activities, functions and external environment. It also fosters a strong sense
of community, caring for each other and trust. In a learning organisation, employees feel free to
communicate openly, share, experiment and learn without fear of criticism or punishment.
How can managers design efficient and effective

flexible work arrangements?
Accenture consultant Keyur Patel’s job arrangement is becoming the norm, rather than the exception.40 To
help him work effectively with collaborators around the globe, he set three clocks on his desk: one set to
Manila time (where his software programmers were), one to Bangalore time (where another programming
support team worked) and the third to San Francisco time, where he was spending four days a week helping
a major retailer implement IT systems to track and improve sales. And his mobile phone kept track of the
time in Atlanta, his home, where he headed on Thursday evenings.
For this new breed of professionals, life is a blend of home and office, work and leisure. Thanks to
technology, work can now be done anywhere, anytime. As organisations adapt their structural designs to
these new realities, we see more of them adopting flexible working arrangements. Such arrangements
not only exploit the power of technology, but give organisations the flexibility to deploy employees when
and where needed. In this section, we’re going to take a look at some different types of flexible work
arrangements including telecommuting, compressed work weeks, flexitime and job sharing. As with the
other structural options we’ve looked at, managers must evaluate these in light of the implications for
decision making, communication, authority relationships, work task accomplishment, and so on.
What’s involved in telecommuting?

Information technology has made telecommuting possible and external environmental changes have made
telecommuting it necessary for many organisations. Telecommuting is a work arrangement in which employees can log
A work arrangement into workplace networks from home, rather than commute to their work site. Needless to say, not every job
in which employees
log into workplace is a candidate for telecommuting. But many are.
networks from home Working from home used to be considered a ‘cushy perk’ for a few lucky employees and such an
rather than commute to arrangement wasn’t allowed very often. Now, many businesses view telecommuting as a business necessity.
their work site. Many organisations use telecommuting to minimise costs for office buildings, equipment and parking
spaces, reducing employee commuting trips (which reduces carbon emissions), and to attract talented
employees who want more freedom and control over their work.
Despite its apparent appeal, many managers are reluctant to have their employees become ‘laptop
hobos’.41 They argue that employees might waste time updating their social media pages or playing online
games instead of working, ignore clients, and miss the camaraderie and social exchanges of the workplace.
In addition, managers worry about how they’ll ‘manage’ these employees. How do you interact with an
employee and gain their trust when they’re not physically present? And what if their work performance isn’t
up to scratch? How do you make suggestions for improvement? Another significant challenge is making
sure that company information is kept safe and secure when employees are working from home.
9780655702412_CH18.indd 512 3/3/20 11:09 AM

Employees often express the same concerns

about working remotely, especially when it comes
to the isolation of not being ‘at work’. At Accenture,
where employees are scattered around the world,
the chief human resources officer says that it isn’t
easy to maintain that esprit de corps.42 However,
the company put in place a number of programs
and processes to create that sense of belonging for
its workforce, including webconferencing tools,
assigning each employee to a career counsellor, and
holding quarterly community events at its offices.
In addition, the telecommuter employee may find
that the line between work and home becomes
even more blurred, which can be stressful.43 These
are important organising issues and ones that
Airbnb, the global travel rental firm, uses telecommuters and a contingency
managers and organisations must address when
workforce of part-time, temporary and freelance workers. Flexible work
moving towards having employees telecommute. arrangements, including those for employees shown here at Airbnb’s office in
Dublin, enable the company to connect people in more than 34,000 cities and
How can organisations use 190 countries either online or from a mobile phone or tablet.
compressed work weeks, View Pictures/Newscom
flexitime and job sharing?

During a recent economic crisis in the United Kingdom, accounting firm KPMG needed to reduce costs
and decided to use flexible work options as a way of doing so.44 The company’s program, called Flexible
Futures, offered employees four options to choose from: a four-day work week with a 20 per cent salary
reduction; a two- to twelve-week sabbatical at 30 per cent of pay; both options; or continue with their
regular schedule. Some 85 per cent of the UK employees agreed to the reduced–work week plan. ‘Since so
many people agreed to the flexible work plans, KPMG was able to cap the salary cut at about 10 per cent
for the year in most cases.’ The best thing, though, was that as a result of the plan, KPMG didn’t have to
radically reduce its workforce.
As this example shows, organisations sometimes find they need to restructure work using other forms
of flexible work arrangements. One approach is a compressed work week in which employees work compressed work
longer hours per day but fewer days per week. The most common arrangement is four 10-hour days (a 4–40 week
A work week where
program). Another alternative is flexitime (also known as flexible work hours), which is a scheduling
employees work longer
system in which employees are required to work a specific number of hours a week but are free to vary those hours per day but fewer
hours within certain limits. In a flexitime schedule, most companies designate certain common core hours days per week
when all employees are required to be on the job, but starting, ending and lunch-hour times are flexible.
flexitime (flexible
Another type of job scheduling is called job sharing – the practice of having two or more people split work hours)
a full-time job. Organisations might offer job sharing to professionals who want to work but don’t want A work scheduling
the demands and hassles of a full-time position. For example, at professional services firm EY, employees system in which
employees are required
in many of the company’s locations can choose from a variety of flexible work arrangements including job
to work a specific
sharing. Many companies use job sharing during economic downturns to avoid employee layoffs.45 number of hours per
week but can vary when
Switch on. Switch off. they work those hours
within certain limits
job sharing
No matter what structural design managers choose for their organisations, the design should help
When two or more
employees do their work in the best, most efficient and effective way they can. The structure needs to help, people split a full-time
not hinder, organisational members as they carry out the organisation’s work. After all, the structure is job
simply a means to an end.
9780655702412_CH18.indd 513 3/3/20 11:09 AM

Student Contemporary structural designs include team-based structures (the entire

organisation is made up of work teams), project structures (where employees
Learning work on projects for short periods of time or continuously) and boundaryless
Centre organisations (where the structural design is free of imposed boundaries). A

boundaryless organisation can be either a virtual or a network one.
Learning Objective 4. Discuss the design challenges

Reviewing the learning objectives faced by today’s organisations.
One design challenge lies in keeping employees connected, which can be
Learning Objective 1. Describe six key elements in
accomplished through using information technology. Another challenge is
organisational design. understanding the global differences that affect organisational structure.
The first element, work specialisation, refers to dividing work activities into Although structures and strategies of organisations worldwide are similar, the
separate job tasks. The second, departmentalisation, is how jobs are grouped behaviour within them differs, which can influence certain design elements.
together, which can be one of five types: functional, product, customer, Another challenge is designing a structure around the mind-set of being a
geographic or process. The third – authority, responsibility and power – has learning organisation. Finally, managers are looking for organisational designs
to do with getting work done in an organisation. Authority refers to the rights with efficient and effective flexible work arrangements. They’re using options
inherent in a managerial position to give orders and expect those orders to be such as telecommuting, compressed work weeks, flexitime and job sharing.
obeyed. Responsibility refers to the obligation to perform when authority has
been delegated. Power is the capacity of an individual to influence decisions
and differs from authority. The fourth element, span of control, refers to the Discussion questions
number of employees a manager can manage efficiently and effectively. The fifth, ❶ Discuss what is meant by the term organisation design.
centralisation and decentralisation, deals with where the majority of decisions are ➋ Describe the traditional and contemporary views of each of the six key
made – at upper organisational levels or pushed down to lower-level managers. elements of organisational design.
The sixth, formalisation, describes how standardised an organisation’s jobs are ➌ Can an organisation’s structure be changed quickly? Why or why not?
and the extent to which employees’ behaviour is guided by rules and procedures. Should it be changed quickly? Why or why not?
➍ ‘An organisation can have no structure.’ Do you agree or disagree with this
Learning Objective 2. Compare and contrast the statement? Explain.
mechanistic and organic organisational forms. ➎ Contrast mechanistic and organic organisations.
A mechanistic organisational design is quite bureaucratic, and is characterised by ➏ With the availability of information technology that allows employees to work
a formal hierarchy of authority, small spans of control, tall structures, standardised anywhere, anytime, is organising still an important managerial function? Why
jobs and departmentalisation. An organic organisational design is more fluid and or why not?
flexible, and is low in specialisation, formalisation amd centralisation. ➐ Researchers are now saying that efforts to simplify work tasks actually have
negative results for both companies and their employees. Do you agree?
Learning Objective 3. Compare and contrast Why or why not?
traditional and contemporary organisational ➑ ‘The boundaryless organisation has the potential to create a major shift in
designs. the way we work.’ Do you agree or disagree with this statement? Explain.
Traditional structural designs include simple, functional, divisional and matrix ➒ Draw an organisation chart of an organisation with which you’re familiar
structures. A simple structure is one with low departmentalisation, wide spans (where you work, a student organisation to which you belong, your
of control, authority centralised in a single person and little formalisation. A university, etc.). Be very careful in showing the departments (or groups),
functional structure is one that groups similar or related occupational specialties and be especially careful to get the chain of command correct. Be prepared
together. A divisional structure is one made up of separate business units or to share your chart with the class.
divisions. A matrix structure combines functional and divisional structures.
9780655702412_CH18.indd 514 3/3/20 11:09 AM


INCREASING YOUR POWER
Managerial jobs come with the power of authority. But sometimes that authority isn’t enough to get things done. And other times you may not want to use your formal
authority as a means of getting people to do what you want. For example, you may want to rely more on your persuasive skills than the power of your title. So, effective
managers increase their power by developing multiple sources of influence.
PERSONAL
PERSONAL INVENTORY ASSESSMENT P I A INVENTORY

ASSESSMENT
Gaining power and influence

As you saw in this chapter, power is an important component of an organisation’s structure.
Use this PIA to identify ways that you gain power and influence.
Skill basics depend on, you hold expert power. In our current age of specialisation, this
You can increase the likelihood that you’ll survive and thrive in your organisation source of power is increasingly potent. If others identify with you and look
if you learn how to develop a power base. Remember: just because you have up to you to the extent that they want to please you, you have referent
power doesn’t mean you have to use it. But it’s nice to be able to call upon power. It develops out of admiration and the desire to be like someone else.
it when you do need it. Four sources of power can be derived from your job.
46 The final source of influence is charismatic power, which is an extension of
Another three sources are based on your personal unique characteristics. referent power. If others will follow you because they admire your heroic
qualities, you have charismatic power over them.
• All management jobs come with the power to coerce, reward and impose
• Based on these sources of power, we can say that you can increase
authority. Coercive power is based on fear. If you can dismiss, suspend,
your power in organisations by taking on managerial responsibilities,
demote, assign unpleasant work tasks or write a negative performance
gaining access to important information, developing an expertise that
review on someone, you hold coercive power over that person. Conversely,
the organisation needs, or displaying personal characteristics that others
if you can give someone something of positive value or remove something
admire.
of negative value – such as control pay rates, raises, bonuses, promotions
or work assignments – you have reward power. And all managerial Practising the skill
positions provide some degree of authority power – though within specific Read through the scenario and follow the directions at the end of it.
limitations – over subordinates. If you can tell someone to do something Margaret is a supervisor in the online sales division of a large clothing retailer.
and they see this request to be within your formal job description, you have She has let it be known that she is devoted to the firm and plans to build her
authority power over them. career there. Margaret is hard-working and reliable, has volunteered for extra
• In addition to coercive, reward and authority power, many managerial projects, has taken in-house development courses and has joined a committee
positions also come with information power that derives from having access dedicated to improving employee safety on the job. She undertook an assignment
to and control over information. If you have data or knowledge that others to research ergonomic office furniture for the head of the department and gave
need, and which only you have access to, it gives you power. Of course, you up several lunch hours to consult with the head of human resources about her
don’t have to be a manager to have information power. Many employees are report. Margaret filed the report late, but she explained the delay by saying that
quite skilled at operating in secrecy, hiding technical shortcuts or avoiding her assistant lost several pages that she had to redraft over the weekend. The
showing others exactly what they do – all with the intention of keeping report was well received and several of Margaret’s colleagues think she should
important knowledge from getting into others’ hands. be promoted when the next opening arises.
• You don’t have to be a manager or control information to have power
Evaluate Margaret’s skill in building a power base. What actions has she taken
in an organisation. You can also exert influence based on your expertise,
that are helpful to her in reaching her goal? Is there anything she should have
admiration that others might have for you, and your charismatic qualities. If
done differently?
you have a special skill or unique knowledge that others in the organisation
9780655702412_CH18.indd 515 3/3/20 11:09 AM

Mini cases
18.1 Structural renewal at the Australian Red Cross
New structure = flexibility + less duplication
The Australian Red Cross is one of the country’s oldest and largest Under this model, the strategic authority of the state and territory divisional
humanitarian non-profit organisations.47 Founded in 1914, following the boards were transferred to a newly created national board, which became
start of World War I, its first focus was on mobilising a vast network of responsible for managing a number of strategic policy and action areas
predominantly female volunteers to produce and deliver support products referred to as National Functions. The organisation’s CEO and national
and services to Australian servicemen and their families who were affected executive team are responsible for the implementation of the strategic plan
by the armed conflict. A century later, in 2015/16, the Australian Red Cross and National Functions set out by the board. The responsibility for the day-
drew upon the efforts of 2300 staff members, 20,700 volunteers and 19,600 to-day management of services and operations at a local level is assumed
members to achieve its goals, while generating $894 million in revenue. by the state and territory divisional boards, with their actions ultimately
Over its long history, the Australian Red Cross has needed to adapt its accountable to the national executive team and the CEO. The restructure
strategic focus, structures and processes in order to remain relevant within a reflects the goals of the ‘One Red Cross’ strategy, which is to align all areas
changing competitive and social landscape. Today, it works to empower and of the organisation with a single vision, mission, strategy and culture.
protect vulnerable people and communities in Australia and internationally. The new management structure has allowed the Australian Red
Its focus is on strengthening disaster and emergency services, increasing Cross to coordinate its activities across a wide range of functional areas
international aid and development, working with Aboriginal and Torres and geographical boundaries. The arrangement, referred to internally as
Strait Islander peoples, overcoming social exclusion by providing bridges collaborative management, is built upon strong channels of communication
back into the community, championing international humanitarian law, and between national and state and territory staff members. Reporting
addressing the impact of migration. 48
arrangements require that state and territory line managers communicate
One of its greatest challenges has been to overhaul an inefficient regularly with national staff members. Collaborative relationships also
organisational structure. Historically, the organisation operated using a enable state and territory offices to provide input into strategy development.
network of nine divisional boards. Each board was responsible for strategic These arrangements ensure that all parties remain up to date on any major
decision making, the delivery of programs and services, and administrative operational changes or risks. Now embedded firmly within the ‘One Red
and support functions in a different state and territory. However, this Cross’ culture, collaborative management has enabled the organisation
federated structure resulted in nine separate and divergent sets of structures, to achieve national standardisation of organisational function, but also to
systems, policies and processes for service delivery and the management of ensure that program and service delivery is flexible enough to allow for
human and financial resources. In addition, it undermined the organisation’s customisation to local conditions and circumstances.
efforts to speak with one voice, and to provide consistent messages across ❶ Which principles of organisational design has the Australian Red Cross
marketing and communication activities. This issue became apparent when used to develop its o rganisational structure? How has it used these
different spokespersons across the country provided conflicting information principles to design the organisation?
about the organisation’s response to the 2004 Indian Ocean Tsunami and ➋ What kind(s) of organisational structure does the Australian Red Cross
ways in which the public could support its activities. use?
Under the leadership of a new president and vice president, the ➌ How has the ‘One Red Cross’ strategy and environment influenced its
Australian Red Cross radically reorganised its strategic decision-making structure?
processes and organisational structure. A fundamental element of these ➍ How could the Australian Red Cross use its organisational design to
reforms was the transition to a centralised model of decision making. encourage a learning organisation?
9780655702412_CH18.indd 516 3/3/20 11:09 AM

18.2 Shortening the corporate ladder

Developing and recognising talent requires new progression pathways
In recent times, many large bureaucratic organisations have redesigned necessitated a shift in thinking and practice about developing managerial
their organisational structures to reduce costs, e nhance efficiency, improve careers. Organisations that have previously used promotions to recognise
effectiveness and better align with strategic goals.49 For example, SAP, one and reward long-serving employees and retain managerial talent are now
of the world’s largest enterprise software companies, recently restructured having to explore other alternatives. Some, such as Wesfarmers Insurance,
its global operations to refocus the company and its 87,100 employees have responded by helping people develop their skills and capabilities in
around cloud-based products and services. SAP’s goals were to use the new their existing roles. Others have focused more on providing lateral transfers
structure to grow more quickly, to be more adaptable to market changes, so that employees can work in new functional areas and broaden their
and to shorten the time it took to roll out new innovations to its customers. understanding of the organisation and its activities. This means, for example,
As Andrew Barkla, the former managing director of SAP Australia, explained that a human resources or finance manager who cannot move up in a flat
at the time, ‘The entire company’s strategy is centred on the customer. We organisation can still grow their career by moving into a new functional area
have to hear and see them and you can’t if they are too far away from or working on specialised projects.
decision makers. The more layers in the organisation, the less agility, the less Multinational organisations can also use international transfers to provide
competitiveness you have in the way you operate.’ developmental opportunities and career paths. SAP, for example, has offices
Using boundaryless designs, outsourcing and offshoring to have in over 130 countries around the world, which has meant that in recent
organisational work performed by outsiders allows organisations to reduce years, 80 of SAP Australia’s 600 employees have undertaken international
employee numbers and operate with leaner structures. Eliminating layers assignments to work in other branches of the organisation and learn about
of middle management and expanding spans of control means organisations new markets and other cultures. However, research has shown that while
can use fewer managers to supervise their employees and flatten their international assignments can help organisations develop their employees’
organisational hierarchies. But these structural changes have some major knowledge and skills, retaining those employees after their assignment
implications for developing and keeping the organisation’s managerial requires that organisations can understand, recognise and leverage their new
expertise. competencies. So, while organisations explore new ways to structure their
New structures require new approaches to management. Broadening operations, they also need to provide new models of career development
managerial responsibilities and spans of control requires different managerial that encourage, recognise and reward lateral movements and project-based
capabilities. Experts predict that as this trend continues, there will be less advancement as well as progressions up the corporate hierarchy.
need for managers to provide expertise in their functional discipline and ❶ Many organisations redesign their structures for short-term gains in
more emphasis on strategic planning, problem solving, creating ‘big-picture reducing costs and dealing with environmental pressures. What does
opportunities’ and project management. this case indicate about the longer-term consequences of changing an
But the same structural changes that created this demand have organisation’s structure?
also changed the ways in which organisations can develop their future ➋ Different organisational structures require, and develop, different
managers. Corporate restructures, outsourcing and offshoring reduce the managerial skills. Table 18.1 presents five
different types of
number of employees within an organisation performing entry-level and organisational departmentalisation. What types of knowledge and
process-based functions such as processing transactions and dealing with skills would be most valuable for a manager working in each of these
customer enquiries. But this also means there are fewer opportunities to organisational types? How would they differ?
develop new managers, because there are fewer employees to manage and ➌ How might organisational size affect the way an organisation
fewer first-line managerial positions in which new managers can develop experiences and manages the c hallenges described in this case? How
their supervisory and leadership skills. could smaller organisations cope with these issues?
Flatter structures with fewer managerial levels also mean fewer ➍ What advantages and disadvantages could a leaner, flatter and more
opportunities for employees to progress their career by climbing up organic structure have for a learning organisation? How might it help
the corporate ladder. For both managers and organisations, this has organisations to learn? How might it hinder organisational learning?
9780655702412_CH18.indd 517 3/3/20 11:09 AM

References
1 R. Grant, B. Butler, H. Hung and S. Orr, Contemporary Strategic Management: An Executive, February 1994, pp. 11–21; and R. E. Hoskisson, C. W. L. Hill and H. Kim,
Australian Perspective (Brisbane: John Wiley & Sons, 2011), pp. 291–2. ‘The Multidivisional Structure: Organizational Fossil or Source of Value?’, Journal of
2 S. E. Humphrey, J. D. Nahrgang and F. P. Morgeson, ‘Integrating Motivational, Social and Management, vol. 19, no. 2 (1993), pp. 269–98.
Contextual Work Design Features: A Meta-Analytic Summary and Theoretical Expansion 22 Q. Hardy, ‘Google Thinks Small’, Forbes, 14 November 2005, pp. 198–202.
of the Work Design Literature’, Journal of Applied Psychology, September 2007, 23 See, for example, D. R. Denison, S. L. Hart and J. A. Kahn, ‘From Chimneys to
pp. 1332–56. Cross-Functional Teams: Developing and Validating a Diagnostic Model’, Academy
3 E. Kelly, ‘Keys to Effective Virtual Global Teams’, Academy of Management Executive, of Management Journal, December 1996, pp. 1005–23; D. Ray and H. Bronstein,
May 2001, pp. 132–3; and D. Ancona, H. Bresman and K. Kaeufer, ‘The Comparative Teaming Up: Making the Transition to a Self-Directed Team-Based Organization (New
Advantage of X-Team’, MIT Sloan Management Review, Spring 2002, pp. 33–9. York: McGraw Hill, 1995); J. R. Katzenbach and D. K. Smith, The Wisdom of Teams
4 R. S. Benchley, ‘Following Orders’, Chief Executive, March 2002, p. 6. (Boston: Harvard Business School Press, 1993); J. A. Byrne, ‘The Horizontal Corporation’,
5 R. Preston, ‘Inside Out’, Management Today, September 2001, p. 37; and R. D. Clarke, BusinessWeek, 20 December 1993, pp. 76–81; B. Dumaine, ‘Payoff from the New
‘Over their Heads’, Black Enterprise, December 2000, p. 79. Management’, Fortune, 13 December 1993, pp. 103–10; and H. Rothman, ‘The Power
6 See J. R. P. French and B. Raven, ‘The Bases of Social Power’, in D. Cartwright and A. F. of Empowerment’, Nation’s Business, June 1993, pp. 49–52.
Zander (eds), Group Dynamics: Research and Theory (New York: Harper & Row, 1960), 24 C. Garvey, ‘Steer Teams with the Right Pay’, HR Magazine, May 2002, pp. 70–8.
pp. 607–23. 25 Based on ‘Production Services’, Fox Studios Australia, <www.foxstudiosaustralia.com>,
7 D. Cherny, ‘Nicole Livingstone appointed head of AFLW’, The Age, 16 November 2017; accessed 25 September 2010.
S. Wellington, ‘AFLW’s new CEO Nicole Livingstone says women’s football is booming’, 26 See, for example, G. G. Dess, A. M. A. Rasheed, K. J. McLaughlin and R. L. Priem, ‘The
ABC News, 17 December 2017. New Corporate Architecture’, Academy of Management Executive, August 1995,
8 D. Samson and R. L. Daft, Management, 3rd Asia Pacific edn (Melbourne: Cengage, pp. 7–20.
2009), p. 374. 27 For additional readings on boundaryless organisations, see S. Rausch and J. Birkinshaw,
9 L. Urwick, The Elements of Administration (New York: Harper & Row, 1944), pp. 52–3. ‘Organizational Ambidexterity: Antecedents, Outcomes, and Moderators’, Journal
See also J. H. Gittel, ‘Supervisory Span, Relational Coordination and Flight Departure of Management, June 2008, pp. 375–409; M. F. R. Kets de Vries, ‘Leadership Group
Performance: A Reassessment of Post-Bureaucracy Theory’, Organizational Science, Coaching in Action: The Zen of Creating High Performance Teams’, Academy of
July–August 2001, pp. 468–83. Management Executive, February 2005, pp. 61–76; J. Child and R. G. McGrath,
10 S. Harrison, ‘Is there a Right Span of Control? Simon Harrison Assesses the Relevance ‘Organizations Unfettered: Organizational Form in an Information-Intensive Economy’,
of the Concept of Span of Control to Modern Businesses’, Business Review, February Academy of Management Journal, December 2001, pp. 1135–48; M. Hammer and
2004, pp. 10–13. S. Stanton, ‘How Process Enterprises Really Work’, Harvard Business Review,
11 See, for example, D. Van Fleet, ‘Span of Management Research and Issues’, Academy November–December 1999, pp. 108–18; T. Zenger and W. Hesterly, ‘The
of Management Journal, September 1983, pp. 546–52; and S. H. Cady and P. M. Fandt, Disaggregation of Corporations: Selective Intervention, High-Powered Incentives
‘Managing Impressions with Information: A Field Study of Organizational Realities’, and Modular Units’, Organization Science, vol. 8 (1997), pp. 209–22; R. Ashkenas,
Journal of Applied Behavioral Science, June 2001, pp. 180–204. D. Ulrich, T. Jick and S. Kerr, The Boundaryless Organization: Breaking the Chains
12 Henri Fayol, General and Industrial Management, trans. C. Storrs (London: Pitman of Organizational Structure (San Francisco: Jossey-Bass, 1997); R. M. Hodgetts, ‘A
Publishing, 1949), pp. 19–42. Conversation with Steve Kerr’, Organizational Dynamics, Spring 1996, pp. 68–79; and
13 See P. Kenis and D. Knoke, ‘How Organizational Field Networks Shape Inter- J. Gebhardt, ‘The Boundaryless Organization’, Sloan Management Review, Winter
Organizational Tie-Formation Rates’, Academy of Management Review, April 2002, 1996, pp. 117–19. For another view of boundaryless organisations, see B. Victor, ‘The
pp. 275–93. Dark Side of the New Organizational Forms: An Editorial Essay’, Organization Science,
14 E. W. Morrison, ‘Doing the Job Well: An Investigation of Pro-Social Rule Breaking’, November 1994, pp. 479–82.
Journal of Management, February 2006, pp. 5–28. 28 See, for example, Y. Shin, ‘A Person–Environment Fit Model for Virtual Organizations’,
15 T. Burns and G. M. Stalker, The Management of Innovation (London: Tavistock, 1961). Journal of Management, December 2004, pp. 725–43; D. Lyons, ‘Smart and Smarter’,
16 D. Dougherty, ‘Re-imagining the Differentiation and Integration of Work for Sustained Forbes, 18 March 2002, pp. 40–1; W. F. Cascio, ‘Managing a Virtual Workplace’,
Product Innovation’, Organization Science, September/October 2001, pp. 612–31. Academy of Management Executive, August 2000, pp. 81–90; G. G. Dess, A. M.
17 H. Mintzberg, Structure in Fives: Designing Effective Organizations (Upper Saddle River, A. Rasheed, K. J. McLaughlin and R. L. Priem, ‘The New Corporate Architecture’,
NJ: Prentice Hall, 1983), p. 157. Academy of Management Executive, August 1995, pp. 7–20; H. Chesbrough and D.
18 Managing for Sustainability box based on C. Osgood, J. Rue and J. Kho, ‘Business Teece, ‘When is Virtual Virtuous: Organizing for Innovation’, Harvard Business Review,
Structures and Sustainability: How Are they Connected?’, The Guardian, 22 November January–February 1996, pp. 65–73; and W. H. Davidow and M. S. Malone, The Virtual
2013; B. Kennedy, ‘Do Family-Owned Businesses Have a Sustainability Advantage?’, Corporation (New York: HarperCollins, 1992).
The Guardian, 22 November 2013; N. Kachaner, G. Stalk and A. Bloch, ‘What You Can 29 R. E. Miles, C. C. Snow, J. A. Matthews, G. Miles and H. J. Coleman, Jr, ‘Organizing in the
Learn from Family Business’, Harvard Business Review, <https://hbr.org>, accessed Knowledge Age: Anticipating the Cellular Form’, Academy of Management Executive,
10 November 2014; and R. Post, ‘Sustainability Meets the Bottom Line: A Closer Look November 1997, pp. 7–24; C. Jones, W. Hesterly and S. Borgatti, ‘A General Theory
at Corporations’, The Guardian, 22 November 2013. of Network Governance: Exchange Conditions and Social Mechanisms’, Academy of
19 D. A. Garvin and L. C. Levesque, ‘The Multiunit Enterprise’, Harvard Business Review, Management Review, October 1997, pp. 911–45; R. E. Miles and C. C. Snow, ‘The
June 2008, pp. 106–17; and R. J. Williams, J. J. Hoffman and B. T. Lamont, ‘The Influence New Network Firm: A Spherical Structure Built on Human Investment Philosophy’,
of Top Management Team Characteristics on M-Form Implementation Time’, Journal of Organizational Dynamics, Spring 1995, pp. 5–18; and R. E. Miles and C. C. Snow,
Managerial Issues, Winter 1995, pp. 466–80. ‘Causes of Failures in Network Organizations’, California Management Review, vol. 34,
20 D. Samson and R. L. Daft, Management, 3rd Asia Pacific edn (Melbourne: Cengage, no. 4 (1992), pp. 53–72.
2009), p. 382. 30 G. Hoetker, ‘Do Modular Products Lead to Modular Organizations?’, Strategic
21 See, for example, R. Greenwood and D. Miller, ‘Tackling Design Anew: Getting Back to Management Journal, June 2006, pp. 501–18; C. H. Fine, ‘Are You Modular or
the Heart of Organization Theory’, Academy of Management Perspectives, November Integral?’, Strategy and Business, Summer 2005, pp. 44–51; D. A. Ketchen, Jr and G.
2010, pp. 78–88; G. J. Castrogiovanni, ‘Organization Task Environments: Have They T. M. Hult, ‘To Be Modular or Not to Be? Some Answers to the Question’, Academy
Changed Fundamentally over Time?’, Journal of Management, vol. 28, no. 2 (2002), of Management Executive, May 2002, pp. 166–7; M. A. Schilling, ‘The Use of
pp. 129–50; D. F. Twomey, ‘Leadership, Organizational Design and Competitiveness Modular Organizational Forms: An Industry-Level Analysis’, Academy of Management
for the 21st Century’, Global Competitiveness, Annual 2002, pp. S31–40; M. Hammer, Journal, December 2001, pp. 1149–68; D. Lei, M. A. Hitt and J. D. Goldhar, ‘Advanced
‘Processed Change: Michael Hammer Sees Process as “the Clark Kent of Business Manufacturing Technology: Organizational Design and Strategic Flexibility’,
Ideas” – a Concept that Has the Power to Change a Company’s Organizational Design’, Organization Studies, vol. 17 (1996), pp. 501–23; R. Sanchez and J. Mahoney,
Journal of Business Strategy, November–December 2001, pp. 11–15; T. Clancy, ‘Radical ‘Modularity Flexibility and Knowledge Management in Product and Organization
Surgery: A View from the Operating Theater’, Academy of Management Executive, Design’, Strategic Management Journal, vol. 17 (1996), pp. 63–76; and R. Sanchez,
February 1994, pp. 73–8; I. I. Mitroff, R. O. Mason and C. M. Pearson, ‘Radical ‘Strategic Flexibility in Product Competition’, Strategic Management Journal, vol. 16
Surgery: What Will Tomorrow’s Organizations Look Like?’, Academy of Management (1995), pp. 135–59.
9780655702412_CH18.indd 518 3/3/20 11:09 AM

31 C. Hymowitz, ‘Have Advice, Will Travel’, Wall Street Journal, 5 June 2006, pp. B1+. Research, 1959), pp. 150–67; B. J. Raven, ‘The Bases of Power: Origin and Recent
32 S. Reed, A. Reinhardt and A. Sains, ‘Saving Ericsson’, BusinessWeek, 11 November Developments’, Journal of Social Issues, vol. 49 (1993), pp. 227–51; E. A. Ward, ‘Social
2002, pp. 64–8. Power Bases of Managers: Emergence of a New Factor’, Journal of Social Psychology,
33 C. Fitzsimmons, ‘Remote Desk Revolution’, BRW, 1–7 August 2013, pp. 10–11. February 2001, pp. 144–7; and B. H. Raven, ‘The Bases of Power and the Power/
34 C. E. Connelly and D. G. Gallagher, ‘Emerging Trends in Contingent Work Research’, Interaction Model of Interpersonal Influence’, Analyses of Social Issues and Public
Journal of Management, November 2004, pp. 959–83. Policy, December 2008, pp. 1–22.
35 L. L. Steinmetz, The Art and Skill of Delegation (Boston: Addison-Wesley, 1976). 47 Australian Red Cross case study based upon International Federation of Red Cross and
36 Based on P. L. Hunsaker, Training in Management Skills (Upper Saddle River, NJ: Prentice Red Crescent Societies, Change, Growth and Renewal in Australian Red Cross, Geneva,
Hall, 2001), pp. 135–6, 430–2; R. T. Noel, ‘What You Say to Your Employees When You 2013, <www.redcross.org.au/files/IFRC_change_growth_renewal.pdf>, accessed 1
Delegate’, Supervisory Management, December 1993, p. 13; and S. Caudron, ‘Delegate March 2017; Australian Red Cross, A Year in Review Australian Red Cross 2012/2013,
for Results’, Industry Week, 6 February 1995, pp. 27–30. <www.redcross.org.au/annualreport_2013//year-in-review/our-path.html>, accessed
37 N. M. Adler, International Dimensions of Organizational Behavior, 5th edn (Cincinnati, 1 June 2017; Australian Red Cross Society, National Library of Australia, <http://
OH: South-Western), 2008, p. 62. trove.nla.gov.au/people/462899?c=people>, accessed 1 June 2017; ‘The Australian
38 P. B. Smith and M. F. Peterson, ‘Demographic Effects on the Use of Vertical Sources of Red Cross in two world wars’, Australian War Memorial, <https://www.awm.gov.au/
Guidance by Managers in Widely Differing Cultural Contexts’, International Journal of articles/encyclopedia/redcross/redcross_bothwars>, accessed 1 June 2017; Australian
Cross Cultural Management, April 2005, pp. 5–26. Red Cross, A Year in Review Australian Red Cross 2015/2016, <www.redcross.org.au/
39 P. Olson, ‘Tesco’s Landing’, Forbes, 4 June 2007, pp. 116–18; and P. M. Senge, The Fifth files/Red_Cross_Year_in_Review_2015-2016.pdf>, accessed 1 June 2017; C. Niesche,
Discipline: The Art and Practice of Learning Organizations (New York: Doubleday, 1990). ‘Modernising the Red Cross’, Australian Institute of Company Directors, 1 November
40 J. Marquez, ‘Connecting a Virtual Workforce’, Workforce Management Online, 3 2013, <www.companydirectors.com.au/director-resource-centre/publications/
February 2009. company-director-magazine/2013-back-editions/november/interview-modernising-the-
41 M. Conlin, ‘Home Offices: The New Math’, BusinessWeek, 9 March 2009, pp. 66–8. red-cross>, accessed 1 June 2017; K. Johnston, The Influence of Cultural Selection on
42 J. Marquez, ‘Connecting a Virtual Workforce’, Workforce Management Online, 3 Strategic Communication, <https://eprints.qut.edu.au/46264/1/Kim_Johnston_Thesis.
February 2009. pdf>, accessed 1 June 2017.
43 S. Jayson, ‘Working at Home: Family-Friendly’, USA Today, 15 April 2010, pp. 1A+; T. 48 Drawn from <www.redcross.org.au/annualreport_2013//year-in-review/our-path.
D. Hecht and N. J. Allen, ‘A Longitudinal Examination of the Work–Nonwork Boundary html>.
Strength Construct’, Journal of Organizational Behavior, October 2009, pp. 839–62; 49 L. D’Angelo Fisher, ‘Inside the New Talent War’, BRW, 8–14 August 2013, pp. 15–20;
and G. E. Kreiner, E. C. Hollensbe and M. L. Sheep, ‘Balancing Borders and Bridges: ‘About SAP’, <www.sap.com>, accessed 12 December 2014; SAP Annual Report
Negotiating the Work–Home Interface via Boundary Work Tactics’, Academy of 2013, <http://global.sap.com>, accessed 12 December 2014; and J. Saarinen, ‘SAP
Management Journal, August 2009, pp. 704–30. to Restructure Worldwide’, IT News, 14 May 2014; ‘SAP Facts and Information’,
44 J. T. Marquez, ‘The Future of Flex’, Workforce Management Online, January 2010. <https://www.sap.com/corporate/en/company.html>, accessed 11 October 2017; ‘SAP
45 S. Greenhouse, ‘Work-Sharing May Help Companies Avoid Layoffs’, New York Times Worldwide locations’, <https://www.sap.com/corporate/en/company.worldwide-
Online, 16 June 2009. locations.html>, accessed 11 October 2017.
46 Based on J. R. P. French, Jr and B. Raven, ‘The Bases of Social Power’, in D. Cartwright
(ed.), Studies in Social Power (Ann Arbor, MI: University of Michigan Institute of Social
9780655702412_CH18.indd 519 3/3/20 11:09 AM

Chapter
19 Foundations of individual
behaviour
One thing you’ve probably realised over the years is how differently you and your friends deal with life’s
situations. Some friends are laid-back; others are more anxious. Some are good at reading others’ emotions;
others aren’t. The same is true of the people a manager manages. That’s why a good manager works hard
to get to know the unique individual characteristics of the people on their team in order to manage each
of them effectively.
Most organisations want to attract and retain employees with the right attitudes and personality. They
want people who show up and work hard, get along with co-workers and customers, have good attitudes
and exhibit good work behaviours in other ways. But as you’re probably already aware, people don’t always
behave like that ‘ideal’ employee. They change jobs at the first opportunity or they may post critical
comments about their workplaces online. People differ in their behaviours, and even the same person
can behave one way one day and a completely different way the next. For example, you might have seen
family members, friends or co-workers behave in ways that prompted you to wonder: Why did they do
that? In this chapter, we look at four psychological aspects – attitudes, personality, perception and learning
– and demonstrate how these things can help managers understand the behaviour of those people with
whom they have to work. We conclude the chapter by looking at contemporary behavioural issues facing
managers.
Learning Objective 1 Identify the focus and goals of organisational behaviour (OB).
What are the focus and goals of organisational behaviour? pp. 522–23
Learning Learning Objective 2 Explain the role that attitudes play in job performance.
Objectives What role do attitudes play in job performance? pp. 523–27
Learning Objective 3 Describe different personality theories.
What do managers need to know about personality? pp. 527–33
Learning Objective 4 Describe perception and the factors that influence it.
What is perception, and what factors influence it? pp. 533–37
Learning Objective 5 Discuss learning theories and their relevance in shaping behaviour.
How do learning theories explain behaviour? pp. 538–40
Learning Objective 6 Discuss contemporary issues in OB.
What contemporary OB issues do managers face? pp. 540–44
9780655702412_CH19.indd 520 3/3/20 11:10 AM

Chapter 19 Foundations of individual behaviour 521
LO 1
Identify the focus
and goals of
organisational
behaviour (OB).
LO 2
Explain the role that
attitudes play in job
performance.
fact or fiction?
LO 3
Describe different
personality theories.
A good manager treats all

LO 4
Describe perception
employees the same.
and the factors that
influence it.
LO 5
Discuss learning
theories and their
fiction
relevance in shaping
behaviour.
LO 6
Discuss
contemporary issues
in OB.
9780655702412_CH19.indd 521 3/3/20 11:10 AM

What are the focus and goals of

organisational behaviour?
The material in this chapter and Chapters 21 to 23 draws heavily on the field of study that’s known as
behaviour organisational behaviour (OB). Although it’s concerned with the subject of behaviour – that is, the actions
The actions of people of people – organisational behaviour is the study of the actions of people at work.
organisational One of the challenges in understanding organisational behaviour is that it addresses issues that
behaviour aren’t obvious. Like an iceberg, OB has a small visible dimension and a much larger hidden portion (see
The study of the actions Figure 19.1). What we see when we look at an organisation are its visible aspects: strategies, objectives,
of people at work
policies and procedures, structure, technology, formal authority relationships and chain of command. But
under the surface are other elements that managers need to understand – elements that also influence how
employees behave at work. As we’ll show, OB provides managers with considerable insights into these
important, but hidden, aspects of the organisation.
Visible aspects
Strategies
Objectives
Policies and procedures
Structure
Technology
Formal authority
Chains of command
Hidden aspects
Attitudes
Perceptions
Group norms
Informal interactions
Interpersonal and
intergroup conflicts
Figure 19.1 Organisation as iceberg
What is the focus of OB?

Organisational behaviour focuses on three main areas:
• Individual behaviour. Based predominantly on contributions from psychologists, this area includes
such topics as attitudes, personality, perception, learning and motivation.
• Group behaviour, which includes norms, roles, team building, leadership and conflict. Our knowledge
about groups comes basically from the work of sociologists and social psychologists.
• Organisational aspects, including structure, culture, and human resource policies and practices.
We’ve addressed organisational aspects in other chapters. In this chapter, we’ll look at individual
behaviour and in Chapter 23, at group behaviour.
What are the goals of organisational behaviour?

The goals of OB are to explain, predict and influence behaviour. Managers need to be able to explain why
employees engage in some behaviours rather than others, predict how employees will respond to various
employee actions and decisions, and influence how employees behave.
productivity Managers are specifically concerned with explaining, predicting and influencing the following six
A performance measure
of both work efficiency employee behaviours. (1) Employee productivity is a performance measure of both work efficiency
and effectiveness and effectiveness. Managers want to know what factors will influence the efficiency and effectiveness of
9780655702412_CH19.indd 522 3/3/20 11:10 AM

employees. (2) Absenteeism is the failure to

show up for work. It’s difficult for work to get
done if employees don’t show up. Unscheduled
absences can cost companies up to $340 per
day, which is estimated to cost the Australian
economy around 92 million working days, or $33
billion, per year.1 Although absenteeism can’t be
totally eliminated, excessive levels have a direct
and immediate impact on the organisation’s
functioning. (3) Turnover is the voluntary
and involuntary permanent withdrawal from
an organisation. It can be a problem because of
increased recruiting, selection and training costs,
and work disruptions. Just like absenteeism,
managers can never eliminate turnover, but it’s
something they want to minimise, especially Job satisfaction is an important concern of managers at Gilead Sciences, a
biopharmaceutical firm that develops new medicines for HIV/AIDS and other
among high-performing employees. (4)
unmet medical needs. Highly satisfied employees such as research scientist
Organisational citizenship behaviour Darryl Kato, shown here, are essential to Gilead in achieving its goal of
(OCB) is discretionary behaviour that’s not improving the lives of people who suffer from life-threatening diseases.
part of an employee’s formal job requirements, David Paul Morris/Bloomberg/Getty Images
but which promotes the effective functioning of

the organisation.2 Examples of good OCB include helping others on one’s work team, volunteering for absenteeism
extended job activities, avoiding unnecessary conflicts, and making constructive statements about one’s The failure to show up
work group and the organisation. Organisations need individuals who will do more than their usual job for work
duties, and the evidence indicates that organisations that have such employees outperform those that turnover
don’t.3 However, drawbacks to OCB arise if employees experience work overload, stress and work–family Voluntary and
conflicts.4 (5) Job satisfaction refers to an employee’s general attitude towards their job. Although job involuntary permanent
satisfaction is an attitude rather than a behaviour, it’s an outcome that concerns many managers because withdrawal from an
organisation
satisfied employees are more likely to show up for work, have higher levels of performance and stay with an
organisation. (6) Workplace misbehaviour is any intentional employee behaviour that is potentially organisational
harmful to the organisation or individuals within the organisation. Workplace misbehaviour shows up in citizenship
organisations in four ways: deviance, aggression, antisocial behaviour and violence.5 Such behaviours can behaviour (OCB)
Discretionary behaviour
range from playing loud music just to irritate co-workers to verbal aggression or even to sabotaging work, that’s not part of an
all of which can create havoc in any organisation. employee’s formal job
In the following pages, we’ll address how an understanding of four psychological factors – employee requirements, but that
promotes the effective
attitudes, personality, perception and learning – can help us predict and explain these employee behaviours.
functioning of the
organisation
What role do attitudes play job satisfaction

An employee’s general
in job performance? attitude towards their

job
Attitudes are evaluative statements, either favourable or unfavourable, concerning objects, people or
workplace
events. They reflect how an individual feels about something. When a person says, ‘I like my job’, they are misbehaviour
expressing an attitude about work. Any intentional
employee behaviour that
What are the three components of an attitude? is potentially harmful
An attitude is made up of three components: cognition, affect and behaviour.6 to the organisation or
individuals within the
● The cognitive component of an attitude is made up of the beliefs, opinions, knowledge and organisation
information held by a person. For example, Brad feels strongly that smoking is unhealthy.
9780655702412_CH19.indd 523 3/3/20 11:10 AM

attitudes ● The affective component is the emotional or feeling part of an attitude. This component would
Evaluative statements, be reflected in the statement by Brad, ‘I don’t like Erica because she smokes.’ Cognition and affect
either favourable
can lead to behavioural outcomes.
or unfavourable,
concerning objects, ● The behavioural component of an attitude refers to an intention to behave in a certain way
people or events towards someone or something. So, to continue our example, Brad might choose to avoid Erica
because of his feelings about her.
cognitive
component Looking at attitudes as being made up of three components – cognition, affect and behaviour – helps
The part of an attitude to illustrate their complexity and helps us better understand what underlies someone’s response, reaction or
made up of the beliefs,
opinions, knowledge and behaviour. But keep in mind that when people use the term attitude – as in, ‘that person has a bad attitude’ or
information held by a ‘I’m glad you’re adopting a positive attitude towards this’ – they’re usually referring only to the actual affective
person (emotional) component. Remember that managers try to explain, predict and influence people’s behaviour,
and knowing that there’s more to ‘attitude’ than just the emotional part helps them do that more effectively.
affective
component
The part of an attitude What attitudes might employees hold?
that’s the emotional or Naturally, managers aren’t interested in every attitude an employee might hold. Rather, they’re specifically
feeling part interested in their job-related attitudes.7 For example:
behavioural ● Job satisfaction is an employee’s general attitude towards their job. When people speak of employee
component attitudes, more often than not they mean job satisfaction.
The part of an attitude ● Job involvement is the degree to which an employee identifies with their job, actively participates
that refers to an in it, and considers their job performance important for self-worth.
intention to behave in
a certain way towards
● Organisational commitment represents an employee’s orientation towards the organisation
someone or something in terms of their loyalty to, identification with and involvement in the organisation.
● Employee engagement is the extent to which employees are connected to, satisfied with and
job involvement
The degree to which enthusiastic about their jobs.8 Highly engaged employees are passionate about and deeply connected
an employee identifies to their work. Disengaged employees have essentially ‘checked out’ and don’t care. They show up for
with their job, actively work, but have no energy or passion for it. A global study of more than 12,000 employees found that
participates in it, and
the top five factors contributing to employee engagement were, in decreasing order of importance:9
considers their job
performance important 1 respect
for self-worth
2 type of work
organisational 3 work/life balance
commitment 4 providing good service to customers
An employee’s 5 base pay.
orientation towards
the organisation in Having highly engaged employees produces both benefits and costs. It’s estimated that employee
terms of their loyalty disengagement costs Australia $70 billion per year in lost productivity, workplace accidents, staff
to, identification with
turnover and absenteeism.10 Therefore, by engaging employees more fully, organisations can improve
and involvement in the
organisation productivity and performance. Highly engaged employees are two-and-a-half times more likely to
be top performers than their less-engaged co-workers. In addition, companies with highly engaged
employee employees have higher retention rates, which help keep recruiting and training costs low. And both of
engagement
When employees are these outcomes – higher performance and lower costs – contribute to superior financial performance.11
connected to, satisfied Digital technologies are offering new options for investigating the attitudes people hold towards their
with and enthusiastic work and their workplace. Many companies use employee attitude surveys to investigate how their staff are
about their jobs
feeling about their employment. But it can take months to survey a workforce and collate the responses;
so by the time managers learn what the survey found, the information may already be out of date. Apps
can provide quicker and better insights into how employees are feeling and gather instant feedback about
the impact of announcements and strategies. For example, Atlassian, an Australian software development
company, poses a daily attitudinal question to each of its 500 staff. Employees answer by tapping their iPad
screen: tapping a second time shows them how their answers compare to those of their colleagues. The app
even identifies the different perspectives of employees on different floors of the office!
9780655702412_CH19.indd 524 3/3/20 11:10 AM

Do individuals’ attitudes and behaviours need

to be consistent?
What I believe is what I do – I hope.
Research generally concludes that people seek consistency among their attitudes and between their
attitudes and their behaviour.12 Individuals try to reconcile differing attitudes and align their attitudes
and behaviour so that they appear rational and consistent. How? By altering their attitudes or their
behaviour OR by developing a rationalisation for the discrepancy.
What is cognitive dissonance theory?

When people try to make their behaviour and attitudes consistent, it’s due to cognitive dissonance.
Cognitive dissonance theory, proposed by Leon Festinger in the 1950s, sought to explain the relationship
between attitudes and behaviour.13 Cognitive dissonance is any incompatibility or inconsistency between cognitive
attitudes, or between behaviour and attitudes. The theory argued that inconsistency is uncomfortable and dissonance
Any incompatibility or
that individuals will try to reduce the discomfort and, thus, the dissonance.
inconsistency between
Of course, no one can avoid dissonance. You know you should floss your teeth every day, but maybe you attitudes, or between
don’t do it. There’s an inconsistency between attitude and behaviour. How do people cope with cognitive behaviour and attitudes
dissonance? The theory proposed that how hard we try to reduce dissonance is determined by three things:
(1) the importance of the factors creating the dissonance; (2) the degree of influence the individual believes
they have over those factors; and (3) the rewards that may be involved in dissonance.
If the factors creating the dissonance are relatively unimportant, the pressure to correct the
inconsistency will be low. However, if those factors are important, individuals may change their
behaviour, conclude that the dissonant behaviour isn’t so important, change their attitude, or identify
compatible factors that outweigh the dissonant ones.
How much influence individuals believe they have over the factors also affects their reaction to
the dissonance. If they perceive the dissonance is something about which they have no choice, they
won’t be receptive to attitude change or feel a need to do so. If, for example, the dissonance-producing
behaviour was required as a result of a manager’s order, the pressure to reduce dissonance would be
less than if the behaviour had been performed
voluntarily. Although dissonance exists, it
can be rationalised and justified by the need
to follow the manager’s orders – that is, the
person had no choice or control.
Finally, rewards also influence the degree
to which individuals are motivated to reduce
dissonance. Coupling high dissonance with
high rewards tends to reduce the discomfort by
motivating the individual to believe that there
is consistency.
Let’s look at an example. Tracey Ford, a
corporate manager, believes strongly that no
company should make employees redundant.
Unfortunately, Tracey has to make decisions
People may believe they are safe drivers yet create potentially unsafe road conditions
that go against this belief. She knows that by driving and texting at the same time. To reduce this cognitive dissonance, they
organisational restructuring means some jobs may stop their habit of driving and texting or they may rationalise that it doesn’t
may no longer be needed. She also knows pose a threat to others’ safety and that they are in control of the situation.
© WavebreakMediaMicro/Fotolia.com
that redundancies are in the best economic
9780655702412_CH19.indd 525 3/3/20 11:10 AM

interest of her firm. What will she do? Undoubtedly, Tracey is experiencing a high degree of cognitive
dissonance. Let’s explain her behaviour.
● Importance of factors: Because of the importance of the issues in this example, Tracey can’t ignore the
inconsistency. To deal with her dilemma, she can follow several steps. She can change her behaviour
(make employees redundant). OR she can reduce dissonance by concluding that the dissonant behaviour
isn’t so important after all (‘I’ve got to make a living and in my role as a decision maker, I often have
to place the good of my company above that of individual organisational members’). She might also
change her attitude (‘There’s nothing wrong in making employees redundant’). Finally, another choice
would be to seek out more consonant elements to outweigh the dissonant ones (‘The long-term benefits
of our restructuring for the remaining employees more than offset the associated costs’).
● Degree of influence: The degree of influence that Tracey believes she has also impacts how she reacts
to the dissonance. If she perceives the dissonance to be uncontrollable – something about which she
has no choice – she’s less likely to feel she needs to change her attitude. If, for example, her boss told
her that she had to make some employees redundant, the pressure to reduce dissonance would be
less than if Tracey was performing the behaviour voluntarily. Dissonance would exist, but it could be
rationalised and justified. This tendency illustrates why it’s critical in today’s organisations for leaders
to establish an ethical culture. Without the leaders’ influence and support, employees won’t feel as
much dissonance when faced with decisions of whether to act ethically or unethically.14
● Rewards: Finally, rewards also influence how likely Tracey is to reduce dissonance. High dissonance,
when accompanied by high rewards, tends to reduce the tension inherent in the dissonance. The
reward reduces dissonance by adding to the consistency side of the individual’s balance sheet. Tracey
might feel that, because she is well compensated in her job, she sometimes has to make hard decisions,
such as making employees redundant.
So, what can we say about dissonance and employee behaviour? These moderating factors suggest that
although individuals experience dissonance, they won’t necessarily act in ways that reduce dissonance and
increase consistency. If the issues underlying the dissonance are of minimal importance, if an individual perceives
that the dissonance is externally imposed and is substantially uncontrollable, or if rewards are significant
enough to offset the dissonance, the individual won’t be under great tension to reduce the dissonance.15
How can an understanding of attitudes help

managers be more effective?
Managers should be interested in their employees’ attitudes because they influence behaviour in the following ways:
● Satisfied and committed employees have lower rates of turnover and absenteeism. If managers want
to keep resignations and absences down – especially among their more productive employees – they’ll
want to do things that generate positive job attitudes.
● Whether satisfied workers are productive workers is a debate that’s been going on for almost 80
years. After the Hawthorne studies (see History Module), managers believed that happy workers
were productive workers. Because it’s not easy to determine whether job satisfaction ‘caused’ job
productivity or vice versa, some management researchers felt that the belief was generally wrong.
However, we can say with some certainty that the correlation between satisfaction and productivity is
fairly strong.16 Satisfied employees do perform better on the job. So, managers should focus on those
factors that have been shown to be conducive to high levels of employee job satisfaction: making work
challenging and interesting, providing equitable rewards, and creating supportive working conditions
and supportive colleagues.17 These factors are likely to help employees be more productive.
● Managers should also survey employees about their attitudes. As one study put it, ‘A sound measurement
of overall job attitude is one of the most useful pieces of information an organisation can have about
its employees.’18 However, research has also shown that attitude surveys can be more effective at
pinpointing employee dissatisfaction if done multiple times rather than just at one point in time.19
9780655702412_CH19.indd 526 3/3/20 11:10 AM

● Managers should know that employees will try to reduce dissonance. If employees are required to
do things that appear inconsistent to them or that are at odds with their attitudes, managers should
remember that pressure to reduce the dissonance isn’t as strong when the employee perceives that
the dissonance is externally imposed and uncontrollable. It’s also decreased if rewards are significant
enough to offset the dissonance. So, the manager might point to external forces such as competitors,
customers or other factors when explaining the need to perform some work that the individual may
have some dissonance about. Or the manager can provide rewards that an individual desires.
Translating good intentions into action

Positive attitudes are an important first step towards improving sustainable, and being discouraged by other employees. The study
sustainability, but managing for sustainability means translating good also found that managers could improve attitudes and behaviour
attitudes into good behaviours.A study of just over 1000 Australian about sustainability by:
workers indicates that employees do have positive attitudes • demonstrating a greater commitment towards sustainability
towards improving sustainability: nearly 70 per cent of respondents • incorporating sustainability into induction programs
felt that it was important for their organisation to behave
• providing visual signs and reminders about sustainable behaviours
sustainably, and less than 10 per cent felt that it wasn’t important at
and simple, user-friendly systems, such as separate bins for green
all.20 But only 30 per cent of respondents who said they were
waste and recycling
motivated to use sustainable practices at work rated themselves as
good or very good at actually doing so.When asked what prevented • incorporating sustainability indicators in employee performance
them from being more sustainable at work, respondents indicated indicators, and supporting sustainability-conscious employees
that the key barriers were a lack of facilities for engaging in more through initiatives such as rewards and recognition for sustainable
sustainable practices, a lack of information about how to be more behaviours.
What do managers need to know

about personality?
Personality. We all have one!
If you’ve ever shared a living space with someone else (family or non-family), you know how important it
is to be compatible and to get along with each other. This compatibility is affected and influenced by our
own and other people’s personalities.
Some of us are quiet and passive; others are loud and aggressive. When we describe people using
terms such as quiet, passive, loud, aggressive, ambitious, extroverted, loyal, tense or sociable, we’re describing
their personalities. An individual’s personality is a unique combination of emotional, thought and personality
behavioural patterns that affect how a person reacts to situations and interacts with others. Personality A unique combination
of emotional, thought
is most often described in terms of measurable traits that a person exhibits. We’re interested in looking and behavioural patterns
at personality because, just like attitudes, it affects how and why people behave the way they do. that affect how a person
reacts to situations and
How can we best describe personality? interacts with others
Your personality traits influence, among other things, how you interact with others and how you solve problems.
Literally dozens of behaviours are attributed to an individual’s personality traits. But how can we best
describe personality? Over the years, researchers have attempted to focus specifically on which personality
traits and personality types would describe an individual’s personality. Two widely recognised personality
research efforts are the Myers-Briggs Type Indicator® and the Big Five model. In addition, we can’t possibly
describe personality and behaviour without looking at emotions.
9780655702412_CH19.indd 527 3/3/20 11:10 AM

What is the Myers-Briggs Type Indicator?

Myers-Briggs Type One of the more widely used methods of identifying personalities is the Myers-Briggs Type Indicator
Indicator (MBTI) (MBTI). The MBTI® assessment uses four dimensions of personality to identify 16 different personality
A personality
types based on the responses to an approximately 100-item questionnaire. Each year, more than 2.5 million
assessment that uses
four dimensions of individuals around the world take the MBTI® assessment.21 It’s used by organisations such as Australia Post,
personality to identify Qantas, Telstra and the Australian Bureau of Statistics.22 The MBTI assessment is based on Carl Jung’s
different personality theory that individuals have distinctive tendencies in the ways they experience the world.23 It measures
types
people’s tendencies, or ways they prefer to behave, on four personality dimensions:
● Extraversion versus Introversion (EI). The EI dimension describes an individual’s orientation
towards the external world of the environment (E) or the inner world of ideas and experiences (I).
● Sensing versus Intuition (SN). The SN dimension indicates an individual’s preference for gathering
data while focusing on a standard routine based on factual data (S) to focusing on the big picture and
making connections among the facts (N).
● Thinking versus Feeling (TF). The TF dimension reflects an individual’s preference for making
decisions in a logical and analytical manner (T) or on the basis of values and beliefs, and the effects
the decision will have on others (F).
● Judging versus Perceiving (JP). The JP dimension reflects an attitude towards how an individual
deals with the external world – either in a planned and orderly way (J) or preferring to remain flexible
and spontaneous (P).24
It’s important to remember that each of these dimensions exists as a spectrum between two extremes.
A person might have a strong preference for behaving a certain way (e.g. they may be strongly introverted
or strongly extroverted), which will significantly affect how they do things. Or they might have a weak
preference, which means they are not strongly oriented one way or the other.
Completing the questionnaire provides a profile of people’s personality type. Let’s give you some
examples:
● ISTJ (Introversion – Sensing – Thinking – Judging): quiet, serious, dependable, practical and matter-of-fact.
● ESFP (Extraversion – Sensing – Feeling – Perceiving): outgoing, friendly, spontaneous, enjoys working
with others and learns best by trying a new skill with other people.
● INFP (Introversion – Intuition – Feeling – Perceiving): idealistic, loyal to personal values, and seeks to
understand people and help them fulfil their potential.
● ENTJ (Extraversion – Intuition – Thinking – Judging): frank, decisive and will assume leadership roles;
also enjoys long-term planning and goal setting and is forceful in presenting ideas.25
How can the MBTI assessment help managers? Proponents believe that it’s important to know these
personality types because they influence the way people interact and solve problems.26 For example, if your
boss prefers Intuition and you’re a Sensing type, you’ll deal with information in different ways. An Intuition
preference indicates your boss is one who prefers gut reactions, whereas you, as a Sensing type, prefer to
deal with the facts. To work well with your boss, you have to present more than just facts about a situation
– you’ll also have to discuss your gut feeling about the situation. The MBTI assessment has also been found
to be useful in focusing on growth orientations for entrepreneurial types as well as profiles supporting
Big Five model emotional intelligence (something we’ll look at shortly).27
A personality trait
model that examines What is the Big Five model of personality?
five traits: extraversion, Another way of viewing personality is through a five-factor model of personality – more typically called the
agreeableness,
Big Five model.28 The Big Five factors are described in Table 19.1.
conscientiousness,
emotional stability and The Big Five model provides more than just a personality framework. Research has shown that
openness to experience important relationships exist between these personality dimensions and job performance.29 For example,
9780655702412_CH19.indd 528 3/3/20 11:10 AM

Table 19.1 Big Five model factors

1 Extraversion A personality dimension that describes the degree to which someone is sociable, talkative
and assertive.
2 Agreeableness A personality dimension that describes the degree to which someone is good-natured,
cooperative and trusting.
3 Conscientiousness A personality dimension that describes the degree to which someone is responsible,
dependable, persistent and achievement oriented.
4 Emotional stability A personality dimension that describes the degree to which someone is calm, enthusiastic
and secure (positive) or tense, nervous, depressed and insecure (negative).
5 Openness to experience A personality dimension that describes the degree to which someone is imaginative,
artistically sensitive and intellectual.
one study reviewed five categories of occupations: professionals (e.g. engineers, architects, lawyers), police,
managers, sales, and semiskilled and skilled employees. Job performance was defined in terms of employee
performance ratings, training competency and personnel data such as salary level. The results of the study
showed that conscientiousness predicted job performance for all five occupational groups.30 Predictions
for the other personality dimensions depended on the situation and the occupational group. For example,
extraversion predicted performance in managerial and sales positions, in which high social interaction is
necessary.31 Openness to experience was found to
be important in predicting training competency.
Ironically, emotional stability wasn’t positively
related to job performance. Although it would
seem logical that calm and secure workers would be
better performers, that wasn’t the case. Perhaps it’s
a function of the likelihood that emotionally stable
workers often keep their jobs and emotionally
unstable people may not. Given that all those
participating in the study were employed, the
variance on that dimension was probably small.
What is emotional intelligence?

People who understand their own emotions and are good
at reading others’ emotions may be more effective in their
jobs. That, in essence, is the theme of the underlying
research on emotional intelligence.32 Emma Isaacs, global CEO of Business Chicks, has high emotional intelligence.
Emotional intelligence (EI) refers to an Her self-awareness, self-management, self-motivation, empathy and social skills
have been valuable assets as she has established a business community for
assortment of non-cognitive skills, capabilities and
women of over 35,000 entrepreneurs around the world.33
competencies that influences a person’s ability to Louise Kennerley/Fairfax
cope with environmental demands and pressures.34
It’s composed of five dimensions:
emotional
● Self-awareness: Being aware of what you’re feeling.
intelligence (EI)
● Self-management: Managing your own emotions and impulses. The ability to notice and
● Self-motivation: Persisting in the face of setbacks and failures. to manage emotional
● Empathy: Sensing how others are feeling. cues and information
● Social skills: Adapting to and handling the emotions of others.
Emotional intelligence affects people’s ability to develop rapport and understanding with others, generate
positive emotional states and enhance creativity in decision making,35 which has led researchers to explore
whether EI makes people more effective in their jobs.36 Several studies have found that EI is positively
related to a person’s job satisfaction, job performance, organisational citizenship behaviour, commitment
9780655702412_CH19.indd 529 3/3/20 11:10 AM

and attachment to their organisation.37 For example, a study of 358 randomly selected managers in the
Johnson & Johnson group of companies found that the leaders ‘who received performance ratings of 4.1
or greater on a 5-point scale were rated by superiors and subordinates significantly higher than other
participants in self-awareness, self-management, social awareness and social skills’.38 Organisations such
as Australia Post and Holden have found that implementing EI programs has helped to enhance decision
making and leadership; other organisations also found similar results that show EI contributes to team and
organisational effectiveness.39 Other studies also indicated that EI can be beneficial to customer satisfaction,
profit generation and quality improvements in contemporary organisations.40 The implications from the
initial EI evidence are that employers should consider EI as a criterion in their selection process, especially
for those jobs that demand a high degree of social interaction.41
Can personality traits predict

practical work-related
Have you ever faked a smile? All of us have sometime, behaviours?
somewhere. Now research has shown that employees ‘fake a
Five specific personality traits have proven most powerful in
positive outlook when the boss is around’.42 Being ambivalent
(or even negative) about your work or about working for explaining individual behaviour in organisations: locus of control,
your organisation can be a definite detriment. Employers Machiavellianism, self-esteem, self-monitoring and risk propensity.
want to see passion. They want you to love your job and be Let’s take a look.
excited about coming to work and about doing your job.And
when you don’t? If you want to keep your job, you fake it. But 1 Locus of control refers to people’s beliefs about their control
all that faking takes a toll.
over their circumstances. People with an internal locus of control
Discuss this: believe they control their own fate. People with an external
• What ethical issues might arise under these circumstances
locus of control see themselves as pawns of fate, believing that
for both employees and for managers?
• How could managers create an environment where
what happens to them in their lives is due to luck or chance.43 A
employees don’t have to fake a positive outlook? manager might also expect to find that ‘externals’ blame a poor
performance evaluation on their boss’s prejudice, their colleagues
or other events outside their control, whereas ‘internals’ explain
the same evaluation in terms of their own actions.
locus of control 2 The second characteristic is called Machiavellianism (‘Mach’) after Niccolo Machiavelli, who
The degree to which
people believe they provided instruction in the 16th century on how to gain and manipulate power. An individual who is
control their own fate high in Machiavellianism is pragmatic, maintains emotional distance, believes that ends can justify the
means,44 and may have beliefs that are less ethical.45 The philosophy ‘if it works, use it’ is consistent
Machiavellianism with a high Mach perspective. Do high Machs make good employees? That answer depends on
(‘Mach’) the type of job and whether you consider ethical implications in evaluating performance. In jobs
A measure of the
degree to which people
that require bargaining skills (a labour negotiator) or that have substantial rewards for winning (a
are pragmatic, maintain commissioned salesperson), high Machs are productive. In jobs in which ends don’t justify the means
emotional distance and or that lack absolute standards of performance, it’s difficult to predict the performance of high Machs.
believe that ends justify 3 People differ in the degree to which they like or dislike themselves. This trait is called self-esteem
means
(SE).46 The research on SE offers some interesting insights into organisational behaviour. For
example, SE is directly related to expectations for success. High SEs believe that they possess the
self-esteem (SE)
An individual’s degree ability to succeed at work. Individuals with high SE will take more risks in job selection and are more
of like or dislike for likely to choose unconventional jobs than are people with low SE.47 The most common finding on
themself self-esteem is that low SEs are more susceptible to external influence than are high SEs. Low SEs are
dependent on positive evaluations from others. As a result, they’re more likely to seek approval from
others and more prone to conform to the beliefs and behaviours of those they respect than are high
SEs. In managerial positions, low SEs will tend to be concerned with pleasing others and, therefore,
will be less likely to take unpopular stands than will high SEs. Not surprisingly, self-esteem has also
been found to be related to job satisfaction. A number of studies confirm that high SEs are more
satisfied with their jobs than are low SEs.
9780655702412_CH19.indd 530 3/3/20 11:10 AM

4 Another personality trait researchers have identified is called self-monitoring.48 Individuals high in self- self-monitoring
monitoring can show considerable adaptability in adjusting their behaviour to external, situational factors.49 A personality trait that
measures the ability
They’re highly sensitive to external cues and can behave differently in different situations. High self-monitors
to adjust behaviour
are capable of presenting striking contradictions between their public persona and their private selves. Low to external situational
self-monitors can’t alter their behaviour. They tend to display their true dispositions and attitudes in every factors
situation; hence, they exhibit high behavioural consistency between who they are and what they do. Evidence
suggests that high self-monitors tend to pay closer attention to the behaviour of others and are more capable
of conforming than are low self-monitors.50 We might also hypothesise that high self-monitors will be more
successful in managerial positions that require individuals to play multiple, and even contradicting, roles.
5 The final personality trait influencing worker behaviour reflects the willingness to take chances – the
propensity for risk taking. A preference to assume or avoid risk has been shown to have an impact
on how long it takes individuals to make a decision and how much information they require before
making their choice. For example, in one classic study, 79 managers worked on a simulated human
resources management exercise that required them to make hiring decisions.51 High risk-taking
managers made more rapid decisions and used less information in making their choices than did the
low risk-taking managers. Interestingly, the decision accuracy was the same for both groups.
Although it’s generally correct to conclude that managers in organisations are risk averse, especially in
large companies and government agencies,52 individual differences are still found on this dimension.53 As a
result, it makes sense to recognise these differences and even to consider aligning risk-taking propensity with
specific job demands. For example, a high risk-taking propensity may lead to effective performance for a stock
trader in a brokerage firm since this type of job demands rapid decision making. The same holds true for the
entrepreneur.54 On the other hand, this personality characteristic might prove a major obstacle to accountants
performing auditing activities, which might be better done by someone with a low risk-taking propensity.
How do we match personalities and jobs?

We all want a job that fits our personality.
‘What if you’re not happy in your job? Is it possible
that you’re in the wrong career entirely?’55 As you
do your job day-by-day, you may realise that your
tasks don’t mesh well with your personality or
talents. Wouldn’t it seem to make more sense to
strive for a match between your personality and
your chosen job or career path?
Obviously, individual personalities differ. So,
too, do jobs. How do we match the two? The
best-documented personality–job fit theory was
developed by psychologist John Holland.56 His
theory states that an employee’s satisfaction with
their job, as well as their likelihood of leaving that
job, depends on the degree to which the individual’s
personality matches the job environment. Holland The World Wildlife Fund (WWF) works with over 5 million members in
identified six basic personality types, as shown in 100 countries around the world to ‘protect the future of nature’ through
conservation activities, such as its world tour of 1600 papier-mache pandas
Figure 19.2. promoting panda conservation (pictured). Knowing the personality dimensions
Holland’s theory proposes that satisfaction is emphasised in different cultures helps WWF managers adjust their managerial
highest and turnover lowest when personality and style to a globally diverse workforce.
occupation are compatible.57 Social individuals Chanwit Issarasuwipakorn/Shutterstock
9780655702412_CH19.indd 531 3/3/20 11:10 AM

TYPE PERSONALITY CHARACTERISTICS SAMPLE OCCUPATIONS
Realistic. Prefers physical Shy, genuine, Mechanic, drill press

activities that require skill, persistent, stable, operator, assembly-line
strength and coordination conforming, practical worker, farmer
Investigative. Prefers Biologist, economist,

activities involving Analytical, original,
mathematician, news
thinking, organising and curious, independent
reporter
understanding
Social. Prefers activities Sociable, friendly, Social worker, teacher,

that involve helping and cooperative, counsellor, clinical
developing others understanding psychologist
Conforming,
Conventional. Prefers efficient, practical,
Accountant, corporate
rule-regulated, orderly and manager, bank teller, file
unimaginative,
unambiguous activities clerk
inflexible
Enterprising. Prefers Self-confident,

Lawyer, real estate
verbal activities that offer agent, public relations
ambitious, energetic,
opportunities to influence specialist, small business
domineering
others and attain power manager
Artistic. Prefers Imaginative,

ambiguous and unsystematic disorderly, Painter, musician, writer,
activities that allow creative idealistic, emotional, interior decorator
expression impractical
Figure 19.2 Holland’s personality job fit

Source: S. P. Robbins and M. Coulter, Management, 13th edn, © 2016, p. 444. Reprinted and electronically reproduced by permission of Pearson Education, Inc.,
New York.
should be in ‘people’-type jobs. and so on. The key points of this theory include the following: (1) there do
appear to be intrinsic differences in personality among individuals; (2) there are different types of jobs; and
(3) people in job environments compatible with their personality types should be more satisfied and less
likely to resign voluntarily than people in incongruent jobs.
Do personality attributes differ across cultures?

Do personality frameworks such as the Big Five model transfer across cultures? Are dimensions such as
locus of control relevant in all cultures? Let’s try to answer these questions.
The five personality factors studied in the Big Five model appear in almost all cross-cultural
studies.58 A wide variety of diverse cultures, such as China, Israel, Germany, Japan, Spain, Nigeria,
Norway, Pakistan and the United States, have been the setting for these studies. Differences are
found in the emphasis on dimensions. For example, a study of 17,000 people from 56 different
nations found that people from Japan and Argentina had the highest average scores for neuroticism,
while people from Jordan and the Democratic Republic of Congo had the highest average scores for
agreeableness.59 But a surprisingly high amount of agreement is found, especially among individuals
from developed countries. As a case in point, a comprehensive review of studies covering people from
the European Community found that conscientiousness was a valid predictor of performance across
jobs and occupational groups.60 US studies have found the same results. Australian research has also
9780655702412_CH19.indd 532 3/3/20 11:10 AM

found that conscientiousness has a positive influence on wage levels, creating a wage advantage for
people on both high and low incomes.61
We know that there are certainly no common personality types for a given country. You can, for example,
find high risk takers and low risk takers in almost any culture. Yet a country’s culture influences the dominant
personality characteristics of its people. We can see this effect of national culture by looking at one of the
personality traits we just discussed: locus of control.
National cultures differ in terms of the degree to which people believe they control their environment.
For example, North Americans and Australians believe that they can dominate their environment; other
societies, such as those in Middle Eastern countries, believe that life is essentially predetermined. Notice
how closely this distinction parallels the concept of internal and external locus of control. On the basis
of this particular cultural characteristic, we should expect a larger proportion of internals in the US and
Australian workforces than in the workforces of Saudi Arabia or Iran.
As we have seen throughout this section, personality traits influence employees’ behaviour. For global
managers, understanding how personality traits differ takes on added significance when looking at it from
the perspective of national culture.
How can an understanding of personality help

Managers should be interested in their employees’ personalities because those personalities influence their
behaviour in the following ways:
● Job–person compatibility. Some 62 per cent of companies are using personality tests when recruiting
and hiring.62 That’s where the main value in understanding personality differences probably lies.
Managers are likely to have higher-performing and more-satisfied employees if consideration is
given to matching personalities with jobs.
● Understanding different approaches to work. By recognising that people approach problem solving,
decision making and job interactions differently, a manager can better understand why, for example,
an employee is uncomfortable with making quick decisions or may insist on gathering as much
information as possible before addressing a problem. For example, managers can expect that
individuals with an external locus of control may be less satisfied with their jobs than those with an
internal locus, and that they may also be less willing to accept responsibility for their actions.
● Being a better manager. Being a successful manager and accomplishing goals means working well
together with others both inside and outside the organisation. In order to work effectively together,
you need to understand each other. This understanding comes, at least in part, from an appreciation
of personality traits and emotions. Also, one of the skills you have to develop as a manager is learning
to fine-tune your emotional reactions according to the situation. In other words, you have to learn to
recognise when ‘you have to smile and when you have to bark’.63
What is perception, and what factors

influence it?
We interpret what we see and call it reality.
perception
‘L ke y ur b ain, the n w L nd Rov r autom tic lly adj sts to anyth ng.’64 This advertisement for a Land Rover A process by which
illustrates the perceptual process at work. You were likely able to read the sentence even with the missing we give meaning to
letters because you recognised the word patterns and organised and interpreted them in a way that made sense. our environment
by organising and
Perception is a process by which we give meaning to our environment by organising and interpreting interpreting sensory
sensory impressions. Research on perception consistently demonstrates that individuals may look at the impressions
9780655702412_CH19.indd 533 3/3/20 11:10 AM

same thing yet perceive it differently. One manager, for example, can interpret the fact that her assistant
regularly takes several days to make important decisions as evidence that the assistant is slow, disorganised
and afraid to make decisions. Another manager with the same assistant might interpret the same tendency
as evidence that the assistant is thoughtful, thorough and deliberate. The first manager would probably
evaluate her assistant negatively; the second manager would probably evaluate the person positively. The
point is that none of us see reality. We interpret what we see and call it reality. And, of course, as the example
shows, we behave according to our perceptions.
What influences perception?

A number of factors operate to shape and sometimes distort perception. These factors can reside in the
perceiver, in the object or target being perceived, or in the context of the situation in which the perception
is made.
● When an individual looks at a target and attempts to interpret what they see, that individual’s
personal characteristics will heavily influence the interpretation. These personal characteristics
include attitudes, personality, motives, interests, past experiences and expectations.
● The characteristics of the target being observed can also affect what is perceived. Loud people are
more likely than quiet people to be noticed in a group. So, too, are extremely attractive or unattractive
individuals. Because targets aren’t looked at in isolation, the relationship of a target to its background
also influences perception (see Figure 19.3 for an example), as does our tendency to group close
things and similar things together.
● The context in which we see objects or events is also important. The time at which an object or
event is seen can influence attention, as can location, lighting, temperature and any number of other
situational factors.
Old woman or young woman? Two faces or an urn? A knight on a horse?
Figure 19.3 Perceptual challenges: What do you see?
How do managers judge employees?

Much of the research on perception is directed at inanimate objects. Managers, though, are more concerned
with people. Our perceptions of people differ from our perceptions of such inanimate objects as computers,
robots or buildings because we make inferences about the actions of people that we don’t, of course,
make about inanimate objects. When we observe people, we attempt to develop explanations of why they
behave in certain ways. Our perception and judgment of a person’s actions, therefore, will be significantly
attribution theory influenced by the assumptions we make about their internal state. Many of these assumptions have led
A theory used to explain
researchers to develop attribution theory.
how we judge people
differently, based on
what meaning we
What is attribution theory?
attribute to a given Attribution theory has been proposed to explain how we judge people differently depending on
behaviour what meaning we attribute to a given behaviour.65 Basically, the theory suggests that when we observe an
9780655702412_CH19.indd 534 3/3/20 11:10 AM

individual’s behaviour, we attempt to determine whether it was internally or externally caused. Internally
caused behaviour is believed to be under the control of the individual. Externally caused behaviour results
from outside causes; that is, the person is seen as having been forced into the behaviour by the situation.
That determination, however, depends on three factors: distinctiveness, consensus and consistency.
● Distinctiveness refers to whether an individual displays a behaviour in many situations or whether it is
particular to one situation. Is the employee who arrived late to work today also the person co-workers see
as lazy? What we want to know is whether this behaviour is unusual. If it is, the observer is likely to give
the behaviour an external attribution. If this action isn’t unique, it will probably be judged as internal.
● If everyone who is faced with a similar situation responds in the same way, we can say the behaviour
shows consensus. Our tardy employee’s behaviour would meet this criterion if all employees who took
the same route to work today were also late. If consensus is high, you would be expected to give an
external attribution to the employee’s tardiness, whereas if other employees who took the same route
made it to work on time, you would conclude the reason to be internal.
● Finally, a manager looks for consistency in an employee’s actions. Does the individual engage in the
behaviours regularly and consistently? Does the employee respond the same way over time? Coming
in 10 minutes late for work isn’t perceived in the same way if, for one employee, it represents an
unusual case (she hasn’t been late for several months), but for another it’s part of a routine pattern
(he is late two or three times a week). The more consistent the behaviour, the more the observer is
inclined to attribute it to internal causes.
Figure 19.4 summarises the key elements in attribution theory. It would tell us, for example, that if
an employee, Michael, generally performs at about the same level on other related tasks as he does on his
current task (low distinctiveness), if other employees frequently perform differently – better or worse – than
Michael does on that current task (low consensus), and if Michael’s performance on this current task is
consistent over time (high consistency), his manager or anyone else who is judging Michael’s work is likely
to hold him primarily responsible for his task performance (internal attribution).
OBSERVATION INTERPRETATION ATTRIBUTION OF CAUSE
Does the person behave this YES: Low distinctiveness Internal attribution
way in other situations? NO: High distinctiveness External attribution
Do other people behave YES: High consensus External attribution

the same way in similar
situations? NO: Low consensus Internal attribution
Does the person behave this YES: High consistency Internal attribution
way consistently? NO: Low consistency External attribution
Figure 19.4 Attribution theory

Source: S. P. Robbins and M. Coulter, Management, 13th edn, © 2016, p. 447. Reprinted and electronically reproduced by permission of Pearson Education, Inc.,
New York.
Can attributions be distorted?

One of the more interesting findings drawn from attribution theory is that errors or biases distort
attributions. For example, substantial evidence supports the hypothesis that when we make judgments about
9780655702412_CH19.indd 535 3/3/20 11:10 AM

the behaviour of other people, we have a tendency to underestimate the

influence of external factors and overestimate the influence of internal or
personal factors.66 This fundamental attribution error can explain
why a sales manager may be prone to attribute the poor performance
of her sales agents to laziness rather than to the innovative product line
introduced by a competitor. Individuals also tend to attribute their own
successes to internal factors such as ability or effort while putting the
blame for failure on external factors such as luck (or an ‘unfair’ test).
This self-serving bias suggests that feedback provided to employees
in performance reviews will be predictably distorted by them, whether
it is positive or negative.
What perceptual shortcuts do we use?

All of us, managers included, use a number of shortcuts to
judge others. Perceiving and interpreting people’s behaviour
is a lot of work, so we use shortcuts to make the task more
manageable.67 Such shortcuts can be valuable when they let us
make accurate perceptions quickly and provide valid data for
making predictions. However, they aren’t perfect. They can and
do get us into trouble. What are these perceptual shortcuts?
(See Table 19.2 for a summary.)
Individuals can’t assimilate all they observe, so they’re selective
Many stereotypes exist about ‘male’ occupations and in their perception. They absorb bits and pieces. These bits and
professions. But according to Fiona Shewring, founder of pieces aren’t chosen randomly; rather, they’re selectively chosen
Supporting And Linking Tradeswomen (SALT), ‘jobs do not
depending on the interests, background, experience and attitudes
have a gender’.68 SALT is a support network for women
who wish to enter trades such as carpentry, plumbing and of the observer. Selective perception allows us to ‘speed read’
building. It provides free skills workshops, and delivers talks others but not without the risk of drawing an inaccurate picture.
in schools to promote awareness of trade-based career It’s easy to judge others if we assume that they’re similar to us.
options.
Supporting and Linking Tradeswomen (SALT) In assumed similarity, or the ‘like me’ effect, the observer’s
perception of others is influenced more by the observer’s own
characteristics than by those of the person observed. For example,
fundamental if you want challenges and responsibility in your job, you’ll assume that others want the same. People
attribution error
The tendency to who assume that others are like them can, of course, be right, but not always.
underestimate the When we judge someone on the basis of our perception of a group they are part of, we’re using
influence of external the shortcut called stereotyping. For example, ‘Married people are more stable employees than
factors and overestimate
single persons’ or ‘Older employees are absent more often from work’ are examples of stereotyping.
the influence of internal
factors when making
judgments about the
behaviour of others Table 19.2 Perceptual shortcuts
Shortcut What it is Distortion
Selectivity People assimilate certain bits and pieces of what ‘Speed reading’ others may result in an inaccurate
self-serving bias
they observe depending on their interests, picture of them
The tendency for
background, experience and attitudes
individuals to attribute
their successes to Assumed similarity People assume that others are like them May fail to take into account individual differences,
internal factors while resulting in incorrect similarities
putting the blame for Stereotyping People judge others on the basis of their perception May result in distorted judgments because many
failures on external of a group to which the others belong stereotypes have no factual foundation
factors Halo effect People form an impression of others on the basis of Fails to take into account the total picture of what an
a single trait individual has done
9780655702412_CH19.indd 536 3/3/20 11:10 AM

To the degree that a stereotype is based on fact, it may produce accurate judgments. However, many selective
stereotypes aren’t factual and distort our judgment. perception
Selectively perceiving
When we form a general impression about a person on the basis of a single characteristic, such
or hearing a
as intelligence, sociability or appearance, we’re being influenced by the halo effect. This effect communication based
frequently occurs when students evaluate their classroom instructor. Students may isolate a single trait on your own needs,
such as enthusiasm and allow their entire evaluation to be slanted by the perception of this one trait. If motivations, experiences
or other personal
an instructor who is quiet, assured, knowledgeable and highly qualified has a classroom teaching style
characteristics
that lacks enthusiasm, that instructor might be rated lower on a number of other characteristics.
Perceptual shortcuts can be valuable when they help us make quick and accurate perceptions and
provide valid data for making predictions.69 However, they can be highly problematic when they lead us assumed
similarity
to make invalid assumptions and distort our judgment. Perceptual shortcuts can cause us to form biased An observer’s
impressions of people, mistakenly assume what others want and generate inaccurate expectations. For perception of others
this reason, when dealing with a diverse workforce, managers (and others) first have to be aware of influenced more by
when they’re using a perceptual shortcut. They then have to ensure that the shortcut isn’t distorting the observer’s own
characteristics than by
what they’re perceiving – and thus believing – about an individual or a situation. those of the person
observed
How can an understanding of perception help
managers be more effective? stereotyping
Managers should be interested in perception because it helps them understand employee behaviour in the When we judge
following ways: someone on the basis
● Managers need to recognise that their employees react to perceptions, not to reality. So, whether of our perception of
a group to which that
a manager’s appraisal of an employee’s performance is actually objective and unbiased, or whether person belongs
the organisation’s wage levels are among the highest in the community, is less relevant than what
employees perceive them to be. If individuals perceive appraisals to be biased or wage levels as low, halo effect
they’ll behave as if those conditions actually exist. When we form a
● Employees organise and interpret what they see, so there is always the potential for perceptual general impression of a
person on the basis of a
distortion. The message is clear: pay close attention to how employees perceive both their jobs and
single characteristic
management actions. Remember: the valuable employee who quits because of an inaccurate perception
is just as great a loss to an organisation as the valuable employee who quits for a valid reason.
MANAGING FOR DIVERSITY
Checking assumptions
Stereotypes establish shared beliefs about the characteristics and global financial company, learned this lesson when they began a
attributes associated with particular genders, nationalities, reli- pilot program employing people with autism as account support
gious affiliations, and so on. Stereotypes can help us determine associates.The company found that the neurodiverse employees
how to understand and respond to new situations but can also had much better work quality, productivity and efficiency than
cause discrimination. Stereotypes establish expectations about their neurotypical colleagues.70 Moreover, they were able to spot
how particular groups of people are and should be, which influ- patterns and anomalies in documents, data and processes, which
ence judgments about the kinds of jobs for which they are ap- fostered new efficiencies and innovations. One autistic employee
propriate and how well they are likely to perform in those roles. managed to streamline a major training process so it could be
They can cause discrimination when decision makers judge an delivered in half the time! The company also found that the expe-
individual according to their membership of a group rather than rience of overseeing employees with autism helped their super-
on their individual merits, or when decision makers fail to deter- visors to become better managers and develop inclusive leader-
mine whether their stereotyped assumptions and expectations ship skills. For example, as autistic people tend to interpret
are in fact accurate and valid. So, it’s important to be consciously information and directions literally, managers learned to commu-
aware, and questioning, of such assumptions. Sometimes, assump- nicate more clearly and directly and to be more logical in the
tions we hold turn out to be very different from reality! EY, the ways they documented instructions and information.
9780655702412_CH19.indd 537 3/3/20 11:10 AM

How do learning theories explain

behaviour?
The last individual behaviour concept we’re going to look at is learning. Since almost all behaviour is
learned, we need to understand how people learn if we want to explain, predict and influence behaviour.
The psychologist’s definition of learning is considerably broader than the average person’s view that
‘it’s what we do in school’. Learning occurs all the time, as we continuously learn from our experiences. A
learning workable definition of learning is any relatively permanent change in behaviour that occurs as a result of
A relatively permanent experience. Two learning theories help us understand how and why individual behaviour occurs: operant
change in behaviour that
conditioning and social learning.
occurs as a result of
experience
What is operant conditioning?
operant Operant conditioning argues that behaviour is a function of its consequences. People learn to behave
conditioning in ways to get something they want or to avoid something they don’t want. Any situation in which it’s either
A theory of learning
explicitly stated or implicitly suggested that reinforcement (rewards) is contingent on some action on your
that says behaviour
is a function of its part is an example of operant conditioning. Operant conditioning proposes that people will most likely
consequences engage in desired behaviours if they are positively reinforced for doing so, and rewards are most effective
if they immediately follow the desired response. In addition, behaviour that isn’t rewarded or is punished is
less likely to be repeated. This means that the linkage between behaviour and reinforcement can also work
to teach the individual to behave in ways that work against the best interests of the organisation. Assume
that your boss tells you that if you work overtime during the upcoming three-week busy season, you’ll be
rewarded with a very positive evaluation in your next performance appraisal. However, when performance
appraisal time comes, your boss omits to praise you for pitching in and helping out when needed, so your
extra effort isn’t positively reinforced. As a result, the next time your boss asks you to work overtime, you’ll
probably refuse because if a behaviour isn’t positively reinforced, it’s less likely to be repeated.
FROM THE PAST TO THE PRESENT: 1927–1971–TODAY
Want to know how to shape someone’s behaviour?

To better understand operant conditioning, we need to look first at that behaviour. Skinner demonstrated that people will most likely
a different perspective on learning – classical conditioning theory. In engage in desired behaviours if they’re positively reinforced for do-
classical conditioning, something happens, and we react in a specific ing so, that rewards are most effective if they immediately follow
way. As such, it can explain simple reflexive behaviour. For example, the desired response (behaviour), and that behaviour that isn’t re-
classical conditioning can explain why a scheduled visit by the ‘top warded or is punished is less likely to be repeated. For example, a
brass’ brings flurried activities of cleaning, straightening and rear- lecturer places a mark by a student’s name each time the student
ranging at a local outlet of a major retail company. However, most makes a contribution to class discussions. Operant conditioning
behaviour by people at work is voluntary rather than reflexive; that would argue that this practice is motivating because it conditions a
is, employees choose to arrive at work on time, to ask their boss for student to expect a reward (earning class credit) each time she
help with some problem, or to slack off when no one is watching. demonstrates a specific behaviour (speaking up in class). Operant
A better explanation for behaviour is operant conditioning, conditioning can be seen in work settings as well.And smart manag-
which says that people behave the way they do so they can get ers quickly recognise that they can use operant conditioning to
something they want or avoid something they don’t want. It’s volun- shape employees’ behaviours to get work done in the most effec-
tary or learned behaviour, not reflexive or unlearned behaviour. tive and efficient manner possible.
Harvard psychologist B. F. Skinner first identified the process of op- Discuss this:
erant conditioning and his research widely expanded our knowl- • How do classical conditioning and operant conditioning differ?
edge of it.71 He argued that creating pleasing consequences to fol-
• What ethical concerns might arise in ‘shaping’ someone’s
low specific forms of behaviour would increase the frequency of
behaviour?
9780655702412_CH19.indd 538 3/3/20 11:10 AM

What is social learning

theory?
In addition to learning through direct experience,
individuals also learn by observing what happens
to other people or just by being told about
something. Much of what we have learned comes
from watching others (models): parents, teachers,
peers, television and movie actors, managers and
so forth. This view that we can learn both through
observation and direct experience is called social
learning theory.72
Social learning theory proposes that four
processes determine the amount of influence that
others have on an individual:
● Attentional processes. People learn from a model This training demonstration for apprentice hairstylists demonstrates how
when they recognise and pay attention to its social learning theory is applied in the workplace. Apprentices observe an
experienced hairstylist using a particular cutting technique and then replicate the
critical features. We’re most influenced by
stylist’s actions. Knowing they will be required to apply the technique motivates
models who are attractive, repeatedly available, apprentices to pay attention and observe closely. Immediately replicating the
thought to be important or seen as similar to us. technique helps to reinforce and reward their learning.
Monkey Business Images/Shutterstock
● Retention processes. A model’s influence will
depend on how well the individual remembers
the model’s action, even after the model is no
longer readily available.
● Motor reproduction processes. After a person has seen a new behaviour by observing the model, the social learning
watching must become doing. This process then demonstrates that the individual can actually do the theory
modelled activities. A theory of learning that
says people can learn
● Reinforcement processes. Individuals will be motivated to exhibit the modelled behaviour if positive through observation and
incentives or rewards are provided. Behaviours that are reinforced will be given more attention, direct experience
learned better and performed more often.
How can managers shape behaviour?

Managers should be concerned with how they can teach employees to behave in ways that most benefit
the organisation.73 Thus, managers will often attempt to mould individuals by guiding their learning in
graduated steps. This process is called shaping behaviour. shaping behaviour
Managers can shape behaviour using four strategies: positive reinforcement, negative reinforcement, The process of
guiding learning in
punishment or extinction. When a response is followed with something pleasant, such as when a manager
graduated steps, using
praises an employee for a job well done, it’s called positive reinforcement. Rewarding a response with the reinforcement or lack of
termination or withdrawal of something pleasant is called negative reinforcement. Managers who habitually reinforcement
criticise their employees for taking extended coffee breaks are using negative reinforcement. The only way
these employees can stop the criticism is to shorten their breaks. Punishment penalises undesirable behaviour.
Suspending an employee for two days without pay for showing up drunk is an example of punishment.
Eliminating any reinforcement that is maintaining a behaviour is called extinction. When a behaviour isn’t
reinforced, it gradually disappears. Managers who wish to discourage employees from continually asking
distracting or irrelevant questions in meetings can eliminate that behaviour by ignoring those employees
when they raise their hands to speak. Soon, the behaviour will be diminished.
Both positive and negative reinforcement result in learning. They strengthen a desired response and
increase the probability of repetition. We shape behaviour by systematically reinforcing each successive
9780655702412_CH19.indd 539 3/3/20 11:10 AM

step that moves the individual closer to the desired response. If an employee who has continually been
30 minutes late for work arrives only 20 minutes late, we can reinforce this improvement. Reinforcement
would increase as responses more closely approximate the desired behaviour. Both punishment and
extinction also result in learning; however, they weaken behaviour and tend to decrease its subsequent
frequency.
How can an understanding of learning help

Employees are going to learn on the job. The only issue is whether managers will manage their learning
through the rewards they allocate and the examples they set, or allow it to occur haphazardly. If managers
want behaviour A, but reward behaviour B, they shouldn’t be surprised to find employees learning to engage
in behaviour B. We talk more in Chapter 21 about how managers can use rewards to influence this type
of employee learning. The point we’re making here is that what managers intend employees to learn, and
what employees actually learn, may be two different things. Managers should also expect that employees will
look to them as models. So, managers who are consistently late to work, take two hours for lunch or help
themselves to company office supplies for personal use should expect employees to read the message they
are sending and model their behaviour accordingly.
What contemporary OB issues

do managers face?
By this point, you’re probably well aware of why managers need to understand how and why employees
behave the way they do. We conclude this chapter by looking at three OB issues that are having a major
influence on managers’ jobs today.
How do generational differences affect the

workplace?
In today’s workplaces, Baby Boomers, Generation X, Generation Y/Millennials and Generation Z are
working side-by-side.74 Anecdotal and empirical evidence suggests that members of these generational
groups have significantly different attitudes on a range of work-related issues, including communication,
uses of technology, work/life balance and preferred leadership styles. Attitudinal differences can cause
conflicts and resentment to arise, making it important for managers to help staff understand the causes
and consequences of different perspectives. Differing priorities and preferences mean managers need to be
flexible and accommodating about work and work arrangements but also ensure equity and fairness. These
challenges make it important to understand how the generational groups differ and how generational
differences can be managed.
What are the generational groups?

Members of each generation develop their perspectives, attitudes and behaviours about work influenced
by their educational environment, their family situation, and the cultural, social, economic and political
conditions that they experienced at the time their impressions were being formed. Common experiences
cause members of the generational group to develop similar attitudes, which then distinguish them from
members of other generational groups. Each generational group has a lot to offer organisations in terms of
their knowledge, passion and abilities. Managers, however, have to recognise and understand the behaviours
of each group in order to create an environment in which work can be accomplished efficiently, effectively
and without disruptive conflict.
Baby Boomers, born between 1943 and 1960, grew up post–World War II in relative prosperity and safety
but have experienced significant social and technological change over their lifetime. Boomers pushed the
working week from 40 hours up to 60 to 70 hours per week, making work a defining and central part of their
9780655702412_CH19.indd 540 3/3/20 11:10 AM

life. For many, transitioning into retirement and away from their work-related identities and roles is a major
and challenging adjustment.
Generation X, born between 1961 and 1981, grew up as the children of divorce and single-parent Boomer
families, meaning many Gen Xers were raised as ‘latch-key’ kids whose parents worked outside the home.
Consequently, Gen Xers tend to be very independent, adaptable and resilient but also to feel overlooked
and unappreciated. The first generation to use personal computers, they are technologically savvy but
having grown up during the AIDS epidemic and experienced numerous boom-and-bust economic cycles
such as the global financial crisis, they also tend to be cynical and question authority. They see job instability
as part of employment and also tend to prioritise family over work.
Generation Y (also called Millennials), born between 1982 and 1995 are highly educated, widely travelled
and very technologically sophisticated. Having grown up with the Internet, mobile phones and DVDs,
they are very comfortable using and communicating with technology. They value work opportunities
for creativity and personal growth, and like to have strong personal connections to their immediate boss.
However, they also see employment as a contract rather than a vocation and will sacrifice income and
promotion for better work/life balance.
Generation Z, born between 1996 and 2010, are characterised as being pragmatic, privacy-oriented and
drawn to safety, largely because they have been raised by Gen X parents who have experienced a lot of
economic and social uncertainty.75 Generation Z have grown up with smartphones and social media, so
are even more technologically savvy than Gen Ys. Consequently, they are used to finding and processing
new information very quickly and easily. Broadly speaking, they also tend to be sensitive to the long-term
consequences of their actions, making less risky life choices and prioritising work opportunities with social
impact and a sense of purpose.
Managerial challenges
Managing generational differences presents some unique challenges. Conflicts and resentment can arise
from different concepts of ‘professionalism’ and ideas about what constitutes ‘appropriate’ presentation
(e.g. through dress, appearance and language), communication style (e.g. media used, forms of address,
timeliness and comprehensiveness), work ethic and time management (e.g. managing deadlines, face time,
time off, flexibility and spending office time on personal activities), and managerial style.
There are several approaches that managers can use to accommodate generational differences in their
workplace. First, managers can review traditional assumptions and ways of working. For example, reviewing
assumptions about when face time is and isn’t necessary might shift the organisation’s focus from where
work is done to the results that are produced, creating more flexibility for all employees to determine where
and how they do their jobs. Second, managers can help employees learn what is expected and appropriate by
articulating expectations during orientation training and by teaching staff how to read and adapt to different
behavioural and communication styles. Third, managers can help employees understand and appreciate the
contributions that each generation can make. For example, arranging a regular weekly meeting at which
staff can contribute ideas, ask questions and get answers signals to Gen Xers, Ys and Zs that they are being
listened to and taken seriously and helps Boomers understand the insights that younger generations can
offer. Ongoing opportunities to communicate and learn from one another will build greater awareness,
understanding and appreciation of other generational groups.
How do ability, disability and mental health affect

the workplace?
As we mentioned in Chapter 15, one in five people in Australia have some type of disability. A disability is
defined as any condition that restricts a person’s mental, sensory or mobility functions.76 In Australia, 2.1
million people of working age (15–64 years) have a disability. Over 1 million of these people are employed,
and another 115,000 are looking for work. Around 34 per cent of people with disability are managers
or professional workers. One of the largest barriers to workforce participation experienced by people
9780655702412_CH19.indd 541 3/3/20 11:10 AM

with disability is discrimination and misconceptions about what they can and cannot do in the workplace.
Estimates are that if disability discrimination in Australia could be overcome, this could add $43 billion to
Australia’s GDP over 10 years.77
Almost 80 per cent of people with disability are affected by physical health issues, such as back problems,
hearing loss or vision impairment. For example, one in six Australians is affected by some degree of hearing
loss. Around 360,000 people have no or low vision, and this number is expected to exceed 560,000 by
2030. An estimated 10 per cent of the population has dyslexia, which is a neurobiological condition that
affects the way the brain processes words and manifests as difficulties with reading, writing and spelling.78
Around half of people with disability use aids or equipment to help with their disability, such as hearing aids,
wheelchairs, glasses, screen magnifiers or talk-to-text computer software.
As we explained in Chapters 15 and 20, managers and organisations have legal responsibilities for
supporting and accommodating people in the workplace who experience physical and mental health
issues. But there are also a range of moral and ethical reasons to do this, including respect for people’s
rights to personal freedom, dignity and equal opportunity. There are a variety of ways this can be
done. One of the most important is to foster workplace cultures and attitudes that foster inclusion
and acceptance and equal treatment for all employees. For example, disability etiquette and awareness
training can help employees understand how to act around a person with a disability and remove some
of the fear and stigma that might otherwise occur.79 Another way is to normalise inclusive and respectful
behaviour. For example, when working with a person who uses a wheelchair or crutches it is polite and
respectful to sit down when speaking to them so that you are at their eye level and addressing them from
an equal height.80 But as with other forms of diversity, arguably the most powerful and effective way is to
provide opportunities for employees to develop experience of working with differently abled colleagues.
One benefit of this approach is that it helps employees check their assumptions about what others can
do and cannot do, and develop new insights about the capabilities and strengths that people bring to the
workplace. For example, people on the autism spectrum have shown themselves to be particularly good
at work that is highly repetitive and requires close attention to detail, such as testing computer software
for bugs.81
Mental health issues such as depression, anxiety and post-traumatic stress disorder can also affect people’s
behaviour in the workplace and have become a huge issue for managers and organisations.82 It’s estimated
that at any given time, one in five people are dealing with a mental health issue, and experts predict that by
2020 between 20 and 55 per cent of adults worldwide will be affected by depression. Depression is already
the leading cause of disability. Untreated, it results in 6 million lost working days each year. Depression is a
serious illness that can result from physical health problems, bereavement, relationship conflict, prolonged
workplace stress or genetic predisposition. People with depression may lose interest in doing things
they normally enjoy, feel irritable, lack energy and find it hard to concentrate, have difficulty sleeping or
sleep more than usual. In the workplace, a person with depression might become socially withdrawn, less
confident or productive, less motivated and less resilient. Medication, counselling and exercise can all be
used to successfully treat depression, but every case is different and there is no ‘magic cure’.
There is still a lot of work to do to overcome misconceptions about mental health and stigmatisation
of people who have mental health issues. Perceptions still exist that people with depression are
‘just letting things get on top of them’ and can and should ‘just snap out of it’. Another challenge is
that some managers believe that workplace mental health is ‘not our problem’, either because they
don’t believe they have any employees with mental health issues, or because they believe it’s not any
of the organisation’s business. This may partly be because people who have a mental health condition
are reluctant to disclose it in their workplace for fear they will be stigmatised or discriminated
against. Many organisations and managers also feel under-confident and under-prepared to handle
mental health issues in the workplace.83 One study found that although 70 per cent of organisational
leaders have worked with or supervised an employee who was experiencing depression, only
9780655702412_CH19.indd 542 3/3/20 11:10 AM

25 per cent of managers had received any mental health training from their employer, and only 33 per
cent worked in an organisation that had a clear policy on mental health.84
The good news is that the situation is starting to improve. Research by PricewaterhouseCoopers shows
that every $1 invested in developing more mentally healthy workplaces produces a 230 per cent return on
that investment.85 Supporting mental health in the workplace can produce significant benefits in workplace
morale, turnover, reductions in sick leave and stress-related injuries, as well as making employees happier
and more committed. Some organisations, such as NSW Fire and Rescue, have used workplace champions
to promote mental health, change workplace attitudes, and encourage employees to look after themselves
and each other. Outdoors Inc., for example, has found that opening up communication about mental health
issues has helped employees realise they don’t need to ‘keep it to themselves’ and can raise concerns before
they become a problem.
How do managers deal with bullying in the

workplace?
Bullying behaviour – whether it occurs in school, online or in the workplace – profoundly affects people’s
physical, emotional and psychological wellbeing.86 Australian legislation defines workplace bullying as
unreasonable behaviour towards a person or group of people that creates a risk to health and safety.87
Examples of bullying behaviour include direct physical bullying (physical intimidation, practical
jokes), direct verbal bullying (name-calling, shouting, accusing), relational aggression (manipulating
social relationships to inflict pain, such as by gossiping, rumour spreading or excluding from a group),
scapegoating (drawing attention to a victim to reduce attention on the bully for a failure of the group),
sexual harassment, increasing work pressure and/or load, and destabilising the workplace by failing to
credit the individual for their successes or setting up the individual for failure. Bullying behaviour is
intended to cause the victim some kind of pain or personal distress by socially isolating and ostracising
them. Consequently, bullies are likely to target people who have low power in their workplace, such as
members of minority groups and lower-paid workers.
Bullying is a widespread and serious problem.88 In Australia, a survey of 6500 workers found that
one in four respondents had been bullied or discriminated against in the previous two years and 44 per
cent had witnessed others being bullied.89 The cost of unaddressed bullying in the workplace has been
hypothesised to be $600,000 per 100 employees. Bullying affects victims and the organisations at which
they work.90 Victims of bullying can experience a range of physical and mental health problems, including
reduced self-esteem, stress, depression, phobias and sleep disturbances. Organisational consequences of
bullying include increased absenteeism and likelihood of workplace accidents, disruption to work and lost
productivity, potential legal action and damage to organisational reputation.
Bullying behaviour can be caused by a number of workplace factors, including stressful and chaotic
work environments; high performance expectations; toxic, corrupt or unethical workplace cultures; and
significant power differences in workplace relationships.91 Managers may also contribute to workplace
cultures in which bullying can flourish when they use unfair or ‘hands off’ leadership styles, ignore
or reinforce low morale, or enable organisational cultures to be excessively informal or to promote
aggressive behaviour.92
What can managers do to manage bullying in their organisations? By developing an organisational
culture that defines, discourages and penalises bullying behaviour, managers can ensure that employees
understand organisational norms for professional behaviour, distinguish ‘right’ from ‘wrong’, and don’t
tolerate bullying behaviours.93
Managers can do this by modelling positive behaviours that send clear signals that bullying and
disrespectful behaviour won’t be tolerated.94 This includes modelling respectful behaviours towards all staff,
treating allegations about bullying seriously and investigating them carefully, dealing with unreasonable and
disrespectful behaviour as soon as it is brought to their attention, and intervening when they see problematic
9780655702412_CH19.indd 543 3/3/20 11:10 AM

behaviour occurring. They can promote the development of productive and respectful workplace relationships
among organisational members by promoting and demonstrating positive leadership, by providing training
to all staff about reasonable and supportive behaviour, and by ensuring that people understand what kinds of
behaviour constitute ‘bullying’ and ‘harassment’. Implementing clear policies and procedures about reporting
and responding to bullying behaviour will help to ensure that people do report bullying when it occurs, and
will also reinforce the message that bullying won’t be tolerated. Providing information in a variety of forms
and formats, including multiple languages, helps ensure that all staff understand what bullying is and how it
should be handled.
When responding to allegations of workplace bullying, managers should use the following principles:95
● Act promptly, and let the parties involved know how long it will take to respond to the reported
behaviour.
● Treat all reports seriously, and assess them based on the facts.
● Maintain the confidentiality of everyone involved.
● Ensure procedural fairness and don’t victimise the person reporting the bullying. Listen respectfully
to them and treat them as credible, but also ensure that the person alleged to have bullied others is
treated as innocent until proved guilty.
● Be neutral and impartial to everyone involved, and ensure that whoever is investigating the matter
has no personal or professional bias in it.
● Communicate the process and outcomes to everyone involved, and explain the reasons for any actions
taken or not taken.
● Keep records of everything done to investigate the matter.
As with any other workplace issue, the resources and control systems put in place to manage workplace
bullying need to be regularly monitored and reviewed to ensure that they are actually working. If managers
find, for example, that bullying behaviour is still occurring, or still not being reported, then it’s time to find
out why change hasn’t occurred.
9780655702412_CH19.indd 544 3/3/20 11:10 AM

Student individual behaviour in organisations: locus of control, Machiavellianism, self-

esteem, self-monitoring and risk taking.
Learning Finally, how a person responds emotionally and how they deal with their
Centre emotions is a function of personality. A person who is emotionally intelligent has

the ability to notice and to manage emotional cues and information.
Learning Objective 4. Describe perception and the

Reviewing the learning objectives factors that influence it.
Perception is how we give meaning to our environment by organising and
Learning Objective 1. Identify the focus and goals of
interpreting sensory impressions.
organisational behaviour (OB). Attribution theory helps explain how we judge people differently. It depends
OB focuses on three areas: individual behaviour, group behaviour and on three factors. Distinctiveness is whether an individual displays different
organisational aspects. The goals of OB are to explain, predict and influence behaviours in different situations (i.e. whether the behaviour is unusual).
employee behaviour. Six important employee behaviours are as follows: Employee Consensus is whether others facing a similar situation respond in the same way.
productivity is a performance measure of both efficiency and effectiveness. Consistency is when a person engages in behaviours regularly and consistently.
Absenteeism is the failure to report to work. Turnover is the voluntary and Whether these three factors are high or low helps managers determine whether
involuntary permanent withdrawal from an organisation. Organisational employee behaviour is attributed to external or internal causes.
citizenship behaviour (OCB) is discretionary behaviour that’s not part of an The fundamental attribution error is the tendency to underestimate the
employee’s formal job requirements, but it promotes the effective functioning influence of external factors and overestimate the influence of internal factors.
of an organisation. Job satisfaction is an individual’s general attitude towards The self-serving bias is the tendency to attribute our own successes to internal
their job. Workplace misbehaviour is any intentional employee behaviour that’s factors and to put the blame for personal failure on external factors. Shortcuts
potentially harmful to the organisation or individuals within the organisation. used in judging others are selective perception, assumed similarity, stereotyping
and the halo effect.
Learning Objective 2. Explain the role that attitudes
play in job performance. Learning Objective 5. Discuss learning theories and
Attitudes are evaluative statements concerning people, objects or events. The their relevance in shaping behaviour.
cognitive component of an attitude refers to the beliefs, opinions, knowledge or Operant conditioning argues that behaviour is a function of its consequences.
information held by a person. The affective component is the emotional or feeling Social learning theory says that individuals learn by observing what happens to
part of an attitude. The behavioural component refers to an intention to behave other people and by directly experiencing something.
in a certain way towards someone or something. Managers can shape behaviour by using positive reinforcement (reinforcing
Four job-related attitudes include job satisfaction, job involvement, a desired behaviour by giving something pleasant), negative reinforcement
organisational commitment and employee engagement. Job satisfaction is a (reinforcing a desired response by withdrawing something unpleasant),
person’s general attitude towards their job. Job involvement is the degree to which punishment (eliminating undesirable behaviour by applying penalties) or
an employee identifies with their job, actively participates in it, and considers their job extinction (not reinforcing a behaviour to eliminate it).
performance to be important to their self-worth. Organisational commitment is the
degree to which an employee identifies with a particular organisation and its goals Learning Objective 6. Discuss contemporary issues
and wishes to maintain membership in that organisation. Employee engagement is in OB.
when employees are connected to, satisfied with and enthusiastic about their jobs. The challenge of managing workers of different generations is that they bring new
According to cognitive dissonance theory, individuals try to reconcile attitude attitudes to the workplace. The main challenges arise from different concepts of
and behaviour inconsistencies by altering either their attitudes or their behaviour, professionalism regarding issues such as appearance, communication style and
or rationalising the inconsistency. work practices.
Improving workplace inclusion, acceptance and equal treatment for differently
Learning Objective 3. Describe different personality
abled individuals can be achieved by addressing misconceptions and stigmatisation
theories. about mental health and physical disability through awareness and etiquette
The MBTI® measures four dimensions: social interaction, preference for training, checking assumptions about what others can do, and developing new
gathering data, preference for decision making and style of making decisions. insights about the capabilities and strengths that people bring to the workplace.
The Big Five model consists of five personality traits: extraversion, agreeableness, Bullying in the workplace can be dealt with by recognising that it’s not
conscientiousness, emotional stability and openness to experience. Another acceptable and by establishing a workplace culture that doesn’t tolerate bullying
way to view personality is through the five personality traits that help explain behaviour.
9780655702412_CH19.indd 545 3/3/20 11:10 AM

➏ How might a manager use personality traits to improve employee selection

Discussion questions in their department? Emotional intelligence? Discuss.
❶ How is an organisation like an iceberg? Use the iceberg metaphor to ➐ Describe the implications of social learning theory for managing people at
describe the field of organisational behaviour. work.
➋ Does the importance of knowledge of OB differ based on a manager’s level ➑ A Gallup Organization survey shows that most workers rate having a caring
in the organisation? If so, how? If not, why not? Be specific. boss even higher than they value money. How should managers interpret
➌ Clarify how individuals reconcile inconsistencies between attitudes and this information? What are the implications?
behaviours. ➒ Write down three attitudes you have. Identify the cognitive, affective and
➍ Describe what is meant by the term emotional intelligence. Provide an behavioural components of those attitudes.
example of how it’s used in contemporary organisations. ❿ Identify some strategies that manager can use when managing physical and
➎ ‘Instead of worrying about job satisfaction, companies should be trying to mental disability in the workplace.
create environments where performance is enabled.’ What do you think this
statement means? Explain. What’s your reaction to this statement? Do you
agree? Disagree? Why?

UNDERSTANDING EMPLOYEE
EMOTIONS
Employees bring their emotions with them to work every day. Although managers would like to think that employees are always rational, they aren’t. And any manager
who deals with people by ignoring how emotions – such as fear, anger, love, hate, joy and grief – shape employees’ day-to-day behaviour isn’t likely to be very effective.
PERSONAL

ASSESSMENT
Understanding employee emotions

How emotionally intelligent are you? Take this PIA and find out how good you are at
understanding employee emotions.
Skill basics conceal our emotions to some extent for privacy and to reflect social
Understanding another person’s felt emotions is a difficult task. But we can learn expectations. So, we might be unwilling to share our true feelings. Second,
to read others’ display emotions. We do this by focusing on actual behaviour as even if we want to convey our feelings verbally, we may be unable to do so.
well as verbal, non-verbal and paralinguistic cues.96 Some people have difficulty understanding their own emotions and, hence,
• Assess others’ emotional intelligence (EI). Some people are more in touch with are unable to express them verbally. So, at best, verbal responses provide
their emotions than others. Those who understand and can manage their only partial information.
emotions are said to be high in EI. When people exhibit the following • Look for non-verbal cues. You’re talking with a co-worker. Does the fact that
behaviours, you should find that they have less variance in their emotions and their back is rigid, their teeth are clenched and their facial muscles are tight
are easier to read. People high in EI understand the way they feel (self-aware), tell you something about their emotional state? It probably should. Facial
are sensitive to the feelings of others (empathetic), voluntarily help others expressions, gestures, body movements and physical distance are non-verbal
(socially responsible), see things the way they are rather than the way they wish cues that can provide additional insights into what a person is feeling. Facial
them to be (reality oriented), reach out to others and show concern for others’ expressions, for example, are a window into a person’s feelings. Notice
interests (sociable), and manage their frustrations and anger (impulse control). differences in facial features: the raising or lowering of the brow, the turn of
• Ask about emotions. The easiest way to find out what someone is feeling is the mouth, the positioning of the lips and the configuration of muscles
to ask them. Saying something as simple as ‘Are you OK?’ can frequently around the eyes. Even something as subtle as the distance at which someone
provide you with the information to assess an individual’s emotional state. chooses to position themself from you can convey their feelings (or lack) of
But relying on a verbal response has two drawbacks. First, almost all of us intimacy, aggressiveness, repugnance or withdrawal.
9780655702412_CH19.indd 546 3/3/20 11:10 AM

• Look for how things are said. Sometimes when people talk, we notice Part B. Now you’ll conduct two role plays. Each will be an interview. In the first,
changes in the tone of their voice or the speed at which they speak. This is one person will play the interviewer and the other will play the job applicant. The
paralanguage, which is communication that goes beyond the specific spoken job is as an assistant manager with a large retail chain. Each role play will last no
words. It includes pitch, amplitude, rate and voice quality of speech. longer than 10 minutes. The interviewer is to conduct a normal job interview,
Paralanguage reminds us that people convey their feelings not only in what except you are to continually rethink the emotional episode you envisioned in
they say, but also in how they say it. Part A. Try hard to convey this emotion while, at the same time, being professional
in interviewing the job applicant.
Practising the skill
Do the following: Part C. Now reverse positions for the second role play. The interviewer becomes
the job applicant, and vice versa. The new interviewer will conduct a normal job
Part A. Form groups of two. Each person is to spend a couple of minutes
interview except that they will continually rethink the emotional episode chosen
thinking (without sharing with the other person) of a time in the past when they
in Part A.
were emotional about something. Examples might include being upset with a
parent, sibling or friend; being excited or disappointed about an academic or Spend 10 minutes deconstructing the interview, paying specific attention to the
athletic achievement; being angry with someone over an insult or slight; being emotion(s) you think the other person was conveying. What cues did you pick
disgusted by something someone has said or done; or being happy because of up? How accurate were you in reading those cues?
something good that happened.
Mini cases
19.1 Troubling texts
Disrespect is no joke
When an offensive text message sent by a member of the Australian Wallabies Di any details [about the earlier message], however, for fear of hurting her
rugby team to a female colleague in the Australian Rugby Union (ARU) went or inflaming the situation.’ Patston learned of Beale’s admission when she
public in 2014, the subsequent scandal engulfed the entire sport. Di Patston,
97
was sent a copy of Beale’s statement for rebuttal, which belied his claim
the Wallabies’ business manager, met Kurtley Beale for the first time on 1 June that he had sent the message on the spur of the moment and without
2014. Two days later, Beale texted an offensive image of an obese, naked malicious intent. The inquiry found Beale guilty of misconduct and fined him
female hunter with a crossbow captioned ‘Di??’ to ‘some Waratah mates’ $45,000 for sending the message. Patston later admitted in a newspaper
(players for the NSW Waratahs rugby union football team) via the WhatsApp interview that the verdict had made her physically ill and that the pro-Beale
phone messenger program. A week later, on 9 June, he attempted to send the media coverage throughout the inquiry had led her to contemplate suicide.
same message to Wallabies teammate James Hanson but confused Patston’s But the controversy over the Beale texting scandal didn’t end there.
number with Hanson’s and sent it to Patston by mistake. When Patston Patston alleged that the text she received from Beale on 9 June contained a
confronted him about the message later that day, Beale apologised for second captioned image even more offensive than the first. Beale claimed
humiliating her and asked her to forgive him because ‘I just do stupid things not to have sent the second image and to have been ‘shocked and disturbed’
for no reason’. Believing his claim that he hadn’t sent the message to anyone at her allegation. Subsequent investigations by IT experts determined that
else, Patston agreed to forgive him and to keep the matter between them, the two images differed in their composition, colours and clarity but didn’t
telling him in a subsequent text message that she hoped he would ‘move on determine who sent the second message. Despite the suspicions hanging
from this with a greater respect for treating people the right way’. Patston over both Beale and Patston, the ARU declared the investigation of the
later disclosed that this was partly because she felt bullied into keeping quiet second image would only be reopened if fresh evidence emerged. By the end
and felt so embarrassed and degraded by the thought that people saw her in of 2014, the scandal had resulted in the resignations of both Patston and
that way that she didn’t know who to tell about the incident. Several months Wallabies coach Ewen McKenzie. Beale continued to play for the Wallabies.
later, during an in-flight argument with Beale during a Wallabies rugby tour,
❶ Which contemporary OB issues does this case illustrate?
Patston allegedly asked him, ‘Do you want me to bring up the text?’ Beale
➋ How might the texts sent by Beale have influenced perceptions of
says he replied, ‘Di, you can do what you want with the text. Tell anyone you
Patson? Of Beale? Of the Wallabies?
like,’ which he later claimed he didn’t mean but had said because he ‘was so
➌ What message do you think the ARU’s actions sent to players, staff
tired of worrying about things and feeling judged’. Subsequent ARU
and other stakeholders about its attitude towards sending offensive
investigations of the in-flight argument uncovered the text incidents, leading
messages?
to a formal Code of Conduct inquiry into the matter.
➍ What do you think Patson and Beale and other members of the
During the inquiry, Beale admitted to the earlier text in a confidential Wallabies learned from this incident? How might it shape players’
statement to the ARU’s Code of Conduct Committee and said, ‘I did not tell behaviour in the future?
9780655702412_CH19.indd 547 3/3/20 11:10 AM

19.2 A fighting chance at a fair go

It’s about what you can do
‘What if social enterprises could change the game for people with a of the business, including marketing activities, customer sales, writing the
disability?’ That’s the question posed by Fighting Chance.98 Fighting Chance business blog and dealing with stakeholder queries. While these business
is a not-for-profit enterprise founded by siblings Laura (CEO) and Jordan activities are undertaken with minimal input from support workers or
O’Reilly to empower and provide meaningful employment for Australians enterprise management, employees are given the support they require to
living with a disability. The venture began as a way for Laura and Jordan to achieve their personal and business goals relating to their employment or
help their brother Shane gain employment. Due to his cerebral palsy, Shane work experience at Avenue Fair Trade. The organisation also offers a work
had been unable to find a job despite having IT knowledge and skills, and a experience program whereby interns are taught skills related to
strong motivation to find work in which he could apply and develop them. communication, workplace etiquette and job readiness. The enterprise
Unfortunately, Shane’s challenges are not uncommon: 85 per cent of utilises a profit-sharing model whereby employees receive a portion of the
Australians with profound disabilities experience lifelong unemployment. At profits on a monthly basis.
the time, day programs existed to support Shane’s engagement in Fighting Chance’s other enterprise, Jigsaw Business Solutions, provides
recreational and leisure activities, but no programs were available to help digitisation services to corporate and government clients. Jigsaw competes
him and other people with profound disabilities build vocational skills, or for contracts against rival companies like any other technology service
receive training within a real business environment – all important ways to provider, but employs people with a disability to complete the work. Jigsaw
prove employability. Frustrated by the injustice of the situation, Laura and provides training and employment experience to help staff achieve
Jordan founded Fighting Chance to address that need. mainstream employment and, unlike many other organisations in the
Based in Sydney, Fighting Chance operates two social enterprises that disability sector, pays its employees Award wages. Both enterprises are
operate in complementary ways as pathways to employment for people needed, explains Laura, because ‘if we only operated Jigsaw, people like my
with a profound disability who face challenges entering the workforce. brother would miss out’.
Avenue is a retail business that sells artisan-made home décor items, soft By 2016, Fighting Chance had established four work hubs across
toys and fashion accessories ethically sourced from organisations in Sydney, helped 200 people through employment, and generated over $1
Cambodia, India, Laos and Nepal that employ and provide employment million in revenue for the 2016 financial year. But the biggest impact is that
training to people with a disability. Products are primarily sold through the the organisation is changing the employment landscape for people with a
enterprise’s online store, but Avenue also sells its wares at local community disability to give them a fighting chance at a fair go.
markets in Sydney. Avenue’s enterprise is built upon the foundational belief
❶ What factors do you think influence people’s perceptions of disability?
that all adults have skills and abilities to contribute. The mission of the
How do they affect perceptions?
enterprise is to empower people by acknowledging their skills rather than
➋ How do you think attitudes about disability are affecting the behaviour
their disability. As CEO, Laura has worked hard to create a supportive
of managers and employees?
culture in which every person is empowered to achieve their maximum
➌ How could emotional intelligence help managers support an employee
capabilities. The enterprise is run entirely by a workforce of people with
with a disability?
profound and severe disabilities, many of whom were previously deemed
➍ What learning is Fighting Chance enabling? For whom?
unfit for work. Employees work in teams that handle the day-to-day running
References
1 E. McDonald, ‘Absenteeism in the Australian Workplace’, Thirdsector.com, 26 January T. M. Glomb, D. P. Bhave, A. G. Miner and M. Wall, ‘Doing Good, Feeling Good:
2016. Examining the Role of Organizational Citizenship Behaviors in Changing Mood’,
2 D. W. Organ, Organizational Citizenship Behavior: The Good Soldier Syndrome Personnel Psychology, Spring 2011, pp. 191–223; T. P. Munyon, W. A. Hochwarter, P.
(Lexington, MA: Lexington Books, 1988), p. 4. See also J. L. Lavell, D. E. Rupp and J. L. Perrewé and G. R. Ferris, ‘Optimism and the Nonlinear Citizenship Behavior – Job
Brockner, ‘Taking a Multifoci Approach to the Study of Justice, Social Exchange and Satisfaction Relationship in Three Studies’, Journal of Management, November 2010,
Citizenship Behavior: The Target Similarity Model’, Journal of Management, December pp. 1505–28; R. Ilies, B. A. Scott and T. A. Judge, ‘The Interactive Effects of Personal
2007, pp. 841–66; and J. A. LePine, A. Erez and D. E. Johnson, ‘The Nature and Traits and Experienced States on Intraindividual Patterns of Citizenship Behavior’,
Dimensionality of Organizational Citizenship Behavior: A Critical Review and Meta- Academy of Management Journal, June 2006, pp. 561–75; P. Cardona, B. S. Lawrence
Analysis’, Journal of Applied Psychology, February 2002, pp. 52–65. and P. M. Bentler, ‘The Influence of Social and Work Exchange Relationships on
3 J. R. Spence, D. L. Ferris, D. J. Brown and D. Heller, ‘Understanding Daily Citizenship Organizational Citizenship Behavior’, Group & Organization Management, April 2004,
Behaviors: A Social Comparison Approach’, Journal of Organizational Behavior, May pp. 219–47; M. C. Bolino and W. H. Turnley, ‘Going the Extra Mile: Cultivating and
2011, pp. 547–71; L. M. Little, D. L. Nelson, J. C. Wallace and P. D. Johnson, ‘Integrating Managing Employee Citizenship Behavior’, Academy of Management Executive, August
Attachment Style, Vigor at Work and Extra-Role Performance’, Journal of Organizational 2003, pp. 60–73; M. C. Bolino, W. H. Turnley and J. J. Bloodgood, ‘Citizenship Behavior
Behavior, April 2011, pp. 464–84; N. P. Podsakoff, P. M. Podsakoff, S. W. Whiting and and the Creation of Social Capital in Organizations’, Academy of Management Review,
P. Mishra, ‘Effects of Organizational Citizenship Behavior on Selection Decisions in October 2002, pp. 505–22; and P. M. Podsakoff, S. B. MacKenzie,J. B. Paine and D. G.
Employment Interviews’, Journal of Applied Psychology, March 2011, pp. 310–26; Bachrach, ‘Organizational Citizenship Behaviors: A Critical Review of the Theoretical
9780655702412_CH19.indd 548 3/3/20 11:10 AM

and Empirical Literature and Suggestions for Future Research’, Journal of Management, 18 D. A. Harrison, D. A. Newman and P. L. Roth, ‘How Important Are Job Attitudes?:
vol. 26, no. 3 (2000), pp. 543–48. Meta-Analytic Comparisons of Integrative Behavioral Outcomes and Time Sequences’,
4 M. C. Bolino and W. H. Turnley, ‘The Personal Costs of Citizenship Behavior: The Academy of Management Journal, April 2006, pp. 305–25.
Relationship between Individual Initiative and Role Overload, Job Stress and Work– 19 G. Chen, R. E. Ployhart, H. C. Thomas, N. Anderson and P. D. Bliese, ‘The Power of
Family Conflict’, Journal of Applied Psychology, July 2005, pp. 740–8. Momentum: A New Model of Dynamic Relationships between Job Satisfaction Change
5 This definition adapted from R. W. Griffin and Y. P. Lopez, ‘Bad Behavior in Organizations: and Turnover Intentions’, Academy of Management Journal, February 2011, pp. 159–81.
A Review and Typology for Future Research’, Journal of Management, December 2005,
pp. 988–1005. 20 Sustainability at Work, ‘Sustainability in the Workplace’, <www.sustainabilityatwork.
6 S. J. Becker, ‘Empirical Validation of Affect, Behavior and Cognition as Distinct com.au>, June 2011, accessed 19 December 2012.
Components of Behavior’, Journal of Personality and Social Psychology, May 1984, 21 S. Marinos, ‘Mettle Testing’, Management Today, June 2010.
pp. 1191–205.
22 Emotional Intelligence Development Australia, ‘Emotional Intelligence Assessment Tools:
7 S. P. Robbins and T. A. Judge, Essentials of Organizational Behavior, 11th edn (Upper Saddle
Myers-Briggs Type Indicator® Personality Assessment Tool’, <www.eidevelopment.com/
River, NJ: Prentice Hall, 2010).
myers.shtml>, accessed 12 July 2010.
8 M. S. Christian, A. S. Garza and J. E. Slaughter, ‘Work Engagement: A Quantitative Review
and Test of Its Relations with Task and Contextual Performance’, Personnel Psychology, 23 F. W. Brown and M. D. Reilly, ‘The Myers-Briggs Type Indicator and Transformational
Spring 2011, pp. 89–136; V. T. Ho, S-S Wong and C. H. Lee, ‘A Tale of Passion: Linking Leadership’, Journal of Management Development, vol. 28, no. 10 (2009), pp. 916–32.
Job Passion and Cognitive Engagement to Employee Work Performance’, Journal of 24 CPP, Inc., Myers-Briggs Type Indicator® (MBTI®), <www.cpp.com>, 2011; and J. Llorens,
Management Studies, January 2011, pp. 26–47; D. R. May, R. L. Gilson and L. M. ‘Taking Inventory of Myers-Briggs’, T&D, April 2010, pp. 18–19.
Harter, ‘The Psychological Conditions of Meaningfulness, Safety and Availability and the
25 CPP, Inc., Myers-Briggs Type Indicator® (MBTI®), <www.cpp.com>, 2011; and J. Llorens,
Engagement of the Human Spirit at Work’, Journal of Occupational and Organizational
‘Taking Inventory of Myers-Briggs’, T&D, April 2010, pp. 18–19.
Psychology, March 2004, pp. 11–37; R. T. Keller, ‘Job Involvement and Organizational
Commitment as Longitudinal Predictors of Job Performance: A Study of Scientists 26 See, for example, J. Overbo, ‘Using Myers-Briggs Personality Type to Create a Culture
and Engineers’, Journal of Applied Psychology, August 1997, pp. 539–45; W. Kahn, Adapted to the New Century’, T&D, February 2010, pp. 70–2; K. Garrety, R. Badham, V.
‘Psychological Conditions of Personal Engagement and Disengagement at Work’, Morrigan, W. Rifkin and M. Zanko, ‘The Use of Personality Typing in Organizational Change:
Academy of Management Journal, December 1990, pp. 692–794; and P. P. Brooke, Jr, D. Discourse, Emotions and the Reflective Subject’, Human Relations, February 2003,
W. Russell and J. L. Price, ‘Discriminant Validation of Measures of Job Satisfaction, Job pp. 211–35.
Involvement and Organizational Commitment’, Journal of Applied Psychology, May 1988, 27 P. Moran, ‘Personality Characteristics and Growth-Orientation of the Small Business Owner
pp. 139–45. Also see, for example, J. Smythe, ‘Engaging Employees to Drive Performance’, Manager’, Journal of Managerial Psychology, July 2000, p. 651; and M. Higgs, ‘Is There
Communication World, May–June 2008, pp. 20–2; A. B. Bakker and W. B. Schaufeli, a Relationship between the Myers-Briggs Type Indicator and Emotional Intelligence?’,
‘Positive Organizational Behavior: Engaged Employees in Flourishing Organizations’, Journal of Managerial Psychology, September–October 2001, pp. 488–513.
Journal of Organizational Behavior, February 2008, pp. 147–54; U. Aggarwal, S. Datta and
28 J. M. Digman, ‘Personality Structure: Emergence of the Five Factor Model’, in M. R.
S. Bhargava, ‘The Relationship between Human Resource Practices, Psychological Contract
Rosenweig and L. W. Porter (eds), Annual Review of Psychology, vol. 41 (Palo Alto,
and Employee Engagement – Implications for Managing Talent’, IIMB Management
CA: Annual Reviews, 1990), pp. 417–40; O. P. John, ‘The Big Five Factor Taxonomy:
Review, September 2007, pp. 313–25; M. C. Christian and J. E. Slaughter, ‘Work
Dimensions of Personality in the Natural Language and in Questionnaires’, in L. A.
Engagement: A Meta-Analytic Review and Directions for Research in an Emerging Area’,
Pervin (ed.), Handbook of Personality Theory and Research (New York: Guilford Press,
AOM Proceedings, August 2007, pp. 1–6; C. H. Thomas, ‘A New Measurement Scale for
1990), pp. 66–100; and M. K. Mount, M. R. Barrick and J. P. Strauss, ‘Validity of
Employee Engagement: Scale Development, Pilot Test and Replication’, AOM Proceedings,
Observer Ratings of the Big Five Personality Factors’, Journal of Applied Psychology,
August 2007, pp. 1–6; A. M. Saks, ‘Antecedents and Consequences of Employee
April 1996, pp. 272–80.
Engagement’, Journal of Managerial Psychology, vol. 21, no. 7 (2006), pp. 600–19; and
29 See, for example, T. W. Yiu and H. K. Lee, ‘How Do Personality Traits Affect Construction
A. Parsley, ‘Road Map for Employee Engagement’, Management Services, Spring 2006,
Dispute Negotiation: Study of Big Five Personality Model’, Journal of Construction
pp. 10–11.
Engineering & Management, March 2011, pp. 169–78; H. J. Kell, A. D. Rittmayer, A. E.
9 Mercer, IndustryWeek, April 2008, p. 24.
Crook and S. J. Motowidlo, ‘Situational Content Moderates the Association between the
10 P. Nicholas, ‘Six Tips to Boost Employee Engagement’, Australian Anthill, 3 December
Big Five Personality Traits and Behavioral Effectiveness’, Human Performance, February
2009; and S. Payne, ‘What is Employee Disengagement Costing You?’, Engineers
2010, pp. 213–28; R. D. Meyer, R. S. Dalal and S. Bonaccio, ‘A Meta-Analytic Investigation
Australia, 12 August 2016.
into the Moderating Effects of Situational Strength on the Conscientiousness–Performance
11 J. M. George, ‘The Wider Context, Costs and Benefits of Work Engagement’, European
Relationship’, Journal of Organizational Behavior, November 2009, pp. 1077–102; G.
Journal of Work & Organizational Psychology, February 2011, pp. 53–9; and ‘Employee
Vittorio, C. Barbaranelli and G. Guido, ‘Brand Personality: How to Make the Metaphor
Engagement Report 2011’, BlessingWhite Research, <www.blessingwhite.com>,
Fit’, Journal of Economic Psychology, June 2001, p. 377; G. M. Hurtz and J. J. Donovan,
January 2011, pp. 7–8.
‘Personality and Job Performance: The Big Five Revisited’, Journal of Applied Psychology,
12 A. J. Elliott and P. G. Devine, ‘On the Motivational Nature of Cognitive Dissonance:
December 2000, p. 869; W. A. Hochwarter, L. A. Witt and K. M. Kacmar, ‘Perceptions of
Dissonance as Psychological Discomfort’, Journal of Personality and Social Psychology,
Organizational Politics as a Moderator of the Relationship between Conscientiousness and
September 1994, pp. 382–94.
Job Performance’, Journal of Applied Psychology, June 2000, p. 472; and M. R. Barrick and
13 L. Festinger, A Theory of Cognitive Dissonance (Stanford, CA: Stanford University Press, 1957);
M. K. Mount, ‘The Big Five Personality Dimensions and Job Performance: A Meta-Analytic
C. Crossen, ‘Cognitive Dissonance Became a Milestone in 1950s Psychology’, Wall Street
Study’, Personnel Psychology, vol. 44 (1991), pp. 1–26.
Journal, 4 December 2006, p. B1; and Y. ‘Sally’ Kim, ‘Application of the Cognitive Dissonance
30 M. R. Barrick and M. K. Mount, ‘Autonomy as a Moderator of the Relationship
Theory to the Service Industry’, Services Marketing Quarterly, April–June 2011, pp. 96–112.
between the Big Five Personality Dimensions and Job Performance’, Journal of Applied
14 H. C. Koh and E. H. Y. Boo, ‘The Link between Organizational Ethics and Job Satisfaction: A
Psychology, vol. 78 (1993), pp. 111–18.
Study of Managers in Singapore’, Journal of Business Ethics, 15 February 2001, p. 309.
31 See also M. R. Furtner and J. F. Rauthmann, ‘Relations between Self-Leadership and
15 See, for example, W. D. Crano and R. Prislin, ‘Attitudes and Persuasion’, Annual Review
Scores on the Big Five’, Psychological Reports, October 2010, pp. 339–53; R. Barrick,
of Psychology, 2006, pp. 345–74; and J. Jermias, ‘Cognitive Dissonance and Resistance
M. Piotrowski and G. L. Stewart, ‘Personality and Job Performance: Test of the Mediating
to Change: The Influence of Commitment Confirmation and Feedback on Judgment
Effects of Motivation among Sales Representatives’, Journal of Applied Psychology,
Usefulness of Accounting Systems’, Accounting, Organizations and Society, March 2001,
February 2002, pp. 43–52; and I. T. Robertson, H. Baron, P. Gibbons, R. Maclver and G.
p. 141.
Nyfield, ‘Conscientiousness and Managerial Performance’, Journal of Occupational and
16 T. A. Judge, C. J. Thoresen, J. E. Bono and G. K. Patton, ‘The Job Satisfaction–Job Organizational Psychology, June 2000, pp. 171–8.
Performance Relationship: A Qualitative and Quantitative Review’, Psychological 32 See, for example, J. L. Kisamore, I. M. Jawahar, E. W. Liguori, T. L. Mharapara and T. H.
Bulletin, May 2001, pp. 376–407. Stone, ‘Conflict and Abusive Workplace Behaviors: The Moderating Effects of Social
17 L. Saari and T. A. Judge, ‘Employee Attitudes and Job Satisfaction’, Human Resource Competencies’, Career Development International, October 2010, pp. 583–600; P. S.
Management, Winter 2004, pp. 395–407; and T. A. Judge and A. H. Church, ‘Job Mishra and A. K. Das Mohapatra, ‘Relevance of Emotional Intelligence for Effective
Satisfaction: Research and Practice’, in C. L. Cooper and E. A. Locke (eds), Industrial and Job Performance: An Empirical Study’, Vikalpa: The Journal for Decision Makers,
Organizational Psychology: Linking Theory with Practice (Oxford, UK: Blackwell, 2000). January–March 2010, pp. 53–61; T-Y. Kim, D. M. Cable, S-P. Kim and J. Wang, ‘Emotional
9780655702412_CH19.indd 549 3/3/20 11:10 AM

Competence and Work Performance: The Mediating Effect of Proactivity and the ‘Re-Examining Machiavelli: A Three-Dimensional Model of Machiavellianism in the
Moderating Effect of Job Autonomy’, Journal of Organizational Behavior, October 2009, Workplace’, Journal of Applied Social Psychology, August 2010, pp. 1868–96; W.
pp. 983–1000; J. M. Diefendorff and G. J. Greguras, ‘Contextualising Emotional Display Amelia, ‘Anatomy of a Classic: Machiavelli’s Daring Gift’, Wall Street Journal, 30–31
Rules: Examining the Roles of Targets and Discrete Emotions in Shaping Display Rule August 2008, p. W10; S. A. Snook, ‘Love and Fear and the Modern Boss’, Harvard
Perceptions’, Journal of Management, August 2009, pp. 880–98; J. Gooty, M. Gavin Business Review, January 2008, pp. 16–17; and R. G. Vleeming, ‘Machiavellianism: A
and N. M. Ashkanasy, ‘Emotions Research in OB: The Challenges that Lie Ahead’, Journal Preliminary Review’, Psychology Reports, February 1979, pp. 295–310.
of Organizational Behavior, August 2009, pp. 833–8; N. M. Ashkanasy and C. S. Daus, 45 P. Harris, ‘Machiavelli and the Global Compass: Ends and Means in Ethics and Leadership’,
‘Emotion in the Workplace: The New Challenge for Managers’, Academy of Management Journal of Business Ethics, June 2010, pp. 131–8; and P. Van Kenhove, I. Vermeir and S.
Executive, February 2002, pp. 76–86; N. M. Ashkanasy, C. E. J. Hartel and C. S. Daus, Verniers, ‘An Empirical Investigation of the Relationship between Ethical Beliefs, Ethical
‘Diversity and Emotions: The New Frontiers in Organizational Behavior Research’, Ideology, Political Preference and Need for Closure’, Journal of Business Ethics, 15 August
Journal of Management, vol. 28, no. 3 (2002), pp. 307–38; S. Fox, ‘Promoting Emotional 2001, p. 347.
Intelligence in Organizations: Make Training in Emotional Intelligence Effective’,
46 Based on J. Brockner, Self-Esteem at Work: Research, Theory and Practice (Lexington, MA:
Personnel Psychology, Spring 2002, pp. 236–40; B. E. Ashforth, ‘The Handbook of
Lexington Books, 1988), Chapters 1–4.
Emotional Intelligence: Theory, Development, Assessment and Application at Home,
School and in the Work Place: A Review’, Personnel Psychology, Autumn 2001, 47 See, for example, R. Vermunt, D. van Knippenberg, B. van Knippenberg and E. Blaauw,
pp. 721–4; and R. Bar-On and J. D. A. Parker, The Handbook of Emotional Intelligence: ‘Self-Esteem and Outcome Fairness: Differential Importance of Procedural and Outcome
Theory, Development, Assessment and Application at Home, School and in the Work Considerations’, Journal of Applied Psychology, August 2001, p. 621; T. A. Judge and
Place (San Francisco, CA: Jossey-Bass, 2000). J. E. Bono, ‘Relationship of Core Self-Evaluation Traits – Self-Esteem, Generalized Self
33 Emma Isaacs, ‘About’, <http://emmaisaacs.com/about/>, accessed 30 October 2017. Efficacy, Locus of Control and Emotional Stability – with Job Satisfaction and Job
34 See, for example, C. S. P. Fernandez, ‘Emotional Intelligence in the Workplace’, Journal Performance’, Journal of Applied Psychology, February 2001, p. 80; and D. B. Fedor,
of Public Health Management and Practice, February 2007, pp. 80–2. J. M. Maslyn, W. D. Davis and K. Mathieson, ‘Performance Improvement Efforts in
35 A. Carmeli, ‘The Relationship between Emotional Intelligence and Work Attitudes, Response to Negative Feedback: The Roles of Source Power and Recipient Self-Esteem’,
Behavior and Outcomes: An Examination among Senior Managers’, Journal of Journal of Management, January–February 2001, pp. 79–97.
Managerial Psychology, September 2003, pp. 788–813. 48 M. Snyder, Public Appearances, Private Realities: The Psychology of Self-Monitoring (New
36 This section is based on R. Bar-On and J. D. A. Parker, The Handbook of Emotional York: W. H. Freeman, 1987).
Intelligence: Theory, Development, Assessment and Application at Home, School and in 49 See, for example, D. U. Bryant, M. Mitcham, A. R. Araiza and W. M. Leung, ‘The
the Work Place (San Francisco, CA: Jossey-Bass, 2000); B. E. Ashforth, ‘The Handbook Interaction of Self-Monitoring and Organizational Position on Perceived Effort’, Journal
of Emotional Intelligence: Theory, Development, Assessment and Application at Home, of Managerial Psychology, vol. 26, no. 2 (2011), pp. 138–54; B. B. Vilela and J. A. V.
School and in the Work Place. A Review’, Personnel Psychology, Autumn 2001, pp. González, ‘Salespesons’ Self-Monitoring: Direct, Indirect and Moderating Effects on
721–4; and S. Fox, ‘Promoting Emotional Intelligence in Organizations: Make Training in Salespersons’ Organizational Citizenship Behavior’, Psychology & Marketing, January
Emotional Intelligence Effective’, Personnel Psychology, Spring 2002, pp. 236–40. 2010, pp. 71–89; and P. M. Fandt, ‘Managing Impressions with Information: A Field
37 See A. Carmeli, ‘The Relationship between Emotional Intelligence and Work Attitudes, Study of Organizational Realities’, Journal of Applied Behavioral Science, June 2001,
Behavior and Outcomes: An Examination among Senior Managers’, Journal of pp. 180–205.
Managerial Psychology, September 2003, pp. 788–813; P. J. Jordan, N. M. Ashkanasy
50 See, for example, D. U. Bryant, M. Mitcham, A. R. Araiza and W. M. Leung, ‘The
and C. E. J. Hartel, ‘Emotional Intelligence as a Moderator of Emotional and Behavioral
Interaction of Self-Monitoring and Organizational Position on Perceived Effort’, Journal
Reactions to Job Insecurity’, Academy of Management Review, July 2002, pp. 361–72.
of Managerial Psychology, vol. 26, no. 2 (2011), pp. 138–54; B. B. Vilela and J. A. V.
38 A. Carmeli, ‘The Relationship between Emotional Intelligence and Work Attitudes,
González, ‘Salespesons’ Self-Monitoring: Direct, Indirect and Moderating Effects on
Behavior and Outcomes: An Examination among Senior Managers’, Journal of
Salespersons’ Organizational Citizenship Behavior’, Psychology & Marketing, January
Managerial Psychology, September 2003, pp. 788–813.
2010, pp. 71–89; and P. M. Fandt, ‘Managing Impressions with Information: A Field
39 C. Cherniss and R. D. Caplan, ‘A Case Study of Implementing Emotional Intelligence
Study of Organizational Realities’, Journal of Applied Behavioral Science, June 2001,
Programs in Organizations’, Journal of Organizational Excellence, Winter 2001, pp.
pp. 180–205.
763–86; S. B. Vanessa-Urch and W. Deuskat, ‘Building the Emotional Intelligence of
51 R. N. Taylor and M. D. Dunnette, ‘Influence of Dogmatism, Risk Taking Propensity and
Groups’, Harvard Business Review, March 2001, pp. 81–91; K. Brown, ‘Emotional
Intelligence on Decision Making Strategies for a Sample of Industrial Managers’,
Intelligence: Is it Ready for the Workplace?’, HR Leader, 5 April 2005; ‘Emotional
Journal of Applied Psychology, August 1974, pp. 420–3.
Intelligence Equates to Better Leaders: Australia Post’, Workplace Info, 19
52 I. L. Janis and L. Mann, Decision Making: A Psychological Analysis of Conflict, Choice
October 2004; and A. Mylons, J. Harvey and J. Hodges, Business Organisation and
and Commitment (New York: Free Press, 1977).
Management for Queensland (South Yarra, Vic.: Macmillan Education, 2007).
53 See, for example, C. P. Cross, L. T. Copping and A. Campbell, ‘Sex Differences in
40 C. Moller and S. Powell, ‘Emotional Intelligence and the Challenges of Quality
Impulsivity: A Meta-Analysis’, Psychological Bulletin, January 2011, pp. 97–130;
Management’, Leadership and Organizational Development Journal, July/August 2001,
A. A. Schooler, K. Fujita, X. Zou and S. J. Stroessner, ‘When Risk Seeking Becomes a
pp. 341–45; S. Kernbach and N. S. Schutte, ‘The Impact of Service Provider Emotional
Motivational Necessity’, Journal of Personality and Social Psychology, August 2010,
Intelligence on Customer Satisfaction’, Journal of Services Marketing, November 2005,
pp. 215–31; A. Chatterjee and D. C. Hambrick, ‘Executive Personality, Capability
pp. 438–44; and T. Heffernan, G. O’Neill, T. Travaglione and M. Droulers, ‘Relationship
Cues and Risk-Taking: How Narcissistic CEOs React to Their Successes and Stumbles’,
Marketing: The Impact of Emotional Intelligence and Trust on Bank Performance’,
Academy of Management Proceedings, <www.aomonline.org>, 2010; E. Soane, C.
International Journal of Bank Marketing, vol. 26, no. 3 (2008), pp. 183–99.
Dewberry and S. Narendran, ‘The Role of Perceived Costs and Perceived Benefits in the
41 See L. A. Downey, V. Papageorgiou and C. Stough, ‘Examining the Relationship
Relationship between Personality and Risk-Related Choices’, Journal of Risk Research,
between Leadership, Emotional Intelligence and Intuition in Female Managers’,
April 2010, pp. 303–18; and N. Kogan and M. A. Wallach, ‘Group Risk Taking as a
Leadership & Organization Development Journal, April 2006, pp. 250–64.
Function of Members’ Anxiety and Defensiveness’, Journal of Personality, March 1967,
42 Question of Ethics box based on P. Jaskunas, ‘The Tyranny of the Forced Smile’, New
pp. 50–63.
York Times Online, 14 February 2015; and R. E. Silverman, ‘Workers Really Do Put on a
54 H. Zhao, S. E. Seibert and G. T. Lumpkin, ‘The Relationship of Personality to
Happy Face for the Boss’, Wall Street Journal, 29 January 2015, p. D4.
Entrepreneurial Intentions and Performance: A Meta-Analytic Review’, Journal of
43 See, for example, J. Silvester, F. M. Anderson-Gough, N. R. Anderson and A. R. Mohamed, Management, March 2010, pp. 381–404; and K. Hyrshy, ‘Entrepreneurial Metaphors
‘Locus of Control, Attributions and Impression Management in the Selection Interview’, and Concepts: An Exploratory Study’, Journal of Managerial Psychology, July 2000, p.
Journal of Occupational and Organizational Psychology, March 2002, pp. 59–77; D. W. 653; and B. McCarthy, ‘The Cult of Risk Taking and Social Learning: A Study of Irish
Organ and C. N. Greene, ‘Role Ambiguity, Locus of Control and Work Satisfaction’, Entrepreneurs’, Management Decision, August 2000, pp. 563–75.
Journal of Applied Psychology, February 1974, pp. 101–2; and T. R. Mitchell, C. M. Smyser 55 M. Goldman, ‘A Journey into Personality Self-Discovery, Vol. 2’, Bloomberg
and S. E. Weed, ‘Locus of Control: Supervision and Work Satisfaction’, Academy of BusinessWeek Online, 22 March 2011; M. Goldman, ‘A Journey into Personality Self-
Management Journal, September 1975, pp. 623–31. Discovery, Vol. 1’, Bloomberg BusinessWeek Online, 15 February 2011; and P. Korkki,
44 I. Zettler, N. Friedrich and B. E. Hilbig, ‘Dissecting Work Commitment: The Role of ‘The True Calling That Wasn’t’, New York Times Online, 16 July 2010.
Machiavellianism’, Career Development International, February 2011, pp. 20–35; 56 J. L. Holland, Making Vocational Choices: A Theory of Vocational Personalities and Work
S. R. Kessler, A. C. Bandelli, P. E. Spector, W. C. Borman, C. E. Nelson and L. M. Penney, Environments (Odessa, FL: Psychological Assessment Resources, 1997).
9780655702412_CH19.indd 550 3/3/20 11:10 AM

57 S. Bates, ‘Personality Counts: Psychological Tests Can Help Peg the Job Applicants Best the Workplace: Personal Values, Behaviors and Popular Beliefs’, Journal of Diversity
Suited for Certain Jobs’, HR Magazine, February 2002, pp. 28–38; and K. J. Jansen Management, vol. 3 (2009), pp. 1–8; E. Parry, Generational Diversity at Work: New
and A. K. Brown, ‘Toward a Multi-Level Theory of Person Environment Fit’, Academy Research Perspectives (Oxon, UK: Routledge, 2014); and R. Scott, ‘Get Ready for
of Management Proceedings from the Fifty-Eighth Annual Meeting of the Academy of Generation Z’, Forbes, 28 November 2016.
Management, San Diego, CA (7–12 August 1998), pp. HR: FR1–8. 75 This section adapted from R. Scott, ‘Get Ready for Generation Z’, Forbes, 28 November
58 See, for example, G. W. M. Ip and M. H. Bond, ‘Culture, Values and the Spontaneous 2016.
Self-Concept’, Asian Journal of Psychology, vol. 1 (1995), pp. 30–6; J. E. Williams, J. 76 Australian Network on Disability, ‘Disability Statistics’, <https://www.and.org.au>,
L. Saiz, D. L. FormyDuval, M. L. Munick, E. E. Fogle, A. Adom, A. Haque, F. Neto and accessed 14 October 2017.
J. Yu, ‘Cross-Cultural Variation in the Importance of Psychological Characteristics: 77 T. Ong, ‘Workplace Discrimination: Half of LGBTI Australians Hide Sexuality at Work,
A Seven-Year Country Study’, International Journal of Psychology, October 1995, Report Finds’, ABC News, 28 September 2016.
pp. 529–50; V. Benet and N. G. Walker, ‘The Big Seven Factor Model of Personality 78 Australian Dyslexia Association, ‘What is Dyslexia?’, <http://dyslexiaassociation.org.
Description: Evidence for Its Cross-Cultural Generalizability in a Spanish Sample’, au>, accessed 14 October 2017.
Journal of Personality and Social Psychology, October 1995, pp. 701–18; R. R. 79 N. Henderson, ‘Different Abilities Pay Off’, National Organization on Disability, <https://
McCrae and P. To. Costa, Jr, ‘Personality Trait Structure as a Human Universal’, www.nod.org/>, 30 August 2017, accessed 14 October 2017.
American Psychologist, 1997, pp. 509–16; and M. J. Schmit, J. A. Kihm and C. 80 NSW Public Service Commission, ‘Implications in the Workplace – Physical Disabilities’,
Robie, ‘Development of a Global Measure of Personality’, Personnel Psychology, <https://www.psc.nsw.gov.au>, accessed 14 October 2017.
Spring 2000, pp. 153–93. 81 I. Fried, ‘Testing Firm Finds That Some Workers with Autism Excel at Spotting Software
59 C. Jarrett, ‘Different Nationalities Really have Different Personalities’, BBC Future, 13 Bugs’, Recode, 2 April 2016.
April 2017. 82 beyondblue, <www.beyondblue.org.au>, accessed 27 October 2017; Heads Up,
60 J. F. Salgado, ‘The Five Factor Model of Personality and Job Performance in the European <www.headsup.org.au>, accessed 27 October 2017; and A. Martin, M. Woods and S.
Community’, Journal of Applied Psychology, February 1997, pp. 30–43. Note: This study Dawkins, ‘Managing Employees with Mental Health Issues: Identification of Conceptual
covered the 15-nation European community and didn’t include the 10 countries that and Procedural Knowledge for Development within Management Education Curricula’,
joined in 2004. Academy of Management Education, 8 January 2014.
61 A. Stanava, ‘How Skills and Personality Traits Contribute to the Gender Pay Gap’, The 83 A. Martin, M. Woods and S. Dawkins, ‘Managing Employees with Mental Health
Conversation, 14 September 2017. Issues: Identification of Conceptual and Procedural Knowledge for Development within
62 G. Kranz, ‘Organizations Look to Get Personal in ’07’, Workforce Management, 19 Management Education Curricula’, Academy of Management Education,
June 2007. 8 January 2014; and A. Martin, ‘Individual and Contextual Correlates of Managers’
63 A. O’Connell, ‘Smile, Don’t Bark in Tough Times’, Harvard Business Review, November Attitudes towards Depressed Employees’, Human Resource Management, vol. 49
2009, p. 27; and G. A. Van Kleef et al., ‘Searing Sentiment or Cold Calculation? The (2010), pp. 647–68.
Effects of Leader Emotional Displays on Team Performance Depend on Follower 84 A. Martin, ‘Individual and Contextual Correlates of Managers’ Attitudes towards
Epistemic Motivation’, Academy of Management Journal, June 2009, pp. 562–80. Depressed Employees’, Human Resource Management, vol. 49 (2010), pp. 647–68.
64 Advertisement for Land Rover Discovery Series II. 85 PricewaterhouseCoopers, ‘Creating a Mentally Healthy Workplace: Return on
65 H. H. Kelley, ‘Attribution in Social Interaction’, in E. Jones et al. (eds), Behavior (Morristown, Investment Analysis’, March 2014, <https://www.headsup.org.au/docs/default-source/
NJ: General Learning Press, 1972). resources/beyondblue_workplaceroi_finalreport_may-2014.pdf>, accessed 20 January
66 G. Miller and T. Lawson, ‘The Effect of an Informational Option on the Fundamental 2018.
Attribution Error’, Personality and Social Psychology Bulletin, June 1989, pp. 194–204. 86 This section based on F. Bulutlar and E. Ü. Öz, ‘The Effects of Ethical Climates on Bullying
See also G. Charness and E. Haruvy, ‘Self-Serving Bias: Evidence from a Simulated Labour Behavior in the Workplace’, Journal of Business Ethics, May 2009, pp. 273–95; ‘Are You
Relationship’, Journal of Managerial Psychology, July 2000, p. 655; and T. J. Elkins, J. S. Tolerating Bullies in Your Crew?’, Safety Now, June 2010, pp. 1–2; T. A. Daniel, ‘Tough
Phillips and R. Konopaske, ‘Gender-Related Biases in Evaluations of Sex Discrimination Boss or Workplace Bully?’, HR Magazine, June 2009, pp. 82–5; and V. J. Roscigno, S.
Allegations: Is Perceived Threat a Key?’, Journal of Applied Psychology, April 2002, H. Lopez and R. Hodson, ‘Supervisory Bullying, Status Inequalities and Organizational
pp. 280–93. Context’, Social Forces, March 2009, pp. 1561–89.
67 S. T. Fiske, ‘Social Cognition and Social Perception’, Annual Review of Psychology, 1993, 87 Fair Work Australia, ‘Bullying and Harassment’, <www.fairwork.gov.au>, accessed 27
pp. 155–94; G. N. Powell and Y. Kido, ‘Managerial Stereotypes in a Global Economy: October 2017.
A Comparative Study of Japanese and American Business Students’ Perspectives’, 88 L. M. Crothers, J. Lipinski and M. C. Minutolo, ‘Cliques, Rumors and Gossip by the Water
Psychological Reports, February 1994, pp. 219–26; and J. L. Hilton and W. von Hippel, Cooler: Female Bullying in the Workplace’, The Psychologist–Manager Journal, April
‘Stereotypes’, in J. T. Spence, J. M. Darley and D. J. Foss (eds), Annual Review of 2009, pp. 97–110.
Psychology, vol. 47 (Palo Alto, CA: Annual Reviews Inc., 1996), pp. 237–71. 89 L. D’Angelo Fisher, ‘Workplace Bullying Rampant’, BRW, 29 November – 6 December
68 A. Collins, ‘Sydney Women’s Shed Encourages Ladies to Pick up Tools, Pursue Trades’, 2012, p. 35.
ABC News, 5 November 2017; ‘About Us’, Supporting And Linking Tradeswomen, 90 ‘Are You Tolerating Bullies in Your Crew?’, Safety Now, June 2010, pp. 1–2.
<https://saltaustralia.org.au>, accessed 15 November 2017; and L. Wachsmuth, ‘Fiona 91 S. R. Valentine, S. K. Hanson and G. M. Fleischman, ‘The Spiralling and Spillover
Aims to Inspire Fellow Tradeswomen’, Illawarra Mercury, 9 July 2013. of Misconduct: Perceived Workplace Bullying, Subclinical Psychopathy, and
69 Based on V. K. Gupta, D. B. Turban, S. A. Wasti and A. Sikdar, ‘The Role of Gender Businesspersons’ Recognition of an Ethical Issue’, Employee Responsibilities and Rights,
Stereotypes in Perceptions of Entrepreneurs and Intentions to Become an vol. 29 (2017), pp. 221–44.
Entrepreneur’, Entrepreneurship Theory and Practice, March 2009, pp. 397–417; and J. 92 S. R. Valentine, S. K. Hanson and G.M. Fleischman, ‘The Spiralling and Spillover
B. Riviera, ‘What’s My Line? An Exercise on First Impressions and Perceptual Shortcuts of Misconduct: Perceived Workplace Bullying, Subclinical Psychopathy, and
that Puts Students into the Picture’, Journal of Management Education, June 1999, Businesspersons’ Recognition of an Ethical Issue’, Employee Responsibilities and Rights,
pp. 297–301. vol. 29 (2017), pp. 221–44.
70 N. Henderson, ‘Different Abilities Pay Off’, National Organization on Disability, <https:// 93 L. M. Crothers, J. Lipinski and M. C. Minutolo, ‘Cliques, Rumors and Gossip by the Water
www.nod.org/>, 30 August 2017, accessed 14 October 2017. Cooler: Female Bullying in the Workplace’, The Psychologist–Manager Journal, April
71 B. F. Skinner, Contingencies of Reinforcement (East Norwalk, CT: Appleton-Century- 2009, pp. 97–110.
Crofts, 1971). 94 Section adapted from SafeWork Australia, Guide for Preventing and Responding to
72 A. Bandura, Social Learning Theory (Upper Saddle River, NJ: Prentice Hall, 1977). Workplace Bullying (Canberra: SafeWork Australia, 2016).
73 For an interesting article on the subject, see D. Nitsch, M. Baetz and J. C. Hughes, 95 Adapted from SafeWork Australia, Guide for Preventing and Responding to Workplace
‘Why Code of Conduct Violations Go Unreported: A Conceptual Framework to Guide Bullying (Canberra: SafeWork Australia, 2016).
Intervention and Future Research’, Journal of Business Ethics, April 2005, pp. 327–41. 96 Based on V. P. Richmond, J. C. McCroskey and S. K. Payne, Nonverbal Behavior in
74 This section based on S. M. Crampton and J. W. Hodge, ‘Generations in the Workplace: Interpersonal Relations, 2nd edn (Englewood Cliffs, NJ: Prentice Hall, 1991), pp. 117–38;
Understanding Age Diversity’, The Business Review, December 2007, pp. 16–22; R. Bar-On, The Emotional Intelligence Inventory (EQ-I): Technical Manual (Toronto: Multi-
B. M. Frandsen, ‘Leading by Recognising Generational Differences’, Long-Term Living, Health Systems, 1997); L. A. King, ‘Ambivalence over Emotional Expression and Reading
February 2009, pp. 34–5; P. W. Haserof, ‘The Keys to Maintaining Professionalism & Emotions in Situations and Faces’, Journal of Personality and Social Psychology, March
Harmony across the Generations at Work’, The Professional Lawyer, June 2009, pp. 1998, pp. 753–62; and M. Lewis, J. M. Haviland-Jones and L. F. Barrett (eds), Handbook of
3–6; J. W. Gibson, R. A. Greenwood and E. F. Murphy, Jr, ‘Generational Differences in Emotions, 3rd edn (New York: Guilford Press, 2011).
9780655702412_CH19.indd 551 3/3/20 11:10 AM

97 R. Wilson, ‘Kurtley Beale Scandal: ARU Failed to Check Former Staffer Di Patston’s 98 A. Coopes, ‘Fighting Chance a Legacy of Love’, UNSW Newsroom, <https://newsroom.
Phone Records’, The Daily Telegraph, 27 October 2014; ‘Wallabies Staffer Di Patston unsw.edu.au/news/>,
Resigns from Position at ARU after Kurtley Beale Saga’, <www.abc.net.au>, 11 30 November 2015, accessed 1 October 2017; Fighting Chance, ‘What We Do’,
October 2014, accessed 20 December 2014; W. Smith, ‘Patston’s Anger Revealed as <https://fightingchance.org.au>, accessed 15 October 2017; Avenue, <https://
Beale Admits to Sending Pictures Twice’, The Australian, 27 October 2014; avenuefairtrade.com.au>, accessed 1 October 2017; Australian Network on Disability,
I. Payten, ‘Kurtley Beale’s Exchange with Di Patston – Wallabies Star Pleaded for ‘Avenue: Disability Fair Trade’, <https://www.and.org.au>, 29 April 2014, accessed 1
Forgiveness over Crude Text Messages’, The Daily Telegraph, 12 October 2014; and October 2017; MyCareerSpace, ‘Why Avenue Will Be a Success’, <https://mycarespace.
R. Guinness, ‘Kurtley Beale–Di Patston Mystery Text Message Case Closed, According to com.au>, 31 May 2017, accessed 1 October 2017; and World Cerebral Palsy Day,
ARU’, Sydney Morning Herald, 31 October 2014. ‘Laura O’Reilly: Fighting Chance’, <https://worldcpday.org/>, 6 October 2017.
9780655702412_CH19.indd 552 3/3/20 11:10 AM

SESSION Managing people
10
• Managing human resources
• Motivating and rewarding employees
9780655702412_CH20.indd 553 3/3/20 11:10 AM

Chapter
20 Managing human resources
Human resources (HR) issues such as selection and performance appraisal are frequently thought to be
the responsibility only of those who work in an organisation’s HR department. The truth is that ALL
managers should be concerned with HR functions of staffing, development, motivation and maintenance
of people in their work unit. Although the HR department provides much-needed advice, suggestions and
support activities, managers do have important HR responsibilities and are involved with HR decisions in
their work units.1
With an organisation’s structure in place, managers have to find people to fill the jobs that have been
created or to remove people from jobs if business circumstances require it. That’s where human resource
management (HRM) comes in. It’s an important task that involves having the right number of the right
people in the right place at the right time. In this chapter, we’ll look at the process managers use to do just
that – a process that includes interviewing and assessing job applicants, helping new employees assimilate,
recommending training and assessing employee performance. In addition, we’ll look at some contemporary
HRM issues that managers face.
Learning Objective 1 Describe the key components of the human resource management
process and the important influences on that process.
Learning What is the human resource management process, and what
Objectives influences it? pp. 556–59
Learning Objective 2 Discuss the tasks associated with identifying and selecting competent
employees.
How do managers identify and select competent employees? pp. 559–66
Learning Objective 3 Explain how employees are provided with needed skills and
knowledge.
How are employees provided with needed skills
and knowledge? pp. 566–70
Learning Objective 4 Discuss how organisations provide a safe working environment.
How do organisations provide a safe working environment? pp. 570–71
Learning Objective 5 Discuss contemporary issues in managing human resources.
What contemporary HRM issues do managers face? pp. 571–75
9780655702412_CH20.indd 554 3/3/20 11:10 AM

Chapter 20 Managing human resources 555
LO 1
Describe the key
components of the
human resource
management
process and the
important influences
on that process.
fact or fiction?
LO 2
Discuss the tasks
associated with
identifying and
selecting competent
employees.
Managers don’t need to

LO 3
Explain how know about human resources
management, because that’s
employees are
provided with
needed skills and
knowledge.
the job of the HR department.
LO 4
fiction
Discuss how
organisations
provide a
safe working
environment.
LO 5
Discuss
contemporary issues
in managing human
resources.
9780655702412_CH20.indd 555 3/3/20 11:10 AM

556 Session 10 Managing people
What is the human resource

management process, and what
influences it?
The quality of an organisation is to a large degree determined by the quality of the people it employs.
Success for most organisations depends on finding the employees with the skills to successfully perform the
tasks required to attain the company’s strategic goals. Staffing and HRM decisions and actions are critical
to ensuring that the organisation hires and keeps the right people.
human resource
management Getting that done is what human resource management (HRM) is all about. The eight
(HRM) important HRM activities (the yellow boxes) are shown in Figure 20.1.
The management After an organisation’s strategy has been established and the organisation structure designed, it’s time
function concerned
to add the people – to acquire the talent! That’s one of the most critical roles for HRM and one that
with getting, training,
motivating and keeping has increased the importance of HR managers to the organisation. The first three activities in the HRM
competent employees process represent employment planning: determining the organisation’s human resource needs and then
Downsizing Environment
Strategic human resource planning

Identification and
selection of
Restructuring
competent employees
Unions
Recruitment and selection
Downsizing
Adapted and competent Orientation

employees with up-to-date
skills, knowledge and
abilities
Training and development
Safety and health

Work process
Legislation
Competent and
high-performing
Per formance management
employees who are
capable of sustaining
high per formance
over the long term Compensation and benefits
Diversity
Figure 20.1 The HRM process
9780655702412_CH20.indd 556 3/3/20 11:10 AM

addressing those needs. When executed properly, these steps lead to the identification and selection of
competent, talented employees who can assist an organisation in achieving its strategic goals.
Once you select the people you want, you need to help them adapt to the organisation, ensure
that their job skills and knowledge are kept current, and provide a safe working environment. These
next activities in the HRM process are accomplished through orientation, training, and managing
workplace health and safety. The last steps in the HRM process are designed to identify performance
goals, correct performance problems if necessary, and help employees sustain a high level of
performance over their entire work life. The activities involved include performance appraisal, and
compensation and benefits. All these activities, if properly executed, will staff an organisation with
competent, high-performing employees who are capable of sustaining their performance levels over
the long run.
HRM = right people, right place, right time

The entire process depicted in Figure 20.1 is influenced by the external environment. Many
of the factors we discussed in Chapter 15 directly affect all management practices, but their effect
is felt keenly in managing the organisation’s human resources, because whatever happens to an
organisation ultimately influences what happens to its employees. So, before we review the HRM
process, let’s examine one external force that affects it – the legal environment.
What is the legal environment of HRM?

Managers aren’t completely free to choose whom they hire, promote or fire. As a manager, it will
be important for you to know what you can and cannot do, legally. HRM practices are governed by
laws, which vary from country to country. Within countries, state or provincial and local regulations
General Electric is a multinational employer committed to observing all the different labour laws of
the 160 countries in which it operates. Shown here are employees of GE’s wind turbine factory in
Vietnam, a country whose Labour Code of Vietnam was first passed in 1994 and provides strong
protections for employees.
HOANG DINH NAM/AFP/Getty Images/Newscom
9780655702412_CH20.indd 557 3/3/20 11:10 AM

further influence specific practices. Although these regulations have significantly helped to reduce
employment discrimination and unfair employment practices, they have, at the same time, reduced
management’s discretion over HR decisions. Consequently, managers need to scan their regulatory
environment constantly and keep abreast of legal requirements.
What are the primary laws affecting HRM in Australia?

Legislation relating to HRM in Australia deals primarily with conditions of employment and work.
Table 20.1 illustrates the major federal Acts that influence HRM in Australia. As you can see, they mostly
deal with how employment conditions can be determined (e.g. Fair Work Act 2009), ensuring that
conditions are fair and equitable rather than discriminatory (e.g. Disability Discrimination Act 1992, Age
Discrimination Act 2004, Sex Discrimination Act 1984; Racial Discrimination Act 1975) and providing a
safe workplace that protects individuals (e.g. Crimes Act 1914, Privacy Act 1988; Safety, Rehabilitation and
Compensation Act 1988; Privacy Amendment (Enhancing Privacy Protection) Act 2012). To understand
exactly how regulation and legislation influence managerial decisions, let’s consider anti-discrimination
legislation.
Acts such as the Equal Opportunity for Women in the Workplace Act 1999 specify that decisions
about employment should be made on the basis of merit. As a result, today’s employers must ensure
that equal employment opportunities exist for job applicants and current employees. Decisions
regarding who will be hired, for example, or which employees will be chosen for a management
training program must be made without regard to race, sex, religion, age, colour, national origin
or disability. Exceptions can occur only when special circumstances exist. For example, a local fire
brigade can deny employment to a firefighter applicant who is confined to a wheelchair, but if that
Table 20.1 Major federal HRM laws

Act Description
Disability Discrimination Act 1992 Aims to ensure ‘that persons with disabilities have the same rights to equality before the law as the rest of the community’
and to ‘eliminate, as far as possible, discrimination against persons on the ground of disability’ in certain areas, including
employment.
Equal Employment Opportunity Promotes equal employment opportunity for a range of identified groups, including Indigenous Australians, migrants whose
(Commonwealth Authorities) Act 1987 first language is not English, and persons with a physical or mental disability.
Equal Opportunity For Women in the Promotes ‘gender equality in employment and the workplace’, including ‘the elimination of discrimination on the basis of
Workplace Amendment Act 2012 gender in employment-related matters’, removal of ‘barriers to full and equal participation of women in the workforce’ and
‘workplace consultation between employers and employees on issues concerning gender equality in employment and in the
workplace’.
Fair Work Act 2009 and Fair Work Provide processes for making workplace employment agreements and addressing workplace disputes and conflict. Also
Amendment Act 2013 specify minimum terms and conditions for employment (known as the National Employment Standards) and provide specific
protection against unfair dismissal, unlawful termination and discrimination.
Privacy Act 1988 Establishes a nationally consistent approach and National Privacy Provisions for the handling of personal information by
government agencies, private sector organisations and health service providers.
Sex Discrimination Act 1984 Aims to ‘eliminate, so far as is possible, discrimination against persons on the grounds of sex, sexual orientation, gender
identity, marital or relationship status, pregnancy or potential pregnancy or breastfeeding’.
Superannuation Guarantee Establishes superannuation entitlements for the majority of Australian workers.
(Administration) Act 1992
Work Health and Safety Act 2011 Aims to provide a balanced and nationally consistent framework for securing the health and safety of workers and
workplaces by: promoting improvements in work health and safety practices; eliminating and minimising risks arising from
work; providing for fair and effective workplace representation, consultation, cooperation and resolution of issues related to
work health and safety; promoting the provision of advice, information, education and training in relation to work health and
safety; and establishing effective and appropriate compliance and enforcement measures.
Source: Federal Register of Legislation, <https://www.legislation.gov.au/>.
9780655702412_CH20.indd 558 3/3/20 11:10 AM

same individual is applying for a desk job, such as a dispatcher in the radio room, the disability cannot
be used as a reason to deny employment. The issues involved, however, are rarely that clear-cut. For
example, employment laws protect most employees whose religious beliefs require a specific style
of dress – hijab (head scarf), long shirts, long hair, and the like. However, if the specific style of dress
may be hazardous or unsafe in the work setting (e.g. when operating machinery), a company could
refuse to hire a person who won’t adopt a safer dress code.
FROM THE PAST TO THE PRESENT: 1913–TODAY
Scientifically studying the workplace

Hugo Munsterberg, a pioneer in the field of industrial psychology, Australian Psychological Society (APS) College of Organisational
is ‘generally credited with creating the field’.2 An admirer of Psychologists at <www.groups.psychology.org.au/cop>.) They
Frederick W. Taylor and the scientific management movement, study organisational topics such as job performance, job analysis,
Munsterberg stated: ‘Taylor . . . introduced most valuable performance appraisal, compensation, work/life balance, work
suggestions which the industrial world cannot ignore.’ Drawing on sample tests, employee training, employment law, personnel
Taylor’s works, Munsterberg stressed the importance of ‘efficiently recruitment and selection, and so on.Their research has contributed
using workers to achieve economic production’. His research and much to the field that we call human resource management.And all
work in showing organisations ways to improve the performance of this is due to the early work done by Hugo Munsterberg.
and wellbeing of workers was fundamental to the emerging field Discuss this:
of management in the early 1900s. • Why is it important to scientifically study the workplace?
Today, industrial–organisational psychology is defined as the
• Do you think it’s easier today to scientifically study the
scientific study of the workplace. Industrial–organisational (I/O)
workplace than it was back in Munsterberg’s days? Why or why
psychologists use scientific principles and research-based designs
not?
to generate knowledge about workplace issues. (Check out the
How do managers identify and select

competent employees?
Every organisation needs people to do whatever work is necessary in order for the organisation to
do what it is in business to do. How do organisations get those people? And, more importantly, what
can they do to ensure they get competent, talented people? This first phase of the HRM process
involves three tasks: employment planning, recruitment and downsizing, and selection.
What is employment planning?

Supply and demand don’t just relate to economics –
they’re also important to HRM!
• Talent wars rage in the Australian hospitality industry, as shortages of wait staff and chefs
cause startups to compete for scarce talent with internationally renowned restaurants and
hotels.
employment
• During the latest economic downturn, Boeing cut more than 3000 jobs, mostly from its planning
commercial airplanes unit. During the same time, it added 106 employees to its defence unit The process by which
and was looking for several hundred more.3 managers ensure they
have the right numbers
Juggling the supply of human resources to meet demand is a challenge for many companies.
and kinds of people in
Employment planning is the process by which managers ensure that they have the right number the right places at the
and kinds of people in the right places at the right times, people who are capable of effectively and right time
9780655702412_CH20.indd 559 3/3/20 11:10 AM

efficiently completing those tasks that will help the organisation achieve its goals. Employment planning,
then, translates the organisation’s mission and goals into a human resource management plan that will allow
the organisation to achieve those goals. The process can be condensed into two steps: (1) assessing current
human resources and future human resource needs, and (2) developing a plan to meet those needs.
How does an organisation assess its human resource needs?

Managers begin by reviewing the current human resource status. This review is typically done by generating
human resource a human resource inventory. It’s not difficult to generate an inventory in most organisations since
inventory the information for it is derived from forms completed by employees. Such inventories might list the
A report listing
important information name, education, training, prior employment, languages spoken, capabilities and specialised skills of each
about employees, such employee in the organisation. This inventory allows managers to assess what talents and skills are currently
as name, education, available in the organisation.
training, skills, languages
Another part of the current assessment is job analysis. Whereas the human resources inventory is
spoken, and so on
concerned with telling management what individual employees can do, job analysis is more fundamental.
job analysis It’s typically a lengthy process, one in which workflows are analysed and skills and behaviours that are
An assessment that
defines jobs and the necessary to perform jobs are identified. For example, what does an international reporter who works for
behaviours necessary to the Australian Financial Review do? What minimal knowledge, skills and abilities are necessary for the
perform them adequate performance of this job? How do the job requirements for an international reporter compare
with those for a domestic reporter or for a newspaper editor? Job analysis can answer these questions.
Ultimately, the purpose of job analysis is to determine the kinds of skills, knowledge and attitudes needed
to successfully perform each job. This information is then used to develop or revise job descriptions and
job specifications.
Why IS JOB ANALYSIS so important?

Job analysis results in:
Job description → describes the job
&
Job specification → describes the person
job description A job description is a written statement that describes the job – what a person performing that job
A written statement that does, how they do it and why they do things that way. It typically details the job content, environment
describes a job
and conditions of employment. The job specification states the minimum qualifications that a
job specification person must possess to perform a given job successfully. It focuses on the person and identifies the
A written statement
knowledge, skills and attitudes that they need to do the job effectively. The job description and job
of the minimum
qualifications that a specification are important documents when managers begin recruiting and selecting. For example,
person must possess the job description can be used to describe the job to potential candidates. The job specification keeps
to perform a given job the manager’s attention on the list of qualifications necessary for an incumbent to perform a job and
successfully
assists in determining whether candidates are qualified. Furthermore, hiring individuals on the basis of
the information contained in these two documents helps ensure that the hiring process is merit- and
evidence-based and isn’t discriminatory.
How are future human resource needs determined?
Future human resource needs are determined by the organisation’s strategic goals and direction.
Demand for human resources (employees) is a result of demand for the organisation’s products or
services. Managers can estimate future revenues and then predict the number and mix of people
needed to reach that revenue. In some cases, however, the situation may be reversed. When
9780655702412_CH20.indd 560 3/3/20 11:10 AM

particular skills are necessary and in scarce supply, the availability of needed human resources
determines revenues. For example, managers of an upmarket chain of aged-care facilities who
find themselves with abundant business opportunities are limited in their ability to grow revenues
by their ability to locate and hire qualified nursing staff to fully meet the needs of the residents.
In most cases, however, the overall organisational goals and the resulting revenue forecast provide
the major input in determining the organisation’s HR requirements.
After assessing both current capabilities and future needs, managers can estimate talent
shortages – both in number and in kind – and highlight areas in which the organisation is overstaffed.
They can then develop a plan that matches these estimates with forecasts of future labour supply.
Employment planning not only guides current staffing needs but also projects future employee
needs and availability.
How do managers reduce their workforce?

When an organisation has too many employees – which may happen when it’s faced with an
economic crisis, declining market share, or overly aggressive growth, or when it’s been poorly
managed – eliminating excess workers can help to reduce costs and improve profits. In the past
decade or so, and especially in recent years, most global organisations, as well as many government
agencies and small businesses, have been forced to shrink the size of their workforce or restructure
their skill composition. Coca-Cola laid off 1600 to 1800 of its corporate US and international
employees.4 American Express cut costs by eliminating 4000 jobs after failing to meet long-term
revenue growth targets.5 eBay cut 2400 jobs (7 per cent of its workforce) to adapt to changing
conditions.6
When reducing or downsizing a workforce, there are a number of strategies that can be used, as
summarised in Table 20.2. Obviously, people can be fired, but other restructuring choices may be
more beneficial to the organisation. Keep in mind that, regardless of the method chosen, employees
suffer. We discuss the impacts of downsizing more fully – for both victims and survivors – later in
this chapter.
How do organisations recruit employees?

Once managers know their current staffing levels – understaffed or overstaffed – they can begin to do
something about it. If the organisation is understaffed and more employees are needed, they can use the
recruitment
Locating, identifying
information gathered through job analysis to guide them in recruitment – that is, the process of locating, and attracting capable
identifying and attracting capable applicants. applicants
Table 20.2 Downsizing options

Option Description
Reduced work week Having employees work fewer hours per week, share jobs or perform their jobs on a part-time basis
Job sharing Having two employees, typically two part-timers, share one full-time job
Transfers Moving employees either laterally or downwards; usually doesn’t reduce costs but can reduce intra-
organisational supply–demand imbalances
Attrition Not replacing staff who retire or resign
Early retirement Providing incentives to older and more senior employees to retire before their intended retirement date
Redundancies Eliminating positions and paying the staff who held them a redundancy package to cover the costs of
unpaid leave, training or re-skilling for a new job, and living costs while searching for a new position
Firing Permanently terminating a person’s employment
9780655702412_CH20.indd 561 3/3/20 11:10 AM

Table 20.3 Recruiting sources
Source Advantage Disadvantage
Internal searches Low cost; build employee morale; candidates are familiar Limited supply; may not increase the diversity and mix of
with organisation employees
Advertisements Wide distribution can be targeted to specific groups Generate many unqualified candidates
Employee referrals Knowledge about the organisation provided by current May not increase the diversity and mix of employees
employees; can generate strong candidates because a good
referral reflects on the recommender
Public employment agencies Free or nominal cost Candidates tend to be lower skilled, although some skilled
employees available
Private employment agencies Wide contacts; careful screening; short-term guarantees often High cost
given
Social networking websites (e.g. Large pool of candidates; generates referrals; maintains More useful for higher-level than entry-level positions; cost
LinkedIn) contact with past employees; enables targeted searches
School placement Large, centralised body of candidates Limited to entry-level positions
Temporary help services Fill temporary needs Expensive
Employee leasing and independent Fill temporary needs but usually for more specific, longer-term Little commitment to an organisation other than current
contractors projects project
Needed! Outstanding job applicants!

Now . . . how do we get those?
Where does a manager recruit applicants?

Applicants can be found by using several sources, including the Internet. Table 20.3 offers some guidance.
The source that’s used should reflect the local labour market, the type or level of position, and the size of
the organisation.
Which recruiting sources tend to produce superior applicants? Most studies have found that
employee referrals generally produce the best applicants, for several reasons.7 First, applicants
referred by current employees are pre-screened by those employees. Because the recommenders
know both the job and the person being recommended, they tend to refer well-qualified applicants.8
Second, because current employees often feel that their reputation in the organisation is at stake
with a referral, they tend to make referrals only when they are reasonably confident that the referral
won’t make them look bad. However, managers shouldn’t always opt for the employee-referred
applicant; such referrals may not increase the diversity and mix of employees.
How do managers select job applicants?

Once the recruiting effort has developed a pool of applicants, the next step in the HRM process is to
selection process determine who is best qualified for the job. In essence, then, the selection process is a prediction exercise:
Screening job applicants it seeks to predict which applicants will be ‘successful’ if hired; that is, who will perform well on the criteria
to ensure that the most
the organisation uses to evaluate its employees. In filling the position of a computer network administrator,
appropriate candidates
are hired for example, the selection process should be able to predict which applicants will be capable of properly
installing, debugging, managing and updating the organisation’s computer network. For a position as a
sales representative, it should predict which applicants will be successful at generating high sales volumes.
Any selection decision can result in four possible outcomes. As shown in Figure 20.2, two outcomes would
9780655702412_CH20.indd 562 3/3/20 11:10 AM

Successful
Later job performance
Reject Correct
error decision
Unsuccessful
Correct Accept
decision error
Reject Accept
Selection decision
Figure 20.2 Selection decision outcomes
indicate correct decisions and two would indicate errors. The purpose of selection techniques is to optimise
correct decisions.
A decision is correct (1) when the applicant who was predicted to be successful was accepted
and later proved to be successful on the job, or (2) when the applicant who was predicted to be
unsuccessful was rejected and, if hired, wouldn’t have been able to do the job. In the former case,
we have successfully accepted; in the latter case, we have successfully rejected. Problems occur,
however, when we reject applicants who, if hired, would have performed successfully on the
job (called reject errors) or accept those who subsequently perform poorly (accept errors). These
problems are, unfortunately, far from insignificant. A generation ago, reject errors only meant
increased selection costs because more applicants would have to be screened. Today, selection
techniques that result in reject errors can open the organisation to charges of employment
discrimination, especially if applicants from protected groups are disproportionately rejected.
Accept errors, on the other hand, have obvious costs to the organisation, including the cost
of training the employee, the costs generated or profits forgone because of the employee’s
incompetence, and the cost of severance and the subsequent costs of additional recruiting and
selection screening. The main intent of any selection activity is therefore to reduce the probability
of making reject errors or accept errors while increasing the probability of making correct decisions.
Managers do this by using selection procedures that are both reliable and valid.
What is reliability?
Reliability addresses whether a selection device measures the same characteristic consistently. For reliability
example, if a test is reliable, any individual’s score should remain fairly stable over time, assuming that the The degree to which
a selection device
characteristics it’s measuring are also stable. No selection device can be effective if it’s low in reliability.
measures the same thing
Using such a device would be the equivalent of weighing yourself every day on an erratic scale. If the scale consistently
is unreliable – randomly fluctuating, say, 2 to 3 kilograms every time you step on it – the results won’t mean
much. To be effective predictors, selection devices must possess an acceptable level of consistency.
What is validity?
Any selection device that a manager uses – such as application forms, tests, interviews or physical
examinations – must also demonstrate validity. Validity is based on a proven relationship between the validity
selection device used and some relevant measure. For example, we mentioned earlier a firefighter applicant The proven relationship
between a selection
who was wheelchair bound. Because of the physical requirements of a firefighter’s job, someone confined
device and some
to a wheelchair would be unable to pass the physical endurance tests. In that case, denying employment relevant criterion
9780655702412_CH20.indd 563 3/3/20 11:10 AM

could be considered valid, but requiring the same physical endurance tests for the dispatching job wouldn’t
be job related. Managers must use selection devices that are directly related to successful job performance.
They must be able to demonstrate that, once on the job, individuals who performed highly on selection
tests outperform individuals who performed less well in selection processes. Consequently, the burden is
on the organisation to verify that any selection device it uses to differentiate applicants is related to job
performance.
Tests . . . not just for school!
How effective are tests and interviews as selection devices?

Managers can use a number of selection devices to reduce accept and reject errors. The best-known
devices include written and performance-simulation tests and interviews. Let’s briefly review each
device, giving particular attention to its validity in predicting job performance.
Typical written tests include tests of intelligence, aptitude, ability and interest. Such tests have
long been used as selection devices, although their popularity has run in cycles. Written tests were
widely used after World War II, but beginning in the late 1960s, they fell out of favour. They were
frequently characterised as discriminatory, and many organisations couldn’t validate that their
written tests were job related. Today, written tests have made a comeback, although most of them
are now Internet based.9 Managers are increasingly aware that poor hiring decisions are costly and
that properly designed tests can reduce the likelihood of making such decisions. In addition, the cost
of developing and validating a set of written tests for a specific job has declined significantly.
Research shows that tests of intellectual ability, spatial and mechanical ability, perceptual accuracy
and motor ability are moderately valid predictors for many semiskilled and unskilled operative jobs
in an industrial organisation.10 However, an enduring criticism of written tests is that intelligence
and other tested characteristics can be somewhat removed from the actual performance of the job
itself.11 For example, a high score on an intelligence test isn’t necessarily a good indicator that the
applicant will perform well as a computer programmer. This criticism has led to an increased use of
performance-simulation tests.
One of the best ways to find out whether an applicant for a technical writing position at Apple can
performance- write technical manuals is to ask them to do it! That’s why there’s an increasing interest in performance-
simulation tests simulation tests. Undoubtedly, the enthusiasm for these tests lies in the fact that they’re based on job
Selection devices based
on actual job behaviours analysis data and are made up of actual job behaviours, rather than substitutes. This makes them more job-
related than written tests. The best-known performance-simulation tests are work sampling (a miniature
replica of the job) and assessment centres (simulating real problems an individual may face on the job). The
former is suited to persons applying for routine jobs, the latter to managerial personnel.
The advantage of performance simulation over traditional testing methods is that simulation content is
essentially identical to job content. Because of this, and the methods used to determine test content, well-
constructed performance-simulation tests are valid predictors of short-term job performance. They also
minimise potential employment discrimination allegations, as employers can show that hiring decisions
were validly based on evidence-based job fit.
The interview, along with the application form, is an almost universal selection device. Few
of us have ever gotten a job without undergoing at least one interview, although it may perhaps
have felt more like an informal chat than a rigorous selection test. The irony of this is that the
value of an interview as a selection device has been the subject of considerable debate.12
Interviews can be reliable and valid selection tools, but too often they’re not. To be effective
predictors, interviews need to be structured and well organised, with interviewers asking relevant
questions.13
9780655702412_CH20.indd 564 3/3/20 11:10 AM

But those conditions don’t characterise

many interviews. The typical interview in
which applicants are asked a varying set of
essentially random questions in an informal
setting often provides little in the way of
valuable information. All kinds of potential
biases can creep into interviews if they’re not
well structured and standardised.
What does research tell us about
interviewing?
• Prior knowledge about the applicant
biases the interviewer’s evaluation.
• Interviewers tend to hold a stereotype of
what represents a good applicant.
• Interviewers tend to favour applicants
who share their own attitudes. Employees who apply for management positions at this Sarku Japan fast food
• The order in which applicants are restaurant must take written tests as part of the company’s selection process.
interviewed will influence evaluations. Properly designed written tests for intelligence, integrity, personality and interests
• The order in which information is are popular selection devices that often are valid and reliable in helping to predict
which applicants will be successful on the job.
elicited during the interview will
Michael S.Williamson/The Washington Post/Getty Images
influence evaluations.
• Negative information is given an unduly high weight.
• Interviewers may make a decision concerning the applicant’s suitability within the first four
or five minutes of the interview.
• Interviewers may forget much of the interview’s content within minutes after its conclusion.
• The interview is most valid in determining an applicant’s intelligence, level of motivation
and interpersonal skills.
• Structured and well-organised interviews are more reliable than unstructured and
unorganised ones.14
How can I be a GOOD INTERVIEWER?

TIPS FOR MANAGERS: Make interviews more valid and reliable!
• Review the job description and job specification to help in assessing the applicant.
• Prepare a structured set of questions to ask all applicants for the job.
• Review an applicant’s résumé before meeting them.
• Ask questions and listen carefully to the applicant’s answers.
• Write your evaluation of the applicant while the interview is still fresh in your mind.
One last popular modification to interviews has been the behavioural or situation interview.15
In this type of interview, applicants are observed not only for what they say, but also for how they
behave. Applicants are presented with situations – often complex problems involving role playing –
and are asked to ‘deal’ with the situation. This type of interview provides an opportunity for
interviewers to see how a potential employee will behave and how they will react under stress.
Proponents of behavioural interviewing indicate that such a process is much more indicative of
an applicant’s performance than simply having the individual tell the interviewer what they have
done. In fact, research in this area indicates that behavioural interviews are nearly eight times more
effective for predicting successful job performance.16
9780655702412_CH20.indd 565 3/3/20 11:10 AM

How can you ensure that new employees are satisfied

and stay with the organisation?
Interviewers who treat the recruiting and hiring of employees as if the applicants must be sold on
the job and exposed only to an organisation’s positive characteristics are likely to have a workforce
that is dissatisfied and prone to high turnover.17
During the hiring process, every job applicant develops a set of expectations about the company
and about the job for which they are interviewing. When the information an applicant receives
is excessively inflated, a number of things happen that have potentially negative effects on the
company:
• Mismatched applicants are less likely to withdraw from the search process.
• Because inflated information builds unrealistic expectations, new employees are likely to
become quickly dissatisfied and to resign prematurely.
• New employees are prone to become disillusioned and less committed to the organisation
when they face the unexpected harsh realities of the job.
• In many cases, these individuals feel that they were misled during the hiring process and may
become problem employees.
It’s estimated that around 23 per cent of new employees leave their job within the first year due
to unmet expectations, and when you consider that replacing a lost employee can cost up to three
times the amount of their salary, you can see why retaining new employees is so important.
To increase job satisfaction among employees and reduce turnover, managers should consider a
realistic job realistic job preview (RJP).18 An RJP includes both positive and negative information about the job
preview (RJP) and the company. For example, in addition to the positive comments typically expressed in the interview,
A preview of a job that
provides both positive the applicant is told of the less attractive aspects of the job. For example, they might be told that there are
and negative information limited opportunities to talk to co-workers during work hours, that the chances of being promoted are slim,
about the job and the or that work hours fluctuate so erratically that employees may be required to work during what are usually
company
off hours (nights and weekends). Research indicates that applicants who have been given a realistic job
preview hold lower and more realistic job expectations for the jobs they will be performing and are better
able to cope with the frustrating elements of the job than are applicants who have been given only inflated
information. The result is fewer unexpected resignations by new employees.
It’s just as important to retain good people

as it is to hire them in the first place.
Presenting only positive job aspects to an applicant may initially entice them to join the
organisation, but it may be a decision that both parties quickly regret.
How are employees provided with

needed skills and knowledge?
If we’ve done our recruiting and selecting properly, we’ve hired competent individuals who
can perform successfully on the job. But successful performance requires more than possessing certain
skills! New hires must be acclimatised to the organisation’s culture, and be trained and given the
knowledge to do the job in a manner consistent with the organisation’s goals. To achieve this, HRM
uses orientation and training.
9780655702412_CH20.indd 566 3/3/20 11:10 AM

How are new employees introduced

to the organisation?
Once a job candidate has been selected, they need to be introduced to the job and organisation. This
introduction is called orientation.19 The main goals of orientation are to: orientation
• reduce the initial anxiety all new employees feel as they begin a new job Introducing a new
employee to the job and
• familiarise new employees with the job, the work unit and the organisation as a whole
the organisation
• facilitate the outsider–insider transition.
Job orientation: (1) expands on the information the employee obtained during the recruitment and
selection stages; (2) clarifies the new employee’s specific duties and responsibilities, as well as how
their performance will be evaluated; and (3) corrects any unrealistic expectations new employees
might hold about the job.
Work unit orientation: (1) Familiarises an employee with the goals of the work unit; (2) clarifies
how their job contributes to the unit’s goals; and (3) provides an introduction to their co-workers.
Organisation orientation: (1) Informs the new employee about the organisation’s goals, history,
philosophy, procedures and rules; (2) clarifies relevant HR policies such as work hours, pay
procedures, overtime requirements and benefits; and (3) may include a tour of the organisation’s
physical facilities.
Managers have an obligation to make the integration of a new employee into the organisation as
smooth and anxiety-free as possible. Successful orientation, whether formal or informal:
• results in an outsider–insider transition that makes the new member feel comfortable and
fairly well-adjusted
• lowers the likelihood of poor work performance
• reduces the probability of a surprise resignation by the new employee only a week or two
into the job.20
What is employee training?

On the whole, planes don’t cause airline accidents; people do. Most collisions, crashes and other
airline mishaps – nearly three-quarters of them – result from errors by the pilot or air traffic
controller, or from inadequate maintenance. Weather and structural failures typically account
for the remaining accidents.21 We cite these statistics to illustrate the importance of training in
the airline industry. Such maintenance and human errors could be prevented or significantly
reduced by better employee training, as shown by the unbelievably amazing ‘landing’ of US
Airways flight 1549 in New York’s Hudson River in January 2009 with no loss of life. Pilot
Captain Chesley Sullenberger attributed the positive outcome to the extensive and intensive
training that all pilots and flight crews undergo.22
Employee training is a learning experience that seeks a relatively permanent change in employees by employee training
improving their ability to perform on the job. Thus, training involves changing skills, knowledge, attitudes A learning experience
that seeks a relatively
or behaviour.23 This change may involve what employees know, how they do their work, or their attitudes
permanent change in
towards their jobs, co-workers, managers and the organisation. Australian employers spend millions of employees by improving
dollars each year on formal courses and training programs to develop workers’ skills. Managers, of course, their ability to perform
are responsible for deciding when employees are in need of training and what form that training should take. on the job
Determining training needs typically involves answering several questions. If some of these questions
sound familiar, you’ve been paying close attention. It’s precisely the type of analysis that takes place when
managers develop an organisational structure to achieve their strategic goals – only now the focus is on the
people.24
9780655702412_CH20.indd 567 3/3/20 11:10 AM

WHEN is training needed?

The questions in Figure 20.3 suggest the kinds of signals that can warn a manager when
training may be necessary. The more obvious ones are related directly to productivity. Indications
that job performance is declining include decreases in production numbers, lower quality, more
accidents, and higher scrap or rejection rates. Any of these outcomes might suggest that worker
skills need to be fine-tuned. Of course, we’re
assuming that an employee’s performance
decline is in no way related to lack of
effort. Managers, too, must also recognise
that training may be required because the
workplace is constantly evolving. Changes
imposed on employees as a result of job
redesign or a technological breakthrough
also require training.
How are employees trained?

Most training takes place on the job, because
it’s simpler and usually costs less than off-the-
job training. However, on-the-job training
can disrupt the workplace and may result
On-the-job training and development accounts for 70 per cent of employee in an increase in errors while learning takes
learning. Regular one-on-one coaching conversations with employees about place. Also, some skill training is too complex
their developmental goals and strategies are a valuable and effective way for to learn on the job and must take place
managers to learn about their employees’ motivations, understand how their work
contributes to the organisation’s mission and strategic objectives, provide timely outside the work setting.
feedback, and help people enhance their knowledge, skills and job performance.25 These days, many organisations are
Marcin Balcerzak/Shutterstock also using technology to enhance employee
training. McColl’s Transport, which specialises
What deficiencies, if any,

do job holders have in terms
of skills, knowledge or
abilities required to Is there a need What are the
exhibit the essential and for training? organisation's
necessary job behaviours? strategic
goals?
What tasks
must be
completed
to achieve
organisational
goals?
What behaviours are
necessary for each job holder
to complete their job
duties?
Figure 20.3 Determining whether training is needed
9780655702412_CH20.indd 568 3/3/20 11:10 AM

in transporting milk, bulk foods and specialised chemicals around Australia by truck, uses simulators
to provide off-the-job training in safe and efficient driving to its fleet of truck drivers. Drivers are
trained to handle a range of different road types, weather conditions and traffic conditions, and are
given the opportunity to practise handling situations such as a tyre blowout and stopping a safe
distance behind other traffic. Drivers who complete simulator training not only drive better, but also
use up to 9 per cent less fuel, saving the business money.26
E-learning is also becoming a popular way to train staff, because employees can complete it
on the job or off the job. E-learning programs involve employees completing online learning
modules to develop and assess their knowledge. This can help them to gain and keep employment.
For example, anyone in Australia whose job involves serving alcohol to customers (such as a
waiter or bartender) is required by law to be trained in the Responsible Service of Alcohol.
Individuals who need such training can complete e-learning programs on their smartphones
or tablets and then, when they successfully complete the training, can print off a certificate of
completion as evidence of their learning.27 Using technology to deliver necessary knowledge,
skills and attitudes has many benefits, such as access to specialised expertise that isn’t available
locally. For example, Asthma Australia uses an e-learning program to educate teachers and other
staff in preschools and primary schools about supporting children with asthma.28 E-learning
allows them to reach educators who work in remote locations and cannot attend face-to-face
training. As one researcher said, ‘The ultimate purpose of e-learning is not to reduce the cost of
training, but to improve the way your organisation does business.’ Unilever, for example, found
that after e-learning training for sales employees, sales increased by several million dollars.
How can managers ensure that training is working?

It’s easy to generate a new training program, but if training efforts aren’t evaluated, it may be
a waste of resources. Training programs are typically evaluated by asking for opinions from
managers, representatives from HRM, and a group of workers who have recently completed
Table 20.4 Training methods
Traditional Training Methods
On-the-job: Employees learn how to do tasks simply by performing them, usually after an initial introduction to the task.
Job rotation: Employees work at different jobs in a particular area, getting exposure to a variety of tasks.
Mentoring and coaching: Employees work with an experienced worker who provides information, support and encouragement; also
called apprenticeships in certain industries.
Experiential exercises: Employees participate in role playing, simulations or other face-to-face

types of training.
Workbooks/manuals: Employees refer to training workbooks and manuals for information.
Classroom lectures: Employees attend lectures designed to convey specific information.
Technology-Based Training Methods
CD-ROM/DVD/videotapes/audiotapes/podcasts: Employees listen to or watch selected media that convey information or demonstrate
certain techniques.
Videoconferencing/teleconferencing/satelliteTV: Employees listen to or participate as information is conveyed or techniques are

demonstrated.
E-learning: Employees participate in Internet-based learning, including simulations or other interactive modules.
Mobile learning: Employees participate in learning activities delivered via mobile devices.
9780655702412_CH20.indd 569 3/3/20 11:10 AM

a training program. If the comments are generally positive, the program may get a favourable
evaluation and it’s continued until someone decides, for whatever reason, that it should be
eliminated or replaced.
Such reactions from participants or managers, while easy to acquire, are the least valid. Their
opinions are heavily influenced by factors that may have little to do with the training’s effectiveness,
such as difficulty, entertainment value or the personality characteristics of the instructor. However,
trainees’ reactions to the training may, in fact, provide feedback on how worthwhile the participants
viewed the training to be. Beyond general reactions, however, training must also be evaluated in
terms of how much the participants learned, how well they are using their new skills on the job (did
their behaviour change?), and whether the training program achieved its desired results (reduced
turnover, increased customer service, etc.).29 With this information, organisations can determine
their return on investment in training.
How do organisations provide a safe

working environment?
Organisations have a legal, moral and business obligation to provide safe and healthy working
environments.30 Legislation such as the Work Health and Safety Act 2011 (Cth) establishes a legal
requirement for organisations to provide a healthy and safe workplace and to minimise the risk of
accident, injury or disease to anyone associated with the work process. Employers and employees
both have a moral obligation to maximise workplace safety. It’s just as socially irresponsible for
employees to behave in an unsafe manner as it is for an employer to place employees at unnecessary
risk. The costs of workplace injuries also create a compelling business case for keeping workplaces as
safe and healthy as possible. Every year in Australia, over 640,000 people experience a work-related
injury or illness, with an estimated cost to the Australian economy of $57.5 billion. Moreover,
organisations with safe and healthy workplaces report less damage to plant and equipment, have
workplace health lower insurance and compensation costs, and lose less work time. The human, productivity and
and safety financial costs of injuries and accidents mean prevention is far better than cure.
Providing a safe
and healthy work Ensuring workplace health and safety depends on establishing attitudes and behaviours that
environment minimise accidents and injuries. The key issue is ensuring that workplaces accommodate human needs so
that they are both productive and health-preserving. Training about
workplace health and safety builds awareness of managerial and
employee responsibilities and helps put health and safety issues ‘on
Employers have a legal and moral obligation to ensure that the radar’. Workplace health and safety audits can be conducted to
people are safe in their workplace. But what about identify organisational policies and practices that don’t comply with
employees? Consider the following situation. legislative requirements, trends in workplace injuries or accidents,
A driver for a courier company is finishing her deliveries
for the day. Due to delays caused by a car accident on a major and strategies for improving health and safety in the organisation.
highway, the driver has fallen behind schedule. She knows it Ensuring a safe and healthy workplace depends on identifying,
will take about two hours to complete her remaining eliminating and/or controlling workplace hazards that are potential
deliveries but she has already been driving for eight hours
sources of harm. These hazards might include excessive heat or cold,
today. She knows from her company training that driving for
another two hours will cause fatigue, which will slow her noise, dangerous substances (e.g. chemicals), equipment that could
response times and increase her chances of having an accident. harm employees through electrocution or maiming, or spaces that
Discuss this: present risks of tripping, slipping or falling (e.g. from high places).
• Is it unethical for the driver to choose to do something Hazards can also include work practices that encourage unhealthy
she knows is unsafe?
behaviour, such as repetitive strain injury, driving long distances
• If the driver MUST complete her deliveries today, what
can she do to fulfil her moral obligation to operate as before working or without adequate rest stops, or dysfunctional
safely as possible? workplace cultures that de-emphasise worker health or promote
cavalier attitudes (‘she’ll be right’).
9780655702412_CH20.indd 570 3/3/20 11:10 AM

Training programs, reviews of work practices and job design, safety equipment, safe handling policies
and warning systems all contribute to providing safer and healthier workplaces. Consultation with employee
groups, unions, consultants and government agencies can all help to develop safer policies and practices.
Effective monitoring of productivity, absenteeism, accident and injury rates, and worker’s compensation
claims can also help by identifying opportunities to further improve health and safety in the workplace and
to provide feedback about the impact of initiatives put in place.
What contemporary HRM issues

do managers face?
HR issues that today’s managers face include downsizing, workforce diversity, sexual harassment
and career development.
How can managers manage downsizing?

Downsizing is the planned elimination of jobs in an organisation. After downsizing, disruptions in the downsizing
workplace and in employees’ personal lives are to be expected. Stress, frustration, anxiety and anger are The planned
elimination of jobs in an
typical reactions of both individuals being laid off and the job survivors, although it may surprise you to
organisation
learn that both victims and survivors experience those feelings.31 Many organisations have helped laid-off
employees by offering a variety of employment and job-seeking services, psychological counselling, support
groups, severance pay and detailed communications. Although some individuals react negatively to being
laid off (the worst cases involve individuals returning to their former organisation and committing a violent
act), offers of assistance reveal that an organisation does care about its former employees. While those
being laid off get to start over with a clean slate and a clear conscience, survivors don’t. Unfortunately, the
‘survivors’ who retain their jobs and have the task of keeping the organisation going, or even of revitalising
it, seldom receive attention. One negative consequence appears to be what is being called lay off-survivor lay off-survivor
sickness, or survivor syndrome, a set of attitudes, perceptions and behaviours of employees who survive sickness
A set of attitudes,
involuntary staff reductions.32 Symptoms include job insecurity, perceptions of unfairness, guilt, depression, perceptions and
stress from increased workload, fear of change, loss of loyalty and commitment, reduced effort, and an behaviours of
unwillingness to do anything beyond the required minimum. employees who survive
lay-offs
To address survivor syndrome, managers may want to provide opportunities for employees to
talk to counsellors about their guilt, anger and anxiety.33 Group discussions can be a way for the
survivors to vent their feelings. Some organisations have used downsizing as the spark to implement
increased employee participation programs such as empowerment and self-managed work teams.
In short, to keep morale and productivity high, managers should make every attempt to ensure that
those individuals still working in the organisation know that they are valuable and much-needed
resources. Table 20.5 summarises some ways that managers can reduce the trauma associated with
downsizing.34
Organisations also need to be aware that downsizing is traumatising for the managers who do
it. Telling an employee that they have been laid off is probably one of the hardest things that a
35
manager has to do. In smaller businesses, it can be especially difficult to do because it’s often more
personal and employees are more like family. Managers may fear that employees will become
highly emotional or angry, and respond with expressions of shock and disbelief or may even cry.
Dealing with these situations can be very difficult for managers to handle, especially when they
haven’t had to do it before. Studies have shown that managers who must tell people they’ve been
laid off also experience stress, poor sleep and even health problems, and these problems often can
linger. In one study, managers called the lay-offs ‘gut-wrenching’ and ‘devastating’36 and were
more likely than other managers to have stress-related health problems for up to six years after
the event.
9780655702412_CH20.indd 571 3/3/20 11:10 AM

Table 20.5 Tips for managing downsizing

• Communicate openly and honestly:
○ Inform those being let go as soon as possible
○ Tell surviving employees the new goals and expectations
○ Explain impact of lay-offs
• Follow any laws regulating severance pay or benefits
• Provide support/counselling for surviving employees
• Reassign roles according to individuals’ talents and backgrounds
• Focus on boosting morale:
○ Offer individualised reassurance
○ Continue to communicate, especially one-on-one
○ Remain involved and available
Managers who have had to deal several times with telling employees they’re laid off say that it gets a
little easier with experience. They soon learn how to tell people in the least hurtful way and to emphasise
that it’s the job that is being eliminated. However, one manager who had laid off several dozen workers at
Union Oil Company said: ‘It’s not that you ever lose the butterflies in your stomach or that sinking feeling,
but you get better at handling it as something that is not personal.’37
How can workforce diversity be managed?

Although we discuss workforce diversity throughout this book, it also affects such basic HRM
activities as recruitment, selection and orientation.38
Improving workforce diversity requires managers to widen their recruiting net. For example, the
popular practice of relying on current employee referrals as a source of new job applicants tends to
produce candidates who have similar characteristics to those of present employees. So, managers
have to look for applicants in places where they haven’t typically looked before. To increase diversity,
managers are increasingly turning to non-traditional recruitment sources such as social media sites
(e.g. LinkedIn, Instagram, Snapchat, SlideShare, Twitter), urban job banks, disabled people’s training
centres, ethnic newspapers and gay rights organisations, and are hosting courses or development
initiatives to attract people whose interests and knowledge align with the organisation’s expertise.39
This type of outreach should enable an organisation to broaden its pool of applicants.
Once a diverse set of applicants exists, efforts must be made to ensure that the selection process
doesn’t discriminate. Moreover, applicants need to be made comfortable with the organisation’s
culture and be made aware of management’s desire to accommodate their needs. In the end, it’s
HRM that will make the workplace a supportive work environment, one where communication
abounds and employees feel free to express themselves. This must be handled with sensitivity so as
to ensure that new staff receive fair and reasonable treatment and existing employees don’t resent
new staff receiving ‘special treatment’.
Finally, orientation is often difficult for women and minorities. Many organisations, such as Lotus
Cars and the Culture Resource Centre, provide special workshops to raise diversity consciousness
among current employees as well as programs for new employees that focus on diversity issues. The
thrust of these efforts is to increase individual understanding of the differences each of us brings
to the workplace. A number of companies also have special mentoring programs to deal with the
reality that lower-level female and minority managers have few role models with whom to identify.40
9780655702412_CH20.indd 572 3/3/20 11:10 AM

Mentoring and discrimination

Settling in to a new organisation involves a lot of learning and benefits can be particularly valuable for people from diverse
adjustment.41 New people, new processes, understanding the cultural backgrounds. Mentoring can help mentees to deal with
organisation’s mission and history, and learning to perform a clashes between their own culture and the workplace culture.
new role can sometimes be overwhelming. Mentoring is For example, the cultures of Aboriginal and Torres Strait
one way organisations can help new employees in this process. Islander peoples see family and extended family as the most
A new staff member (the mentee) is paired up with an important priority in life, which may clash with the expectations
experienced colleague (the mentor), who helps them ‘learn the of mainstream workplaces that employees will put work first.
ropes’, answers questions and provides advice. But mentoring Effective mentoring can keep disadvantaged groups in jobs
can also be very valuable for overcoming workplace longer and progress their careers faster than other forms of
discrimination. Mentoring helps employees learn how to support or intervention, but the cultural sensitivity of the
operate in their organisation and can help them prepare for mentor is key. Fortunately, mentors can also learn through the
career advancement. It also helps to improve the mentee’s mentoring process and develop their own understanding of
confidence, sense of competence and self-worth. These cultural diversity.
What is sexual harassment? mentoring

A process in which new
or junior employees
Sexual harassment is a serious issue. are formally paired with
a more experienced
colleague who provides
Sexual harassment is a serious issue for all types of organisations and it can occur anywhere. In advice, support and
a global survey of workers in countries including India, China, Saudi Arabia, Sweden, France, Belgium, encouragement
Germany, Great Britain and Poland, nearly 10 per cent of respondees reported that they had been harassed sexual
sexually or physically at work.42 A Human Rights Comission survey in 2012 found that 20 per cent of harassment
Any unwanted or
respondents had experienced sexual harassment in the previous five years. A third of all female respondents, unwelcome sexual
and 10 per cent of male respondents, reported having been sexually harassed.43 behaviour that makes
In Australia, sexual harassment is defined as ‘any unwanted or unwelcome sexual behaviour [that] makes a person feel offended,
a person feel offended, humiliated or intimidated’.44 It includes behaviours such as unwelcome touching, humiliated or intimidated
hugging or kissing; staring or leering; making suggestive comments or jokes; using or sending sexually
explicit pictures, screen savers, poster emails or SMS messages; offering unwanted invitations to go out on
dates or provide sex; or asking intrusive questions about an employee’s private life or body. Under the Sex
Discrimination Act 1984 (Cth), sexual harassment is illegal whether it is a one-off incident or repeated or
continuous behaviour. It is unlawful at the workplace, during working hours, and at work-related activities
such as training courses, conferences and office parties.
There are four main reasons why managers need to understand and handle sexual harassment
effectively. The first reason is that under the Sex Discrimination Act, employers are liable for acts of sexual
harassment by their employees unless the employer has taken all reasonable steps to prevent it from taking
place. ‘Reasonable steps’ means that, at a minimum, the employer has done two things: (1) developed,
implemented and monitored an appropriate sexual harassment policy that is communicated to all workplace
participants; and (2) taken appropriate action if sexual harassment does occur. The second reason is that
sexual harassment creates a risk of costly lawsuits. It’s estimated that sexual harassment is the single largest
financial risk facing companies today – and can result in upwards of a 30 per cent decrease in a company’s
share price.45 At Mitsubishi, for example, the company paid out more than $34 million to 300 women for
the rampant sexual harassment to which they were exposed.46 The third reason is that sexual harassment
creates an unpleasant work environment for employees and undermines their ability to perform their jobs.
9780655702412_CH20.indd 573 3/3/20 11:10 AM

Sexual harassment results in millions of dollars lost in absenteeism, low productivity and turnover.47 The
fourth reason is damage to the organisation’s reputation. In recent years, the reputations of organisations
including technology company Oracle, the Age newspaper, the retail giant David Jones, the Australian
Army and Victoria Police have all been damaged by allegations of sexual harassment of employees, which
have undermined their standing as potential employers and within the Australian community.48
Many organisations now provide harassment training to employees to help them learn how to identify,
avoid and deal with harassing behaviour.49 Training programs usually include group discussions, role-play
situations and coaching sessions. Group discussions allow participants to consider different perspectives
on harassment issues. Role plays provide insights into harassment situations and ways of dealing with
them. During coaching, facilitators work with participants to help them reflect on their understanding of
harassment and develop strategies for handling harassment situations.
Organisational success in preventing and managing harassment will, in part, reflect how sensitive each
employee is towards others in the company. It means understanding one another and, most importantly,
respecting others’ rights. Whether behaviour such as sexually explicit language in the office, off-colour
jokes or pictures of naked women are considered offensive depends on the people in the organisation and
the environment in which they work. The point here is that we all must be attuned to what makes our
fellow employees uncomfortable – and if we don’t know, we should ask.
Finally, in a sexual harassment matter, managers must remember that the harasser has rights, too.50
No action should be taken against someone accused of harassment until a thorough investigation has
been conducted. Furthermore, the results of the investigation should be reviewed by an independent and
objective individual before any action against the alleged harasser is taken. Even then, the harasser should
be given an opportunity to respond to the allegation and have a disciplinary hearing if desired. Additionally,
an avenue for appeal should exist for the alleged harasser – an appeal heard by someone at a higher level of
management who isn’t associated with the case.
You’ve got to be attuned to what makes

fellow employees uncomfortable.
What is career development?
career A career is the sequence of work positions held by a person during their lifetime. These days, employees
The sequence of work increasingly expect – and are expected – to take responsibility for their own careers. This idea of increased
positions held by a
person during their personal responsibility for one’s career has been described as a boundaryless career. The shift to employee-
lifetime managed careers has several implications for organisations. First, organisations need to adopt a more
collaborative approach to career planning. Career planning is the process of matching career goals
career planning
The process of matching and individual capabilities with opportunities for achieving those goals. Employees looking for growth
career goals and and developmental opportunities will look inside and outside their current workplace. Helping employees
individual capabilities to plan their careers gives organisations the chance to encourage their staff to pursue career goals within
with opportunities for
achieving those goals
the organisation. Second, organisations should think about the ‘big picture’ of an employee’s career.
Sometimes, allowing an employee to develop themselves elsewhere means they can bring fresh perspectives
back to the organisation. Letting staff pursue opportunities by taking leave without pay provides a win–win
situation: the employee develops their talents and the employer gets a more valuable staff member. Third,
organisations need to consider non-traditional sources of employee skills. Employees with the desired
capabilities might have developed them by working for volunteer organisations, charities, not-for-profits
and aid organisations, so employers should consider non-traditional career pathways as potential sources
of valuable staff.
9780655702412_CH20.indd 574 3/3/20 11:10 AM

What does all this mean for you and your career? Well, it means that you – not the organisation –
will be responsible for designing, guiding and developing your own career. To help you do that, here
are some suggestions about managing your career successfully that are based on extensive research
into career management:
• Choose a career that reflects what you want out of life. A good career match, then, is one in which
you are able to develop a positive self-concept, to do work that you think is important and to lead
the kind of life you desire.
• Assess your personal strengths and weaknesses. Play to your strengths and figure out how to
overcome or complement your weaknesses.
• Identify market opportunities. What new job opportunities are presented by developments such as
an increasingly ageing society, continued emphasis on technology, increased spending on education
and training, and concern with personal security?
• Take responsibility for managing your own career. Act as if your career is your business and you’re its
CEO. You have to protect your career from harm and position yourself to benefit from changes in
the environment.
• Develop your interpersonal skills. Strong interpersonal skills, especially the ability to communicate,
are likely to give you a competitive edge.
• Practice makes perfect. Build your capabilities by consistently engaging in repeated activity
specifically designed to improve performance beyond your current comfort and ability level.
• Stay up to date. Keep learning new skills and reading books and journals to ensure that you don’t
get caught with obsolete skills.
• Network. Create and maintain beneficial relationships with others in order to accomplish your
goals.
• Stay visible. Enhance your value in the marketplace by writing articles in your professional journals,
teaching classes or giving talks in your area of expertise, attending conferences and professional
meetings, and making sure your accomplishments are properly promoted.
• Seek a mentor. Mentors can help you to advance your career and achieve success by helping you
to better understand your organisation, get access to senior people, increase your visibility and
enhance your job satisfaction.
• Leverage your competitive advantage. Specialise and develop skills that are important to employers,
skills that are scarce, and areas where you have limited competition.
• Don’t shun risks. Don’t be afraid to take risks, especially when you’re young and don’t have much to
lose.
• It’s OK to change jobs. This will keep your skills fresh, your income increasing and your job tasks
interesting.
• Opportunities, preparation and luck = success. Be prepared for special opportunities so that you can
control your preparation and willingness to act when opportunity knocks.
9780655702412_CH20.indd 575 3/3/20 11:10 AM

Student are accommodative of human needs and preserve health. Training about
workplace health and safety builds awareness of managerial and employee
Learning responsibilities and helps put health and safety issues ‘on the radar’. Workplace
Centre health and safety audits identify organisational policies and practices that don’t
comply with the requirements of safety legislation, trends in workplace injuries
or accidents, strategies for improving health and safety in the organisation, and
hazards that can be eliminated or controlled. Organisations can also use safety
Reviewing the learning objectives equipment, safe handling policies and warning systems to provide safer and
healthier workplaces. Effective monitoring of productivity, absenteeism, accident
Learning Objective 1. Describe the key components
and injury rates, and worker’s compensation claims can also identify opportunities
of the human resource management process and to improve health and safety and provide feedback about the impact of current
the important influences on that process. safety initiatives.
The HRM process consists of eight activities that will staff an organisation with
competent, high-performing employees who are capable of sustaining their Learning Objective 5. Discuss contemporary issues
performance level over the long term. The first three HR activities involve employment in managing human resources.
planning and include recruitment, downsizing and selection. The next two steps Downsizing is the planned elimination of jobs and must be managed from the
involve helping employees adapt to the organisation and ensuring that their skills perspectives of the lay-off victims and survivors, and the managers. Workforce
and knowledge are kept current, and include the HR activities of orienting and diversity must be managed through HRM activities including recruitment, selection
training. The last steps involve identifying performance goals, correcting performance and orientation. Sexual harassment is a significant concern of organisations and
problems and helping employees sustain high levels of performance. These are done managers, which means programs and mechanisms must be in place to educate
using the HR activities of performance appraisal, compensation and benefits, and all employees about it.
safety and health. The main influences on the HRM process are legal, although other
environmental conditions such as restructuring, downsizing, diversity and so forth
can impact it as well.
❶ How does HRM affect all managers?
❷ Should an employer have the right to choose employees without
Learning Objective 2. Discuss the tasks associated
governmental interference? Support your position.
with identifying and selecting competent employees.
➌ Some critics claim that corporate HR departments have outlived their
The first task is employment planning, which involves job analysis and the
usefulness; that their purpose isn’t to help employees but to shield the
creation of job descriptions and job specifications. Then, if job needs are indicated,
organisation from legal problems. What do you think? What benefits are
recruitment involves attempts to develop a pool of potential job candidates.
there to having a formal HRM process? What are the drawbacks?
Downsizing is used to reduce the labour supply. Selection involves determining
➍ Do you think it’s ethical for a prospective employer to delve into an
who is best qualified for the job. Selection devices need to be both reliable and
applicant’s life by means of interviews, tests and background investigations?
valid. Managers may want to give potential employees a realistic job preview.
What if those investigations involved looking at your Facebook, Instagram
or Twitter accounts? Explain your position.
Learning Objective 3. Explain how employees are
❺ Discuss the advantages and drawbacks of the various recruiting sources.
provided with needed skills and knowledge.
❻ Discuss the advantages and drawbacks of the various selection devices.
New hires must be acclimatised to the organisation’s culture and be trained and
❼ What are the benefits and drawbacks of realistic job previews? (Consider
given the knowledge to do the job in a manner consistent with the organisation’s
this question from the perspective both of the organisation and of a
goals. Orientation – job, work unit and organisational – provides new employees
potential employee.)
with information to introduce them to the job. Training is used to help employees
➑ What, in your view, constitutes sexual harassment? Describe how companies
improve their ability to perform on the job.
can minimise sexual harassment in the workplace.
➒ Research your chosen career by finding out what it’s going to take to be
Learning Objective 4. Discuss how organisations
successful in this career in terms of education, skills, experience, and so on.
provide a safe working environment.
Write a personal career guide that details this information.
Organisations provide safe working environments by establishing attitudes and
behaviours that minimise accidents and injuries, and by ensuring that workplaces
9780655702412_CH20.indd 576 3/3/20 11:10 AM


PROVIDING GOOD FEEDBACK
Everyone needs feedback! If you want people to do their best, they need to know what they’re doing well and what they can do better. That’s why providing
feedback is so important. But being effective at giving feedback is tricky! That’s why we often see managers either (a) not wanting to give feedback, or (b) giving
feedback in such a way that it doesn’t result in anything positive.

PERSONAL
P I A INVENTORY
ASSESSMENT
Work performance assessment

As this chapter indicated, performance assessment is an important HR function. Use this PIA to assess work performance.
Skill basics insufficient information, if you’re angry, or if you’re otherwise emotionally

You can feel more comfortable with and be more effective at providing feedback upset. In such instances, ‘well timed’ could mean ‘somewhat delayed’.
if you use the following specific suggestions:51 • Ensure understanding. Make sure your feedback is concise and complete so
• Be straightforward by focusing on specific behaviours. Feedback should that the recipient clearly and fully understands the communication. It may
be specific rather than general. Avoid such statements as ‘You have a bad help to have the recipient rephrase the content of your feedback to find out
attitude’ or ‘I’m really impressed with the good job you did’. They’re vague whether it fully captured the meaning you intended.
and, although they provide information, they don’t tell the recipient enough • Watch your body language, tone of voice and facial expressions. Your
to correct the ‘bad attitude’ or on what basis you concluded that a ‘good body language and tone of voice can speak louder than your words. Think
job’ had been done so the person knows what behaviours to repeat or to about what you want to communicate and make sure your body language
avoid. supports that message.
• Be realistic. Focus your feedback on what can be changed. It’s not useful to Practising the skill
comment on things over which people have no control. Read through the scenario and follow the directions at the end of it.
• Keep feedback impersonal. Feedback, particularly the negative kind, should Craig is an excellent employee whose expertise and productivity have always met
be descriptive rather than judgmental or evaluative. No matter how upset or exceeded your expectations. But recently he’s been making work difficult for
you are, keep the feedback focused on job-related behaviours and never other members of your advertising team. Like his co-workers, Craig researches
criticise someone personally because of an inappropriate action. and calculates the costs of media coverage for your advertising agency’s clients.
• Keep feedback goal oriented. Feedback shouldn’t be given primarily to ‘blow The work requires laboriously leafing through several large reference books
off steam’ or ‘unload’ on another person. If you have to say something to find the correct base price and add-on charges for each radio or television
negative, make sure it’s directed towards the recipient’s interests and station and time slot, calculating each actual cost, and compiling the results in a
priorities. Ask yourself who the feedback is supposed to help. If the answer computerised spreadsheet. To make things more efficient and convenient, you’ve
is you, bite your tongue and hold the comment. Such feedback undermines always allowed your team members to bring the reference books they’re using to
your credibility and lessens the meaning and influence of future feedback. their desks while they’re using them. Lately, however, Craig has been piling books
• Know when to give feedback – make it well timed. Feedback is most around him for days – and sometimes weeks – at a time. The books interfere with
meaningful to a recipient when there’s a very short interval between their the flow of traffic past his desk and other people have to go out of their way to
behaviour and the receipt of feedback about that behaviour. Moreover, if retrieve them from Craig’s pile. It’s time for you to have a talk with Craig.
you’re particularly concerned with changing behaviour, delays in providing Prepare an outline of how you will address this issue with Craig. Using the
feedback on the undesirable actions lessen the likelihood that the feedback suggestions in the Skill Basics, be as specific as possible in terms of what you will
will be effective in bringing about the desired change. Of course, making say and how you will approach this. If your instructor chooses, be prepared to do
feedback prompt merely for the sake of promptness can backfire if you have some role playing in class.
9780655702412_CH20.indd 577 3/3/20 11:10 AM

Mini cases
20.1 Managing diversity at PwC
Connection 1 understanding 5 success
Diversity management is the bottom line at professional services company cent of PwC’s partners came from diverse cultural backgrounds. As Luke Sayers,
PricewaterhouseCoopers (PwC). PwC is a global provider of legal and CEO of PwC Australia, explains: ‘Developing workforces that have a deep
financial services, employing more than 236,000 staff in 151 countries. In understanding of and connection with the many different cultures throughout
Australia alone, PwC’s 5000 Australian employees are located in Sydney, the Asia Pacific region is absolutely critical if Australian businesses are to take
Adelaide, Brisbane, Canberra, Melbourne, Newcastle, Perth and the Gold advantage of opportunities for growth across the region. With 17 per cent of
Coast,52 so the PwC workforce is both culturally and geographically diverse. our employees identifying as being of Asian cultural background, it is incumbent
The company’s commitment to diversity has seen it consistently rank in the on the firm to provide the right development opportunities and organisational
top 5 of the Top Companies for Diversity as determined by DiversityInc. So, culture for these people to join our leadership ranks.’
what does a company do to be recognised as one of the leaders in diversity Another diversity commitment that PwC has made is to ‘find, engage,
management? Well, it starts at the top.53 and promote the best and brightest employees, especially those from
Bob Moritz, global chairman of PwC, is a vocal advocate of diversity and underrepresented groups’. To attract such outstanding diverse talent, the
inclusion. ‘It’s also the key to sustainable global growth for an organisation,’ company offers employees work/life flexibility through an array of benefits
he says. Moritz’s commitment to diversity stems from his personal experiences. including back-up child-care assistance, paid paternity leave, child-care
As a young professional, he lived in Japan for three years where he had first- resources and referrals, and wellbeing rewards.
hand experience of being a cultural minority. He recalls, ‘If you’re overseas Finally, a major key to PwC’s diversity management is its mentoring
or in a country where no one speaks your language – or the cab refuses program, which has been described as ‘world class’. A mentor is a senior
to pick you up in the middle of the night because you’re a foreigner – you employee who sponsors and supports a less-experienced employee, called a
get a different perspective.’ In addition, his work team included individuals protégé. Although half of the company’s mentoring pairings are cross-cultural,
from France, Australia and the United Kingdom, as well as from Japan. He Moritz has asked each of PwC’s 2500 US partners to ‘consciously diversify
soon recognised that people from different cultures approach problems with their pool of protégés’. Part of the partners’ evaluations will be based on
differing perspectives – that his way wasn’t necessarily the right way and their advocacy and investment in these individuals. A toolkit for successful
certainly not the only way. advocacy was created that includes guidelines, suggested readings, other
To encourage other senior leaders to factor issues about diversity and internal resources, and videos showing partners and staff members sharing
inclusion into their thinking, the company’s first chief diversity officer (CDO) was their personal experiences with mentoring.
appointed in 2003. Importantly, the CDO reports directly to the organisation’s ❶ How might population trends affect a professional services organisation
senior management as a member of the leadership team, or to the board of such as PwC? What might it have to do to adapt to these trends?
directors, depending on the structure used in their location. ❷ What challenges might PwC face in adapting to a more diverse
PwC believes that to succeed in today’s global economy, an inclusive applicant pool of university graduates?
culture that attracts and retains diverse talent is critical to building a competitive ➌ Businesses often face the dilemma of retaining diverse employees once
workforce and providing excellent services to its clients. To achieve this, PwC they’re trained. What can PwC do to retain its diverse employees?
has several diversity programs and initiatives in place. In 2015, PwC Australia ➍ What advantages do you think PwC’s mentoring program provides? What
set a cultural diversity target that within a year, people from culturally diverse potential drawbacks might there be?
backgrounds would make up 20 per cent of its partners. By May 2017, 18 per
20.2 Producing CHAMPS at KFC

If we put ‘people capability’ first, satisfied customers and profitability follow
Human resource management at KFC means ‘Keep Finding CHAMPS’.54 Like rest operated by franchisees who pay a fee to use the KFC restaurant design,
most fast food companies, KFC emphasises quick and friendly service, so product lines, operating procedures and brand name, including its HRM
effective human resource management is crucial to its success. Since KFC systems. In KFC’s own words, ‘we know we need the very best people on our
opened its first Australian store in 1968, the company has grown to operate team. We believe that if we put “people capability” first, satisfied customers
over 612 stores across the country and now employs more than 30,000 and profitability follow. This means hiring, developing and retaining the right
people. About one-quarter of KFC stores are owned by the company, with the people to take our brands to the customer.’
9780655702412_CH20.indd 578 3/3/20 11:10 AM

20.2 Producing CHAMPS at KFC continued

To attract the ‘right people’, KFC recruits potential employees through the content most relevant to them, and means that face-to-face time with
retail traineeships, school career advisers, recruitment posters hung in its the restaurant management team can be used for personalised coaching.
restaurants, and an employee referral program. Applications are handled KFC reinforces its training and quality standards using a worldwide Intranet
through an online recruitment process that is standardised across all stores. site titled Yumnet (because KFC is part of YUM! Restaurants International).
As all applicants are asked the same questions and are assessed the same Yumnet contains a company-wide database of all its restaurant operating
way, the recruitment process is consistent, fair and efficient, enabling store procedures to provide a go-to resource for franchisees and employees around
managers to spend more time on training and developing staff. the world. KFC staff can also complete nationally accredited qualifications,
Before they commence working, new employees complete Web-based including traineeships and certificate courses in retail operations, retail
pre-employment training about food safety, role orientation and how to supervision and retail management.
be CHAMPS: employees who deliver on KFC’s six priorities of cleanliness, Retaining staff and reducing turnover reduces recruitment costs and
hospitality, accuracy, maintenance, product quality and speed. Training gives the company a greater return on its training investment. Since many
is delivered using the Learning Management System (LMS) and Virtual of its employees are studying at high school or university, KFC offers flexible
Classroom Tools (Centra), which is complemented by on-the-job training in working hours to accommodate time off for exams, extra-curricular school
communication skills, teamwork and how to manage money once employees activities, sports and family events, to help employees juggle their work and
commence work. Team members can also cross-train within the restaurant if personal commitments and keep them with the company. Providing visible
they wish to learn additional skills and build their competencies further. and defined career paths also helps KFC retain talented and knowledgeable.
For a company as large as KFC, online training has particular advantages. KFC team members can progress to be area coaches, training managers
Online classrooms allow KFC to provide consistent and up-to-date information and restaurant general managers. The company also advertises career
to all team members in all restaurant locations. This means information about opportunities through its organisational network.
new products, operating procedures or performance standards can be easily ❶ What key HR challenges does KFC face? How has the organisation
and immediately disseminated across all stores. It’s also cheaper and more addressed them?
efficient than face-to-face training. Combining Web-based and in-store ❷ Evaluate the recruitment methods used by KFC. What other methods
training reduces the time taken to train each learner by roughly 40 per cent, would you recommend it use?
thus also reducing the cost and making staff more productive. Because the ➌ Consider the various training and development approaches used by KFC.
LMS automatically records the training hours and modules completed by What benefits and drawbacks are there for the organisation?
employees, administrative costs are reduced. Testing is also uniform, ensuring ➍ Many KFC employees are students working part time while they complete
that results can be compared across both team members and store locations. their studies. Who else could KFC target as potential employees? What
Online training also has advantages for employees, as it provides flexibility advantages might result from KFC diversifying its workforce? What could
in where and when they complete the training, allows learners to focus on the company offer to appeal to other types of employees?
References
1 Material for this chapter is drawn from D. A. DeCenzo and S. P. Robbins, Fundamentals of p. 8; and L. Greenhalgh, A. T. Lawrence and R. I. Sutton, ‘Determinants of Work Force
Human Resources Management, 10th edn (Hoboken, NJ: John Wiley & Sons, 2010). Reduction Strategies in Declining Organizations’, Academy of Management Review,
2 From the Past to the Present box based on D. A. Wren and A. G. Bedeian, The Evolution April 1988, pp. 241–54.
of Management Thought, 6th edn (Hoboken, NJ: John Wiley & Sons, 2009), pp. 8 J. J. Salopek, ‘Employee Referrals Remain a Recruiter’s Best Friend’, Workforce
198–200; ‘Building Better Organizations: Industrial–Organizational Psychology in Management Online, December 2010; ‘Employee Referral Programs: Highly Qualified
the Workplace’, Society for Industrial and Organizational Psychology, <www.siop. New Hires Who Stick Around’, Canadian HR Reporter, 4 June 2001, p. 21; and C.
org>, 13 July 2009; M. Munsterberg, Hugo Munsterberg: His Life and Work (New Lachnit, ‘Employee Referral Saves Time, Saves Money, Delivers Quality’, Workforce,
York: Appleton-Century-Crofts, 1922); and H. Munsterberg, Psychology and Industrial June 2001, pp. 66–72.
Efficiency (Boston: Houghton Mifflin Company, 1913). 9 J. Mooney, ‘Pre-Employment Testing on the Internet: Put Candidates a Click Away and
3 P. W. Tam and S. Woo, ‘Talent War Crunches Start-Ups’, Wall Street Journal, 28 February Hire at Modem Speed’, Public Personnel Management, Spring 2002, pp. 41–52.
2011, pp. B1+; and C. Tuna, ‘Many Companies Hire as They Fire’, Wall Street Journal, 10 See, for example, R. D. Arvey and J. E. Campion, ‘The Employment Interview: A
11 May 2009, p. B6. Summary and Review of Recent Research’, Personnel Psychology, Summer 1982, pp.
4 B. Horovitz, ‘Layoffs Sting Icons Coca-Cola and McDonald’s’, USA Today, 9 January 281–322; M. M. Harris, ‘Reconsidering the Employment Interview: A Review of Recent
2015, p. 5B. Literature and Suggestions for Future Research’, Personnel Psychology, Winter 1989,
5 B. Tuttle, ‘Why These 5 Companies Are Laying off Thousands of Workers’, <http://time pp. 691–726; J. H. Prager, ‘Nasty or Nice: 56-Question Quiz’, Wall Street Journal, 22
.com/money/3678511/ebay-amex-baker-hughes-layoffs/>, 22 January 2015. February 2000, p. A4; and M. K. Zachary, ‘Labor Law for Supervisors’, Supervision,
6 B. Tuttle, ‘Why These 5 Companies Are Laying off Thousands of Workers’, <http://time March 2001, pp. 23–6.
.com/money/3678511/ebay-amex-baker-hughes-layoffs/>, 22 January 2015. 11 See, for example, G. Nicholsen, ‘Screen and Glean: Good Screening and Background
7 J. J. Salopek, ‘Employee Referrals Remain a Recruiter’s Best Friend’, Workforce Checks Help Make the Right Match for Every Open Position’, Workforce, October 2000,
Management Online, December 2010; L. G. Klaff, ‘New Internal Hiring Systems Reduce p. 70.
Cost and Boost Morale’, Workforce Management, March 2004, pp. 76–9; M. N. 12 R. A. Posthuma, F. P. Morgeson and M. A. Campion, ‘Beyond Employment Interview
Martinez, ‘The Headhunter Within’, HR Magazine, August 2001, pp. 48–55; ‘Even Non- Validity: A Comprehensive Narrative Review of Recent Research and Trends over Time’,
Recruiting Companies Must Maintain Hiring Networks’, HR Focus, November 2001, Personnel Psychology, Spring 2002, pp. 1–81.
9780655702412_CH20.indd 579 3/3/20 11:10 AM

13 A. I. Huffcutt, J. M. Conway, P. L. Roth and N. J. Stone, ‘Identification and Meta-Analysis 30 This section based on P. Davidson, A. Simon, P. Woods and R.W. Griffin, Management,
Assessment of Psychological Constructs Measured in Employment Interviews’, Journal 4th Australasian edn (Brisbane: John Wiley & Sons, 2009), pp. 521–3; Australian
of Applied Psychology, October 2001, pp. 897–913; and A. I. Huffcutt, J. A. Weekley, Bureau of Statistics, Work-Related Injuries, Australia, 2005–06 (Canberra: Australian
W. H. Wiesner, T. G. Degroot and C. Jones, ‘Comparison of Situational and Behavioral Bureau of Statistics, 2006); Australian Bureau of Statistics, Australian Social Trends
Description Interview Questions for Higher-Level Positions’, Personnel Psychology, June 2011 (Canberra: Australian Bureau of Statistics: 2011); and Australian Safety
Autumn 2001, pp. 619–44. and Compensation Council, The Cost of Work-related Injury and Illness for Australian
14 See C. H. Middendorf and T. H. Macan, ‘Note-Taking in the Employment Interview: Employers, Workers and the Community: 2005–06 (Canberra: Australian Safety and
Effects on Recall and Judgments’, Journal of Applied Psychology, April 2002, pp. Compensation Council, 2009).
293–303; D. Butcher, ‘The Interview Rights and Wrongs’, Management Today, April 31 P. P. Shah, ‘Network Destruction: The Structural Implications of Downsizing’, Academy of
2002, p. 4; P. L. Roth, C. H. Can Iddekinge, A. I. Huffcutt, C. E. Eidson and P. Bobko, Management Journal, February 2000, pp. 101–12.
‘Corrections for Range Restriction in Structured Interview Ethnic Group Differences: The 32 See, for example, K. A. Mollica and B. Gray, ‘When Layoff Survivors Become Layoff
Value May Be Larger than Researchers Thought’, Journal of Applied Psychology, April Victims: Propensity to Litigate’, Human Resource Planning, January 2001, pp. 22–32.
2002, pp. 369–76; and E. Hermelin and I. T. Robertson, ‘A Critique and Standardization 33 S. Koudsi, ‘You’re Stuck’, Fortune, 10 December 2001, pp. 271–4.
of Meta-Analytic Coefficients in Personnel Selection’, Journal of Occupational and 34 S. Berfield, ‘After the Layoff, the Redesign’, BusinessWeek, 14 April 2008, pp. 54–6;
Organizational Psychology, September 2001, pp. 253–77. L. Uchitelle, ‘Retraining Laid-off Workers, But for What?’, New York Times Online, 26
March 2006; D. Tourish, N. Paulsen, E. Hobman and P. Bordia, ‘The Downsides of
15 See J. Merritt, ‘Improv at the Interview’, BusinessWeek, 3 February 2003, p. 63; P. J.
Downsizing: Communication Processes and Information Needs in the Aftermath of a
Taylor and B. Small, ‘Asking Applicants What They Would Do versus What They Did Do:
Workforce Reduction Strategy’, Management Communication Quarterly, May 2004,
A Meta-Analysis Comparison of Situation and Past Behavior Employment Interview
pp. 485–516; J. Brockner, G. Spreitzer, A. Mishra, W. Hochwarter, L. Pepper and J.
Questions’, Journal of Occupational and Organizational Psychology, September 2002,
Weinberg, ‘Perceived Control as an Antidote to the Negative Effects of Layoffs on
pp. 277–95; S. D. Mauer, ‘A Practitioner-Based Analysis of Interviewer Job Expertise and
Survivors’ Organizational Commitment and Job Performance’, Administrative Science
Scale Format as Contextual Factors in Situational Interviews’, Personnel Psychology,
Quarterly, vol. 49 (2004), pp. 76–100; and E. Krell, ‘Defusing Downsizing’, Business
Summer 2002, pp. 307–28; and J. M. Barclay, ‘Improving Selection Interviews with
Finance, December 2002, pp. 55–7.
Structure: Organizations’ Use of Behavioral Interviews’, Personnel Review, vol. 30, no. 1
35 C. Dougherty, ‘A Happy Family of 8000, but for How Long?’, New York Times Online, 12
(2001), pp. 81–95.
July 2009; M. Luo, ‘For Small Employers, Shedding Workers and Tears’, New York Times
16 J. Merrit, ‘Improv at the Interview’, BusinessWeek, 3 February 2003, p. 63. Online, 7 May 2009; M. Elias, ‘Those Doing Layoffs Can Feel the Pain’, USA Today, 23
17 S. H. Applebaum and M. Donia, ‘The Realistic Downsizing Preview: A Management April 2009, p. 5D; and M. Cooper, ‘Handing out the Pink Slips Can Hurt, Too’, New York
Intervention in the Prevention of Survivor Syndrome (Part II)’, Career Development Times Online, 1 February 2009.
International, January 2001, pp. 5–19. 36 M. Elias, ‘Those Doing the Payoffs Can Feel Lingering Stress’, USA Today, April 2009.
18 D. Zielinski, ‘Effective Assessments’, HR Magazine, January 2011, pp. 61–4; W. L. 37 M. Elias, ‘Those Doing the Payoffs Can Feel Lingering Stress’, USA Today, April 2009.
Gardner, B. J. Reithel, R. T. Foley, C. C. Cogliser and F. O. Walumbwa, ‘Attraction to 38 A. Joshi, ‘Managing the Organizational Melting Pot: Dilemmas of Workplace Diversity’,
Organizational Culture Profiles: Effects of Realistic Recruitment and Vertical and Administrative Science Quarterly, December 2001, pp. 783–4.
Horizontal Individualism–Collectivism’, Management Communication Quarterly, February 39 J. Ponte, ‘Social Recruitment: 7 Non-traditional Ways for Recruiters to Source Excellent
2009, pp. 437–72; and S. L. Premack and J. P. Wanous, ‘A Meta-Analysis of Realistic Job Candidates’, Re-bounty, 20 June 2017.
Preview Experiments’, Journal of Applied Psychology, November 1985, pp. 706–20. 40 See, for example, K. Iverson, ‘Managing for Effective Workforce Diversity’, Cornell Hotel
and Restaurant Administration Quarterly, April 2000, pp. 31–8.
19 C. Garvey, ‘The Whirlwind of a New Job’, HR Magazine, June 2001, pp. 110–18.
41 Managing for Diversity box based on S. Robbins, R. Bergman, I. Stagg and M. Coulter,
20 B. P. Sunoo, ‘Results-Oriented Customer Service Training’, Workforce, May 2001, Management, 5th edn (Sydney: Pearson, 2010); G. Strachan, E. French and J. Burgess,
pp. 84–90. Managing Diversity in Australia: Theory and Practice (Sydney: McGraw-Hill Australia,
21 See, for example, E. G. Tripp, ‘Aging Aircraft and Coming Regulations: Political and 2010).
Media Pressures Have Encouraged the FAA to Expand Its Pursuit of Real and Perceived 42 B. Leonard, ‘Survey: 10% of Employees Report Harassment at Work’, HR Magazine,
Problems of Older Aircraft and Their Systems. Operators Will Pay’, Business and October 2010, p. 18.
Commercial Aviation, March 2001, pp. 68–75. 43 ‘Survey Shows Workplace Harassment Still Rife’, ABC News, 31 October 2012.
22 ‘A&S Interview: Sully’s Tale’, Air & Space Magazine, 18 February 2009; A. Altman, 44 Information from this section taken from Australian Human Rights Commission, ‘Sexual
‘Chesley B. Sullenberger III’, Time, 16 January 2009; and K. Burke, P. Donohue and Harassment’, <https://www.humanrights.gov.au/our-work/sex-discrimination/guides/
C. Siemaszko, ‘US Airways Airplane Crashes in Hudson River – Hero Pilot Chesley sexual-harassment>, accessed 11 October 2017.
Sullenberger III Saves All Aboard’, New York Daily News, 16 January 2009. 45 N. F. Foy, ‘Sexual Harassment Can Threaten Your Bottom Line’, Strategic Finance, August
2000, pp. 56–7.
23 C. S. Duncan, J. D. Selby-Lucas and W. Swart, ‘Linking Organizational Goals and
46 ‘Federal Monitors Find Illinois Mitsubishi Unit Eradicating Harassment’, Wall Street
Objectives to Employee Performance: A Quantitative Perspective’, Journal of American
Journal, 7 September 2000, p. A8.
Academy of Business, March 2002, pp. 314–18.
47 L. J. Munson, C. Hulin and F. Drasgow, ‘Longitudinal Analysis of Dispositional Influences
24 R. Langlois, ‘Fairmont Hotels: Business Strategy Starts with People’, Canadian HR and Sexual Harassment: Effects on Job and Psychological Outcomes’, Personnel
Reporter, 5 November 2001, p. 19. Psychology, Spring 2000, p. 21.
25 M. Valcour, ‘A Great Manager Must Be a Great Coach: Here’s 5 Tips to Get You Started’, 48 G. Alcorn, ‘Perverse Outcomes: How Australia is Failing Sexual Harassment Victims’, The
BRW, 25 July 2014. Guardian, 18 October 2017.
49 Information taken from J. M. Freeman, ‘Harassment Training Exercises’, <www.ehow
26 M. Blelby, ‘Trucking on through a Bust’, BRW, August–September 2013, pp. 28–9.
.com>, accessed 17 September 2010.
27 Galaxy Training Australia, <https://galaxytraining.com.au/online-rsa-rsg-courses.asp>, 50 See, for example, P. W. Dorfman, A. T. Cobb and R. Cox, ‘Investigations of Sexual
accessed 27 August 2017. Harassment Allegations: Legal Means Fair – Or Does It?’, Human Resources
28 Asthma Australia, ‘Asthma First Aid for School Staff’, <https://elearning. Management, Spring 2000, pp. 33–9.
asthmaaustralia.org.au>, October 2011, accessed 13 November 2014. 51 Based on A. Tugend, ‘You’ve Been Doing a Fantastic Job. Just One Thing . . .’ New York
Times Online, 5 April 2013; C. R. Mill, ‘Feedback: The Art of Giving and Receiving Help’,
29 See, for example, R. E. Catalano and D. L. Kirkpatrick, ‘Evaluating Training Programs: The
in L. Porter and C. R. Mill (eds), The Reading Book for Human Relations Training (Bethel,
State of the Art’, Training and Development Journal, May 1968, pp. 2–9.
9780655702412_CH20.indd 580 3/3/20 11:10 AM

ME: NTL Institute for Applied Behavioral Science, 1976), pp. 18–19; and S. Bishop, The pp. 42–3; ‘PwC Tops Global Ranking of Firms’, Accountancy, November 2011, p. 10;
Complete Feedback Skills Training Book (Aldershot, UK: Gower Publishing, 2000). ‘About PwC’, PricewaterhouseCoopers, <www.pwc.com.au>, accessed 20 August
52 ‘Pwc local offices – Australia’, <https://www.pwc.com.au/contact-us/local-offices. 2010; PricewaterhouseCoopers, ‘PwC Announces Cultural Diversity Target’, <www
html>, accessed 11 October 2017. .pwc.com.au>, 23 October 2013, accessed 3 December 2014; PricewaterhouseCoopers,
53 ‘No. 1: PricewaterhouseCoopers’, DiversityInc Online, 24 April 2012; <www ‘Global Annual Review 2017, <www.pwc.com/>, accessed 11 October 2017; ‘PwC
.prnewswire.com/news-releases/diversityinc-unveils-the-2015-top-50-companies-for Splits with Deloitte, EY and KPMG on Diversity Targets’, Financial Review, 1 August
-diversity-300070633.html>; Diversity Inc., ‘2016 Top 50 Companies for Diversity’, 2017.
<www.diversityinc.com/>, accessed 11 October 2017; Diversity Inc., ‘Top 50 54 ‘KFC: Human Resources to Meet Emerging Business Needs’, AFR Business Case Studies,
Companies for Diversity 2017’, <www.diversityinc.com/>, accessed 11 October 2017; <www.afrbiz.com.au>, accessed 4 December 2014; and ‘About KFC’, <www.kfc.com
L. Kwor, ‘Firms Hail Chiefs (of Diversity)’, Wall Street Journal, 5 January 2012, p. B10; .au>, accessed 21 September 2017.
S. Ali, ‘PwC Chairman Bob Moritz Makes Diversity Personal’, DiversityInc, Fall 2011,
9780655702412_CH20.indd 581 3/3/20 11:10 AM

Chapter
21 Motivating and rewarding

employees
Maybe the greatest fallacy about motivation is that everyone is motivated by money. Many ineffective or
inexperienced managers naively believe that money is a prime motivator. Then they proceed to ignore
the many other actions and rewards they control that are as equally important as money, if not more so. In
this chapter, you’ll learn about the many options open to managers for improving employee motivation.
You’ll see that one-size-doesn’t-fit-all and that the secret to being an effective motivator is understanding
each individual’s unique needs.
Successful managers need to understand that what motivates them personally may have little or no
effect on others. Just because you are motivated by being part of a cohesive work team, don’t assume that
everyone is. Or just because you are motivated by your job doesn’t mean that everyone is. Employees might
have access to free food, free massages, free laundry and free M&Ms, but that doesn’t mean those extras are
enough to keep them from looking elsewhere for career opportunities. Effective managers know how and
why employees are motivated and tailor motivational practices to satisfy their needs and wants. Motivating
and rewarding employees are some of the manager’s most important and challenging activities. To get
employees to put forth maximum work effort, managers need to know how and why they’re motivated.
Learning Objective 1 Define and explain motivation.

What is motivation? p. 584
Learning Learning Objective 2 Compare and contrast early theories of motivation.
Objectives What do the early theories of motivation say? pp. 584–88
Learning Objective 3 Compare and contrast contemporary theories of motivation.
How do the contemporary theories explain motivation? pp. 588–95
9780655702412_CH21.indd 582 3/3/20 11:11 AM

Chapter 21 Motivating and rewarding employees 583
LO 1
Define and explain
fact or fiction?
motivation.
Motivation is all about ‘show

LO 2
Compare and
contrast early
theories of
motivation. me the money’.
LO 3
Compare
and contrast
fiction
contemporary
theories of
motivation.
9780655702412_CH21.indd 583 3/3/20 11:11 AM

What is motivation?
Several CEOs were attending a meeting where the topic was ‘What do employees want?’1 Each CEO
took turns describing the benefits they provided and how they gave out free M&Ms every Wednesday
and offered their employees stock options and free parking spaces. However, the meeting’s main speaker
made the point that ‘employees don’t want M&Ms; they want to love what they do’. Half expecting
his audience to laugh, the speaker was pleasantly surprised as the CEOs stood up one-by-one to agree.
They all recognised that ‘the value in their companies comes from the employees who are motivated to
be there’.
These CEOs understand how important employee motivation is. Like them, all managers need to be
able to motivate their employees, which requires understanding what motivation is. Why? Because many
people incorrectly view motivation as a personal trait; that is, they think some people are motivated and
others aren’t. Our knowledge of motivation tells us that we can’t label people that way, because individuals
differ in motivational drive and their overall motivation varies from situation to situation. For example,
you’re probably more motivated to work hard and do well in some classes than in others.
motivation Motivation refers to the process by which a person’s efforts are energised, directed and sustained
The process by which towards attaining a goal.2 This definition has three key elements: energy, direction and persistence.3
a person’s efforts are
The (1) energy element is a measure of intensity or drive. A motivated person puts forth effort and
energised, directed
and sustained towards works hard. However, the quality of the effort must be considered as well as its intensity. High levels of
attaining a goal effort don’t necessarily lead to favourable job performance unless the effort is channelled in a (2) direction
that benefits the organisation. Effort that’s directed towards, and consistent with, organisational goals is the
kind of effort we want from employees. Finally, motivation includes a (3) persistence dimension. We want
employees to persist in putting forth effort to achieve those goals.
Motivating high levels of employee performance is an important organisational concern and managers
keep looking for answers. For example, a Gallup poll found that a large majority of US employees – some
73 per cent – aren’t excited about their work. As the researchers stated, ‘These employees are essentially
“checked out”. They’re sleepwalking through their workday, putting time, but not energy or passion,
into their work.’4 It’s no wonder, then, that both managers and academics want to understand and explain
employee motivation.
What do the early theories

of motivation say?
The 1950s and 1960s were a fruitful time for the development of motivation concepts. Four specific theories
formulated during this period are probably still the best-known explanations of employee motivation: the
hierarchy of needs theory, the three-needs theory, Theories X and Y, and the two-factor theory. You should
be familiar with these early theories for at least two reasons. First, they represent the foundation from
which contemporary theories grew. Second, practising managers regularly use these theories and their
terminology in explaining employee motivation. Let’s take a look at them.
hierarchy of needs
What is Maslow’s hierarchy of needs theory?
theory The best-known motivation theory is probably Abraham Maslow’s hierarchy of needs theory.5
Maslow’s theory that Maslow was a psychologist who proposed that within every person is a hierarchy of five needs:
there is a hierarchy • Physiological needs: food, drink, shelter, sex and other physical requirements.
of five human needs:
• Safety needs: security and protection from physical and emotional harm, as well as assurance that
physiological, safety,
social, esteem and self- physical needs will continue to be met.
actualisation • Social needs: affection, belongingness, acceptance and friendship.
9780655702412_CH21.indd 584 3/3/20 11:11 AM

Self-
actualisation
Esteem
Social
Safety
Physiological
Figure 21.1 Maslow’s hierarchy of needs

Source: A. H. Maslow, R. D. Frager (ed.) and J. Fadiman (ed.), Motivation and Personality, 3rd edn, © 1987, reproduced by permission of Pearson
Education Inc., Upper Saddle River, NJ.
• Esteem needs: internal esteem factors such as self-respect, autonomy and achievement, and external
esteem factors such as status, recognition and attention.
• Self-actualisation needs: growth, achieving one’s potential and self-fulfilment; the drive to become
what one is capable of becoming.
Maslow argued that an individual moves up the needs hierarchy from one level to the next. Each level in the
needs hierarchy must be substantially satisfied before the next need becomes dominant (see Figure 21.1).
This means that a person would initially be motivated to fulfil their physiological needs for shelter, food
and drink. Once they fulfilled those needs, the need for safety and security would become dominant, and three-needs
they would turn their attention to that issue. In addition, Maslow separated the five needs into higher and theory
McClelland’s theory,
lower levels. Physiological and safety needs were considered lower-order needs; social, esteem and self- which says that three
actualisation needs were considered higher-order needs. Lower-order needs are predominantly satisfied acquired (not innate)
externally, while higher-order needs are satisfied internally. needs – achievement,
power and affiliation –
How does Maslow’s theory explain motivation? Managers using Maslow’s hierarchy to motivate employees
are major motives at
do things to satisfy employees’ needs. But the theory also says that once a need is substantially satisfied, an work
individual isn’t motivated to satisfy that need. Therefore, to motivate someone, you need to understand what
need level that person is on in the hierarchy and focus on satisfying needs at or above that level.
need for
achievement
Maslow’s need theory has received wide recognition, especially among practising managers. Its
(nAch)
popularity probably can be attributed to the theory’s intuitive logic and ease of understanding.6 However, The drive to succeed
Maslow provided no empirical support for his theory, and several studies that sought to validate it could and excel in relation to a
not do so.7 So, while it’s an interesting theory, there is little evidence to suggest that people actually are set of standards
motivated by these needs or that they deal with their motivations as Maslow described. need for power
(nPow)
What is McClelland’s three-needs theory? The need to make
David McClelland also considered personal needs that motivate behaviour. He and his associates proposed others behave in a way
that they wouldn’t have
the three-needs theory, which says there are three acquired (not innate) needs that are major motives behaved otherwise
at work.8 These three needs are the need for achievement (nAch), which is the drive to succeed and
excel in relation to a set of standards; the need for power (nPow), which is the need to make others need for affiliation
behave in a way that they wouldn’t have behaved otherwise; and the need for affiliation (nAff), which is
(nAff )
The desire for friendly
the desire for friendly and close interpersonal relationships. Of these three needs, the need for achievement and close interpersonal
has been researched the most. relationships
9780655702412_CH21.indd 585 3/3/20 11:11 AM

People with a high need for achievement are striving for personal achievement rather than for the
trappings and rewards of success. They have a desire to do something better or more efficiently than it’s
been done before.9 They prefer jobs that offer personal responsibility for finding solutions to problems,
in which they can receive rapid and unambiguous feedback on their performance in order to tell whether
they’re improving, and in which they can set moderately challenging goals. High achievers avoid what
they perceive to be very easy or very difficult tasks. Also, a high need to achieve doesn’t necessarily lead
to being a good manager, especially in large organisations. That’s because high achievers focus on their
own accomplishments while good managers emphasise helping others accomplish their goals.10 McClelland
showed that employees can be trained to stimulate their achievement need by being in situations where
they have personal responsibility, feedback and moderate risks.11
The other two needs in this theory haven’t been researched as extensively as the need for achievement.
Theory X However, we do know that the best managers tend to be high in the need for power and low in the need
The assumption that
for affiliation.12
employees dislike
work, are lazy, avoid
responsibility and must What are McGregor’s Theory X and Theory Y?
be coerced to work Douglas McGregor proposed an alternative theory about what motivates people’s behaviour in their
workplace. He suggested two views of human nature: Theory X and Theory Y.13 Very simply, Theory X is
Theory Y
The assumption that a negative view of people that assumes workers have little ambition, dislike work, want to avoid responsibility
employees are creative, and need to be closely controlled to work effectively. Theory Y is a positive view that assumes employees
enjoy work, seek enjoy work, seek out and accept responsibility, and exercise self-direction. McGregor believed that Theory
responsibility and can
exercise self-direction Y assumptions should guide management practice and proposed that participation in decision making,
responsible and challenging jobs, and good group relations would maximise employee motivation.
two-factor theory Unfortunately, there’s no evidence to confirm that either set of assumptions is valid or that being a Theory
Herzberg’s motivation
Y manager is the only way to motivate employees.
theory, which proposes
that intrinsic factors
are related to job What is Herzberg’s two-factor theory?
satisfaction and Frederick Herzberg considered another possibility: that a person’s working conditions influence their
motivation, whereas
motivation.14 Herzberg’s two-factor theory (also called motivation-hygiene theory) was developed from
extrinsic factors are
associated with job his research into attitudes towards work and the factors that influenced job satisfaction (see Figure 21.2, and
dissatisfaction the From the Past to the Present box). At the time, people thought that individuals experienced some degree
MOTIVATORS HYGIENE FACTORS
Supervision
Company policy
Achievement Relationship with supervisor
Recognition Working conditions
Work itself Salary
Responsibility Relationship with peers
Advancement Personal life
Growth Relationship with employees
Status
Security
Extremely Neutral Extremely

satisfied dissatisfied
Figure 21.2 Herzberg’s two-factor theory
9780655702412_CH21.indd 586 3/3/20 11:11 AM

TRADITIONAL VIEW
Satisfied Dissatisfied
Motivators HERZBERG’S VIEW Hygiene factors

Satisfaction No satisfaction No dissatisfaction Dissatisfaction
Figure 21.3 Contrasting views of satisfaction–dissatisfaction

of job satisfaction ranging from ‘very satisfied’ to ‘very dissatisfied’15 and that their level of job satisfaction
affected the effort they put into their work.16 Herzberg wanted to know when people felt exceptionally good
(satisfied) or bad (dissatisfied) about their jobs. (These findings are shown in Figure 21.3.) He concluded
that the replies people gave when they felt good about their jobs were significantly different from the replies
they gave when they felt badly. When people felt good about their work, they tended to cite intrinsic factors
arising from the job itself such as achievement, recognition and responsibility. On the other hand, when
they were dissatisfied, they tended to cite extrinsic factors arising from the job context such as company
policy and administration, supervision, interpersonal relationships and working conditions.
Herzberg concluded that the factors that led to job satisfaction were separate and distinct from those
that led to job dissatisfaction. As shown in Figure 21.3, Herzberg proposed that job satisfaction and job
dissatisfaction were two distinct constructs that each existed along a continuum: the opposite of ‘satisfaction’
is ‘no satisfaction,’ and the opposite of ‘dissatisfaction’ is ‘no dissatisfaction’. The extrinsic factors that create
job dissatisfaction were called hygiene factors. When hygiene factors are missing or going poorly, people hygiene factors
get annoyed, frustrated and dissatisfied. When these factors are adequate, people won’t be dissatisfied, but Factors that eliminate
job dissatisfaction but
they won’t be satisfied either. As a simple example, people who work in office environments expect that
don’t motivate
when they get to work in the morning they can log onto their computer quickly and easily and get on with
their work. If their computer takes 30 minutes to start up in the morning, they will quickly become annoyed
and dissatisfied with their work environment. If the organisation then fixes the problem so their computer
logs on within a minute or two, they will stop being annoyed and frustrated and dissatisfied. But they won’t
then become very satisfied, committed and motivated about their jobs or their organisation.
The implications for motivation are that if managers seek to eliminate or redress hygiene factors, they
can keep people from being dissatisfied with their jobs and their organisations but that won’t necessarily
motivate them to work harder or achieve more. To motivate people, Herzberg suggested emphasising
motivators, the intrinsic factors having to do with the job itself. motivators
Herzberg’s theory enjoyed wide popularity from the mid-1960s to the early 1980s, despite criticisms of Intrinsic factors that
have to do with the
his procedures and methodology. Although some critics said his theory was too simplistic, it has influenced
job itself and serve to
how we currently design jobs. motivate individuals
The early theories of motivation provided a foundation for understanding human behaviour in
the workplace and how managers might motivate greater efforts from employees. As these theories
and researchers have been questioned and contested, more valid explanations of motivation have been
developed. Let’s consider these next.
9780655702412_CH21.indd 587 3/3/20 11:11 AM

Job design: How should work tasks get done?

Deciding how work tasks should be performed has long been of Herzberg’s findings in identifying the five core job dimensions,
interest to managers.17 From scientific management’s attempts to especially autonomy. As managers and organisations continue to
find the ‘one best way’ to do work, to the Hawthorne studies that search for work designs that will energise and engage employees,
attempted to unravel patterns of human behaviour at work, Herzberg’s study of when people felt good and felt bad at work
researchers have been curious about the ideal approach to work continues as a classic.
design. In the 1950s, Frederick Herzberg and his associates began Discuss this:
research to ‘discover the importance of attitudes toward work and • Historically, jobs such as being a factory worker, a fruit picker or
the experiences both good and bad, that workers reported’. He a garment manufacturer have been designed to be very
wanted to know the kinds of things that made people at their work structured and repetitive.This gives employees who perform
happy and satisfied or unhappy and dissatisfied.What he discovered such jobs very little autonomy to determine what they do and
changed the way we view job design.The fact that job dissatisfaction how they do it. How do you think that affects employee
and job satisfaction were the results of different aspects of the motivation?
work environment was an important finding. Herzberg’s two-factor • Which factors in the workplace and in job design are
theory gave practising managers insights into both job context and motivators for employees today? Which factors do you think
job content.And if you wanted to motivate employees, you’d better are hygiene factors? (Hint:The hygiene factors are the ones that
focus more on the job content aspects (the motivators) than on people expect to get as ‘usual work conditions’ and will be
the job context aspects (the hygiene factors). annoyed and unhappy when they don’t.)
In addition, Herzberg’s research stimulated additional interest in
work design. The job characteristics model, for one, built upon
How do the contemporary theories

explain motivation?
At Electronic Arts (EA), one of the world’s largest video game designers, employees put in gruelling
hours developing games. However, EA takes care of its game developers by providing them with workday
intramural sports leagues, pinball arcades, group fitness classes and an open invitation to bring pets to
work.18 With some 9000 workers in more than 20 countries, EA’s managers need to understand employee
motivation.
The theories we look at in this section – goal setting, job design, equity and expectancy – represent
current explanations of employee motivation. Although maybe not as well known as those we just discussed,
these theories are backed by research.19
What is goal-setting theory?

Goals CAN be powerful motivators!
goal-setting Research on goal-setting theory shows that goal specificity, challenge and feedback significantly influence
theory
The proposition that performance.20 Goal-setting theory says that specific goals increase performance and that difficult
specific goals increase goals, when accepted, result in higher performance than do easy goals. Let’s consider how goal-setting
performance and that theory helps us understand people’s motivation.
difficult goals, when
• Working towards a goal is a major source of job motivation. Studies on goal setting have demonstrated
accepted, result in higher
performance than do that specific and challenging goals are superior motivating forces.21 Such goals produce a higher
easy goals output than does the generalised goal of ‘do your best’. The specificity of the goal itself acts as an
9780655702412_CH21.indd 588 3/3/20 11:11 AM

internal stimulus. For example, when a sales

rep commits to making eight sales calls daily,
this intention gives them a specific goal to try
to attain.
• Will employees try harder if they have the
opportunity to participate in the setting of
goals? Not always. In some cases, participatively
set goals elicit superior performance; in
other cases, individuals performed best when
their manager assigned goals. However,
participation is probably preferable to
assigning goals when employees might resist
accepting difficult challenges as employees are
more likely to accept and support goals into Atlassian, an Australian software development company based in Sydney, keeps
which they had input.22 its staff motivated and challenged by letting employees combine work and their
• We know that people will do better if they personal passions. One way Atlassian does this is by holding ShipIt days, on
which employees develop their own software projects and present them to the
get feedback on how well they’re progressing
organisation. The company also has a Hack House, a beachside house in Sydney,
towards their goals because feedback helps where teams develop software while enjoying ‘sand, surf, beer and code’.
identify discrepancies between what they’ve © Atlassian
done and what they want to do. But all
feedback isn’t equally effective. Self-generated feedback – where an employee monitors their
own progress – has been shown to be a more powerful motivator than feedback coming from
someone else.23
Three other contingencies besides feedback influence the goal–performance relationship: goal
commitment, adequate self-efficacy and national culture.
• Goal-setting theory assumes that an individual is committed to the goal. Commitment is most likely
when goals are made public, when the individual has an internal locus of control, and when the goals
are self-set rather than assigned.24
• Self-efficacy refers to an individual’s belief that they are capable of performing a task.25 The higher self-efficacy
your self-efficacy, the more confidence you have in your ability to succeed in a task. So, in difficult An individual’s belief
that they are capable of
situations, we find that people with low self-efficacy are likely to reduce their effort or give up
performing a task
altogether, whereas those with high self-efficacy will try harder to master the challenge.26 In addition,
individuals with high self-efficacy seem to respond to negative feedback with increased effort and
motivation, whereas those with low self-efficacy are likely to reduce their effort when given negative
feedback.27
• The value of goal-setting theory depends on the national culture. It’s well adapted to countries
such as Australia and the United States because its main ideas align rather well with those cultures.
It assumes that subordinates will be reasonably independent (not a high score on power distance),
that people will seek challenging goals (low in uncertainty avoidance), and that performance is
considered important by both managers and subordinates (high in assertiveness). Don’t expect
goal setting to lead to higher employee performance in countries where the cultural characteristics
aren’t like this.
Figure 21.4 summarises the relationships among goals, motivation and performance. Our overall
conclusion: The intention to work towards hard and specific goals is a powerful motivating force. Under
the proper conditions, it can lead to higher performance. However, there’s no evidence that such goals are
associated with increased job satisfaction.28
9780655702412_CH21.indd 589 3/3/20 11:11 AM

• Goals are public

• Individual has internal
locus of control
• Self-set goals
Self-ef ficacy
Committed Self-generated
to achieving feedback on
Motivation progress Higher performance
Goals (intention to work plus
towards goal) goal achievement
Accepted
• Specific
• Dif ficult National
culture
Participation
in setting
Figure 21.4 Goal-setting theory
How does job design influence motivation?

Yes – you can design jobs that motivate!
job design Because managers want to motivate individuals on the job, we need to look at ways to d esign motivating
The way tasks are
combined to form jobs. If you look closely at what an organisation is and how it works, you’ll find that it’s composed of
complete jobs thousands of tasks. These tasks are, in turn, aggregated into jobs. We use the term job design to refer to
the way tasks are combined to form complete jobs.
The jobs that people perform in an organisation
shouldn’t evolve by chance. Managers should
design jobs deliberately and thoughtfully to reflect
the demands of the changing environment, the
organisation’s technology, and employees’ skills,
abilities and preferences.29 When jobs are designed
like that, employees are motivated to work hard.
What are the ways that managers can design
motivating jobs? We can answer that with the
job characteristics model (JCM) developed
by J. Richard Hackman and Greg R. Oldham.30
According to Hackman and Oldham, any job
can be described in terms of the following five core
job dimensions:
• Skill variety: the degree to which the job
The job of this paediatric nurse caring for newborn babies at a children’s requires a variety of activities so the worker can
hospital in Germany scores high on task significance as she uses her specialised
knowledge and skills in caring for children from infancy through the late teen use a number of different skills and talents.
years, and their families. Task significance contributes to the meaningfulness of • Task identity: the degree to which the job
her job and high internal work motivation. requires completion of a whole and identifiable
Ulrich Baumgarten/Getty Images
piece of work.
9780655702412_CH21.indd 590 3/3/20 11:11 AM

• Task significance: the degree to which the job affects the lives or work of other people job characteristics
model (JCM)
• Autonomy: the degree to which the job provides freedom, independence and discretion to the
A framework for
individual in scheduling the work and in determining the procedures to be used in carrying it out. analysing and designing
• Feedback: the degree to which carrying out the work activities required by the job results in the jobs that identifies
individual’s obtaining direct and clear information about the effectiveness of their performance. five primary core
job dimensions, their
Figure 21.5 presents the model. The first three dimensions – skill variety, task identity and task interrelationships
significance – combine to create meaningful work. What we mean is that if these three characteristics exist in and their impact on
a job, we can predict that the person will view their job as being important, valuable and worthwhile. Notice, outcomes
too, that jobs that possess autonomy give the job incumbent a feeling of personal responsibility for the
results and that, if a job provides feedback, the employee will know how effectively they are performing.
From a motivational point of view, the JCM suggests that internal rewards are obtained when an
employee learns (knowledge of results through feedback) that they personally (experienced responsibility
through autonomy of work) have performed well on a task that they care about (experienced meaningfulness
through skill variety, task identity and/or task significance). The more these three conditions characterise
a job, the greater the employee’s motivation, performance and satisfaction and the lower their absenteeism
and the likelihood of resigning. As the model shows, the links between the job dimensions and the outcomes
are moderated by the strength of the individual’s growth need (the person’s desire for self-esteem and self-
actualisation). Individuals with a high growth need are more likely to experience the critical psychological
states and respond positively when their jobs include the core dimensions than are individuals with a low
growth need. This distinction may explain the mixed results with job enrichment (vertical expansion of job enrichment
a job by adding planning and evaluation responsibilities): Individuals with low growth need don’t tend to The vertical expansion
of a job by adding
achieve high performance or satisfaction by having their jobs enriched.
planning and evaluation
The JCM provides significant guidance to managers for job design for both individuals and teams.31 responsibilities
It shows managers how jobs can be changed in order to improve on each of the five core job dimensions.
Core job Critical Personal

dimensions psychological and work
states outcomes
Skill variety Experienced High internal

Task identity meaningfulness of work motivation
Task significance the work
High-quality
work performance
Experienced
Autonomy responsibility for
outcomes of the work High satisfaction
with the work
Knowledge of the Low absenteeism

Feedback actual results of the and turnover
work activities
Employee
growth-need
strength
Figure 21.5 Job characteristics model

Source: J. R. Hackman, ‘Work Design’, in J. R. Hackman and J. L. Suttle (eds), Improving Life at Work (Glenview, IL: Scott, Foresman, 1977), p. 129. With
permission of the authors.
9780655702412_CH21.indd 591 3/3/20 11:11 AM

Combining tasks increases skill variety and task identity. Forming natural work teams increases task identity
and task significance. Expanding jobs vertically increases autonomy. Establishing client relationships improves
skill variety and fosters feedback. Feedback can also be enhanced by opening feedback channels. Using the
JCM, managers can tailor job characteristics to individual employees to make their work more rewarding.
What is equity theory?

Do you ever wonder what kind of mark the person sitting next to you in class gets on a test or on a major
equity theory class assignment? Most of us do! Being human, we tend to compare ourselves with others. Equity theory,
The theory that an developed by J. Stacey Adams, proposes that employees compare what they get from a job (outcomes) in
employee compares
relation to what they put into it (inputs) and then compare their inputs–outcomes ratio with the inputs–
their job’s input-to-
outcome ratio with outcomes ratios of relevant others (see Table 21.1).
that of relevant others The term equity is related to the concept of fairness and equitable treatment compared with others
and then corrects any who behave in similar ways. There is considerable evidence that employees compare themselves to others
inequity
and that inequities influence how much effort employees exert.32 If an employee perceives their ratio to be
equitable in comparison to those of relevant others, there’s no problem. However, if the ratio is inequitable,
they view themself as under-rewarded or over-rewarded.
Imagine you found yourself in the following situation. You graduate from university and someone offers
you a job paying $50,000 a year. You’d probably jump at the offer and report to work enthusiastic, ready to
tackle whatever needed to be done and certainly satisfied with your pay. How would you react, though, if you
found out a month into the job that a colleague – another recent graduate, your age, with comparable marks
from a comparable university and with comparable work experience – was getting $55,000 a year? You’d
probably be upset! Even though in absolute terms $50,000 is a lot of money for a new graduate to make (and
you know it!), that suddenly isn’t the issue. Now you see the issue as what you believe is fair – what is equitable.
When inequities occur, employees attempt to do something about it.33 The result might be lower or
higher productivity, improved or reduced quality of output, increased absenteeism or voluntary resignation.
For example, an employee who thinks they are under-rewarded might try to fix that inequity by reducing
the amount of effort they put into their work to a level they think reflects the level of reward they receive.
Or they might try to increase their rewards by negotiating a pay increase. If they perceive that the inequity
can’t be changed, they might seek a job at another organisation that provides more equitable rewards.
referent The referent – the other persons, systems or selves individuals compare themselves against in order to
The persons, systems assess equity – is an important variable in equity theory.34 Each of the three referent categories is important.
or selves against which
(1) The ‘persons’ category includes other individuals with similar jobs in the same organisation but also
individuals compare
themselves to assess includes friends, neighbours or professional associates. Based on what they hear at work or read about in
equity newspapers or trade journals, employees compare their pay with that of others. (2) The ‘system’ category
includes organisational pay policies, procedures and allocation. (3) The ‘self’ category refers to inputs–
outcomes ratios that are unique to the individual. It reflects past personal experiences and contacts and is
influenced by criteria such as past jobs or family commitments.
Table 21.1 Equity theory relationships

Perceived Ratio Comparison* Employee’s Assessment
Outcomes A Outcomes B
Inputs A
< Inputs B
Inequity (under-rewarded)
Inputs A
= Inputs B
Equity
Inputs A
> Inputs B Inequity (over-rewarded)
*Person A is the employee, and Person B is a relevant other or referent.
9780655702412_CH21.indd 592 3/3/20 11:11 AM

Originally, equity theory focused on distributive justice, which is the perceived fairness of the distributive justice
amount and allocation of rewards among individuals. More recent research has focused on looking at issues Perceived fairness of the
amount and allocation
of procedural justice, which is the perceived fairness of the process used to determine the distribution
of rewards among
of rewards. This research shows that distributive justice has a greater influence on employee satisfaction individuals
than procedural justice, while procedural justice tends to affect an employee’s organisational commitment,
procedural justice
trust in their boss and intention to quit.35 The implications for managers are that they should openly
Perceived fairness
share information on how allocation decisions are made, follow consistent and unbiased procedures, and of the process used
engage in similar practices to increase the perception of procedural justice. By increasing the perception of to determine the
procedural justice, employees are likely to view their bosses and the organisation as positive even if they’re distribution of rewards
dissatisfied with pay, promotions and other personal outcomes.
How does expectancy theory explain motivation?

• How hard do I have to work to achieve a certain level of performance?
• Can I actually do that?
• What reward will I get for reaching it?
• How much do I want that reward?
The most comprehensive explanation of how employees are motivated is Victor Vroom’s expectancy expectancy
theory.36 Although the theory has its critics,37 most research evidence supports it.38 Expectancy theory theory
The theory that an
states that an individual tends to act in a certain way based on the expectation that the act will be followed
individual tends to act
by a given outcome and on the attractiveness of that outcome to the individual. It includes three variables in a certain way, based
or relationships (see Figure 21.6): on the expectation that
• Expectancy or effort–performance linkage is the probability perceived by the individual that exerting a the act will be followed
by a given outcome and
given amount of effort will lead to a certain level of performance. In other words, how hard do I have
on the attractiveness
to work to achieve a certain level of performance, and can I actually achieve that level? of that outcome to the
• Instrumentality or performance–reward linkage is the degree to which the individual believes that individual
performing at a particular level will attain a desired outcome. In simple terms, what reward will
performing at that level of performance get me?
• Valence or attractiveness of reward is the importance that the individual places on the potential
outcome or reward that can be achieved on the job. Valence considers both the goals and the needs
of the individual. This means: how attractive is the reward to me, and does it help me to achieve my
own personal goals?
The key to expectancy theory is understanding an individual’s goal and the linkages between effort
and performance, between performance and rewards, and finally, between rewards and individual
goal satisfaction. It emphasises payoffs or rewards. As a result, we have to believe that the rewards an
Individual Individual Organisational Individual

A performance B rewards C goals
ef fort
A = Ef fort–performance linkage (expectancy)

B = Performance–reward linkage (instrumentality)
C = Attractiveness (valence)
Figure 21.6 Expectancy model
9780655702412_CH21.indd 593 3/3/20 11:12 AM

organisation is offering align with what

the individual wants. Expectancy theory
recognises that there is no universal principle
for explaining what motivates individuals
and thus stresses that managers should strive
to understand why employees view certain
outcomes as attractive or unattractive. After
all, we want to reward individuals with those
things they value positively. Also, expectancy
theory emphasises expected behaviours. Do
employees know what is expected of them and
how they’ll be evaluated? Finally, the theory
is concerned with perceptions. Reality is
irrelevant. An individual’s own perceptions of
performance, reward and goal outcomes, not
the outcomes themselves, will determine their
Foxconn chairman and founder Terry Gou (centre) honoured 140 employees in
Shenzhen, China, for their excellent performance at an awards and recognition motivation (level of effort). So, as we explained
banquet for them and their relatives. Recognition programs that express appreciation in Chapter 19, what an employee learns about
for a job well done play a powerful role in motivating appropriate employee behaviour. the actual outcomes and rewards that result
Chen Wen/ColourChinaPhoto/Associated Press
from their efforts will affect how motivated
they are to make those efforts in the future.
How can we integrate contemporary

motivation theories?
Many of the ideas underlying the contemporary motivation theories are complementary, and you’ll
understand better how to motivate people if you see how the theories fit together.39 Figure 21.7 presents
a model that integrates much of what we know about motivation. Its basic foundation is the expectancy
model. Let’s work through the model, starting on the left.
• The individual effort box has an arrow leading into it. This arrow flows from the individual’s goals.
Consistent with goal-setting theory, this goals–effort link is meant to illustrate that goals direct
behaviour.
• Expectancy theory predicts that an employee will exert a high level of effort if they perceive a strong
relationship between effort and performance, performance and rewards, and rewards and satisfaction
of personal goals. Each of these relationships is, in turn, influenced by certain factors. You can see from
the model that the level of individual performance is determined not only by the level of individual
effort but also by the individual’s ability to perform and by whether the organisation has a fair and
objective performance evaluation system. The performance–reward relationship will be strong if the
individual perceives that it is performance (rather than seniority, personal favourites or some other
criterion) that is rewarded. The final link in expectancy theory is the rewards–goal relationship.
• The traditional need theories come into play at this point. Motivation would be high to the degree
that the rewards an individual received for their high performance satisfied the dominant needs
consistent with their individual goals.
A closer look at the model also shows that it considers other theories.
• Achievement-need is seen in that the high achiever isn’t motivated by the organisation’s assessment
of their performance or organisational rewards, hence the jump from effort to individual goals for
those with a high nAch. Remember that high achievers are internally driven as long as the jobs
9780655702412_CH21.indd 594 3/3/20 11:12 AM

High
nAch
Equity
Per formance comparison
evaluation OA OB
criteria :
IA I B
Job
Job
Ability design
design
Individual Individual Organisational Individual

ef fort per formance rewards goals
Objective
per formance Dominant
evaluation needs
system
Reinforcement
Goals
direct
behaviour
Figure 21.7 Integrating contemporary theories of motivation
they’re doing provide them with personal responsibility, feedback and moderate risks. They’re not
concerned with the effort–performance, performance–reward or rewards–goals linkages.
• Reinforcement theory is seen in the model by recognising that the organisation’s rewards reinforce
the individual’s performance. If managers have designed a reward system that is seen by employees
as ‘paying off’ for good performance, the rewards will reinforce and encourage continued good
performance.
• Rewards also play a key part in equity theory. Individuals will compare the rewards (outcomes) they
have received from the inputs or efforts they made with the inputs–outcomes ratio of relevant others.
If inequities exist, the effort expended may be influenced.
• Finally, the JCM is seen in this integrative model. Task characteristics (job design) influence job
motivation at two places. First, jobs that are designed around the five job dimensions are likely to
lead to higher actual job performance because the individual’s motivation will be stimulated by the
job itself – that is, they will increase the linkage between effort and performance. Second, jobs that
are designed around the five job dimensions also increase an employee’s control over key elements
in their work. Therefore, jobs that offer autonomy, feedback and similar task characteristics help to
satisfy the individual goals of employees who desire greater control over their work.
9780655702412_CH21.indd 595 3/3/20 11:12 AM

Student than generalised goals; participation in setting goals as preferable to assigning

goals, but not always; feedback to guide and motivate behaviour, especially
Learning self-generated feedback; and contingencies that affect goal setting, such as goal
Centre commitment, self-efficacy and national culture.

The job characteristics model is based on five core job dimensions (skill
variety, task identity, task significance, autonomy and feedback) that are used
to design motivating jobs.
Reviewing the learning objectives Equity theory focuses on how employees compare their inputs–outcomes
ratios to relevant others’ ratios. A perception of inequity will cause an employee
Learning Objective 1. Define and explain motivation.
to do something about it. Distributive justice has a greater influence on employee
Motivation is the process by which a person’s efforts are energised, directed and satisfaction than does procedural justice.
sustained towards attaining a goal. Expectancy theory says that an individual tends to act in a certain way based
The energy element is a measure of intensity or drive. The high level of on the expectation that the act will be followed by a desired outcome. Expectancy
effort needs to be directed in ways that help the organisation achieve its goals. is the effort–performance linkage (How much effort do I need to exert to achieve
Employees must persist in putting forth effort to achieve those goals. a certain level of performance?); instrumentality is the performance–reward
linkage (Achieving at a certain level of performance will get me what reward?);
Learning Objective 2. Compare and contrast early
and valence is the attractiveness of the reward (Is the reward what I want?).
theories of motivation.
Individuals move up the hierarchy of five needs (physiological, safety, social,
esteem and self-actualisation) as needs are substantially satisfied. A need that’s
❶ Most of us have to work for a living, and a job is a central part of our lives.
substantially satisfied no longer motivates.
So, why do managers have to worry so much about employee motivation
Three-needs theory proposed three acquired needs that are major motives in
issues?
work: need for achievement, need for affiliation and need for power.
❷ What is motivation? Explain the three key elements of motivation.
A Theory X manager believes that people don’t like to work, or won’t seek
➌ Contrast lower-order and higher-order needs in Maslow’s needs hierarchy.
out responsibility, so they have to be threatened and coerced to work. A Theory
➍ What role would money play in (a) the hierarchy of needs theory, (b) two-
Y manager assumes that people like to work and seek out responsibility, so they
factor theory, (c) equity theory, (d) expectancy theory, and (e) motivating
will exercise self-motivation and self-direction.
employees with a high nAch?
Herzberg’s theory proposed that intrinsic factors associated with job
❺ What are some of the possible consequences of employees perceiving an
satisfaction were what motivated people. Extrinsic factors associated with job
inequity between their inputs and outcomes and those of others?
dissatisfaction simply kept people from being dissatisfied.
➏ Many job design experts who have studied the changing nature of work
Learning Objective 3. Compare and contrast say that people do their best work when they’re motivated by a sense of
contemporary theories of motivation. purpose rather than by the pursuit of money. Do you agree? Explain your
position. What are the implications for managers?
Goal-setting theory says that specific goals increase performance, and difficult
➐ Can an individual be too motivated? Discuss.
goals, when accepted, result in higher performance than do easy goals. Important
➑ What challenges do managers face in motivating today’s workforce?
points in goal-setting theory include intention to work towards a goal as a major
source of job motivation; specific hard goals to produce higher levels of output

BEING A GOOD MOTIVATOR
Great managers are great motivators. They’re able to find the magic ‘potion’ that stimulates employees to reach their full potential. The fact that there are hundreds
of business books on motivation and dozens of experts who make a living by putting on motivation seminars only confirms the importance of this topic to managerial
effectiveness.
9780655702412_CH21.indd 596 3/3/20 11:12 AM


PERSONAL
P I A INVENTORY
ASSESSMENT
Work motivation indicator

How motivated are you? Use this PIA to assess your own level of work motivation.
You could also use it to assess others’ levels of work motivation.
Skill basics key is to identify what needs are dominant and unsatisfied, then choose
Attempting to motivate others is a complex task. Unfortunately, no universal rewards that will help satisfy those needs.
motivators are available that are guaranteed to work on anyone, anywhere. • Link rewards to performance. The rewards you choose should be allocated
That said, we do know a lot about what works and doesn’t work in terms of so as to be contingent on performance. Importantly, the person you’re trying
motivating others. The following suggestions summarise the essence of what we to motivate must perceive a clear linkage. Regardless of how closely rewards
know is likely to be effective.40 are actually correlated to performance criteria, it’s perception that counts. If
• Recognise individual differences. People have different needs. Don’t treat individuals perceive this relationship to be low, motivation and performance
them all alike. Moreover, spend the time necessary to understand what’s will suffer.
important to each person. This will allow you to individualise goals, level • Maintain equity. Rewards should be perceived by people in the organisation
of involvement and rewards to align with individual needs. as equating with the inputs they bring to their job. At a simplistic level,
• Use goals and feedback. People prefer to have goals. If you’re in a position it means that experience, skills, abilities, effort and other obvious inputs
to assign or participate in setting goals for others, help them to set hard and should explain differences in performance and, hence, pay, job assignments
specific goals. These are most likely to motivate. In addition, individuals are and other obvious rewards.
most likely to be motivated when they get feedback on how well they are Practising the skill
faring in the pursuit of their goals. Read through the scenario and follow the directions at the end of it.
• Allow people to participate in decisions that affect them. If you are in
Sean’s first job out of university is as a supervisor for Lyle’s Catering Services.
a position to influence the level of participation, actively seek input from
One of Lyle’s main businesses is managing the food service operations at nursing
the person you seek to motivate. Employees are especially likely to respond
homes and hospitals.
positively when allowed to participate in setting work goals, choosing their
Sean has been given responsibility for the cafeteria at St Paul Hospital. He
benefit packages, solving productivity and quality problems, and the like.
has a staff of approximately 12 full-time and 15 part-time workers. The cafeteria
• Link rewards to unsatisfied needs. The second and third recommendations
is open seven days a week, from 6:30 a.m. until 8 p.m.
above apply most directly to managers or team leaders trying to motivate
Sean has been in the job eight months and has become frustrated by the high
their employees or team members. Effectively linking rewards to unsatisfied
employee turnover. Since he’s been on the job, three full-time and six part-time
needs is a more generalisable action: it applies to motivating colleagues,
people have quit. Sean reviewed the personnel records for the past five years and
friends, spouses, customers – as well as employees and team members. It
this pattern has been a constant. He’s frustrated by the cost and time involved in
builds on the first recommendation above and on individual differences.
continually hiring and training new people. He’s decided he needs to do something.
Depending on your position in an organisation and your resources, the
Sean has begun informally talking to employees. None of them seem
rewards you control will vary. For example, senior-level executives typically
particularly enthusiastic about their jobs. Even some of the ‘old-timers’ – who’ve
can control pay increases, bonuses, promotion decisions, job assignments
worked in the cafeteria for six years or more – have little enthusiasm for their
and training decisions. They also can usually control job design such as
work. In fact, the part-timers seem more motivated than the full-timers, even
allowing employees more freedom and control over their work, improving
though the average part-timer makes much less money than the full-time staff.
working conditions, increasing social interactions in the workplace or
The class should form into small groups. Assume you are Sean. How can you
modifying the workload. But everyone can offer others rewards such as
improve the staff’s motivation and reduce the turnover rate?
recognition or providing sympathetic and sensitive help with problems. The
9780655702412_CH21.indd 597 3/3/20 11:12 AM

Mini cases
21.1 Battling bugs and vanquishing viruses
Channelling passion into protection
You used to be able to tell who the bad guys were. But in our digital can hire. If you find them in any part of the world, you just go after them.’
online world, those days are long gone. Now, the bad guys are faceless The response-centre team’s makeup reflects that. For example, one senior
and anonymous and they can inflict all kinds of damage on individuals, researcher is from Hungary; another is from Iceland; and another works out
businesses, governments and other organisations. Surveys show that data of her home in Florida. But they all share something in common: they’re all
breach attacks are happening with alarming regularity. And while your motivated by solving problems.
home and work computers are hopefully well protected from data theft and For Symantec, the launch of the Blaster-B worm, a particularly nasty
viruses, don’t think that you’re in the clear. The newest targets for data virus, in 2003 inspired a new approach to managing, motivating and
thieves are smartphones and other mobile devices. rewarding its virus-hunting teams. The domino effect of Blaster-B and other
For Symantec, one of the world’s largest software and security technology viruses spawned by it meant that front-line software analysts were working
companies, fighting and beating digital threats is a constant battle.41 around the clock for almost two weeks. The ‘employee burnout’ potential
Symantec, which designs content and network security software for both made the company realise that its virus hunting needed to be supported
consumers and businesses, reflects the realities facing many o rganisations by a deeper pool of talent. Now, the virus-hunting team has hundreds
today – quickly shifting customer expectations and continuously emerging of members and managers can rotate people from the front lines, where
global competitors and global threats. ‘Imagine what life would be like if they’re responsible for responding to new security threats that crop up, into
your product were never finished, if your work were never done, and if your groups where they can help with new-product development. Others write
market shifted 30 times a day.’ Sounds pretty crazy, doesn’t it? But for the internal research papers. Still others are assigned to develop new tools that
computer-virus hunters and security experts at Symantec, it’s the reality of will help their colleagues battle the next wave of threats.
their daily work. But the goals for managing the virus hunters are to ‘try to take the chaos
Managing talented people in such an environment can be quite out, to make the exciting boring’, to have a predictable and well-defined
challenging. For example, at the company’s well-obscured Dublin facility, process for dealing with the virus threats, and to spread work evenly to
operations manager Patrick Fitzgerald must keep his engineers and the company’s facilities around the world. It’s a managerial challenge the
researchers focused 24/7 on identifying and combating what the bad guys company’s managers have embraced.
are throwing out there. When Dublin’s team finishes its day, colleagues in ❶ Keeping professionals excited about work that is routine and
Santa Monica take over. When the US team finishes its day, it hands over standardised and chaotic is a major challenge for Symantec’s managers.
to the team in Tokyo, who then hands back to D
ublin for the new day. It’s a How could they maintain an environment that motivates virus h unters
frenetic, chaotic, challenging work environment that spans the entire globe. to be innovative and professional?
Symantec’s virus hunters around the world deal with some 20,000 ❷ What do you think motivates virus hunters? If Symantec achieved its
virus samples each month, not all of which are unique, stand-alone viruses. goal of making virus hunting less chaotic and exciting, do you think
To make the hunters’ jobs even more interesting, computer attacks are that would make its virus hunters more or less motivated?
increasingly being spread by criminals around the world wanting to steal ➌ What kinds of rewards should Symantec use to
recognise the
information, whether corporate data or personal user account information, achievements of its virus hunters?
that can be used in fraud. Dealing with these critical and time-sensitive ➍ Go to Symantec’s website (www.symantec.com) and look up information
issues requires special talents. The response-centre team is a diverse about the company. What can you tell about its emphasis on customer
group whose members weren’t easy to find. ‘It’s not as if colleges are service and innovation? In what ways does the organisation support its
creating thousands of anti-malware or security experts every year that we employees in servicing customers and in being innovative?
21.2 One for the money . . .

Money = happiness, or does it?
Does money buy happiness? Several of the 120 employees at Gravity minimum wage in the US is just over US$7 an hour, and the average salary
Payments, a credit card processing company based in Seattle, are about to at Gravity Payments at the time was US$48,000, that’s a pretty big deal!
find out.42 The company’s founder, 33-year-old Dan Price, made the news To pay for the salary increase, Price took a pay cut from his own annual US$1
in April 2015 when he decided to put everyone in the company (including million salary and used 75–80 per cent of the company’s profits to help
himself!) on a new ‘minimum wage’ of US$70,000. Given that the national cover the US$1.8 million total cost of the plan.
9780655702412_CH21.indd 598 3/3/20 11:12 AM

21.2 One for the money . . . continued

Why did Price do it? He said that he had been thinking about employee In the wake of Price’s announcement, customer enquiries jumped from
pay for a while, especially after reading several news reports about the 30 per month to 2000 in two weeks. In an industry in which customer
glaring pay disparities between corporate CEOs and employees, which he retention rates average about 68 per cent, Gravity has had a 91 per cent
says struck him as ‘ridiculous’ and ‘absurd’. Price had also read an article retention rate for the past three years. Revenue rates and profits have also
on happiness by two Princeton researchers (one a Nobel Prize-winning doubled, and the company has had to hire more staff, some of whom took
psychologist) who had surveyed 450,000 US residents on whether money significant pay cuts to join Gravity because, as one new employee put it,
could buy happiness – both as it affected overall happiness and day-to- ‘I spent years chasing the money. Now I’m looking for something fun and
day life. The researchers concluded that people claimed to be happier with meaningful.’
each doubling of income, but only to the point where their income reached What will happen in the longer term remains unclear. Will employees
about US$75,000 a year. Learning how friends and employees were dealing be less motivated to work to be promoted to higher levels of responsibility?
with having to make ends meet on low incomes also made him realise that Will employees who put in additional effort above and beyond their current
‘I needed to take a bold action instead of waiting around for someone tasks lose the incentive to do so? (‘Why should I work harder if we all get
else to do something. When employees are making a less-than-workable the same pay?’) Will Price himself lose the incentive to grow the c ompany?
income, it’s distracting . . . Paying more results in less distraction, greater What will happen if it becomes less profitable? Only time will tell.
autonomy . . . all things leading to high levels of engagement and ultimately ❶ Look back at the chapter-opening ‘Fact or Fiction’ and how it was
better business outcomes.’ ‘debunked’. Evaluate this wage decision in light of that.
The company did lose two of its ‘rock-star’ employees who reportedly ❷ Explain each of the employee productivity/motivation concerns. Which
thought it was unfair that other employees got big raises without contributing of these do you think is most critical? Why?
as much to the company’s performance. Some clients also left because they ➌ Expectancy theory says employees are motivated when they see a clear
anticipated that fee increases would be used to pay for the new salaries, or link between effort, p erformance and rewards. By that logic, do you
because they felt Price’s actions were a political statement or a PR stunt. think employees would find Price’s approach to be m
otivating or de-
Price and his plan have also attracted an overwhelming amount of public motivating?
attention and commentary, with commentators calling it everything from ➍ What problem(s) might managers face under this new pay approach,
‘inspired’ to ‘socialism’ and ‘doomed to fail’. But the business c onsequences and how could they use knowledge about employee motivation to help
have been mostly positive. them deal with those problem(s)?
References
1. P. Bronson, ‘What Should I Do with My Life Now?’, Fast Company, April 2009, M. L. Ambrose and C. T. Kulik, ‘Old Friends, New Faces: Motivation Research in the
pp. 35–7. 1990s’, Journal of Management, vol. 25, no. 3 (1999), pp. 231–92.
2. R. M. Steers, R. T. Mowday and D. L. Shapiro, ‘The Future of Work Motivation Theory’, 8. D. C. McClelland, The Achieving Society (New York: Van Nostrand Reinhold, 1961);
Academy of Management Review, July 2004, pp. 379–87. J. W. Atkinson and J. O. Raynor, Motivation and Achievement (Washington, DC: Winston,
3. N. Ellemers, D. De Gilder and S. A. Haslam, ‘Motivating Individuals and Groups at Work: 1974); D. C. McClelland, Power: The Inner Experience (New York: Irvington, 1975); and
A Social Identity Perspective on Leadership and Group Performance’, Academy of M. J. Stahl, Managerial and Technical Motivation: Assessing Needs for Achievement,
Management Review, July 2004, pp. 459–78. Power and Affiliation (New York: Praeger, 1986).
4. J. Krueger and E. Killham, ‘At Work, Feeling Good Matters’, Gallup Management 9. D. C. McClelland, The Achieving Society (New York: Van Nostrand Reinhold, 1961).
Journal, 8 December 2005. 10. D. C. McClelland, Power: The Inner Experience (New York: Irvington, 1975); and
5. A. Maslow, Motivation and Personality (New York: McGraw-Hill, 1954); A. Maslow, D. C. McClelland and D. H. Burnham, ‘Power is the Great Motivator’, Harvard Business
D. C. Stephens and G. Heil, Maslow on Management (New York: John Wiley & Sons, Review (March–April 1976), pp. 100–10.
1998); M. L. Ambrose and C. T. Kulik, ‘Old Friends, New Faces: Motivation Research in 11. D. Miron and D. C. McClelland, ‘The Impact of Achievement Motivation Training on
the 1990s’, Journal of Management, vol. 25, no. 3 (1999), pp. 231–92; and ‘Dialogue’, Small Businesses’, California Management Review, Summer 1979, pp. 13–28.
Academy of Management Review, October 2000, pp. 696–701. 12. ‘McClelland: An Advocate of Power’, International Management, July 1975, pp. 27–9.
6. N. K. Austin, ‘The Power of the Pyramid: The Foundation of Human Psychology and, Thereby, 13. G. Heil, W. Bennis and D. C. Stephens, Douglas McGregor, Revisited: Managing the
of Motivation, Maslow’s Hierarchy is One Powerful Pyramid’, Incentive, July 2002, p. 10. Human Side of Enterprise (New York: Wiley, 2000).
7. See, for example, D. T. Hall and K. E. Nongaim, ‘An Examination of Maslow’s Need Hierarchy 14. F. Herzberg, B. Mausner and B. Snyderman, The Motivation to Work (New York: John
in an Organizational Setting’, Organizational Behavior and Human Performance, Wiley, 1959); F. Herzberg, The Managerial Choice: To Be Effective or to Be Human,
February 1968, pp. 12–35; E. E. Lawler III and J. L. Suttle, ‘A Causal Correlational Test rev. edn (Salt Lake City, UT: Olympus, 1982); R. M. Creech, ‘Employee Motivation’,
of the Need Hierarchy Concept’, Organizational Behavior and Human Performance, Management Quarterly, Summer 1995, pp. 33–9; and M. L. Ambrose and C. T. Kulik,
April 1972, pp. 265–87; R. M. Creech, ‘Employee Motivation’, Management ‘Old Friends, New Faces: Motivation Research in the 1990s’, Journal of Management,
Quarterly, Summer 1995, pp. 33–9; J. Rowan, ‘Maslow Amended’, Journal of vol. 25, no. 3 (1999), pp. 231–92.
Humanistic Psychology, Winter 1998, pp. 81–92; J. Rowan, ‘Ascent and Descent in
15. See, for example, A. H. Brayfield and H. F. Rothe, ‘An Index of Job Satisfaction’, Journal
Maslow’s Theory’, Journal of Humanistic Psychology, Summer 1999, pp. 125–33; and
of Applied Psychology, October 1951, pp. 307–11; A. M. Anikeeff, ‘The Effect of Job
9780655702412_CH21.indd 599 3/3/20 11:12 AM

Satisfaction upon Attitudes of Business Administrators and Employees’, Journal of 25. M. E. Gist, ‘Self-Efficacy: Implications for Organizational Behavior and Human Resource
Social Psychology, vol. 45, no. 2 (1957), pp. 277–81; and J. B. Pearson, G. H. Barker and Management’, Academy of Management Review, July 1987, pp. 472–85; and A. Bandura,
R. D. Elliott, ‘Sales Success and Job Satisfaction’, American Sociological Review, August Self-Efficacy: The Exercise of Control (New York: Freeman, 1997).
1957, pp. 424–7. 26. E. A. Locke, E. Frederick, C. Lee and P. Bobko, ‘Effect of Self-Efficacy, Goals and Task
Strategies on Task Performance’, Journal of Applied Psychology, May 1984,
16. See A. H. Brayfield and W. H. Crockett, ‘Employee Attitudes and Employee Performance’,
pp. 241–51; M. E. Gist and T. R. Mitchell, ‘Self-Efficacy: A Theoretical Analysis of Its
Psychological Bulletin, September 1955, pp. 396–428.
Determinants and Malleability’, Academy of Management Review, April 1992,
17. From the Past to the Present box based on C. M. Christensen, ‘How Will You Measure pp. 183–211; A. D. Stajkovic and F. Luthans, ‘Self-Efficacy and Work-Related
Your Life?’, Harvard Business Review, July–August 2010, pp. 46–51; D. A. Wren and Performance: A Meta-Analysis’, Psychological Bulletin, September 1998, pp. 240–61;
A. G. Bedeian, The Evolution of Management Thought (New York: John Wiley & Sons, A. Bandura, ‘Cultivate Self-Efficacy for Personal and Organizational Effectiveness’, in
Inc., 2009); F. Herzberg, One More Time: How Do You Motivate Employees? (Boston: E. Locke (ed.), Handbook of Principles of Organizational Behavior (Malden, MA:
Harvard Business School Press, 2008); and F. Herzberg, B. Mausner and B. Snyderman, Blackwell, 2004), pp. 120–36; and F. Q. Fu, K. A. Richards and E. Jones, ‘The Motivation
The Motivation to Work (New York: John Wiley, 1959). Hub: Effects of Goal Setting and Self-Efficacy on Effort and New Product Sales’, Journal
18. J. Flint, ‘How to Be a Player’, Bloomberg BusinessWeek, 24–30 January 2011, pp. 108–9. of Personal Selling & Sales Management, Summer 2009, pp. 277–92.
27. A. Bandura and D. Cervone, ‘Differential Engagement in Self-Reactive Influences
19. R. M. Steers, R. T. Mowday and D. L. Shapiro, ‘The Future of Work Motivation Theory’, in Cognitively Based Motivation’, Organizational Behavior and Human Decision
Academy of Management Review, July 2004, pp. 379–87; E. A. Locke and G. P. Latham, Processes, August 1986, pp. 92–113; and R. Ilies and T. A. Judge, ‘Goal Regulation
‘What Should We Do About Motivation Theory? Six Recommendations for the Twenty- across Time: The Effects of Feedback and Affect’, Journal of Applied Psychology, May
First Century’, Academy of Management Review, July 2004, pp. 388–403; and 2005, pp. 453–67.
M. L. Ambrose and C. T. Kulik, ‘Old Friends, New Faces: Motivation Research in the 28. See J. C. Anderson and C. A. O’Reilly, ‘Effects of an Organizational Control System on
1990s’, Journal of Management, vol. 25, no. 3 (1999), pp. 231–92. Managerial Satisfaction and Performance’, Human Relations, June 1981, pp. 491–501;
20. M. L. Ambrose and C. T. Kulik, ‘Old Friends, New Faces: Motivation Research in the and J. P. Meyer, B. Schacht-Cole and I. R. Gellatly, ‘An Examination of the Cognitive
1990s’, Journal of Management, vol. 25, no. 3 (1999), pp. 231–92. Mechanisms by Which Assigned Goals Affect Task Performance and Reactions to
Performance’, Journal of Applied Social Psychology, vol. 18, no. 5 (1988), pp. 390–408.
21. J. C. Naylor and D. R. Ilgen, ‘Goal Setting: A Theoretical Analysis of a Motivational
29. See, for example, R. W. Griffin, ‘Toward an Integrated Theory of Task Design’, in
Technique’, in B. M. Staw and L. L. Cummings (eds), Research in Organizational
L. L. Cummings and B. M. Staw (eds), Research in Organizational Behavior, vol. 9
Behavior, vol. 6 (Greenwich, CT: JAI Press, 1984), pp. 95–140; A. R. Pell, ‘Energize
(Greenwich, CT: JAI Press, 1987), pp. 79–120; and M. Campion, ‘Interdisciplinary
Your People’, Managers Magazine, December 1992, pp. 28–9; E. A. Locke, ‘Facts and
Approaches to Job Design: A Constructive Replication with Extensions’, Journal of
Fallacies about Goal Theory: Reply to Deci’, Psychological Science, January 1993, pp.
Applied Psychology, August 1988, pp. 467–81.
63–4; M. E. Tubbs, ‘Commitment as a Moderator of the Goal–Performance Relation: A
30. See J. R. Hackman and G. R. Oldham, ‘Motivation through the Design of Work: Test of a
Case for Clearer Construct Definition’, Journal of Applied Psychology, February 1993,
Theory’, Organizational Behavior and Human Performance, August 1976, pp. 250–79;
pp. 86–97; M. P. Collingwood, ‘Why Don’t You Use the Research?’, Management
Y. Fried and G. R. Ferris, ‘The Validity of the Job Characteristics Model: A Review and
Decision, May 1993, pp. 48–54; M. E. Tubbs, D. M. Boehne and J. S. Dahl, ‘Expectancy,
Meta Analysis’, Personnel Psychology, Summer 1987, pp. 287–322; S. J. Zaccaro and
Valence and Motivational Force Functions in Goal-Setting Research: An Empirical Test’,
E. F. Stone, ‘Incremental Validity of an Empirically Based Measure of Job Characteristics’,
Journal of Applied Psychology, June 1993, pp. 361–73; E. A. Locke, ‘Motivation through
Journal of Applied Psychology, May 1988, pp. 245–52; and R. W. Renn and
Conscious Goal Setting’, Applied and Preventive Psychology, vol. 5 (1996), pp. 117–24;
R. J. Vandenberg, ‘The Critical Psychological States: An Underrepresented Component
M. L. Ambrose and C. T. Kulik, ‘Old Friends, New Faces: Motivation Research in the
in Job Characteristics Model Research’, Journal of Management, February 1995,
1990s’, Journal of Management, vol. 25, no. 3 (1999), pp. 231–92; E. A. Locke and
pp. 279–303.
G. P. Latham, ‘Building a Practically Useful Theory of Goal Setting and Task Motivation:
31. G. Van Der Vegt, B. Emans and E. Van Der Vliert, ‘Motivating Effects of Task and
A 35-Year Odyssey’, American Psychologist, September 2002, pp. 705–17; Y. Fried and
Outcome Interdependence in Work Teams’, Journal of Managerial Psychology, July
L. H. Slowik, ‘Enriching Goal-Setting Theory with Time: An Integrated Approach’, Academy
2000, p. 829; and B. Bemmels, ‘Local Union Leaders’ Satisfaction with Grievance
of Management Review, July 2004, pp. 404–22; G. P. Latham, ‘The Motivational Benefits
Procedures’, Journal of Labor Research, Summer 2001, pp. 653–69.
of Goal-Setting’, Academy of Management Executive, November 2004, pp. 126–9; and
32. J. S. Adams, ‘Inequity in Social Exchanges’, in L. Berkowitz (ed.), Advances in
G. Yeo, S. Loft, T. Xiao and C. Kiewitz, ‘Goal Orientation and Performance: Differential
Experimental Social Psychology, vol. 2 (New York: Academic Press, 1965), pp. 267–300;
Relationships across Levels of Analysis and as a Function of Task Demands’, Journal of
and M. L. Ambrose and C. T. Kulik, ‘Old Friends, New Faces: Motivation Research in the
Applied Psychology, May 2009, pp. 710–26.
1990s’, Journal of Management, vol. 25, no. 3 (1999), pp. 231–92.
22. J. A. Wagner III, ‘Participation’s Effects on Performance and Satisfaction: A
33. See, for example, P. S. Goodman and A. Friedman, ‘An Examination of Adams’ Theory of
Reconsideration of Research and Evidence’, Academy of Management Review,
Inequity’, Administrative Science Quarterly, September 1971, pp. 271–88; M. R. Carrell,
April 1994, pp. 312–30; J. George-Falvey, ‘Effects of Task Complexity and Learning
‘A Longitudinal Field Assessment of Employee Perceptions of Equitable Treatment’,
Stage on the Relationship between Participation in Goal Setting and Task Performance’,
Organizational Behavior and Human Performance, February 1978, pp. 108–18;
Academy of Management Proceedings on Disk, 1996; T. D. Ludwig and E. S. Geller,
E. Walster, G. W. Walster and W. G. Scott, Equity: Theory and Research (Boston: Allyn &
‘Assigned versus Participative Goal Setting and Response Generalization: Managing
Bacon, 1978); R. G. Lord and J. A. Hohenfeld, ‘Longitudinal Field Assessment of Equity
Injury Control among Professional Pizza Deliverers’, Journal of Applied Psychology, April
Effects on the Performance of Major League Baseball Players’, Journal of Applied
1997, pp. 253–61; and S. G. Harkins and M. D. Lowe, ‘The Effects of Self-Set Goals on
Psychology, February 1979, pp. 19–26; J. E. Dittrich and M. R. Carrell, ‘Organizational
Task Performance’, Journal of Applied Social Psychology, January 2000, pp. 1–40.
Equity Perceptions, Employee Job Satisfaction and Departmental Absence and Turnover
23. J. M. Ivancevich and J. T. McMahon, ‘The Effects of Goal Setting, External Feedback
Rates’, Organizational Behavior and Human Performance, August 1979, pp. 29–40;
and Self-Generated Feedback on Outcome Variables: A Field Experiment’, Academy of
and J. Greenberg, ‘Cognitive Reevaluation of Outcomes in Response to Underpayment
Management Journal, June 1982, pp. 359–72; and E. A. Locke, ‘Motivation through
Inequity’, Academy of Management Journal, March 1989, pp. 174–84.
Conscious Goal Setting’, Applied and Preventive Psychology, vol. 5 (1996), pp. 117–24.
34. P. S. Goodman, ‘An Examination of Referents Used in the Evaluation of Pay’,
24. J. R. Hollenbeck, C. R. Williams and H. J. Klein, ‘An Empirical Examination of the
Organizational Behavior and Human Performance, October 1974, pp. 170–95;
Antecedents of Commitment to Difficult Goals’, Journal of Applied Psychology, February
S. Ronen, ‘Equity Perception in Multiple Comparisons: A Field Study’, Human Relations,
1989, pp. 18–23; see, also, J. C. Wofford, V. L. Goodwin and S. Premack, ‘Meta-Analysis
April 1986, pp. 333–46; R. W. Scholl, E. A. Cooper and J. F. McKenna, ‘Referent
of the Antecedents of Personal Goal Level and of the Antecedents and Consequences
Selection in Determining Equity Perception: Differential Effects on Behavioral and
of Goal Commitment’, Journal of Management, September 1992, pp. 595–615;
Attitudinal Outcomes’, Personnel Psychology, Spring 1987, pp. 113–27; and C. T.
M. E. Tubbs, ‘Commitment as a Moderator of the Goal-Performance Relation: A Case
Kulik and M. L. Ambrose, ‘Personal and Situational Determinants of Referent Choice’,
for Clearer Construct Definition’, Journal of Applied Psychology, February 1993,
Academy of Management Review, April 1992, pp. 212–37.
pp. 86–97; J. W. Smither, M. London and R. R. Reilly, ‘Does Performance Improve
35. See, for example, R. C. Dailey and D. J. Kirk, ‘Distributive and Procedural Justice as
Following Multisource Feedback? A Theoretical Model, Meta-Analysis and Review of
Antecedents of Job Dissatisfaction and Intent to Turnover’, Human Relations, March
Empirical Findings’, Personnel Psychology, Spring 2005, pp. 171–203.
1992, pp. 305–16; D. B. McFarlin and P. D. Sweeney, ‘Distributive and Procedural Justice
9780655702412_CH21.indd 600 3/3/20 11:12 AM

as Predictors of Satisfaction with Personal and Organizational Outcomes’, Academy 40. Based on V. H. Vroom, Work and Motivation (New York: John Wiley, 1964); J. S. Adams,
of Management Journal, August 1992, pp. 626–37; M. A. Konovsky, ‘Understanding ‘Inequity in Social Exchanges’, in L. Berkowitz (ed.), Advances in Experimental Social
Procedural Justice and Its Impact on Business Organizations’, Journal of Management, Psychology (New York: Academic Press, 1965), pp. 267–300; and E. A. Locke and
vol. 26, no. 3 (2000), pp. 489–511; J. A. Colquitt, ‘Does the Justice of One Interact G. P. Latham, A Theory of Goal Setting and Task Performance (Upper Saddle River, NJ:
with the Justice of Many? Reactions to Procedural Justice in Teams’, Journal of Applied Prentice Hall, 1990).
Psychology, August 2004, pp. 633–46; J. Brockner, ‘Why It’s So Hard to Be Fair’, 41. N. Perlroth, ‘Outmaneuvered at Their Own Game, Anti-virus Makers Struggle to
Harvard Business Review, March 2006, pp. 122–9; and B. M. Wiesenfeld, W. B. Swann, Adapt’, New York Times Online, 31 December 2012; A. Vance, ‘Have You Seen This
Jr, J. Brockner and C. A. Bartel, ‘Is More Fairness Always Preferred: Self-Esteem Moderates Android?’, Bloomberg BusinessWeek, 12–18 March 2012, pp. 37–8; ‘Are We Winning
Reactions to Procedural Justice’, Academy of Management Journal, October 2007, the Cybersecurity War?’, <www.networkworld.com>, 13 February 2012, pp. 19–20;
pp. 1235–53. ‘Symantec Corporation: Company Profile’, Data-monitor, 10 February 2012; A.
36. V. H. Vroom, Work and Motivation (New York: John Wiley, 1964). Greenberg, ‘As Hackers Leak Symantec’s Source Code, Firm Says Cops Set up Extortion
37. See, for example, H. G. Heneman III and D. P. Schwab, ‘Evaluation of Research on Sting Operation’, Forbes.com, 7 February 2012, p. 8; ‘Under Siege’, Best’s Review,
Expectancy Theory Prediction of Employee Performance’, Psychological Bulletin, July January 2012, p. 77; E. Savits and A. K. Ghosh, ‘Cyber Spies Are Winning: Time to
1972, pp. 1–9; and L. Reinharth and M. Wahba, ‘Expectancy Theory as a Predictor of Reinvent Online Security’, Forbes.com, 18 November 2011, p. 3; ‘The Virus Hunters’,
Work Motivation, Effort Expenditure and Job Performance’, Academy of Management Management Today, December 2010, p. 98; and Symantec company information,
Journal, September 1975, pp. 502–37. <www.symantec.com>, accessed 9 December 2014.
38. See, for example, V. H. Vroom, ‘Organizational Choice: A Study of Pre- and Postdecision 42. L. Dishman, ‘Can a $70,000 Minimum Wage Work?’, Fast Company, 20 April 2015;
Processes’, Organizational Behavior and Human Performance, April 1966, pp. 212–25; P. Cohen, ‘One Company’s New Minimum Wage: $70,000 a Year’, New York Times
L. W. Porter and E. E. Lawler III, Managerial Attitudes and Performance (Homewood, IL: Online, 13 April 2015; M. Levy, ‘Buying Happiness: What Motivated Gravity Payments
Richard D. Irwin, 1968); W. Van Eerde and H. Thierry, ‘Vroom’s Expectancy Models and CEO Dan Price to Slash His Pay and Lift Staff Salaries’, Sydney Morning Herald, 16 April
Work-Related Criteria: A Meta-Analysis’, Journal of Applied Psychology, October 1996, 2015; C. Sailor, ‘No Regret for Dan Price: The CEO Who Put $70K Minimum Wage in
pp. 575–86; and M. L. Ambrose and C. T. Kulik, ‘Old Friends, New Faces: Motivation Place is Here to Stay’, The News Tribune, 11 February 2017; S. Becker, ‘The $70 000
Research in the 1990s’, Journal of Management, vol. 25, no. 3 (1999), pp. 231–92. Minimum Wage Experiment Reveals a Dark Truth’, <www.cheatsheet.com>, 26 January
39. See, for example, M. Siegall, ‘The Simplistic Five: An Integrative Framework for Teaching 2017, accessed 24 September 2017; and P. Keegan, ‘Here’s What Really Happened at
Motivation’, The Organizational Behavior Teaching Review, vol. 12, no. 4 (1987–88), that Company that Set a $70 000 Minimum Wage’, Inc., November 2015.
pp. 141–3.
9780655702412_CH21.indd 601 3/3/20 11:12 AM

9780655702412_CH21.indd 602 3/3/20 11:12 AM

SESSION Leading and
11
managing groups
• Leadership and trust
• Understanding groups and managing work
teams
9780655702412_CH22.indd 603 3/3/20 11:13 AM

Chapter
22 Leadership and trust
Many people incorrectly assume that leaders are born. For example, they point to kids who, as early as four
or five years old, are leading other kids around on the playground and displaying leadership qualities. The
evidence suggests that while there are certainly personality traits associated with leadership and that these
traits are due more to nature than to nurture, leadership CAN be taught. In this chapter, we’ll describe
behaviours generally ascribed to leaders and demonstrate how training can teach people to display these
behaviours.
It’s important for managers in all organisations to be seen as effective leaders because it’s the leaders
in organisations who make things happen. But what does it take to be an effective leader in today’s
organisations? What makes leaders different from non-leaders? What makes leaders effective? What’s the
most appropriate style of leadership? Should the workplace environment be one in which employees feel
like they’re heard and trusted? These are just some of the topics we’re going to address in this chapter.
Learning Objective 1 Define leader and leadership.

Who are leaders, and what is leadership? p. 606
Learning Learning Objective 2 Compare and contrast early leadership theories.
Objectives What do early leadership theories tell us about leadership? pp. 606–10
Learning Objective 3 Describe the four main contingency leadership theories.
What do the contingency theories of leadership tell us? pp. 610–16
Learning Objective 4 Describe modern views of leadership and the issues facing today’s
leaders.
What is leadership like today? pp. 616–22
9780655702412_CH22.indd 604 3/3/20 11:13 AM

Chapter 22 Leadership and trust 605
LO 1
Define leader and
leadership.
fact or fiction?
LO 2
Compare and
contrast early
leadership theories.
Leadership can’t be taught.

LO 3
Describe the four
main contingency
leadership theories.
fiction
LO 4
Describe modern
views of leadership
and the issues
facing today’s
leaders.
9780655702412_CH22.indd 605 3/3/20 11:13 AM

606 Session 11 Leading and managing groups
Who are leaders, and what

is leadership?
leader Let’s begin by clarifying who leaders are and what leadership is. Our definition of a leader is someone
Someone who can who can influence others and who has managerial authority. Leadership is what leaders do. It’s a process
influence others and of leading a group and influencing that group to achieve its goals.
who has managerial
authority Are all managers leaders? Because leading is one of the four management functions, ideally
all managers should be leaders. Thus, we’re going to study leaders and leadership from a managerial
leadership perspective.1 However, we’re also aware that groups often have informal leaders who emerge. Although
The process of leading
a group and influencing these informal leaders may be able to influence others, they haven’t been the focus of most leadership
that group to achieve its research and aren’t the types of leaders we’re studying in this chapter.
goals Leaders and leadership, like motivation, are organisational behaviour topics that have been well
researched. Most of that research has been aimed at answering the question: ‘What is an effective leader?’
We’ll begin our study of leadership by looking at some early leadership theories that attempted to answer
that question.
What do early leadership theories

tell us about leadership?
People have been interested in leadership since they started coming together in groups to accomplish
goals. However, it wasn’t until the early part of the 20th century that researchers actually began to
study the topic. These early leadership theories focused on the leader (trait theories) and how the leader
interacted with their group members (behavioural theories).
What traits do leaders have?

Ask the average person on the street what comes to mind when they think of leadership. You’re likely to
get a list of qualities such as intelligence, charisma, decisiveness, enthusiasm, strength, bravery, integrity
trait theories of and self-confidence. These responses represent, in essence, trait theories of leadership. The search
leadership for traits or characteristics that differentiate leaders from non-leaders dominated early leadership
Theories that isolate research efforts. Researchers tried to determine whether there were consistent and unique traits that
characteristics (traits)
that differentiate leaders would apply universally to all effective leaders, no matter whether they were in charge of Toyota Motor
from non-leaders Corporation, the Moscow Ballet or the country of Brazil. If the concept of traits were valid, all leaders
would have to possess specific characteristics.
Despite the best efforts of researchers, it proved impossible to identify a set of traits that would
always differentiate a leader (the person) from a non-leader. Possessing the appropriate traits only made
it more likely that an individual would be an effective leader. However, later attempts to identify traits
consistently associated with leadership (the process, not the person) were more successful. The seven
traits shown to be associated with effective leadership are described briefly in Figure 22.1.2
Researchers eventually recognised that traits alone weren’t sufficient for identifying effective leaders
since explanations based solely on traits ignored the interactions of leaders and their group members
as well as situational factors. Wondering whether there was something unique in what effective leaders
behavioural did – in other words, in their behaviour – leadership researchers from the late 1940s to the mid-1960s
theories of concentrated on the preferred behavioural styles that leaders demonstrated.
leadership
Theories that isolate What behaviours do leaders exhibit?
behaviours that It was hoped that the behavioural theories of leadership approach would provide more definitive
differentiate effective
leaders from ineffective answers about the nature of leadership, and if successful, also have practical implications quite different
leaders from those of the trait approach. If trait research had been successful, it would have provided a basis
for selecting the right people to assume formal leadership positions in organisations. In contrast, if
9780655702412_CH22.indd 606 3/3/20 11:13 AM

1 2 3 4 Drive.
Leaders exhibit a high effort
level. They have a relatively
high desire for achievement,
are ambitious, have a lot
of energy, are tirelessly
persistent in their activities
and show initiative.
Desire to lead.
Leaders have a strong desire
to influence and lead others.
They demonstrate the willing-
ness to take responsibility.
Honesty and
integrity.
Leaders build trusting rela-
tionships with followers by
being truthful, or non-
deceitful and by showing
high consistency between
word and deed.
Self-confidence.
Followers look to leaders who
don’t self-doubt. Leaders,
therefore, need to show
self-confidence in order to
convince followers of the
rightness of their goals and
decisions.
5 6 7 Intelligence.
Leaders need to be intelligent
enough to gather, synthesise
and interpret large amounts
of information, and they need
to be able to create visions,
solve problems and make
correct decisions.
Job-relevant
knowledge.
Effective leaders have a high
degree of knowledge about
the company, industry and
technical matters. In-depth
knowledge allows leaders to
make well-informed decisions
and to understand the impli-
cations of those decisions.
Extraversion.
Leaders are energetic, lively
people. They are sociable,
assertive and rarely silent or
withdrawn.
Figure 22.1 Traits Associated with Leadership

Sources: Based on S. A. Kirkpatrick and E. A. Locke, ‘Leadership: Do Traits Really Matter?’, Academy of Management Executive, May 1991, pp. 48–60; and
T. A. Judge, J. E. Bono, R. Ilies and M. W. Gerhardt, ‘Personality and Leadership: A Qualitative and Quantitative Review’, Journal of Applied Psychology, August 2002, pp. 765–80.
behavioural studies were to turn up critical behavioural determinants of leadership, people could be
trained to be leaders, which is precisely the premise behind management development programs. autocratic style
A leader who centralises
A number of studies looked at behavioural styles. We’ll briefly review three of the most popular: Kurt authority, dictates
Lewin’s studies at the University of Iowa, the Ohio State studies and the University of Michigan studies. work methods, makes
Then we’ll see how the concepts developed in those studies were used in a grid created for appraising unilateral decisions
leadership styles. and limits employee
participation
What did the University of Iowa studies tell us about democratic style
leadership behaviour? A leader who involves
One of the first studies of leadership behaviour was done by Kurt Lewin and his associates at the employees in decision
making, delegates
University of Iowa.3 In their studies, the researchers explored three styles of leadership behaviours:
authority, encourages
autocratic, democratic and laissez-faire. An autocratic style is that of a leader who typically tends to participation in deciding
centralise authority, dictate work methods, make unilateral decisions and limit employee participation. work methods and
A leader with a democratic style tends to involve employees in decision making, delegates authority, uses feedback to coach
employees
encourages participation in deciding work methods and goals, and uses feedback as an opportunity to
coach employees. The democratic style can be further classified in two ways: consultative and participative. laissez-faire style
A democratic–consultative leader seeks input and hears the concerns and issues of employees but makes A leader who generally
gives employees
the final decision themself. In this capacity, the democratic–consultative leader is using the input as an complete freedom to
information-seeking exercise. A democratic–participative leader often allows employees to have a say make decisions and to
in what’s decided. Here, decisions are made by the group, with the leader providing one input to that complete their work
group. Finally, the laissez-faire style leader generally gives their employees complete freedom to make however they see fit
9780655702412_CH22.indd 607 3/3/20 11:13 AM

decisions and to complete their work in whatever way they see fit. A laissez-faire leader might simply
provide necessary materials and answer questions.
Lewin and his associates wondered which one of the three leadership styles was most effective. On
the basis of their studies of leaders from boys’ clubs, they concluded that the laissez-faire style was
ineffective on every performance criterion when compared with both democratic and autocratic styles.
Quantity of work done was equal in groups with democratic and autocratic leaders, but work quality and
group satisfaction were higher in democratic groups. The results suggest that a democratic leadership
style could contribute to both good quantity and high quality of work.
Later studies of autocratic and democratic styles of leadership showed mixed results. For example,
democratic leadership styles sometimes produced higher performance levels than autocratic styles, but
at other times they produced group performance that was lower than or equal to that of autocratic
styles. Nonetheless, more consistent results were generated when a measure of employee satisfaction was
used. Group members’ satisfaction levels were generally higher under a democratic leader than under
an autocratic one.4 Two researchers, Robert Tannenbaum and Warren Schmidt, attempted to determine
whether this meant that leaders should always exhibit a democratic style of leadership.5
Tannenbaum and Schmidt developed a continuum of leader behaviours ranging from boss-centred
(autocratic) on the left side of the model to employee-centred (laissez-faire) on the right side of the
model. A leader with an autocratic ‘boss-centred’ leadership style uses leadership behaviours that
emphasise their authority and provide little discretion to employees. For example, this sort of leader
would make a decision and announce the outcome to their employees, rather than involve their employees
in the decision. A leader at the other end of the continuum uses leadership behaviours that focus on
empowering employees and giving them discretion to act within defined limits. Leaders in the middle
of the continuum use more participative leadership styles that are more consultative and democratic.
For example, a consultative leader would make a decision by presenting ideas to their followers and
then inviting questions from them. A democratic leader would present a problem to their followers, get
their suggestions on how it could be solved, and then make a decision based on their input. In deciding
which leader behaviour from the continuum to use, Tannenbaum and Schmidt proposed that managers
look at forces within themselves (such as comfort level with the chosen leadership style), forces within
the employees (such as readiness to assume responsibility) and forces within the situation (such as time
pressures). They suggested that managers should move towards more employee-centred styles in the
long run because such behaviour would increase employees’ motivation, decision quality, teamwork,
morale and development.
This dual nature of leader behaviours – that is, focusing on the work to be done and focusing on the
employees – is also a key characteristic of the Ohio State and University of Michigan studies.
initiating What did the Ohio State Studies show?

structure The most comprehensive and replicated of the behavioural theories resulted from research that began
The extent to which at Ohio State University in the late 1940s.6 These studies sought to identify independent dimensions of
a leader defines and leader behaviour. Beginning with more than 1000 dimensions, the researchers eventually narrowed the
structures their role and
the roles of employees list down to two categories that accounted for most of the leadership behaviour described by employees.
to attain goals They called these two dimensions initiating structure and consideration.
Initiating structure refers to the extent to which a leader is likely to define and structure their
consideration
The extent to role and the roles of employees in the search for goal attainment. It includes behaviour that attempts
which a leader has to organise work, work relationships and goals. For example, the leader who is characterised as high
job relationships in initiating structure assigns group members to particular tasks, expects workers to maintain definite
characterised by mutual
standards of performance and emphasises meeting deadlines.
trust, respect for
employees’ ideas and Consideration is defined as the extent to which a leader has job relationships characterised by
regard for their feelings mutual trust and respect for employees’ ideas and feelings. A leader who is high in consideration helps
9780655702412_CH22.indd 608 3/3/20 11:13 AM

employees with personal problems, is friendly and approachable, and treats all employees as equals. They
show concern for their followers’ comfort, wellbeing, status and satisfaction.
Extensive research based on these definitions found that a leader who is high in initiating structure
and consideration (a high–high leader) achieved high employee performance and satisfaction more
frequently than one who rated low on either consideration, initiating structure or both. However, the
high–high style didn’t always yield positive results. For example, leader behaviour characterised as high
on initiating structure led to greater rates of grievances, absenteeism and turnover, and lower levels of
job satisfaction for workers performing routine tasks. Other studies found that high consideration was
negatively related to performance ratings of the leader by their manager. In conclusion, the Ohio State
studies suggested that the high–high style generally produced positive outcomes, but enough exceptions
were found to indicate that situational factors needed to be integrated into the theory.
How did the University of Michigan Studies differ?

Leadership studies undertaken at the University of Michigan’s Survey Research Center, at about the
same time as those being done at Ohio State, had similar research objectives: to locate the behavioural
characteristics of leaders that were related to performance effectiveness. The Michigan group also came
up with two dimensions of leadership behaviour, which they labelled employee oriented and production
oriented.7 Leaders who were employee oriented emphasised interpersonal relations; they took a employee
personal interest in the needs of their employees and accepted individual differences among members. oriented
Leaders who were production oriented, in contrast, tended to emphasise the technical or task aspects A leader who
emphasises the people
of the job, were concerned mainly with accomplishing their group’s tasks and regarded group members
aspects
as a means to that end.
The conclusions of the Michigan researchers strongly favoured leaders who were employee oriented. production
Employee-oriented leaders were associated with higher group productivity and higher job satisfaction. oriented
A leader who
Production-oriented leaders were associated with lower group productivity and lower worker satisfaction. emphasises the technical
or task aspects
What is the managerial grid?
The behavioural dimensions from these early leadership studies provided the basis for the development managerial grid
of a two-dimensional grid for appraising leadership styles. This managerial grid used the behavioural A two-dimensional grid
for appraising leadership
dimensions ‘concern for people’ and ‘concern for production’ and evaluated a leader’s use of these styles
People–task: Both are important to leaders

Both the Ohio State and Michigan studies have added a lot important for the rigorous methodology they used and for
to our understanding of effective leadership.8 Prior to the increasing awareness of how important leader behaviour is.
completion of these studies, it was widely thought by researchers Although the behavioural theories may not have been the final
and practising managers that one style of leadership was good chapter in the book on leadership, they provided us with
and another bad. However, as the research showed, both leader important insights that became the foundation of contingency
behaviour dimensions – job-centred and employee-centred in leadership theories.
the Michigan studies, and initiating structure and consideration in Discuss this:
the Ohio State studies – are necessary for effective • How did the behavioural theories serve as a springboard for
leadership. That dual focus of ‘what’ a leader does still holds the leadership research that followed?
today. Leaders are expected to focus on both the task and on • When you think about how leaders have to operate in today’s
the people they are leading. Even the later contingency organisations, is saying that their ‘job’ is to focus on the task or
leadership theories used the people–task distinction to define a on the people too simplistic? Explain
leader’s style. Finally, these early behavioural studies were
9780655702412_CH22.indd 609 3/3/20 11:13 AM

behaviours, ranking them on a scale from 1 (low) to 9 (high).9 Although the grid had 81 potential
categories into which a leader’s behavioural style might fall, only five styles were named:
● Impoverished management (1,1), characterised by low concern for people or production, and
focusing only on getting the minimum amount of work done that is required to stay in the
organisation (or in other words, doing just enough to not get fired!).
● Task management (9,1), typified by a strong emphasis on efficiency and minimising the impact
of human elements on production (think automated production lines).
● Middle-of-the-road management (5,5), which seeks to balance the need to get work done with
the need to maintain satisfactory levels of morale.
● Country club management (1,9), which prioritises the needs of people over production and
produces a comfortable, friendly work tempo and organisational climate.
● Team management (9,9), which generates a sense of common purpose and interdependence
that causes members to be committed to the organisation and each other, and emphasises
trust and respect in their working relationships.
Of these five styles, the researchers concluded that managers performed best when using a 9,9 style.
Unfortunately, the grid offered no answers to the question of what made a manager an effective leader; it
only provided a framework for conceptualising leadership style. In fact, there’s little substantive evidence
to support the conclusion that a 9,9 style is most effective in all situations.10
Leadership researchers were discovering that predicting leadership success involved something more
complex than isolating a few leader traits or preferable behaviours. They began looking at situational
influences. Specifically, which leadership styles might be suitable in different situations, and what were
these different situations?
What do the contingency theories

of leadership tell us?
‘The corporate world is filled with stories of leaders who failed to achieve greatness because they failed to
understand the context they were working in.’11 In this section, we examine four contingency theories –
Fiedler, Hersey-Blanchard, leader-participation and path–goal. Each looks at defining leadership style
Fiedler
and the situation, and attempts to answer the if-then contingencies (i.e. if this is the context or situation,
contingency
model then this is the best leadership style to use).
Leadership theory
proposing that effective What was the first comprehensive contingency
group performance
depends on the proper
model?
match between a The first comprehensive contingency model for leadership was developed by Fred Fiedler.12 The Fiedler
leader’s style and the contingency model proposed that effective group performance depended on properly matching the
degree to which the leader’s style and the amount of control and influence in the situation. The model was based on the
situation allowed the
premise that a certain leadership style would be most effective in different types of situations. The keys
leader to control and
influence were:
1 define those leadership styles and the different types of situations, and then
2 identify the appropriate combinations of style and situation.
Fiedler proposed that a key factor in leadership success was an individual’s basic leadership style,
least-preferred either task oriented or relationship oriented. To measure a leader’s style, Fiedler developed the least-
co-worker (LPC) preferred co-worker (LPC) questionnaire. This questionnaire contained 18 pairs of contrasting
questionnaire
A questionnaire that adjectives – for example, pleasant–unpleasant, cold–warm, boring–interesting or friendly–unfriendly.
measures whether Respondents were asked to think of all the co-workers they had ever had and to describe that one person
a leader is task or
relationship oriented
9780655702412_CH22.indd 610 3/3/20 11:13 AM

they least enjoyed working with by rating them on a scale of 1 to 8 for each of the sets of adjectives. (The
8 always described the positive adjective out of the pair, and the 1 the negative adjective.)
If the leader described the least preferred co-worker in relatively positive terms (in other words, a
‘high’ LPC score – a score of 64 or above), then the respondent was primarily interested in good personal
relations with co-workers and the style would be described as relationship oriented. In contrast, if you saw
the least preferred co-worker in relatively unfavourable terms (a low LPC score – a score of 57 or below),
you were primarily interested in productivity and getting the job done; thus, your style would be labelled
as task oriented. Fiedler did acknowledge that a small number of people might fall in between these
two extremes and not have a cut-and-dried leadership style. One other important point is that Fiedler
assumed that a person’s leadership style was fixed regardless of the situation. In other words, if you were
a relationship-oriented leader, you’d always be one, and so would task-oriented leaders.
After an individual’s leadership style had been assessed through the LPC, it was time to evaluate the
situation in order to be able to match the leader with the situation. Fiedler’s research uncovered three
contingency dimensions that defined the key situational factors in leader effectiveness. These were:
● Leader–member relations: the degree of confidence, trust and respect employees had for their
leader; rated as either good or poor.
● Task structure: the degree to which job assignments were formalised and structured; rated as
either high or low.
● Position power: the degree of inf luence a leader had over activities such as hiring, firing,
discipline, promotions and salary increases; rated as either strong or weak.
Each leadership situation was evaluated in terms of these three contingency variables, which when
combined produced eight possible situations that were either favourable or unfavourable for the leader
to exert power and influence over the group.
Once Fiedler had described the leader variables and the situational variables, he had everything he
needed to define the specific contingencies for leadership effectiveness. To do so, he studied 1200 groups
where he compared relationship-oriented versus task-oriented leadership styles in each of the eight
situational categories. He concluded that task-oriented leaders performed better in both very favourable
and very unfavourable situations. On the other hand, relationship-oriented leaders performed better in
moderately favourable situations.
Because Fiedler treated an individual’s leadership
style as fixed, there were only two ways to improve leader
effectiveness. First, you could bring in a new leader
whose style better fit the situation. For example, if the
group situation was highly unfavourable but was led by a
relationship-oriented leader, the group’s performance could
be improved by replacing that person with a task-oriented
leader. The second alternative was to change the situation to
fit the leader. This could be done by restructuring tasks; by
increasing or decreasing the power that the leader had over
factors such as salary increases, promotions and disciplinary
actions; or by improving the leader–member relations.
Research testing the overall validity of Fiedler’s model has Sir Richard Branson, founder and CEO of Virgin Group, is a
shown considerable evidence to support it.13 However, his relationship-oriented leader. Pictured here with an in-flight teammate
theory wasn’t without criticisms. The main one is that it’s while showing the interior of a new Virgin airplane, Branson is
fun loving, takes a personal interest in the needs of employees,
probably unrealistic to assume that a person can’t change emphasises interpersonal relations and accepts individual differences
their leadership style to fit the situation. Effective leaders among workers.
© David Woo/Dallas Morning News/Corbis
9780655702412_CH22.indd 611 3/3/20 11:13 AM

can, and do, change their styles. Another is that the LPC wasn’t very practical. Finally, the situation
variables were difficult to assess.14 Despite its shortcomings, the Fiedler model showed that effective
leadership style needed to reflect situational factors.
situational
leadership theory How do followers’ willingness and ability
(SLT)
A leadership influence leaders?
contingency theory that Paul Hersey and Ken Blanchard developed a leadership theory that has had a strong following among
focuses on followers’ management development specialists.15 This model, called situational leadership theory (SLT), is
readiness
a contingency theory that focuses on leader effectiveness and followers’ readiness.
readiness The emphasis on the followers in leadership effectiveness reflects the reality that it is the followers
The extent to which who accept or reject the leader. Regardless of what the leader does, the group’s effectiveness depends on
people have the ability the actions of the followers. This is an important dimension that has been overlooked or underemphasised
and willingness to
accomplish a specific in most leadership theories. Readiness as defined by Hersey and Blanchard refers to the extent to which
task people have the ability and willingness to accomplish a specific task.
LEADER
SLT uses the same two leadership dimensions that Fiedler identified: task and relationship behaviours.
However, Hersey and Blanchard go a step further by considering each as either high or low and then
combining them into four specific leadership styles described as follows:
● Telling (high task–low relationship): The leader defines roles and tells people what, how, when
and where to do various tasks.
● Selling (high task–high relationship): The leader provides both directive and supportive
behaviour.
● Participating (low task–high relationship): The leader and followers share in decision making;
the main role of the leader is facilitating and communicating.
● Delegating (low task–low relationship): The leader provides little direction or support.
FOLLOWERS
Hersey and Blanchard proposed that followers have four
stages of readiness:
● R1: People are both unable and unwilling to take
responsibility for doing something. Followers aren’t
competent or confident.
● R2: People are unable but willing to do the necessary
job tasks. Followers are motivated but lack the
appropriate skills.
● R3: People are able but unwilling to do what the
French entrepreneur Bertin Nahum is the founder and CEO of leader wants. Followers are competent, but don’t
Medtech, a firm that develops, designs and markets computer-
assisted neurosurgical robotics. With high follower readiness of
want to do something.
being able and willing, Nahum’s managers and staff have the skills ● R4: People are both able and willing to do what is
and experience to innovate and provide superior technical support. asked of them.
Alain Robert/APERCU/SIPA/Newscom
9780655702412_CH22.indd 612 3/3/20 11:13 AM

Now – let’s put the two together!

SLT essentially views the leader–follower relationship as like that of a parent and a child. Just as a
parent needs to relinquish control when a child becomes more mature and responsible, so, too, should
leaders. As followers reach higher levels of readiness, the leader responds not only by decreasing control
over their activities but also by decreasing relationship behaviours. The SLT says:
● If followers are at R1 (unable and unwilling to do a task), the leader needs to use the telling
style and give clear and specific directions.
● If followers are at R2 (unable and willing), the leader needs to use the selling style and display
high task orientation to compensate for the followers’ lack of ability and high relationship
orientation to get followers to ‘buy into’ the leader’s desires.
● If followers are at R3 (able and unwilling), the leader needs to use the participating style to gain
their support.
● If followers are at R4 (both able and willing), the leader doesn’t need to do much and should
use the delegating style.
SLT has intuitive appeal. It acknowledges the importance of followers and builds on the logic that
leaders can compensate for ability and motivational limitations in their followers. However, research
efforts to test and support the theory generally have been disappointing.16 Possible explanations include
internal inconsistencies in the model as well as problems with research methodology. Despite its appeal
and wide popularity, we have to be cautious about any enthusiastic endorsement of SLT.
How participative should a leader be?

Back in 1973, Victor Vroom and Phillip Yetton developed a leader-participation model that related leader-
leadership behaviour and participation to decision making.17 Recognising that task structures have participation
varying demands for routine and non-routine activities, these researchers argued that leader behaviour model
A leadership
must adjust to reflect the task structure. Vroom and Yetton’s model was normative. That is, it provided contingency theory
a sequential set of rules to be followed in determining the form and amount of participation in decision that’s based on a
making in different types of situations. The model was a decision tree incorporating seven contingencies sequential set of rules
for determining how
(whose relevance could be identified by making yes or no choices) and five alternative leadership styles.
much participation a
More recent work by Vroom and Arthur Jago has revised that model.18 The new model retains the leader uses in decision
same five alternative leadership styles but expands the contingency variables to 12 – from the leader’s making according
making the decision completely by themself to sharing the problem with the group and developing a to different types of
situations
consensus decision. These variables are listed in Table 22.1.
Research on the original leader-participation model was encouraging.19 But unfortunately, the
model is far too complex for the typical manager to use regularly. In fact, Vroom and Jago have
developed a computer program to guide managers through all the decision branches in the revised
model. Although we obviously can’t do justice to this model’s sophistication in this discussion, it has
provided us with some solid, empirically supported insights into key contingency variables related to
leadership effectiveness. Moreover, the leader-participation model confirms that leadership research
should be directed at the situation rather than at the person. That is, it probably makes more sense to
talk about autocratic and participative situations than autocratic and participative leaders. As House
did in his path–goal theory, Vroom, Yetton and Jago argue against the notion that leader behaviour
is inflexible. The leader-participation model assumes that the leader can adapt their style to different
situations.20
9780655702412_CH22.indd 613 3/3/20 11:13 AM

Table 22.1 Contingency variables in the revised leader–participation model

1. Importance of the decision
2. Importance of obtaining follower commitment to the decision
3. Whether the leader has sufficient information to make a good decision
4. How well structured the problem is
5. Whether an autocratic decision would receive follower commitment
6. Whether followers ‘buy into’ the organisation’s goals
7. Whether there is likely to be conflict among followers over solution alternatives
8. Whether followers have the necessary information to make a good decision
9. Time constraints on the leader that may limit follower involvement
10. Whether costs to bring geographically dispersed members together are justified
11. Importance to the leader of minimising the time it takes to make the decision
12. Importance of using participation as a tool for developing follower decision skills
Source: S. P. Robbins and T. A. Judge, Organizational Behavior, 13th edn, © 2009, p. 400. Reprinted and electronically reproduced by permission of
Pearson Education, Inc., New York.
Only 53 per cent of leaders are willing

to step outside their leadership comfort zone
and try new techniques.21
How do leaders help followers?

path–goal theory Another approach to understanding leadership is path–goal theory, which states that the leader’s job
A leadership theory is to assist followers in attaining their goals and to provide direction or support needed to ensure that
that says the leader’s
their goals are compatible with the goals of the group or organisation. Developed by Robert House,
job is to assist followers
in attaining their goals path–goal theory takes key elements from the expectancy theory of motivation (see Chapter 21).22 The
and to provide direction term path–goal is derived from the belief that effective leaders clarify the path to help their followers get
or support needed to from where they are to the achievement of their work goals and make the journey along the path easier
ensure that their goals
are compatible with the
by reducing roadblocks and pitfalls.
organisation’s or group’s House identified four leadership behaviours
goals ● Directive leader: Lets subordinates know what’s expected of them, schedules work to be done
and gives specific guidance on how to accomplish tasks.
● Supportive leader: Shows concern for the needs of followers and is friendly.
● Participative leader: Consults with group members and uses their suggestions before making a
decision.
● Achievement-oriented leader: Sets challenging goals and expects followers to perform at their
highest level.
In contrast to Fiedler’s view that a leader couldn’t change their behaviour, House assumed that leaders
are flexible and can display any or all of these leadership styles depending on the situation.
9780655702412_CH22.indd 614 3/3/20 11:13 AM

Environmental contingency
factors
• Task structure
• Formal authority system
• Work group
Leader behaviour
• Directive Outcomes
• Supportive • Performance
• Participative • Satisfaction
• Achievement oriented
Employee contingency factors

• Locus of control
• Experience
• Perceived ability
Figure 22.2 Path–goal model
As Figure 22.2 illustrates, path–goal theory proposes two situational or contingency variables that
moderate the leadership behaviour–outcome relationship: those in the environment that are outside the
control of the follower (factors including task structure, formal authority system and the work group) and
those that are part of the personal characteristics of the follower (including locus of control, experience and
perceived ability). Environmental factors determine the type of leader behaviour required if subordinate
outcomes are to be maximised; personal characteristics of the follower determine how the environment
and leader behaviour are interpreted. The theory proposes that a leader’s behaviour won’t be effective
if it’s inconsistent with what the environmental structure is providing or is incongruent with follower
characteristics. For example, some predictions from path–goal theory are:
● When tasks are relatively unstructured, ambiguous or stressful, directive leadership leads to
greater follower satisfaction. The followers aren’t sure what to do, so the leader needs to give
them some direction.
● When tasks are ambiguously structured, achievement-oriented leadership will increase
subordinates’ expectancies that effort will lead to high performance. By setting challenging
goals, followers know what the expectations are.
● When subordinates are performing structured tasks, supportive leadership results in high
employee performance and satisfaction. In this situation, the leader only needs to support
followers, not tell them what to do.
● Subordinates with high perceived ability or with considerable experience are likely to perceive
directive leadership as redundant. These followers are quite capable so they don’t need a
leader to tell them what to do.
● The clearer and more bureaucratic the formal authority relationships, the more leaders should
exhibit supportive behaviour and de-emphasise directive behaviour. The organisational
9780655702412_CH22.indd 615 3/3/20 11:13 AM

situation has provided the structure as far as what is expected of followers, so the leader’s role
is simply to support.
● When there is substantive conf lict within a work group, directive leadership will lead to higher
employee satisfaction. In this situation, the followers need a leader who will take charge.
● Subordinates with an internal locus of control will be more satisfied with a participative style.
Because these followers believe that they control what happens to them, they prefer to
participate in decisions.
● Subordinates with an external locus of control will be more satisfied with a directive style.
These followers believe that what happens to them is a result of the external environment, so
they would prefer a leader who tells them what to do.
Research findings on the path–goal model have been mixed because the theory has so many variables
to examine. Although not every study has found support, we can still say that evidence supports the logic
underlying the theory.23 That is, an employee’s performance and satisfaction are likely to be positively
influenced when the leader chooses a leadership style that compensates for shortcomings in either the
employee or the work setting. However, if the leader spends time explaining tasks that are already clear,
or when the employee has the ability and experience to handle them without interference, the employee
is likely to see such directive behaviour as redundant or even insulting.
What is leadership like today?

What are the latest views of leadership and what issues do today’s leaders have to deal with? In this section,
we’ll look at four contemporary views of leadership: leader–member exchange (LMX), transformational–
transactional leadership, charismatic–visionary leadership and team leadership. In addition, we’ll discuss
some issues that leaders have to face in leading effectively in today’s environment.
What do the four contemporary views of

leadership tell us?
Remember our discussion at the beginning of this chapter where we said that leadership studies have
long had the goal of describing what it takes to be an effective leader? That goal hasn’t changed! Even the
contemporary views of leadership are interested in answering that question. These views of leadership
have a common theme: leaders who interact with, inspire and support followers.
How do leaders interact with followers?

Have you ever been in a group in which the leader had ‘favourites’ who made up their in-group? If so,
leader–member that’s the premise behind leader–member exchange (LMX) theory.24 Leader–member exchange
exchange (LMX) (LMX) theory says that leaders create in-groups and out-groups, and that those in the in-group will
theory have higher performance ratings, less turnover and greater job satisfaction.
A leadership theory that
LMX theory suggests that early on in the relationship between a leader and a given follower, a leader
says leaders create in-
groups and out-groups, will implicitly categorise a follower as an ‘in’ or as an ‘out’. That relationship tends to remain fairly
and that those in the stable over time. Leaders also encourage LMX by rewarding those employees with whom they want a
in-group will have higher closer linkage and punishing those with whom they don’t.25 For the LMX relationship to remain intact,
performance ratings, less
however, both the leader and the follower must ‘invest’ in the relationship.
turnover and greater job
satisfaction It’s not exactly clear how a leader chooses who falls into each category, but evidence indicates that
in-group members have demographic, attitude, personality and even gender similarities with the leader,
or they have a higher level of competence than out-group members.26 The leader does the choosing, but
the follower’s characteristics drive the decision.
Research on LMX has been generally supportive. It appears that leaders do differentiate among
followers; that these disparities aren’t random; and that followers with in-group status will have higher
9780655702412_CH22.indd 616 3/3/20 11:13 AM

performance ratings, engage in more helping or ‘citizenship’ behaviours at work, and report greater
satisfaction with their boss.27 These findings probably shouldn’t be surprising when leaders are most
likely to invest their time and other resources in those whom they expect to perform best.
How do transactional leaders differ from transformational
leaders?
Many early leadership theories viewed leaders as transactional leaders; that is, leaders who lead transactional
primarily by using social exchanges (or transactions). Transactional leaders guide or motivate followers leaders
Leaders who lead
to work towards established goals by exchanging rewards for their productivity.28 But another type primarily by using
of leader – a transformational leader – stimulates and inspires (transforms) followers to achieve social exchanges (or
extraordinary outcomes. How? By paying attention to the concerns and developmental needs of individual transactions)
followers; changing followers’ awareness of issues by helping those followers look at old problems in new transformational
ways; and being able to excite, arouse and inspire followers to exert extra effort to achieve group goals. leaders
Transactional and transformational leadership shouldn’t be viewed as opposing approaches to getting Leaders who stimulate
things done.29 Transformational leadership develops from transactional leadership. Transformational and inspire (transform)
followers to achieve
leadership produces levels of employee effort and performance that go beyond what would occur with extraordinary outcomes
a transactional approach alone. Moreover, transformational leadership is more than charisma since the
transformational leader attempts to instil in followers the ability to question not only established views
but those views held by the leader.30
The evidence supporting the superiority of transformational leadership over transactional leadership
is overwhelmingly impressive. For example, studies that looked at managers in different settings, including
charismatic
leaders
the armed forces and business, found that transformational leaders were evaluated as more effective, Enthusiastic, self-
higher performers, more promotable than their transactional counterparts and more interpersonally confident leaders whose
sensitive.31 In addition, evidence indicates that transformational leadership is strongly correlated with personalities and actions
influence people to
lower turnover rates and higher levels of productivity, work engagement, employee satisfaction, creativity,
behave in certain ways
goal attainment and follower wellbeing.32
How do charismatic leadership
and visionary leadership differ?
Jeff Bezos, founder and CEO of Amazon.com, is a person
who exudes energy, enthusiasm and drive.33 He’s fun loving,
but has pursued his vision for Amazon with serious intensity
and has demonstrated an ability to inspire his employees
through the ups and downs of a rapidly growing company.
Bezos is what we call a charismatic leader – that is, an
enthusiastic, self-confident leader whose personality and
actions influence people to behave in certain ways.
Several authors have attempted to identify personal
characteristics of the charismatic leader.34 The most
comprehensive analysis identified five such characteristics:
they have a vision, the ability to articulate that vision,
willingness to take risks to achieve that vision, sensitivity
to both environmental constraints and follower needs, and
behaviours that are out of the ordinary.35 Amazon.com founder and CEO Jeff Bezos is a charismatic leader
described as energetic, enthusiastic, optimistic and self-confident.
Bezos has the drive to set and pursue goals for risky new ventures
It’s good to be charismatic! and uses his charisma to inspire his employees to work hard
to achieve them.
AP Photo/Reed Saxon
9780655702412_CH22.indd 617 3/3/20 11:13 AM

An increasing body of evidence shows impressive correlations between charismatic leadership and
high performance and satisfaction among followers.36 Although one study found that charismatic CEOs
had no impact on subsequent organisational performance, charisma is still believed to be a desirable
leadership quality.37
If charisma is desirable, can people learn to be charismatic leaders? Or are charismatic leaders born
with their qualities? Although a small number of experts still think that charisma can’t be learned, most
believe that individuals can be trained to exhibit charismatic behaviours.38 For example, researchers have
succeeded in teaching undergraduate students to ‘be’ charismatic. Students were taught to articulate
a far-reaching goal, communicate high performance expectations, exhibit confidence in the ability
of subordinates to meet those expectations, and empathise with the needs of their subordinates; they
learned to project a powerful, confident and dynamic presence; and they practised using a captivating
and engaging voice tone. The researchers also trained the student leaders to use charismatic non-verbal
behaviours, including leaning towards the follower when communicating, maintaining direct eye contact,
and having a relaxed posture and animated facial expressions. In groups with these ‘trained’ charismatic
leaders, members had higher task performance, higher task adjustment, and better adjustment to the
leader and to the group than did group members who worked in groups led by non-charismatic leaders.
One last thing we should say about charismatic leadership is that it may not always be necessary
to achieve high levels of employee performance. It may be most appropriate when the follower’s task
has an ideological purpose or when the environment involves a high degree of stress and uncertainty.39
This aspect may explain why, when charismatic leaders surface, it’s more likely to be in politics, religion
or wartime; or when a business firm is starting up or facing a survival crisis. For example, Martin
Luther King, Jr used his charisma to bring about social equality through non-violent means, and Steve
Jobs achieved unwavering loyalty and commitment from Apple’s technical staff in the early 1980s by
articulating a vision of personal computers that would dramatically change the way people lived.
visionary
leadership Although the term vision is often linked with charismatic leadership, visionary leadership is
The ability to create different: it’s the ability to create and articulate a realistic, credible and attractive vision of the future that
and articulate a realistic, improves on the present situation.40 This vision, if properly selected and implemented, is so energising
credible and attractive
that it ‘in effect jump-starts the future by calling forth the skills, talents and resources to make it happen’.41
vision of
the future that improves An organisation’s vision should offer clear and compelling imagery that taps into people’s emotions
on the present situation and inspires enthusiasm to pursue the organisation’s goals. It should be able to generate possibilities
Leading sustainability
As we’ve discussed throughout this book, leadership on sustainability • being aware of the social dynamics of change
issues can emerge from any level or area of an organisation. In fact, • creating conversations between people with diverse
the Sustainability Leadership Institute has proposed that ‘anyone perspectives to generate new understandings and solutions
willing to challenge old assumptions and genuinely engage with • engaging in holistic thinking to understand interrelationships
others to find integrated and long term solutions can be a between people, organisations and their environment, and to
sustainability leader’ and has identified eight key practices or understand the consequences of possible actions
behaviours of sustainability leaders:42 • continuously learning by experimenting, reflecting, learning from
• empowering themselves to take responsibility for leading change others and sharing their lessons
• being consciously aware of themselves and how they are • treating leadership and change as occurring in fluid contexts and
interacting with others constantly updating plans and expectations to reflect new
• creating transformative change by developing creative tension developments.
and leveraging power relationships to find solutions for
sustainability issues
9780655702412_CH22.indd 618 3/3/20 11:13 AM

that are inspirational and unique and offer new ways of doing things that are clearly better for the
organisation and its members. Visions that are clearly articulated and have powerful imagery are easily
grasped and accepted. For example, Michael Dell created a vision of a business that sells and delivers
customised PCs directly to customers in less than a week.
What about leaders and teams?

Because leadership is increasingly taking place within a team context and more organisations are using
work teams, the role of the leader in guiding team members has become increasingly important. One study
looking at organisations that had reorganised themselves around employee teams found certain common
responsibilities of all leaders. These responsibilities included coaching, facilitating, handling disciplinary
problems, reviewing team and individual performance, training and communication.43 However, a more
meaningful way to describe the team leader’s job is to focus on two priorities: (1) managing the team’s
external boundary, and (2) facilitating the team process.44 These priorities entail four specific leadership
roles, as shown in Figure 22.3.
However, many leaders aren’t equipped to handle the change to employee teams. As one consultant
noted, ‘Even the most capable managers have trouble making the transition because all the command-
and-control type things they were encouraged to do before are no longer appropriate. There’s no reason
to have any skill or sense of this.’45 This same consultant estimated that ‘probably 15 per cent of managers
are natural team leaders; another 15 per cent could never lead a team because it runs counter to their
personality – that is, they’re unable to sublimate their dominating style for the good of the team. Then
there’s that huge group in the middle: Team leadership doesn’t come naturally to them, but they can
learn it.’46
The most ‘dangerous’ leadership trait: 32 per cent

of team members say indecisiveness and
over-cautiousness; 26 per cent say selfishness.47
The challenge for many managers is learning how to become an effective team leader. They have
to learn skills such as patiently sharing information, being able to trust others and to give up authority,
and understanding when to intervene. Effective team leaders have mastered the difficult balancing act of
knowing when to leave their teams alone and when to get involved. New team leaders may try to retain
too much control at a time when team members need more autonomy, or they may abandon their teams
at times when the teams need support and help.48
Liaisons with
Coaches
external constituents
Ef fective
team leadership
roles
Conflict managers Troubleshooters
Figure 22.3 Team Leader Roles
9780655702412_CH22.indd 619 3/3/20 11:13 AM

What issues do today’s leaders face?

Leading effectively in today’s environment involves challenges for many leaders. Twenty-first-century
leaders face some important leadership issues. In this section, we look at these issues, including
empowering employees, cross-cultural leadership, and emotional intelligence and leadership.
Say what? Lead by NOT leading

Why do leaders need to empower employees?
As we’ve described in different places throughout the text, managers are increasingly leading by not
empowerment leading; that is, by empowering their employees. Empowerment involves increasing the decision-
The act of increasing making discretion of workers. Millions of individual employees and employee teams are making the key
the decision-making operating decisions that directly affect their work. They’re developing budgets, scheduling workloads,
discretion of workers
controlling inventories, solving quality problems and engaging in similar activities that until very recently
were viewed exclusively as part of the manager’s job.49
One reason more companies are empowering employees is the need for quick decisions by those
people who are most knowledgeable about the issues – often those at lower organisational levels. If
organisations want to successfully compete in a dynamic global economy, employees have to be able to
make decisions and implement changes quickly. Another reason is that organisational downsizings left
many managers with larger spans of control. In order to cope with the increased work demands, managers
had to empower their people. Although empowerment isn’t a universal answer, it can be beneficial when
employees have the knowledge, skills and experience to do their jobs competently.
Does national culture affect leadership?

One general conclusion that surfaces from leadership research is that effective leaders don’t use a single
style. They adjust their style to the situation. Although not mentioned explicitly, national culture is
certainly an important situational variable in determining which leadership style will be most effective.
What works in China isn’t likely to be effective in
France or Canada. For example, one study of Asian
leadership styles revealed that Asian managers
preferred leaders who were competent decision
makers, effective communicators and supportive of
employees.50 Another study of leadership in Sub-
Saharan Africa found that charismatic leaders can
help overcome cultural problems of corruption,
poverty, tribalism and violence.51
National culture affects leadership style because
it influences how followers will respond. Leaders
can’t (and shouldn’t) just choose their styles
randomly. They’re constrained by the cultural
conditions their followers have come to expect.
Table 22.2 provides some findings from selected
examples of cross-cultural leadership studies.
In China, the cultural value of collectivism affects the relationship between
leaders and followers such as Yuki Tan, president of fashion retailer Folli Follie Because most leadership theories were developed
China, and store employees. During store visits, Tan displays her effective in the United States, they have an American bias.
paternalistic leadership style of caring for her loyal, dependable and hard- They emphasise follower responsibilities rather
working employees.
than rights; assume self-gratification rather than
Ton Koene/ZUMApress/Newscom
commitment to duty or altruistic motivation; assume
9780655702412_CH22.indd 620 3/3/20 11:13 AM

Table 22.2 Cross-cultural leadership

• Korean leaders are expected to be paternalistic towards employees.
• Arab leaders who show kindness or generosity without being asked to do so are seen by other Arabs as weak.
• Japanese leaders are expected to be humble and speak frequently.
• Scandinavian and Dutch leaders who single out individuals with public praise are likely to embarrass, not energise, those
individuals.
• Effective leaders in Malaysia are expected to show compassion while using more of an autocratic than a participative style.
• Effective German leaders are characterised by high performance orientation, low compassion, low self-protection, low team
orientation, high autonomy and high participation.
Source: Based on J. C. Kennedy, ‘Leadership in Malaysia: Traditional Values, International Outlook’, Academy of Management Executive, August
2002, pp. 15–17; F. C. Brodbeck, M. Frese and M. Javidan, ‘Leadership Made in Germany: Low on Compassion, High on Performance’, Academy of
Management Executive, February 2002, pp. 16–29; M. F. Peterson and J. G. Hunt, ‘International Perspectives on International Leadership’, Leadership
Quarterly, Fall 1997, pp. 203–31; R. J. House and R. N. Aditya, ‘The Social Scientific Study of Leadership: Quo Vadis?’, Journal of Management, vol. 23,
no. 3 (1997), p. 463; and R. J. House, ‘Leadership in the Twenty-First Century’, in A. Howard (ed.), The Changing Nature of Work (San Francisco: Jossey-
Bass, 1995), p. 442.
centrality of work and democratic value orientation; and stress rationality rather than spirituality, religion
or superstition.52 However, the GLOBE research program, which we first introduced in Chapter 15, is
the most extensive and comprehensive cross-cultural study of leadership ever undertaken. The GLOBE
study has found that there are some universal aspects to leadership. Specifically, a number of elements of
transformational leadership appear to be associated with effective leadership regardless of what country
the leader is in.53 These elements include vision, foresight, providing encouragement, trustworthiness,
dynamism, positivity and proactiveness. The results led two members of the GLOBE team to conclude
that ‘effective business leaders in any country are expected by their subordinates to provide a powerful
and proactive vision to guide the company into the future, strong motivational skills to stimulate all
employees to fulfill the vision, and excellent planning skills
to assist in implementing the vision’.54 Some people suggest
that the universal appeal of these transformational leader
characteristics is due to the pressures towards common
technologies and management practices, as a result of global
competitiveness and multinational influences.
Becoming a STAR ✯ leader
How does emotional intelligence

affect leadership?
We introduced emotional intelligence (EI) in our discussion
of emotions in Chapter 19. We revisit the topic here
because of recent studies indicating that EI – more than IQ,
expertise or any other single factor – is the best predictor of PepsiCo CEO Indra Nooyi is a leader with high emotional intelligence.
who will emerge as a leader.55 Shown here listening to an employee at the firm’s yoghurt plant,
As we said in our earlier discussion of trait research, Nooyi possesses the five EI components that have contributed to her
excellent performance in jobs that demand a high degree of social
leaders need basic intelligence and job-relevant knowledge. interaction with workers, customers and business leaders throughout
But IQ and technical skills are ‘threshold capabilities’. the world
They’re necessary but not sufficient requirements for © DONALD HEUPEL/Reuters/Corbis
9780655702412_CH22.indd 621 3/3/20 11:13 AM

leadership. It’s the possession of the five components of emotional intelligence – self-awareness, self-
management, self-motivation, empathy and social skills – that allows an individual to become a star
performer. Without EI, a person can have outstanding training, a highly analytical mind, a long-term
vision and an endless supply of terrific ideas but still not make a great leader, especially as individuals
move up in an organisation. The evidence indicates that the higher the rank of a person considered to be
a star performer, the more that EI capabilities surface as the reason for their effectiveness. Specifically,
when star performers were compared with average ones in senior management positions, nearly 90 per
cent of the difference in their effectiveness was attributable to EI factors rather than basic intelligence.
EI has been shown to be positively related to job performance at all levels. But it appears to be
especially relevant in jobs that demand a high degree of social interaction. And, of course, that’s what
leadership is all about. Great leaders demonstrate their EI by exhibiting all five of its key components –
self-awareness, self-management, self-motivation, empathy and social skills (see Chapter 19).
Although there has been some controversy about the role of EI in leadership,56 most research makes a
case for concluding that EI is an essential element in leadership effectiveness.57 As such, it could be added
to the list of traits associated with leadership that we described earlier in the chapter.
9780655702412_CH22.indd 622 3/3/20 11:13 AM

Student The leader-participation model relates leadership behaviour and participation to

decision making. It uses a decision tree format with seven contingencies and five
Learning alternative leadership styles.
Centre The path–goal model developed by Robert House identified four leadership
behaviours: directive, supportive, participative and achievement-oriented. House
assumes that a leader can and should be able to use any of these styles. The
two situational contingency variables were found in the environment and in
Reviewing the learning objectives the follower. Essentially, the path–goal model says that a leader should provide
direction and support as needed; that is, structure the path so the followers can
Learning Objective 1. Define leader and leadership. achieve goals.
A leader is someone who can influence others and who has managerial authority.
Leadership is a process of leading a group and influencing that group to achieve Learning Objective 4. Describe modern views of
its goals. Managers should be leaders because leading is one of the four leadership and the issues facing today’s leaders.
management functions. Leader–member exchange (LMX) theory says that leaders create in-groups and
out-groups, and that those in the in-group will have higher performance ratings,
Learning Objective 2. Compare and contrast early less turnover and greater job satisfaction.
leadership theories. A transactional leader exchanges rewards for productivity, whereas a
Early attempts to define leader traits were unsuccessful, although later attempts transformational leader stimulates and inspires followers to achieve goals.
found seven traits associated with leadership. A charismatic leader is an enthusiastic and self-confident leader whose
The University of Iowa studies explored three leadership styles. The only personality and actions influence people to behave in certain ways. People can
conclusion was that group members were more satisfied under a democratic learn to be charismatic. A visionary leader is able to create and articulate a
leader than under an autocratic one. The Ohio State studies identified two realistic, credible and attractive vision of the future.
dimensions of leader behaviour: initiating structure and consideration. A leader A team leader has two priorities: manage the team’s external boundary and
high in both those dimensions at times achieved high group task performance facilitate the team process. Four leader roles are involved: liaison with external
and high group member satisfaction, but not always. The University of Michigan constituencies, troubleshooter, conflict manager and coach.
studies looked at employee- and production-oriented leaders. They concluded The issues facing leaders today include employee empowerment, national
that leaders who were employee oriented could get high group productivity and culture and emotional intelligence. As employees are empowered, the leader’s
high group member satisfaction. The managerial grid looked at leaders’ concern role tends to be one of not leading. As leaders adjust their style to the situation,
for production and concern for people and identified five leader styles. Although one of the most important situational characteristics is national culture. Finally, EI
it suggested that the best leader was one who was high in concern for both is proving to be an essential element in leadership effectiveness.
production and people, there was no substantive evidence for that conclusion.
As the behavioural studies showed, a leader’s behaviour has a dual nature: a
focus on the task and a focus on the people. Discussion questions
❶ Define the terms leader and leadership and discuss why managers should be
Learning Objective 3. Describe the four main leaders.
contingency leadership theories. ➋ Discuss the strengths and weaknesses of the trait theory.
Fiedler’s model attempted to define the best style to use in particular situations. ➌ What does each of the behavioural leadership theories say about leadership?
He measured leader style – relationship oriented or task oriented – using the ➍ What would a manager need to know to use Fiedler’s contingency model?
least-preferred co-worker questionnaire. Fiedler also assumed that a leader’s style Be specific.
was fixed. He measured three contingency dimensions: leader–member relations, ➎ Do you think that most managers in real life use a contingency approach to
task structure and position power. The model suggests that task-oriented increase their leadership effectiveness? Discuss.
leaders performed best in very favourable and very unfavourable situations, and ➏ ‘All managers should be leaders, but not all leaders should be managers.’ Do
relationship-oriented leaders performed best in moderately favourable situations. you agree or disagree with this statement? Support your position.
Hersey and Blanchard’s situational leadership theory focused on followers’ ➐ Do you think trust evolves out of an individual’s personal characteristics or
readiness. They identified four leadership styles: telling (high task–low out of specific situations? Explain.
relationship), selling (high task–high relationship), participating (low task–high ➑ How can organisations develop effective leaders?
relationship) and delegating (low task–low relationship). They also identified four ➒ When might leaders be irrelevant?
stages of readiness: unable and unwilling (use telling style); unable but willing
(use selling style); able but unwilling (use participative style); and able and willing
(use delegating style).
9780655702412_CH22.indd 623 3/3/20 11:13 AM


BEING A GOOD LEADER
The terms management and leadership are frequently used interchangeably. That’s a misnomer. The two aren’t the same, but they are related. Although you don’t need
to hold a management position to be a leader, you’re unlikely to be an effective manager if you can’t be an effective leader.

PERSONAL
P I A INVENTORY
ASSESSMENT
Leadership style indicator

What’s your leadership style? Take this PIA and find out!
Skill basics AI is a large insurance company. In the headquarters office alone, where you’ll be
Simply put, leadership style can be categorised as task- or people-oriented. working, there are more than 1500 employees. The company believes strongly in
Neither one is right for all situations. Although a number of situational variables the personal development of its employees. This belief translates into a
influence the choice of an effective leadership style, four variables seem most philosophy, emanating from the top executive offices, of trust and respect for all
relevant: 68 AI employees. The company is also regularly atop most lists of ‘best companies to
• Task structure. Structured tasks have procedures and rules that minimise work for’, largely due to its progressive work/life programs and strong
ambiguity. The more structured a job is, the less need there is for a leader to commitment to minimising job cuts.
provide task structure. In your new job, you’ll direct the activities of 18 policy-renewal clerks. Their
• Level of stress. Situations differ in terms of time and performance stress. High- jobs require little training and are highly routine. A clerk’s responsibility is to
stress situations favour leaders with experience. Low stress favours a leader’s ensure that renewal notices are sent on current policies, to tabulate any changes
intelligence. in premiums, to advise the sales division if a policy is to be cancelled because it
• Level of group support. Members of close-knit and supportive groups help hasn’t been renewed, and to answer questions and solve problems related to
each other out. They can provide both task support and relationship support. renewals.
Supportive groups make fewer demands on a leader. The people in your work group range in age from 19 to 62, with a median
• Follower characteristics. Personal characteristics of followers – such as age of 25. For the most part they are high school graduates with little prior
experience, ability and motivation – influence which leadership style will be working experience. You will be replacing a long-time AI employee, Jan Allison.
most effective. Employees with extensive experience, strong abilities and high Jan is retiring after 37 years with AI, the past 14 spent as a policy-renewal
motivation don’t require much task behaviour. They will be more effective with supervisor. Because you spent a few weeks in Jan’s group last summer, you’re
a people-oriented style. Conversely, employees with little experience, marginal familiar with Jan’s style and are acquainted with most of the department
abilities and low motivation will perform better when leaders exhibit task- members. But people don’t know you very well and are suspicious of the fact
oriented behaviour. that you’re fresh out of university and have little experience in the department.
Practising the skill The reality is that you got this job because management wanted someone with a
Read through the scenario and follow the directions at the end of it. degree to oversee the department. Your most vocal critic is Lillian Lantz. Lillian is
well into her fifties, has been a policy renewal clerk for over a dozen years and
You recently graduated from university with your degree in business
– as the ‘grand old lady’ of the department – carries a lot of weight with group
administration. You’ve spent the past two summers working at Australian
members. You know that it’ll be very hard to lead this department without
Insurance (AI), filling in as an intern for employees taking their leave over the
Lillian’s support.
Christmas break and school holidays. You have received and accepted an offer to
join AI full time as supervisor of the policy renewal department. Using your knowledge of leadership concepts, which leadership style would you
choose? Explain the reasons for your choice.
9780655702412_CH22.indd 624 3/3/20 11:13 AM

Mini cases
22.1 Gearing up and reaching out
Paying it forward to help people achieve
Melanie Lavelle-Maloney believes leadership is all about being prepared employer before, but it’s absolutely crucial to any business employing staff.’
to ‘move up a gear’ and help others make that move, too.59 Melanie is a Believing that to help and empower others, you must first empower yourself,
member of the Bundjalung Indigenous people from northern New South Melanie studied a diploma in business management to develop her skills
Wales and says coming from a family and cultural background that was in finding the right people for her business, retaining them and managing
inclusive, supportive and focused on helping others is the foundation for her them effectively.
leadership style. Melanie’s professional interest in helping others developed Eight years later, when Melanie returned to Australia, she decided to
when, for two years in the late 1980s, she provided administrative support take on a new challenge and establish her own business consultancy, Con-
to the Queensland Nurses’ Union during a now-historic wage claim. ‘That tact First Business Solutions, to focus on supporting Indigenous people. In
resonated with me; fighting a cause for nurses who really put themselves addition to providing business solutions, marketing, mentoring, training and
out on a limb to help people,’ said Melanie. facilitation to her business clients, Melanie also facilitates workshops for
Several years later, the experience of growing a small construction Indigenous Business Australia and provides advice and mentoring to local
company in the United Kingdom into a multi-million dollar business taught businesses through the Redland City Council’s Business Grow program. Her
her valuable lessons about working towards a vision and learning to own experiences have framed her passion and her focus in helping others.
develop new strengths. Ironically, when Melanie joined her partner Bernie’s ‘Knowledge is power; I really do believe that,’ said Melanie. ‘It’s always
construction company in 1995, the goal was to leave! The grand plan been instrumental in my own personal development, and in advancing my
was for Melanie and Bernie to build up the business, sell it and use the career opportunities, and now I’m motivating other people to progress their
proceeds to fund their relocation to Australia. Melanie and Bernie grew the own too.’
company by expanding the company’s focus from demolition and asbestos Helping others overcome their fears and build their confidence is a
removal to civil engineering, headhunting top people in the industry to join cornerstone of Melanie’s leadership. ‘I tell [workshop] participants, ‘I’ve
their organisation, increasing their workforce from three staff to 30, and done it, you can do it too. You can learn those skills if you are passionate.’
establishing a network of more than 200 contractors that spanned the And helping others ‘move up a gear’ reinforces Melanie’s own confidence
United Kingdom. As the business grew, so did Melanie’s understanding as a leader. ‘I’ve realised my potential and I feel confident going out and
of her own strengths and weaknesses as a business leader. ‘I’m a natural helping others,’ she reflects. ‘People put their trust in me. I’m very proud
marketer and networker so that came easy,’ Melanie said. ‘What didn’t of the difference I am making in people’s lives – Indigenous and non-
come easy was mixing with a lot of highly qualified professional people, Indigenous.’
like architects and surveyors. I felt a little bit intimidated, particularly as the ❶ What values and behaviours characterise Melanie as a leader?
construction industry was very male-dominated at the time. I also struggled ➋ How does Melanie practise contingency leadership?
with being the boss,’ she said. ‘I was too soft, so at first I would end up ➌ Is Melanie a charismatic leader or a visionary leader?
doing their job as well as mine. I knew I had to step things up. Human ➍ How has Melanie used her emotional intelligence and personal
resource management is not an easy role when you have never been the experiences to build trust and credibility as a leader?
22.2 Top-down leadership

‘If that does not suit you, then get out!’
When Lieutenant General David Morrison became chief of the Australian changing the Army’s culture of disrespect and discrimination. The following
Army in June 2011, he found himself at the top of the organisation where year, 17 Army members were alleged to have sent videos and naked
he had spent his whole working life. But within four years, he would lead a photographs of unsuspecting women to 172 soldiers using Australian
radical re-visioning of the Army and its organisational culture.60 Defence Force email systems. Morrison responded by posting a three-
Shortly after he became chief, the then Sex Discrimination Commissioner, minute video message to the entire Australian Army on YouTube stating
Elizabeth Broderick, arranged for Morrison to meet several female soldiers unequivocally that such behaviour wouldn’t be tolerated.
who had experienced abuse, discrimination, harassment and bullying while Those who think that it is okay to behave in a way that demeans or
serving in the Army. Those meetings fostered a powerful commitment to exploits their colleagues, have no place in this army. . . . On all operations,
9780655702412_CH22.indd 625 3/3/20 11:13 AM

22.2 Top-down leadership continued

female soldiers and officers have proven themselves worthy of the BEST per cent of cadets at the Australian Defence Force Academy and 20 per cent
traditions of the Australian Army. They are vital to us, maintaining our of cadets at the Royal Military College at Duntroon; however, as Morrison
capability now, and into the future. If that does not suit you . . . then get out! admitted, ‘that makes lousy use of the talent on offer in 51 per cent of
I will be ruthless in ridding the army of people who cannot live up to Australia’s population’.
its values. And I need every one of you to support me in achieving this. The Since leaving the army, Morrison has continued to advocate for inclusion
standard you walk past is the standard you accept. . . . It is up to us to make as the chair of the Diversity Council of Australia and as the 2016 Australian
a difference. If you’re not up to it, find something else to do with your life. of the Year. In these roles, he has worked with captains of industry to help
There is no place for you amongst this band of brothers and sisters. them see the need to redefine Australian cultural and business stereotypes
The video went viral and within a few weeks had been viewed by over to be more gender and culturally inclusive. He has also fostered discussion
1 million people. Morrison announced that he would use his remaining time and debate around support for diversity. ‘Too many of our fellow Australians
as chief to establish respect as the fourth core value of the Australian Army are denied the opportunity to reach their potential. . . . We as a nation . .
and as ‘the glue that binds the other three [values of courage, integrity . should be able to give them the chance to reach their potential because
and teamwork] together’. As he later recalled, ‘Over the last 16 years there when they do, we all benefit and that’s what true diversity is about and why
have been 13 major enquiries and reports into various aspects of the ADF I am so passionate about it.’
and its culture. . . . I decided that drastic action was necessary. . . . That is ❶ What sort of leadership style does David Morrison have?
why I stated to the Australian people we have a systemic problem with our ➋ Describe David Morrison’s leadership of cultural change in the Army
culture. To pretend otherwise after so many scandals and repeated scrutiny using leader–member exchange theory
is dishonest and self-delusional.’ ➌ Is Morrison a visionary or a charismatic leader? Or both?
Over the next two years, Morrison re-oriented the Army’s culture around ➍ To what extent would organisational context influence Morrison’s
a focus on talent, inclusion and support for diversity. By the time he retired effectiveness as a leader? Would the same leadership approach have
in May 2015, females represented 12 per cent of the Army workforce, 25 been as effective in another type of organisation?
References
1 Most leadership research has focused on the actions and responsibilities of managers Analytic Test of Their Relative Validity’, Personnel Psychology, Spring 2011, pp. 7–52;
and extrapolated the results to leaders and leadership in general. and D. A. Wren and A. G. Bedeian, The Evolution of Management Thought, 6th edn
2 See T. A. Judge, J. E. Bono, R. Ilies and M. W. Gerhardt, ‘Personality and Leadership: (Hoboken, NJ: John Wiley & Sons, 2009), pp. 345–6.
A Qualitative and Quantitative Review’, Journal of Applied Psychology, August 2002, 9 R. R. Blake and J. S. Mouton, The Managerial Grid III (Houston, TX: Gulf Publishing,
pp. 765–80; and S. A. Kirkpatrick and E. A. Locke, ‘Leadership: Do Traits Matter?’, 1984).
Academy of Management Executive, May 1991, pp. 48–60. 10 L. L. Larson, J. G. Hunt and R. N. Osborn, ‘The Great Hi-Hi Leader Behavior Myth: A
3 K. Lewin and R. Lippitt, ‘An Experimental Approach to the Study of Autocracy Lesson from Occam’s Razor’, Academy of Management Journal, December 1976,
and Democracy: A Preliminary Note’, Sociometry, vol. 1 (1938), pp. 292–300; K. pp. 628–41; and P. C. Nystrom, ‘Managers and the Hi-Hi Leader Myth’, Academy of
Lewin, ‘Field Theory and Experiment in Social Psychology: Concepts and Methods’, Management Journal, June 1978, pp. 325–31.
American Journal of Sociology, vol. 44 (1939), pp. 868–96; K. Lewin, R. Lippitt 11 W. G. Bennis, ‘The Seven Ages of the Leader’, Harvard Business Review, January 2004,
and R. K. White, ‘Patterns of Aggressive Behavior in Experimentally Created Social p. 52.
Climates’, Journal of Social Psychology, vol. 10 (1939), pp. 271–301; and R. 12 F. E. Fiedler, A Theory of Leadership Effectiveness (New York: McGraw-Hill, 1967).
Lippitt, ‘An Experimental Study of the Effect of Democratic and Authoritarian Group 13 R. Ayman, M. M. Chemers and F. Fiedler, ‘The Contingency Model of Leadership
Atmospheres’, University of Iowa Studies in Child Welfare, vol. 16 (1940), pp. 43–95. Effectiveness: Its Levels of Analysis’, Leadership Quarterly, Summer 1995, pp. 147–67;
4 B. M. Bass, Stodgill’s Handbook of Leadership (New York: Free Press, 1981), pp. 298–9. C. A. Schriesheim, B. J. Tepper and L. A. Tetrault, ‘Lease Preferred Co-Worker Score,
5 R. Tannenbaum and W. H. Schmidt, ‘How to Choose a Leadership Pattern’, Harvard Situational Control and Leadership Effectiveness: A Meta-Analysis of Contingency
Business Review, May/June 1973, pp. 162–80. Model Performance Predictions’, Journal of Applied Psychology, August 1994,
6 R. M. Stodgill and A. E. Coons (eds), Leader Behavior: Its Description and Measurement, pp. 561–73; and L. H. Peters, D. D. Hartke and J. T. Pholmann, ‘Fiedler’s Contingency
Research Monograph no. 88 (Columbus, OH: Ohio State University, Bureau of Business Theory of Leadership: An Application of the Meta-Analysis Procedures of Schmidt and
Research, 1951). See also S. Kerr, C. A. Schriesheim, C. J. Murphy and R. M. Stodgill, Hunter’, Psychological Bulletin, March 1985, pp. 274–85.
‘Toward a Contingency Theory of Leadership Based upon the Consideration and 14 See B. Kabanoff, ‘A Critique of Leader Match and Its Implications for Leadership
Initiating Structure Literature’, Organizational Behavior and Human Performance, Research’, Personnel Psychology, Winter 1981, pp. 749–64; and E. H. Schein,
August 1974, pp. 62–82; and B. M. Fisher, ‘Consideration and Initiating Structure Organizational Psychology, 3rd edn (Upper Saddle River, NJ: Prentice Hall, 1980),
and Their Relationships with Leader Effectiveness: A Meta Analysis’, in F. Hoy (ed.), pp. 116–17.
Proceedings of the 48th Annual Academy of Management Conference (Anaheim, CA: 15 P. Hersey and K. H. Blanchard, Management of Organizational Behavior: Leading Human
1988), pp. 201–5. Resources, 8th edn (Englewood Cliffs, NJ: Prentice Hall, 2001); and P. Hersey and
7 R. Kahn and D. Katz, ‘Leadership Practices in Relation to Productivity and Morale’, in K. Blanchard, ‘So You Want to Know Your Leadership Style?’, Training and Development
D. Cartwright and A. Zander (eds), Group Dynamics: Research and Theory, 2nd edn Journal, February 1974, pp. 1–15.
(Elmsford, NY: Pow, Paterson, 1960). 16 See, for example, E. G. Ralph, ‘Developing Managers’ Effectiveness: A Model with
8 Past to the Present box based on D. S. Derue, J. D. Nahrgang, N. Wellman and S. E. Potential’, Journal of Management Inquiry, June 2004, pp. 152–63; C. L. Graeff,
Humphrey, ‘Trait and Behavioral Theories of Leadership: An Integration and Meta- ‘Evolution of Situational Leadership Theory: A Critical Review’, Leadership Quarterly
9780655702412_CH22.indd 626 3/3/20 11:13 AM

vol. 8, no. 2 (1997), pp. 153–70; and C. F. Fernandez and R. P. Vecchio, ‘Situational Linkage: A Longitudinal Assessment of Antecedents, Measures and Consequences’,
Leadership Theory Revisited: A Test of an Across-Jobs Perspective’, Leadership Journal of Applied Psychology, February 1986, pp. 56–60.
Quarterly, vol. 8, no. 1 (1997), pp. 67–84. 27 See, for example, F. O. Walumbwa, D. M. Mayer, P. Wang, H. Wang, K. Workman and
17 V. H. Vroom and P. W. Yetton, Leadership and Decision Making (Pittsburgh, PA: A. L. Christensen, ‘Linking Ethical Leadership to Employee Performance: The Roles of
University of Pittsburgh Press, 1973). Leader–Member Exchange Theory, Self-Efficacy and Organizational Identification’,
18 V. H. Vroom and A. G. Jago, The New Leadership: Managing Participation in Organizational Behavior & Human Decision Processes, July 2011, pp. 204–13; K.
Organizations (Upper Saddle River, NJ: Prentice Hall, 1988). See especially Chapter 8. J. Harris, A. R. Wheeler and K. M. Kacmar, ‘The Mediating Role of Organizational
19 See, for example, R. H. G. Field and R. J. House, ‘A Test of the Vroom Yetton Model Embeddedness in the LMX–Outcomes Relationship’, Leadership Quarterly, April 2011,
Using Manager and Subordinate Reports’, Journal of Applied Psychology, June pp. 271–81; W. M. Bowler, J. R. B. Halbesleben and J. R. B. Paul, ‘If You’re Close with
1990, pp. 362–6; J. T. Ettling and A. G. Jago, ‘Participation under Conditions of the Leader, You Must Be a Brownnose: The Role of Leader–Member Relationships in
Conflict: More on the Validity of the Vroom Yetton Model’, Journal of Management Follower, Leader and Coworker Attributions of Organizational Citizenship Behavior
Studies, January 1988, pp. 73–83; C. R. Leana, ‘Power Relinquishment versus Motives’, Human Resource Management Review, December 2010, pp. 309–16; G.
Power Sharing: Theoretical Clarification and Empirical Comparison of Delegation Sears and C. Holmvall, ‘The Joint Influence of Supervisor and Subordinate Emotional
and Participation’, Journal of Applied Psychology, May 1987, pp. 228–33; and R. Intelligence on Leader–Member Exchange’, Journal of Business & Psychology, December
H. G. Field, ‘A Test of the Vroom Yetton Normative Model of Leadership’, Journal of 2010, pp. 593–605; V. Venkataramani, S. G. Green and D. J. Schleicher, ‘Well-Connected
Applied Psychology, October 1982, pp. 523–32. Leaders’ Social Network Ties on LMX and Members’ Work Attitudes’, Journal of Applied
20 For additional information about the exchanges that occur between the leader and Psychology, November 2010, pp. 1071–84; Z. Chen, W. Lam and J. A. Zhong, ‘Leader–
the follower, see A. S. Phillips and A. G. Bedeian, ‘Leader Follower Exchange Quality: Member Exchange and Member Performance: A New Look at Individual-Level Negative
The Role of Personal and Interpersonal Attributes’, Academy of Management Journal, Feedback-Seeking Behavior and Team-Level Empowerment Culture’, Journal of Applied
vol. 37, no. 4 (1994), pp. 990–1001; and T. A. Scandura and C. A. Schriesheim, ‘Leader Psychology, January 2007, pp. 202–12; R. Ilies, J. D. Nahrgang and
Member Exchange and Supervisor Career Mentoring as Complementary Constructs F. P. Morgeson, ‘Leader–Member Exchange and Citizenship Behaviors: A Meta-Analysis’,
in Leadership Research’, Academy of Management Journal, vol. 37, no. 6 (1994), Journal of Applied Psychology, January 2007, pp. 269–77; and C. R. Gerstner and D.
pp. 1588–602. V. Day, ‘Meta-analytic Review of Leader–Member Exchange Theory: Correlates and
21 SmartPulse, ‘How Willing Are You to Step Outside Your Leadership Style “Comfort Zone” Construct Issues’, Journal of Applied Psychology, December 1997, pp. 827–44.
and Try New Techniques?’, <www.smartbrief.com/leadership>, 10 December 2013. 28 B. M. Bass and R. E. Riggio, Transformational Leadership, 2nd edn (Mahwah, NJ:
22 R. J. House, ‘Path-Goal Theory of Leadership: Lessons, Legacy and a Reformulated Lawrence Erlbaum Associates, Inc., 2006), p. 3.
Theory’, Leadership Quarterly, Fall 1996, pp. 323–52; R. J. House and T. R. Mitchell, 29 J. Seltzer and B. M. Bass, ‘Transformational Leadership: Beyond Initiation and
‘Path-Goal Theory of Leadership’, Journal of Contemporary Business, Autumn 1974, Consideration’, Journal of Management, December 1990, pp. 693–703; and B. M. Bass,
p. 86; and R. J. House, ‘A Path-Goal Theory of Leader Effectiveness’, Administrative ‘Leadership: Good, Better, Best’, Organizational Dynamics, Winter 1985, pp. 26–40.
Science Quarterly, September 1971, pp. 321–38. 30 B. J. Avolio and B. M. Bass, ‘Transformational Leadership, Charisma and Beyond’,
23 A. Sagie and M. Koslowsky, ‘Organizational Attitudes and Behaviors as a Function of Working paper, School of Management, State University of New York, Binghamton,
Participation in Strategic and Tactical Change Decisions: An Application of Path-Goal 1985, p. 14.
Theory’, Journal of Organizational Behavior, January 1994, pp. 37–47; and J. C. 31 R. S. Rubin, D. C. Munz and W. H. Bommer, ‘Leading from Within: The Effects of Emotion
Wofford and L. Z. Liska, ‘Path-Goal Theories of Leadership: A Meta-Analysis’, Journal of Recognition and Personality on Transformational Leadership Behavior’, Academy of
Management, Winter 1993, pp. 857–76. Management Journal, October 2005, pp. 845–58; T. A. Judge and J. E. Bono, ‘Five-Factor
24 L. Ma and Q. Qu, ‘Differentiation in Leader–Member Exchange: A Hierarchical Linear Model of Personality and Transformational Leadership’, Journal of Applied Psychology,
Modeling Approach’, Leadership Quarterly, October 2010, pp. 733–44; C. P. Schriesheim, October 2000, pp. 751–65; B. M. Bass and B. J. Avolio, ‘Developing Transformational
S. L. Castro, X. Zhou and F. J. Yamarinno, ‘The Folly of Theorizing “A” but Testing “B”: A Leadership: 1992 and Beyond’, Journal of European Industrial Training, January 1990,
Selective Level-of-Analysis Review of the Field and a Detailed Leader–Member Exchange p. 23; and J. J. Hater and B. M. Bass, ‘Supervisors’ Evaluation and Subordinates’
Illustration’, Leadership Quarterly, Winter 2001, pp. 515–51; Perceptions of Transformational and Transactional Leadership’, Journal of Applied
R. C. Liden, R. T. Sparrowe and S. J. Wayne, ‘Leader–Member Exchange Theory: The Past and Psychology, November 1988, pp. 695–702.
Potential for the Future’, in G. R. Ferris (ed.), Research in Personnel and Human Resource 32 M. Tims, A. B. Bakker and D. Xanthopoulou, ‘Do Transformational Leaders Enhance Their
Management, vol. 15 (Greenwich, CT: JAI Press, 1997), pp. 47–119; G. B. Graen and M. Followers’ Daily Work Engagement?’, Leadership Quarterly, February 2011, pp. 121–31;
Uhl-Bien, ‘Relationship-Based Approach to Leadership: Development of Leader–Member X.-H. (Frank) Wang and J. M. Howell, ‘Exploring the Dual-Level Effects of Transformational
Exchange (LMX) Theory of Leadership over 25 Years: Applying a Multi-Domain Perspective’, Leadership on Followers’, Journal of Applied Psychology, November 2010, pp. 1134–44;
Leadership Quarterly, Summer 1995, pp. 219–47; and R. M. Dienesch and R. C. Liden, A. E. Colbert, A. L. Kristof-Brown, B. H. Bradley and M. R. Barrick, ‘CEO Transformational
‘Leader–Member Exchange Model of Leadership: A Critique and Further Development’, Leadership: The Role of Goal Importance Congruence in Top Management Teams’,
Academy of Management Review, July 1986, pp. 618–34. Academy of Management Journal, February 2008, pp. 81–96; R. F. Piccolo and J. A.
25 J. B. Wu, A. S. Tsui and A. J. Kinicki, ‘Consequences of Differentiated Leadership Colquitt, ‘Transformational Leadership and Job Behaviors: The Mediating Role of Core
in Groups’, Academy of Management Journal, February 2010, pp. 90–106; S. S. Job Characteristics’, Academy of Management Journal, April 2006, pp. 327–40; O.
Masterson, K. Lewis and B. M. Goldman, ‘Integrating Justice and Social Exchange: Epitropaki and R. Martin, ‘From Ideal to Real: A Longitudinal Study of the Role of Implicit
The Differing Effects of Fair Procedures and Treatment on Work Relationships’, Leadership Theories on Leader–Member Exchanges and Employee Outcomes’, Journal of
Academy of Management Journal, August 2000, pp. 738–48; S. J. Wayne, L. J. Applied Psychology, July 2005, pp. 659–76; J. E. Bono and T. A. Judge, ‘Self-Concordance
Shore, W. H. Bommer and L. E. Tetrick, ‘The Role of Fair Treatment and Rewards in at Work: Toward Understanding the Motivational Effects of Transformational Leaders’,
Perceptions of Organizational Support and Leader–Member Exchange’, Journal of Academy of Management Journal, October 2003, pp. 554–71; T. Dvir, D. Eden, B. J.
Applied Psychology, June 2002, pp. 590–8; R. C. Liden, S. J. Wayne and D. Stilwell, ‘A Avolio and B. Shamir, ‘Impact of Transformational Leadership on Follower Development
Longitudinal Study of the Early Development of Leader–Member Exchanges’, Journal and Performance: A Field Experiment’, Academy of Management Journal, August 2002,
of Applied Psychology, August 1993, pp. 662–74; and R. C. Liden and G. Graen, pp. 735–44;
‘Generalizability of the Vertical Dyad Linkage Model of Leadership’, Academy of N. Sivasubramaniam, W. D. Murry, B. J. Avolio and D. I. Jung, ‘A Longitudinal Model
Management Journal, September 1980, pp. 451–65. of the Effects of Team Leadership and Group Potency on Group Performance’, Group
26 V. L. Goodwin, W. M. Bowler and J. L. Whittington, ‘A Social Network Perspective on and Organization Management, March 2002, pp. 66–96; J. M. Howell and B. J. Avolio,
LMX Relationships: Accounting for the Instrumental Value of Leader and Follower ‘Transformational Leadership, Transactional Leadership, Locus of Control and Support
Networks’, Journal of Management, August 2009, pp. 954–80; R. Vecchio and D. M. for Innovation: Key Predictors of Consolidated-Business-Unit Performance’, Journal
Brazil, ‘Leadership and Sex-Similarity: A Comparison in a Military Setting’, Personnel of Applied Psychology, December 1993, pp. 891–911; R. T. Keller, ‘Transformational
Psychology, vol. 60 (2007), pp. 303–35; M. Uhl-Bien, ‘Relationship Development Leadership and the Performance of Research and Development Project Groups’, Journal of
as a Key Ingredient for Leadership Development’, in S. E. Murphy and R. E. Riggio Management, September 1992, pp. 489–501; and B. M. Bass and B. J. Avolio, ‘Developing
(eds), Future of Leadership Development (Mahwah, NJ: Lawrence Erlbaum, 2003), Transformational Leadership: 1992 and Beyond’, Journal of European Industrial Training,
pp. 129–47; R. C. Liden, S. J. Wayne and D. Stilwell, ‘A Longitudinal Study of the January 1990, p. 23.
Early Development of Leader–Member Exchanges’, Journal of Applied Psychology, 33 M. Thompson and B. Tracy, ‘Building a Great Organization’, Leader to Leader, Fall 2010,
August 1993, pp. 662–74; and D. Duchon, S. G. Green and T. D. Taber, ‘Vertical Dyad pp. 45–9; and F. Vogelstein, ‘Mighty Amazon’, Fortune, 26 May 2003, pp. 60–74.
9780655702412_CH22.indd 627 3/3/20 11:13 AM

34 J. M. Crant and T. S. Bateman, ‘Charismatic Leadership Viewed from above: The 48 D. S. DeRue, C. M. Barnes and F. M. Morgeson, ‘Understanding the Motivational
Impact of Proactive Personality’, Journal of Organizational Behavior, February 2000, Contingencies of Team Leadership’, Small Group Research, October 2010, pp. 621–51;
pp. 63–75; G. Yukl and J. M. Howell, ‘Organizational and Contextual Influences on the B. Meredith, ‘Leader Characteristics: Is there a Shift in Requirements?’, Leadership
Emergence and Effectiveness of Charismatic Leadership’, Leadership Quarterly, Summer Excellence, September 2010, p. 19; B. Neal, ‘Heroes and Sidekicks: Ensuring Proper
1999, pp. 257–83; and J. A. Conger and R. N. Kanungo, ‘Behavioral Dimensions of Followership’, T&D, September 2010, pp. 76–7; R. D. Ramsey, ‘Preparing to Be
Charismatic Leadership’, in J. A. Conger, R. N. Kanungo and Associates, Charismatic Tomorrow’s Leader Today’, Supervision, January 2010, p. 79; N. Steckler and N. Fondas,
Leadership (San Francisco: Jossey-Bass, 1988), pp. 78–97. ‘Building Team Leader Effectiveness: A Diagnostic Tool’, Organizational Dynamics,
35 J. A. Conger and R. N. Kanungo, Charismatic Leadership in Organizations (Thousand Winter 1995, p. 20.
Oaks, CA: Sage, 1998). 49 J. Fabre, ‘The Importance of Empowering Front-Line Staff’, Supervision, December
36 F. Walter and H. Bruch, ‘An Affective Events Model of Charismatic Leadership Behavior: 2010, pp. 6–7; S. Raub and C. Robert, ‘Differential Effects of Empowering Leadership
A Review, Theoretical Investigation and Research Agenda’, Journal of Management, on In-Role and Extra-Role Employee Behaviors: Exploring the Role of Psychological
December 2009, pp. 1428–52; K. S. Groves, ‘Linking Leader Skills, Follower Attitudes Empowerment and Power Values’, Human Relations, November 2010, pp. 1743–70;
and Contextual Variables via an Integrated Model of Charismatic Leadership’, Journal N. D. Cakar and A. Erturk, ‘Comparing Innovation Capability of Small and Medium-
of Management, April 2005, pp. 255–77; J. J. Sosik, ‘The Role of Personal Values in the Sized Enterprises: Examining the Effects of Organizational Culture and Empowerment’,
Charismatic Leadership of Corporate Managers: A Model and Preliminary Field Study’, Journal of Small Business Management, July 2010, pp. 325–59; A. Srivastava, K. M.
Leadership Quarterly, April 2005, pp. 221–44; A. H. B. deHoogh, D. N. den Hartog, Bartol and E. A. Locke, ‘Empowering Leadership in Management Teams: Effects on
P. L. Koopman, H. Thierry, P. T. van den Berg, J. G. van der Weide and C. P. M. Wilderom, Knowledge Sharing, Efficacy and Performance’, Academy of Management Journal,
‘Leader Motives, Charismatic Leadership and Subordinates’ Work Attitudes in the Profit December 2006, pp. 1239–51; P. K. Mills and G. R. Ungson, ‘Reassessing the Limits
and Voluntary Sector’, Leadership Quarterly, February 2005, pp. 17–38; of Structural Empowerment: Organizational Constitution and Trust as Controls’,
J. M. Howell and B. Shamir, ‘The Role of Followers in the Charismatic Leadership Academy of Management Review, January 2003, pp. 143–53; W. A. Rudolph and M.
Process: Relationships and their Consequences’, Academy of Management Review, Sashkin, ‘Can Organizational Empowerment Work in Multinational Settings?’, Academy
January 2005, pp. 96–112; J. Paul, D. L. Costley, J. P. Howell, P. W. Dorfman and of Management Executive, February 2002, pp. 102–15; C. Gomez and B. Rosen, ‘The
D. Trafimow, ‘The Effects of Charismatic Leadership on Followers’ Self-Concept Leader–Member Link between Managerial Trust and Employee Empowerment’, Group &
Accessibility’, Journal of Applied Social Psychology, September 2001, pp. 1821–44; J. Organization Management, March 2001, pp. 53–69; C. Robert and
A. Conger, T. M. Probst, ‘Empowerment and Continuous Improvement in the United States,
R. N. Kanungo and S. T. Menon, ‘Charismatic Leadership and Follower Effects’, Mexico, Poland and India’, Journal of Applied Psychology, October 2000, pp. 643–58;
Journal of Organizational Behavior, vol. 21 (2000), pp. 747–67; R. W. Rowden, R. C. Herrenkohl, G. T. Judson and J. A. Heffner, ‘Defining and Measuring Employee
‘The Relationship between Charismatic Leadership Behaviors and Organizational Empowerment’, Journal of Applied Behavioral Science, September 1999, p. 373; R. C.
Commitment’, Leadership & Organization Development Journal, January 2000, Ford and M. D. Fottler, ‘Empowerment: A Matter of Degree’, Academy of Management
pp. 30–5; G. P. Shea and C. M. Howell, ‘Charismatic Leadership and Task Feedback: Executive, August 1995, pp. 21–31; and W. A. Rudolph, ‘Navigating the Journey to
A Laboratory Study of their Effects on Self-Efficacy’, Leadership Quarterly, Fall 1999, Empowerment’, Organizational Dynamics, Spring 1995, pp. 19–32.
pp. 375–96; S. A. Kirkpatrick and E. A. Locke, ‘Direct and Indirect Effects of Three Core 50 F. W. Swierczek, ‘Leadership and Culture: Comparing Asian Managers’, Leadership &
Charismatic Leadership Components on Performance and Attitudes’, Journal of Applied Organization Development Journal, December 1991, pp. 3–10.
Psychology, February 1996, pp. 36–51; D. A. Waldman, B. M. Bass and F. J. Yammarino, 51 I. Wanasika, J. P. Howell, R. Littrell and P. Dorfman, ‘Managerial Leadership and Culture
‘Adding to Contingent-Reward Behavior: The Augmenting Effect of Charismatic in Sub-Saharan Africa’, Journal of World Business, April 2011, pp. 234–41.
Leadership’, Group & Organization Studies, December 1990, pp. 381–94; and R. J. 52 R. J. House, ‘Leadership in the Twenty-First Century’, in A. Howard (ed.), The Changing
House, J. Woycke and E. M. Fodor, ‘Charismatic and Noncharismatic Leaders: Differences Nature of Work (San Francisco: Jossey-Bass, 1995), p. 443; M. F. Peterson and J. G. Hunt,
in Behavior and Effectiveness’, in J. A. Conger, R. N. Kanungo and Associates, ‘International Perspectives on International Leadership’, Leadership Quarterly, Fall 1997,
Charismatic Leadership (San Francisco: Jossey-Bass, 1988), pp. 103–4. pp. 203–31; and J. R. Schermerhorn and M. H. Bond, ‘Cross-Cultural Leadership in
37 B. R. Agle, N J. Nagarajan, J. A. Sonnenfeld and D. Srinivasan, ‘Does CEO Charisma Collectivism and High Power Distance Settings’, Leadership & Organization Development
Matter? An Empirical Analysis of the Relationships among Organizational Performance, Journal, vol. 18, no. 4/5 (1997), pp. 187–93.
Environmental Uncertainty and Top Management Team Perceptions of CEO Charisma’, 53 I. Wanasika, J. P. Howell, R. Littrell and P. Dorfman, ‘Managerial Leadership and Culture
Academy of Management Journal, February 2006, pp. 161–74. in Sub-Saharan Africa’, Journal of World Business, April 2011, pp. 234–41; R. J. House,
38 R. Birchfield, ‘Creating Charismatic Leaders’, Management, June 2000, pp. 30–1; S. P. J. Hanges, S. A. Ruiz-Quintanilla, P. W. Dorfman and Associates, ‘Culture Specific
Caudron, ‘Growing Charisma’, Industry Week, 4 May 1998, pp. 54–5; and J. A. Conger and and Cross-Culturally Generalizable Implicit Leadership Theories: Are the Attributes of
R. N. Kanungo, ‘Training Charismatic Leadership: A Risky and Critical Task’, in J. A. Conger, Charismatic/Transformational Leadership Universally Endorsed?’, Leadership Quarterly,
R. N. Kanungo and Associates, Charismatic Leadership (San Francisco: Jossey-Bass, 1988), Summer 1999, pp. 219–56; and D. E. Carl and M. Javidan, ‘Universality of Charismatic
pp. 309–23. Leadership: A Multi-Nation Study’, paper presented at the National Academy of
39 J. G. Hunt, K. B. Boal and G. E. Dodge, ‘The Effects of Visionary and Crisis-Responsive Management Conference, Washington, DC, August 2001.
Charisma on Followers: An Experimental Examination’, Leadership Quarterly, Fall 1999, 54 D. E. Carl and M. Javidan, ‘Universality of Charismatic Leadership: A Multi-Nation
pp. 423–48; R. J. House and R. N. Aditya, ‘The Social Scientific Study of Leadership: Quo Study’, paper presented at the National Academy of Management Conference,
Vadis?’, Journal of Management, vol. 23, no. 3 (1997), pp. 316–23; and R. J. House, ‘A Washington, DC, August 2001, p. 29.
1976 Theory of Charismatic Leadership’, (Ontario: Toronto University, 1976). 55 This section is based on D. Goleman, R. E. Boyatzis and A. McKee, Primal Leadership:
40 This definition is based on M. Sashkin, ‘The Visionary Leader’, in J. A. Conger, R. N. Realizing the Power of Emotional Intelligence (Boston: Harvard Business School Press,
Kanungo and Associates, Charismatic Leadership (San Francisco: Jossey-Bass, 1988), 2002); D. R. Caruso, J. D. Mayer and P. Salovey, ‘Emotional Intelligence and Emotional
pp. 124–5; B. Nanus, Visionary Leadership (New York: Free Press, 1992), p. 8; N.H. Leadership’, in R. E. Riggio, S. E. Murphy and F. J. Pirozzolo (eds), Multiple Intelligences
Snyder and M. Graves, ‘Leadership and Vision’, Business Horizons, January–February and Leadership (Mahwah, NJ: Lawrence Erlbaum, 2002), pp. 55–74; J. M. George,
1994, p. 1; and J. R. Lucas, ‘Anatomy of a Vision Statement’, Management Review, ‘Emotions and Leadership: The Role of Emotional Intelligence’, Human Relations,
February 1998, pp. 22–6. August 2000, pp. 1027–55; D. Goleman, ‘What Makes a Leader?’, Harvard Business
41 B. Nanus, Visionary Leadership (New York: Free Press, 1992), p. 8. Review, November–December 1998, pp. 93–102; and D. Goleman, Working with
42 M. A. Ferdig, ‘Sustainability Leadership Relational Model’, Emotional Intelligence (New York: Bantam, 1998).
<www.sustainabilityleadershipinstitute.org>, accessed 30 January 2013. 56 F. Walter, M. S. Cole and R. H. Humphrey, ‘Emotional Intelligence: Sine Qua Non of
43 R. S. Wellins, W. C. Byham and G. R. Dixon, Inside Teams (San Francisco: Jossey-Bass, Leadership or Folderol?’, Academy of Management Perspectives, February 2011,
1994), p. 318. pp. 45–59.
44 N. Steckler and N. Fondas, ‘Building Team Leader Effectiveness: A Diagnostic Tool’, 57 See F. Walter, M. S. Cole and R. H. Humphrey, ‘Emotional Intelligence: Sine Qua Non
Organizational Dynamics, Winter 1995, p. 21. of Leadership or Folderol?’, Academy of Management Perspectives, February 2011,
45 S. Caminiti, ‘What Team Leaders Need to Know’, Fortune, 20 February 1995, p. 93. pp. 45–59; L. A. Zampetakis and V. Moustakis, ‘Managers’ Trait Emotional Intelligence
46 S. Caminiti, ‘What Team Leaders Need to Know’, Fortune, 20 February 1995, p. 100. and Group Outcomes: The Case of Group Job Satisfaction’, Small Group Research,
47 SmartPulse, ‘Which of these Characteristics is the Most Dangerous Leadership Trait?’, February 2011, pp. 77–102; H.-W. Vivian Tang, M.-S. Yin and D. B. Nelson, ‘The
<www.smartbrief.com/leadership>, 1 July 2014. Relationship between Emotional Intelligence and Leadership Practices’, Journal of
9780655702412_CH22.indd 628 3/3/20 11:13 AM

Managerial Psychology, vol. 25, no. 8 (2010), pp. 899–926; P. K. Chopra and G. K. 12 June 2013, accessed 21 October 2017; ‘Chief of Army Lieutenant General
Kanji, ‘Emotional Intelligence: A Catalyst for Inspirational Leadership and Management David Morrison Introduces New Army Value “Respect”’, <https://www.youtube.com/
Excellence’, Total Quality Management & Business Excellence, October 2010, watch?v=ENL6zDhzUxs>, 4 July 2013, accessed 22 October 2017; D. Morrison and L.
pp. 971–1004; R. Boyatzis and A. McKee, ‘Intentional Change’, Journal of Organizational Sales, ‘“Create the Society You Want to Live in” urges Chief of Army’, The 7.30 Report,
Excellence, Summer 2006, pp. 49–60; and R. Kerr; J. Garvin, N. Heaton and E. Boyle, 11 May 2015; H. Davidson, ‘David Morrison, Former Chief of Army, Named Australian
‘Emotional Intelligence and Leadership Effectiveness’, Leadership and Organizational of the Year’, The Guardian, 25 January 2016; D. Smith, ‘Australian of the Year: David
Development Journal, April 2006, pp. 265–79. Morrison, Former Army Chief, Given Top Honour for Gender Equality Work’, ABC News,
58 Based on R. J. House and R. N. Aditya, ‘The Social Scientific Study of Leadership: Quo 26 January 2016; C. Sibthorpe, ‘Former Army Chief David Morrison New Chairman of
Vadis?’, Journal of Management, June 1997, pp. 409–73; and G. A. Yukl, Leadership in Diversity Council Australia’, Canberra Times, 3 September 2015; E. Partridge and D.
Organizations, 7th edn (Upper Saddle River, NJ: Prentice Hall, 2010). Wroe, ‘Jedi Council Members Face Criminal Charges over Army Sex Scandal’, Sydney
59 ‘Taking the Lead’, Inspire, May 2014, <www.iba.gov.au>, accessed 4 December Morning Herald, 15 November 2013; and L. Burke, ‘Australian of the Year David
2014; and ‘Contact First Business Solutions’, <www.contactfirst.com.au>, accessed Morrison Pulls No Punches in First Speech’, News.com, 26 January 2016.
4 December 2014.
60 D. Morrison, Chief of Army Lieutenant General David Morrison Message about
Unacceptable Behaviour, <https://www.youtube.com/watch?v=QaqpoeVgr8U>,
9780655702412_CH22.indd 629 3/3/20 11:13 AM

Chapter
23 Understanding groups and

managing work teams
Based on reports in business periodicals, you’d think that every organisation has restructured itself around
teams. It’s become almost an article of faith that team-based organisations will always outperform the more
traditional organisations that are designed around individuals. As you’ll see in this chapter, teams can be
very effective devices for accomplishing tasks. But one size doesn’t fit all! For tasks that demand leaps in
creative thinking, individuals will often outperform teams. Additionally, teams can dilute responsibility –
which can lead to the taking of outsized risks and allow contributors to hide behind the work of others.
Managers today believe that the use of teams allows their organisations to increase sales or produce
better products faster and at lower costs. Although efforts to create teams aren’t always successful, well-
planned teams can reinvigorate productivity and better position an organisation to deal with a rapidly
changing environment.
You’ve probably had a lot of experience working on a team – to complete a class project, to play
sport, to raise funds for a charity or to generate sales at work. Work teams are one of the realities – and
challenges – of managing in today’s dynamic global environment. Many organisations have made the
move to restructure work around teams rather than individuals. Why? What do these teams look like?
And how can managers build effective teams? These are some of the questions we’ll be answering in this
chapter. Before we can understand teams, however, we first need to understand some basics about groups
and group behaviour.
Learning Objective 1 Define a group, and describe the stages of group development.
What is a group, and what stages of development do groups go
Learning through? pp. 632–33
Objectives Learning Objective 2 Describe the main concepts of group behaviour.
What are the main concepts of group behaviour? pp. 634–37
Learning Objective 3 Discuss how groups are turned into effective teams.
How are groups turned into effective teams? pp. 637–45
Learning Objective 4 Discuss contemporary issues in managing teams.
What current issues do managers face in managing teams? pp. 645–47
9780655702412_CH23.indd 630 3/3/20 11:14 AM

Chapter 23 Understanding groups and managing work teams 631
LO 1
Define a group,
and describe the
stages of group
development.
fact or fiction?
LO 2
Describe the main
concepts of group
behaviour.
Teams almost always

outperform employees
LO 3
working individually.
Discuss how groups
are turned into
effective teams.
fiction
LO 4
Discuss
contemporary issues
in managing teams.
9780655702412_CH23.indd 631 3/3/20 11:14 AM

What is a group, and what stages of

development do groups go through?
Managers would like their work groups to be successful at their tasks. The first step in achieving this goal
is to understand what a group is and how groups develop.
What is a group?
group A group is defined as two or more interacting and interdependent individuals who come together to
Two or more interacting achieve specific goals. Formal groups are work groups that are defined by the organisation’s structure
and interdependent
individuals who come and have designated work assignments and specific tasks directed at accomplishing organisational goals.
together to achieve Table 23.1 provides some examples. Informal groups are social groups. These groups occur naturally in
specific goals the workplace and tend to form around friendships and common interests. For example, five employees
from different departments who regularly eat lunch together are an informal group.
What are the stages of group development?

forming stage
The first stage of
Five stages of group development
group development in
which people join the
Research shows that groups develop through five stages.1 As shown in Figure 23.1, these five stages are:
group and then define
the group’s purpose, forming, storming, norming, performing and adjourning.
structure and leadership The forming stage has two phases. The first occurs as people join the group. In a formal group,
people join because of some work assignment. Once they’ve joined, the second phase begins: defining the
storming stage
The second stage of group’s purpose, structure and leadership. This phase involves a great deal of uncertainty as members ‘test
group development, the waters’ to determine what types of behaviour are acceptable. This stage is complete when members
which is characterised by begin to think of themselves as part of a group.
intragroup conflict
The storming stage is appropriately named because of the intragroup conflict. There’s conflict
norming stage over who will control the group and what the group needs to be doing. When this stage is complete, a
The third stage of group relatively clear hierarchy of leadership and agreement on the group’s direction will be evident.
development, which
The norming stage is one in which close relationships develop and the group becomes cohesive.
is characterised by
close relationships and The group now demonstrates a strong sense of group identity and camaraderie. This stage is complete
cohesiveness when the group structure solidifies and the group has assimilated a common set of expectations (or
norms) regarding member behaviour.
performing stage
The fourth stage is the performing stage. The group structure is in place and accepted by group
The fourth stage of
group development, members. Their energies have moved from getting to know and understand each other to working on the
when the group is fully
functional and works on
the group task
Table 23.1 Examples of formal work groups
• Command groups: Groups that are determined by the organisation chart and composed of individuals who report directly to a
given manager.
• Task groups: Groups composed of individuals brought together to complete a specific job task; their existence is often
temporary because when the task is completed, the group disbands.
• Cross-functional teams: Groups that bring together the knowledge and skills of individuals from various work areas, or
groups whose members have been trained to do each other’s jobs.
• Self-managed teams: Groups that are essentially independent and that, in addition to their own tasks, take on traditional
managerial responsibilities, such as hiring, planning and scheduling, and evaluating performance.
9780655702412_CH23.indd 632 3/3/20 11:14 AM

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

Forming Storming Norming Performing Adjourning
Figure 23.1 Stages of group development
group’s task. This is the last stage of development for permanent work groups. However, for temporary
groups – project teams, task forces or similar groups that have a limited task to do – the final stage is the
adjourning stage. In this stage, the group prepares to disband. Attention is focused on wrapping up adjourning stage
activities instead of task performance. Group members react in different ways. Some are upbeat, thrilled The final stage of
group development
about the group’s accomplishments. Others may be sad over the loss of camaraderie and friendships.
for temporary groups,
Think of a class project you’ve been involved in and you’ve probably experienced these stages first- during which groups
hand. Group members are selected or assigned and then meet for the first time. There’s a ‘feeling out’ prepare to disband
period to assess what the group is going to do and how it’s going to be done. This is usually followed by
a battle for control: Who’s going to be in charge? Once this issue is resolved and a ‘hierarchy’ agreed on,
the group identifies specific work that needs to be done, who’s going to do each part of the project and
dates by which the assigned work needs to be completed. General expectations are established. These
decisions form the foundation for what you hope will be a coordinated group effort culminating in a
project that’s been done well. Once the project is complete and turned in, the group breaks up. Of course,
some groups don’t get much beyond the forming or storming stages. These groups may have serious
interpersonal conflicts, turn in disappointing work and get lower grades.
So . . . does a group become more effective as it progresses through the first four stages? Some researchers say
yes, but it’s not that simple.3 This assumption may be generally true, but what makes a group effective is
a complex issue. Here’s why:
● Under some conditions, high levels of conf lict are
conducive to high levels of group performance; that
is, there might be situations in which groups in the
storming stage outperform those in the norming or
performing stages.
● Groups don’t always proceed sequentially from one
stage to the next. Sometimes, groups are storming
and performing at the same time. Groups even
occasionally regress to previous stages.
● Don’t assume that all groups precisely follow this
process or that performing is always the most
preferable stage.
Think of this group stages model as a general framework
that underscores the fact that groups are dynamic entities Group work and teams are central to Flight Centre’s operations.
All Flight Centre businesses operate using teams of up to seven
and managers need to know the stage a group is in so they
members. Teams are then grouped into villages and villages are
can understand the problems and issues that are most likely grouped into tribes.2
to surface. AAP image/Dave Hunt
9780655702412_CH23.indd 633 3/3/20 11:14 AM

What are the main concepts of group

behaviour?
The basic foundation for understanding group behaviour includes roles, norms and conformity, status
systems, group size and group cohesiveness. Let’s take a closer look at each of those aspects.
What are roles?

role We introduced the concept of roles in Chapter 14 when we discussed what managers do. A role is the
Behaviour patterns behaviour patterns expected of someone who occupies a given position in a social unit. The concept
expected of someone
of roles applies to all employees in organisations, and to their lives outside the organisation as well.
who occupies a given
position in a social unit Individuals play multiple roles, adjusting them to the group to which they belong at the time. In an
organisation, employees attempt to determine what behaviours are expected of them in the roles they
perform by reading their job descriptions, getting suggestions from their bosses and watching what their
co-workers do. When an individual is confronted by divergent role expectations, they experience role
conflict. For example, newly hired university lecturers experience conflict when they find that students
want them to give out lots of high grades to enhance the students’ grade point averages but other
lecturers want them to give out only a few high grades in order to maintain the department’s reputation
for high standards. To the degree that the instructors sincerely seek to satisfy the expectations of both
their colleagues and their students, they face role conflict.
How do norms and conformity affect group

behaviour?
norms All groups have established norms, acceptable standards that are shared by the group’s members. Norms
Standards or dictate output levels, absenteeism rates, promptness or tardiness, the amount of socialising allowed on
expectations that are
the job, and so on. Although each group has its own unique set of norms, common classes of norms
accepted and shared by
a group’s members appear in most organisations. These norms focus on dress, loyalty, effort and performance.
Some organisations have formal dress codes – even describing what’s considered acceptable for
corporate casual dress. However, even in the absence of codes, norms frequently develop to dictate the
kind of clothing that should be worn to work. For example, group norms in a finance company might
dictate that staff who have little direct customer contact come to work dressed casually. However, on
occasion, a newly hired employee will come to work dressed in a suit. They are then teased and pressured
until their dress conforms to the group’s standard.
Loyalty norms relate to the expression of commitment to the organisation. Few managers appreciate
employees who ridicule the organisation. Similarly, professional employees and those in the executive
ranks recognise that most employers view persons who openly look for another job unfavourably. People
who are unhappy know that they should keep their job searches secret. These examples demonstrate that
loyalty norms are widespread in organisations. This concern for demonstrating loyalty, by the way, often
explains why ambitious aspirants to top management positions willingly take work home at night, come
in on weekends, and accept transfers to cities in which they would otherwise prefer not to live.
Probably the most widespread norms are related to levels of effort and performance. Work groups
typically provide their members with explicit cues on how hard to work, what level of output to have,
when to look busy, when it’s acceptable to slack off, and the like. These norms are extremely powerful
in affecting an individual employee’s performance. They’re so powerful, in fact, that performance
predictions based solely on an employee’s ability and level of personal motivation often prove wrong.
Because individuals desire acceptance by the groups to which they belong, they’re susceptible
to conformity pressures. The impact of group pressures for conformity on an individual member’s
judgment and attitudes was demonstrated in the classic studies by Solomon Asch.4 Asch’s results suggest
9780655702412_CH23.indd 634 3/3/20 11:14 AM

that group norms press us towards conformity. We desire to be one of the group and to avoid being
visibly different. We can generalise this finding to say that when an individual’s opinion of objective data
differs significantly from that of others in the group, they feel extensive pressure to align their opinion
to conform with those of the others. (See our previous discussion on groupthink, p. 478.) The From the
Past to the Present box has additional background information on Asch’s contributions to group theory.
What is status, and why is it important?

Status is a prestige grading, position or rank within a group. As far back as scientists have been able status
A prestige grading,
to trace human groupings, they’ve found status hierarchies: tribal chiefs and their followers, nobles and position or rank within
peasants, the haves and the have-nots. Status systems are important factors in understanding behaviour. a group
FROM THE PAST TO THE PRESENT: 1951–TODAY
Have you ever been pressured by a group to conform?

• Does the desire to be accepted as a part of a group leave one • The group was seated in a prearranged way so the USS was the
susceptible to conforming to the group’s norms? last to announce their decision and so was unaware that the
• Will a group exert pressure that’s strong enough to change a experiment was fixed.
member’s attitude and behaviour? • The experiment began with two sets of matching exercises in
That’s what Solomon Asch wanted to know, and according to his which all the subjects gave the right answers.
research, the answer appears to be yes.5 • On the third set, however, the first subject gave an obviously
wrong answer – for example, saying ‘C’ in Figure 23.2. The next
Asch’s research
subject gave the same wrong answer, and so did the others, until
• Study involved groups of seven or eight people who sat in a it was the unsuspecting subject’s turn.
classroom and were asked to compare two cards held by an
• The USS knew that ‘B’ was the same as ‘X’ but everyone else
investigator. The object was for each group member to
said ‘C’.
announce aloud which of the three lines matched the single line.
• The decision confronting the USS was this: Do you publicly state
• One card had one line; the other had three lines of varying
a perception that differs from the pre-announced position of
length. One of the lines on the three-line card was identical to
the others? Or do you give an answer that you strongly believe
the line on the one-line card and the difference in line length
to be incorrect in order to have your response agree with the
was quite obvious (see Figure 23.2).
other group members?
• Under ordinary conditions, subjects made errors of less than 1
• Asch’s subjects conformed – that is, gave answers they knew
per cent.
were wrong but were consistent with the replies of other
BUT . . . what happens if members of the group begin to give group members – in about 35 per cent of many experiments
incorrect answers? and many trials.
Will the pressure to conform cause an unsuspecting subject Implications for managers
(USS) to alter their answers to align with those of the others? • The Asch study provides considerable insight into group
behaviours. The tendency, as Asch showed, is for individual
members to go along with the pack. To diminish the negative
aspects of conformity, managers should create a climate of
openness in which employees are free to discuss problems
without fear of retaliation.
Discuss this:
• Many people belong to online groups whose members they never
meet in person. Do you think the desire to be accepted as a part
of a group leave one susceptible to conforming to the group’s
X A B C norms in online groups? Will a group exert pressure that’s strong
enough to change a member’s attitude and behaviour? Discuss.
• What can you use from this discussion to help you be a better
manager? Would you use these ideas the same way to manage
Figure 23.2 Examples of cards used in Asch’s study face-to-face teams and virtual teams?
9780655702412_CH23.indd 635 3/3/20 11:14 AM

Status is a significant motivator that has behavioural consequences when individuals see a disparity
between what they perceive their status to be and what others perceive it to be.
Status may be informally conferred by characteristics such as education, age, skill or experience.
However, anything can have status value if others in the group admire it. Of course, just because status
is informal doesn’t mean that it’s unimportant or that there’s disagreement on who has it or who doesn’t.
Members of groups have no problem placing people into status categories, and they usually agree about
who’s high, low and in the middle.
It’s important for employees to believe that the organisation’s formal status system is congruent. That
is, there should be equity between the perceived ranking of an individual and the status symbols they are
given by the organisation. For example, incongruence may occur when a supervisor earns less than their
employees or when a desirable office is occupied by a lower-ranking individual. Employees may view
such cases as a disruption to the general pattern of order and consistency in the organisation.
Does group size affect group behaviour?

The size of a group affects that group’s behaviour. However, that effect depends on what criteria you’re
looking at.6
The evidence indicates, for example, that small groups complete tasks faster than larger ones.
However, if a group is engaged in problem solving, large groups consistently get better marks than their
smaller counterparts. Translating these results into specific numbers is a bit trickier, but we can offer
some parameters. Large groups – with a dozen or more members – are good for gaining diverse input.
Thus, if the goal of the group is to find facts, larger groups should be more effective. On the other hand,
smaller groups are better at doing something productive with those facts. Groups of approximately five
to seven members tend to act more effectively.
One of the more disturbing findings is that, as groups get incrementally larger, the contribution
of individual members often tends to lessen. That is, although the total productivity of a group of four
is generally greater than that of a group of three, the individual productivity of each group member
declines as the group expands. Thus, a group of four will tend to produce at a level of less than four times
the average individual performance. The best explanation for this reduction of effort is that dispersion
social loafing of responsibility encourages individuals to slack off; a behaviour referred to as social loafing.7 When
The tendency for the results of the group can’t be attributed to any single person, the relationship between an individual’s
individuals to expend
input and the group’s output is clouded. In such situations, individuals may be tempted to become ‘free
less effort when working
collectively than when riders’ and coast on the group’s efforts. In other words, efficiency is reduced when individuals think that
working individually their contributions cannot be measured. The obvious conclusion from this finding is that managers who
use work groups should also provide a means by which individual efforts can be identified.
Are cohesive groups more effective?

Intuitively, it makes sense that groups that experience a lot of internal disagreement and lack of
cooperation are less effective than are groups in which individuals generally agree, cooperate and like
group each other. Group cohesiveness is the degree to which members are motivated to remain in a group
cohesiveness and share its goals.8 The stronger members’ desire to stay in the group and the more that a group’s goals
The degree to which
align with each individual’s goals, the greater the group’s cohesiveness.
members are motivated
to remain in a group and Previous research has generally shown that highly cohesive groups are more effective than are those
share its goals with less cohesiveness, but the relationship between cohesiveness and effectiveness is more complex.9 A
key moderating variable is the degree to which the group’s attitude aligns with its formal goals or those
of the larger organisation.10 The more cohesive a group is, the more its members will follow its goals. If
these goals are favourable (e.g. high output, quality work, cooperation with individuals outside the group),
a cohesive group is more productive than a less cohesive group. But if cohesiveness is high and attitudes
are unfavourable, productivity decreases. If cohesiveness is low and goals are supported, productivity
9780655702412_CH23.indd 636 3/3/20 11:14 AM

Cohesiveness
High Low
Alignment of group and

organisational goals
Strong increase Moderate increase
High in productivity in productivity
Decrease in No significant effect

Low
productivity on productivity
Figure 23.3 Group cohesiveness and productivity
increases, but not as much as when both cohesiveness and support are high. When cohesiveness is low
and goals aren’t supported, cohesiveness has no significant effect on productivity. These conclusions are
summarised in Figure 23.3.
How are groups turned into effective

teams?
When companies such as Volvo and Kraft Foods introduced teams into their production processes, it
made news because no one else was doing it. Today, it’s just the opposite – the organisation that doesn’t
use teams would be newsworthy. In fact, in a recent study by Deloitte of over 7000 companies in 130
Green Teams
Green Teams are used by many organisations to help them manage (e.g. reducing energy usage, increasing the recycling of resources
for sustainability.11 Green Teams are groups of employees that and equipment), define tasks and time frames, and identify key
collaborate together to improve sustainability outcomes in their stakeholders from whom the team will need to recruit support.
organisations. Some Green Teams are formally organised by top • Establish a structure for action and reporting. Ensure that team
management as a forum for improving sustainability. Others begin as members understand their roles and responsibilities, and
self-organising groups that become more formally organised as they consider establishing a rotating chair or note taker to help the
grow. For example, eBay’s Green Team was created when a few team record and implement its decisions so that things actually
employees hosted a pizza lunch for people interested in sustainability get done!
and 75 people showed up. Engaged and productive Green Teams can • Ask the CEO or managing director to join the team, or at least to
help their organisations develop and implement sustainability policies attend a few team meetings each year. Ensure that line managers
and facilitate cultural change around waste reduction and better and the HR manager support team members being involved in
resource usage. In these ways, they can also help their organisations the Green Team. Ask for support in communicating the Green
reduce costs and improve their reputations. But many Green Teams Team’s ideas and initiatives to the rest of the organisation so that
often stagnate after a year because they lack focus, skills and people know what the team is doing and can provide support.
organisational support. How can this be avoided? By operating the • Ensure that team successes are shared and celebrated, within the
Green Team around four key principles: team and with the rest of the organisation.
• Clearly define the purpose and focus of the team. Set specific
goals for the areas of sustainable practice the team will focus on
9780655702412_CH23.indd 637 3/3/20 11:14 AM

countries, 92 per cent of the companies surveyed said the key challenge they faced was redesigning the
way their organisation worked in order to become a ‘network of teams’.12 Teams are likely to continue
to be popular. Why? Research suggests that teams typically outperform individuals when the tasks being
done require multiple skills, judgment and experience.13 Organisations are using team-based structures
because they’ve found that teams are more flexible and responsive to changing events than are traditional
departments or other permanent work groups. Teams have the ability to quickly assemble, deploy,
refocus and disband. In this section, we’ll discuss what a work team is, the different types of teams that
organisations might use, and how to develop and manage work teams.
Work groups = work teams?
Are work groups and work teams the same thing?

work teams At this point, you may be asking yourself whether teams and groups are the same thing. The answer is no.
Groups whose
members work intensely In this section, we clarify the difference between a work group and a work team.14
on specific, common Most of you are probably familiar with teams, especially if you’ve watched or participated in
goals using their positive organised sports events. Work teams do differ from work groups and have their own unique traits (see
synergy, individual and
Figure 23.4). Work groups interact primarily to share information and to make decisions to help each
mutual accountability,
and complementary member do their job more efficiently and effectively. There’s no need or opportunity for work groups to
skills engage in collective work that requires joint effort. On the other hand, work teams are groups whose
members work intensely on a specific, common goal using their positive synergy, individual and mutual
accountability, and complementary skills.
These descriptions should help clarify why so many organisations have restructured work processes
around teams. Managers are looking for that positive synergy that will help the organisation improve its
performance.15 The extensive use of teams creates the potential for an organisation to generate greater
outputs with no increase in (or even fewer) inputs.
Recognise, however, that such increases are simply ‘potential’. Nothing inherently magical in the
creation of work teams guarantees that this positive synergy and its accompanying productivity will occur.
Accordingly, merely calling a group a team doesn’t automatically increase its performance.16 As we show
later in this chapter, successful or high-performing work teams have certain common characteristics. If
management hopes to gain increases in organisational performance, it will need to ensure that its teams
possess those characteristics.
Work teams Work groups
Collective
Goal Share information
performance
Neutral
Positive Synergy (sometimes negative)
Individual
Accountability Individual
and mutual
Complementary Skills Random and varied
Figure 23.4 Groups versus teams
9780655702412_CH23.indd 638 3/3/20 11:14 AM

What are the different types of work teams?

Teams can do a variety of things. They can design products, provide services, negotiate deals, coordinate
projects, offer advice and make decisions.17 The four most common types of work teams are problem-
solving teams, self-managed work teams, cross-functional teams and virtual teams.
● When work teams first became popular, most were problem-solving teams, which are problem-solving
teams from the same department or functional area involved in efforts to improve work teams
A team from the
activities or to solve specific problems. Members share ideas or offer suggestions on how work
same department or
processes and methods can be improved. However, these teams are rarely given the authority functional area that’s
to implement any of their suggested actions. involved in efforts to
improve work activities
● Although problem-solving teams were helpful, they didn’t go far enough in getting employees
or to solve specific
involved in work-related decisions and processes. This need led to another type of team, a problems
self-managed work team, which is a formal group of employees who operate without a
self-managed
manager and are responsible for a complete work process or segment. A self-managed team is
work team
responsible for getting the work done and for managing themselves, and usually includes A type of work
planning and scheduling of work, assigning tasks to members, collective control over the pace team that operates
of work, making operating decisions and taking action on problems. For example, teams at without a manager
and is responsible for a
Corning have no shift supervisors and work closely with other manufacturing divisions to complete work process
solve production-line problems and coordinate deadlines and deliveries. The teams have the or segment
authority to make and implement decisions, finish projects and address problems.18 Other cross-functional
organisations such as Xerox, Boeing, PepsiCo and Hewlett-Packard also use self-managed team
teams. Most organisations that use self-managed teams find them to be effective.19 A work team composed
of individuals from
● The third type of team is the cross-functional team, which we introduced in Chapter 18 various specialties
and defined as a work team composed of individuals from various specialties. Many
organisations use cross-functional teams. For example, cross-functional teams work together virtual team
A type of work team
to improve quality and productivity. Teams can investigate technical or process problems and
that uses technology to
are empowered to make recommendations and implement changes to improve the company.20 link physically dispersed
● The final type of team is the virtual team, which is a team that uses technology to link members in order to
achieve a common goal
physically dispersed members in order to achieve a
common goal. In a virtual team, members collaborate
online using wide-area networks, videoconferencing,
online file sharing, email and group chat forums.21
Virtual teams can do all the things that other teams
can – share information, make decisions and
complete tasks; however, they lack the normal give-
and-take of face-to-face discussions. That’s why
virtual teams tend to be more task-oriented,
especially if the team members have never personally
met.
What makes a team effective?

Firefighters work as effective teams to extinguish fires and deal with
Making a team effective emergency incidents. Team leaders set the goals for the team (e.g.
contain the fire, rescue civilians) and allocate tasks and duties to crew
members. Team members communicate constantly about conditions
Much research has been done on what it is that makes a team and hazards, which, with extensive training and strong group
cohesion, heightens trust and team performance.
effective.22 Out of these efforts, we now have a fairly focused
NSW Fire Brigades
model identifying those characteristics.23 Figure 23.5
9780655702412_CH23.indd 639 3/3/20 11:14 AM

Context
• Adequate resources
• Leadership and structure
• Climate of trust
• Per formance evaluation
and reward systems
Composition
• Abilities of members
• Personality
• Allocating roles
• Diversity
• Size of teams
• Member flexibility
• Member preferences Team effectiveness
Work design
• Autonomy
• Skill variety
• Task identity
• Task significance
Process
• Common purpose
• Specific goals
• Team efficacy
• Conflict levels
• Social loafing
Figure 23.5 Groups versus teams

Source: S. P. Robbins and T. A. Judge, Organizational Behavior, 14th edn, © 2011. Printed and electronically reproduced by permission
of Pearson Education, Inc., Upper Saddle River, NJ.
summarises what we currently know about what makes a team effective. As we look at this model, keep
in mind two things. First, teams differ in form and structure. This model attempts to generalise across
all teams, so you should only use it as a guide.24 Second, the model assumes that managers have already
determined that teamwork is preferable to individual work. Creating ‘effective’ teams in situations in
which individuals can do the job better would be wasted effort.
One thing we need to clarify first before looking at the model is what we mean by ‘team effectiveness’.
Typically, it includes objective measures of a team’s productivity, managers’ ratings of the team’s
performance and aggregate measures of member satisfaction. As you can see from the model, the four
key components of effective teams are the context, the team’s composition, work design and process
variables.
What factors in the context appear to make a team effective?

Four contextual factors appear to be most significantly related to team performance. These factors are
adequate resources, leadership and structure, a climate of trust, and performance evaluation and reward
systems.
As part of the larger organisation system, a team relies on resources outside the group to sustain it.
If it doesn’t have adequate resources, the team’s ability to perform its job effectively is reduced. This factor
appears to be so important to team performance that one research study concluded that effective work
groups must have support from the organisation.26 Resources can include timely information, proper
equipment, encouragement, adequate staffing and administrative assistance.
9780655702412_CH23.indd 640 3/3/20 11:14 AM

The challenge of managing diverse work teams

Managing teams composed of people who are similar isn’t always disappointed about their new work assignment? What were
easy. But add in diverse members and it can be even more their previous work experiences? How can the team help them
challenging! However, the benefits from the diverse perspectives, feel more comfortable? By empathising, existing team members
skills and abilities are worth it.25 Four interpersonal factors are can work together better as an effective group.
important for meeting the challenge of coordinating a diverse Tolerance is another important interpersonal consideration.
work team: understanding, empathy, tolerance and Just because you understand that people are different and you
communication. empathise with them doesn’t mean that it’s any easier to accept
You know that people aren’t the same, yet they need to be different perspectives or behaviours. But it’s important to be
treated fairly and equitably. Differences (cultural, physical or tolerant and open-minded about different values, attitudes and
other) can cause people to behave in different ways.You need to behaviours.
understand and accept these differences and encourage each Finally, open and two-way communication is important to
team member to do the same. managing a diverse team. Diversity problems may intensify if
Empathy is closely related to understanding. As a team leader, people are afraid or unwilling to openly discuss issues that
you should try to understand others’ perspectives. Put yourself concern them. If a person wants to know whether a certain
in their place and encourage team members to empathise as behaviour is offensive to someone else, it’s best to ask. Likewise, a
well. For example, suppose a new team member joins a team person who is offended by another’s behaviour should explain
that has worked together for a long time. The team can make their concerns and ask that person to stop. Such communication
their new colleague feel more welcome and comfortable by exchanges can be positive when they’re handled in a non-
identifying with how they might feel. Are they excited or threatening, low-key and friendly manner.
If a team can’t agree on who is to do what or ensure that all members contribute equally in sharing
the workload, it won’t function properly. Agreeing on the specifics of work and how all the team
members’ individual skills fit together requires team leadership and structure. This aspect can come from
the organisation or from the team itself. Even in self-managed teams, a manager’s job is to be more of a
coach by supporting the team’s efforts and managing outside (rather than inside) the team.
Members of effective teams trust each other. And they also trust their leaders.27 Why is trust
important? It facilitates cooperation, reduces the need to monitor each other’s behaviour, and bonds
members around the belief that others on the team won’t take advantage of them. Trusting the team
leader is also important because it means the team is willing to accept and commit to the leader’s goals
and decisions.
The final contextual factor of an effective team is a performance evaluation and reward system. Team
members have to be accountable both individually and jointly. So, in addition to evaluating and rewarding
employees for their individual contributions, managers should consider group-based appraisals, profit
sharing, and other approaches that reinforce team effort and commitment.
What team composition factors lead to effectiveness?

Several team composition factors are important to a team’s effectiveness. They include team member
abilities, personality, role allocation, diversity, size of teams, member flexibility and member preferences.
Part of a team’s performance depends on its members’ knowledge, skills and abilities.28 Research has
shown that to perform effectively, a team needs three different types of skills. First, it needs people with
technical expertise. Next, it needs members with problem-solving and decision-making skills. Finally, a
team needs people with interpersonal skills. A team can’t achieve its performance potential if it doesn’t
have or can’t develop all these skills. And the right mix of these skills is also critical. Too much of one at
the expense of another will lead to lower team performance. However, a team doesn’t necessarily need
all these skills immediately. It’s not uncommon for team members to take responsibility for learning the
skills in which the group is deficient. That way a team can achieve its full potential.
9780655702412_CH23.indd 641 3/3/20 11:14 AM

As we saw in Chapter 19, personality significantly influences

A question of ethics individual behaviour. It’s also true for team behaviour. Research
has shown that three of the Big Five dimensions are relevant
When co-workers work closely on a team project, they
to team effectiveness.29 For example, high levels of both
sometimes come to know quite a lot about each other. This
may include personal information about their private lives, conscientiousness and openness-to-experience tend to lead to
their personal relationships, and how they spent their time higher team performance. Agreeableness also appears to matter.
out of work. It can also include learning about their And teams that had one or more highly disagreeable members
personality and personal character, and how they ‘operate’ as
a person. But what happens when you know so much about performed poorly. Maybe you’ve had that not-so-good experience
a team member that you also know when they have been in group projects that you’ve been part of!
dishonest with the team? Consider the following scenario. Nine potential team roles have been identified (see Figure
You are working on a team that oversees quality 23.6). High-performing work teams have people to fill all these
assurance of company products and services. One of your
team members was responsible for collating the information
roles who were selected to fulfil these roles based on their skills
that the team needs to produce an important report and and preferences.30 On many teams, individuals may play multiple
presenting it to the team at the next team meeting. On the roles. It’s important for managers to understand the individual
day of the meeting, they claim they couldn’t present the strengths a person will bring to a team and to select team members
information as they have been away on sick leave for the past
fortnight.You know they were actually on an overseas holiday. with those strengths in mind to ensure that these roles are filled.
Because they haven’t collated the information by the Team diversity is another factor that can influence team
deadline, the whole team will now have to put in extra effectiveness. Although many of us hold the optimistic view that
efforts to complete the report on time.
diversity is desirable, research seems to show the opposite. One
Discuss this: review found that ‘[s]tudies on diversity in teams from the last
• How do you think the team members would feel about 50 years have shown that surface-level social-category differences
having to put extra work into the project because their
colleague missed a deadline? Do you think they would feel such as race/ethnicity, gender, and age tend to . . . have negative
differently about doing this if they knew the person effects’ on the performance of teams.31 However, some evidence
missed the deadline because they were on holiday rather does show that the disruptive effects of diversity decline over time,
than away on sick leave?
but doesn’t confirm that diverse teams perform better eventually.
• If you know the team member has misled the team about
the reason that they didn’t complete their task, do you have
What size should a work team be in order to be effective? At
an ethical obligation to report that to the team? Amazon, work teams have considerable autonomy to innovate
and to investigate ideas. Jeff Bezos, founder and CEO, uses a ‘two
The Microsoft Surface design team had the necessary technical and interpersonal skills
to perform effectively in creating the company’s new tablet computer. Shown here
demonstrating the product’s innovative design are, from left, team members Steven Sinofsky
and Mike Angiulo and team leader Panos Panay.
AP Photo/Damian Dovarganes
9780655702412_CH23.indd 642 3/3/20 11:14 AM

Creator–
innovator
Explorer–
Linker Initiates promoter
creative ideas
Coordinates and Champions ideas after
integrates they have been
initiated
Reporter– Assessor–
Encourages the Offers insightful developer
adviser
search for more analysis of
information Team options
Fights external Provides structure

battles
Upholder– Thruster–
maintainer Examines Provides organiser
details and direction and
enforces rules follow-through
Controller– Concluder–
inspector producer
Figure 23.6 Team member roles

Source: Based on C. Margerison and D. McCann, Team Management: Practical New Approaches (London: Mercury Books, 1990).
pizzas’ philosophy; that is, a team should be small enough that it can be fed with two pizzas. This ‘two
pizzas’ philosophy usually limits groups to five to seven people – depending, of course, on team member
appetites!32 Generally speaking, the most effective teams have five to nine members. And experts suggest
using the smallest number of people who can do the task.
Team member preferences need to be considered. Why? Some people just prefer not to work on teams.
Given the option, many employees will opt not to be part of a team. When people who would prefer to
work alone are forced on a team, it creates a direct threat to the team’s morale and to individual member
satisfaction.33
How does work design affect team effectiveness?

Effective teams need to work together and take collective responsibility for completing tasks. An effective
team must be more than a ‘team in name only’.34 Important work design elements include autonomy,
using a variety of skills, being able to complete a whole and identifiable task or product, and working on a
task or project that has a significant impact on others. Research indicates that these characteristics enhance
team member motivation and increase team effectiveness.35
What team processes are related to team effectiveness?

Five team process variables have been shown to be related to team effectiveness. These include a common
purpose, specific team goals, team efficacy, managed conflict and minimal social loafing.
An effective team has a common plan and purpose. This common purpose provides direction, momentum
and commitment for team members.36 Members of successful teams put a lot of time and effort into
discussing, shaping and agreeing on a purpose that belongs to them both individually and as a team.
9780655702412_CH23.indd 643 3/3/20 11:14 AM

Teams also need specific goals. Such goals facilitate clear communication and help teams maintain their
focus on getting results.
Team efficacy emerges when teams believe in themselves and are confident that they can succeed.37
Effective teams have confidence in themselves and in their members.
Effective teams need some conflict. Conflict on a team isn’t necessarily bad and can actually improve
team effectiveness.38 But it has to be the right kind of conflict. Relationship conflicts – those based on
interpersonal incompatibilities, tension and autonomy towards others – are almost always dysfunctional.
However, task conflicts – those based on disagreements about task content – can be beneficial because
they may stimulate discussion, promote critical assessment of problems and options, and can lead to
better team decisions.
Finally, effective teams work to minimise the tendency for social loafing, which we discussed earlier in
this chapter. Successful teams make members individually and jointly accountable for the team’s purpose,
goals and approach.39
How can a manager shape team behaviour?

A manager can do several things to shape a team’s behaviour, including proper selection, employee
training and rewarding the appropriate team behaviours. Let’s look at each of these.
What role does selection play?

Some individuals already possess the interpersonal skills to be effective team players. When hiring team
members, managers should check whether applicants have the technical skills required to successfully
perform the job and whether they can fulfil team roles.
Some applicants may have been socialised around individual contributions and, consequently,
lack team skills, which could also be true for some current employees being moved into teams due to
organisational restructuring. When faced with this
situation, a manager can do several things. First, and
most obvious, if team skills are woefully lacking, don’t
hire the person. If successful performance is going
to require interaction, not hiring the individual is
appropriate. On the other hand, an applicant who has
some basic skills can be hired on a probationary basis
and required to undergo training to shape them into
a team player. If the skills aren’t learned or practised,
then the individual may have to be let go.
Can individuals be trained to be

team players?
Performing well in a team involves a set of
behaviours.40 As we discussed in Chapter 19,
Australian Medical Assistance Teams (AUSMAT) are teams of doctors, new behaviours can be learned. Even people who
nurses, firefighters and other health professionals (such as pharmacists and feel strongly about the importance of individual
environmental health specialists) who provide life-saving treatment in disaster accomplishment can be trained to become team
zones around the world. Individuals who wish to join these teams must
complete compulsory training in humanitarian work, disaster response, and
players. Training specialists can conduct exercises so
the mental and physical challenges of working in disaster zones, as well as that employees can experience what teamwork is all
practical simulations in which they must plan, prepare and deploy as if they about. The workshops can cover such topics as team
were dealing with a real disaster.43 problem solving, communications, negotiations,
Chris McGrath/Staff/Getty Images
conflict resolution and coaching skills. In addition,
9780655702412_CH23.indd 644 3/3/20 11:14 AM

it’s not unusual for these individuals to be exposed to the five stages of team development that we
discussed earlier.41 At Verizon Communications, for example, trainers focus on how a team goes through
various stages before it gels. And employees are reminded of the importance of patience, because teams
take longer to do some things – such as make decisions – than do employees acting alone.42
What role do rewards play in shaping team players?

An organisation’s reward system needs to encourage cooperative efforts rather than competitive ones.
For example, Lockheed Martin’s aeronautics division organised its 20,000 or so employees into teams.
Rewards are structured to return a percentage increase in the bottom line to the team members on the
basis of achievements of the team’s performance goals.
Promotions, pay increases and other forms of recognition should be given to employees who are
effective collaborative team members. Taking this approach doesn’t mean that individual contribution is
ignored, but rather that it’s balanced with selfless contributions to the team. Examples of behaviours that
should be rewarded include training new colleagues, sharing information with teammates, helping resolve
team conflicts and mastering new skills in which the team is deficient.44 Finally, managers can’t forget
the inherent rewards that employees can receive from teamwork. Work teams provide camaraderie. It’s
exciting and satisfying to be an integral part of a successful team. The opportunity to engage in personal
development and to help teammates grow can be a satisfying and rewarding experience for employees.45
What current issues do managers face

in managing teams?
Few trends have influenced how work gets done in organisations as much as the use of work teams.
The shift from working alone to working on teams requires employees to cooperate with others, share
information, confront differences and sublimate personal interests for the greater good of the team.
Managers can build effective teams by understanding what influences performance and satisfaction.
However, managers also face some current challenges in managing teams, including those associated
with managing global teams and with understanding when teams aren’t the answer.
What’s involved with managing global teams?

Two characteristics of today’s organisations are obvious: they’re global, and work is increasingly being
done by teams. Because of those reasons, any manager is likely to have to manage a global team. What do
we know about managing global teams? We know there are both drawbacks and benefits in using global
teams (see Table 23.2). What are some of the challenges associated with managing global teams?
Table 23.2 Global teams
Drawbacks Benefits
• Disliking team members • Greater diversity of ideas
• Mistrusting team members • Limited groupthink
• Stereotyping • Increased attention on understanding others’ ideas, perspectives, etc.
• Communication problems
• Stress and tension
Source: Based on N. Adler, International Dimensions of Organizational Behavior, 4th edn (Cincinnati, OH: Southwestern Cengage Publishing, 2002),
pp. 141–7.
9780655702412_CH23.indd 645 3/3/20 11:14 AM

How do team composition factors affect managing a global team?

In global organisations, understanding the relationship between team effectiveness and team composition
is more challenging because of the unique cultural characteristics represented by members of a global
team. In addition to recognising team members’ abilities, skills, knowledge and personality, managers
need to be familiar with and clearly understand the cultural characteristics of the groups and the group
members they manage.46 For example, is the global team from a culture in which uncertainty avoidance
is high? If so, members won’t be comfortable dealing with unpredictable and ambiguous tasks. Also, as
managers work with global teams, they need to be aware of the potential for stereotyping, which can lead
to problems.
How does team structure affect managing a global team?

Some of the structural areas where we see differences in managing global teams include conformity,
status, social loafing and cohesiveness.
Are conformity findings generalisable across cultures? Research suggests that Asch’s findings are
culture-bound.47 For example, as might be expected, conformity to social norms tends to be higher in
collectivistic cultures than in individualistic ones. However, groupthink tends to be less of a problem in
global teams because members are less likely to feel pressured to conform to the ideas, conclusions and
decisions of the group.48
Also, the importance of status varies between cultures. The French, for example, are extremely status
conscious. Also, countries differ on the criteria that confer status. For example, in India, status tends
to come from a person’s caste, family position and formal role held in their organisation.49 In contrast,
while status is important in countries like Australia and the United States, it tends to be less ‘in your face’
and is based on accomplishments rather than on titles and family history. Managers must understand
who and what holds status when interacting with people from a culture different from their own. An
Australian manager who doesn’t understand that office size isn’t a measure of a Japanese executive’s
position or who fails to grasp the importance the British place on family genealogy and social class
is likely to unintentionally offend others and lessen their
interpersonal effectiveness.
Social loafing has a Western bias. It’s consistent
with individualistic cultures, such as Australia and the
United States, which are dominated by self-interest.
It’s not consistent with collectivistic societies, in which
individuals are motivated by group goals. For example,
in studies comparing employees from the United States
with employees from the People’s Republic of China
and Israel (both collectivistic societies), the Chinese and
Israelis showed no propensity to engage in social loafing.
In fact, they actually performed better in a group than
when working alone.50
Cohesiveness is another group structural element that
Jambu Palaniappan led the introduction of a food delivery service may create special challenges for managers. In a cohesive
in Europe and South Africa by Uber, the car service that is rapidly
group, members are unified and ‘act as one’. There’s
expanding throughout the world. In managing the market strategy,
operations and expansion teams that launch the service in different a great deal of camaraderie, and group identity is high.
countries, he had to understand and accommodate the unique cultural In global teams, however, cohesiveness is often more
characteristics of team members. difficult to achieve because of higher levels of ‘mistrust,
Mosa’ab Elshamy/AP Images
miscommunication and stress’.51
9780655702412_CH23.indd 646 3/3/20 11:14 AM

How do team processes affect managing a global team?

The processes that global teams use to do their work can be particularly challenging for managers. For
one thing, communication issues often arise because not all team members may be fluent in the team’s
working language, which can lead to inaccuracies, misunderstandings and inefficiencies.52 However,
research has also shown that a multicultural global team is better able to capitalise on the diversity of
ideas represented if a wide range of information is used.53
Managing conflict in global teams isn’t easy, especially when those teams are virtual teams. Conflict
can interfere with how information is used by the team. However, research shows that in collectivistic
cultures, a collaborative conflict management style can be most effective.54
When are teams not the answer?

Teamwork takes more time and often more resources than does individual work.55 Teams require
managers to communicate more, manage conflicts and run meetings. So, the benefits of using teams
need to exceed the costs. And that’s not always the case!56 In the rush to use teams, some managers have
introduced them into situations in which it would have been better to have individuals do the work. So,
before implementing teams just because everyone’s talking about their popularity, you should carefully
evaluate whether the work requires or will benefit from a collective effort.
How do you know whether work is better done individually or by a group? Three ‘tests’ have been
suggested.57 First, can the work be done better by more than one person? Task complexity would be
a good indicator of a need for different perspectives. Simple tasks that don’t require diverse input are
probably better done by individuals. Second, does the work create a common purpose or set of goals for
the people in the group that’s more than the sum of individual goals? For example, many car dealerships
use teams to link customer-service personnel, mechanics, parts specialists and sales representatives. Such
teams can better meet the goal of outstanding customer satisfaction. The final test to assess whether teams
or individuals are better suited for doing work is to look at the interdependence of the individuals. Using
teams makes sense when there’s interdependence between tasks; that is, when the success of everyone
depends on the success of each person and the success of each person depends on the others. For example,
soccer is an obvious team sport. Success requires a lot of coordination between interdependent players.
On the other hand, swim teams aren’t really teams, except on relays. They’re groups of individuals,
performing individually, whose total performance is merely the sum of their individual performances.
9780655702412_CH23.indd 647 3/3/20 11:14 AM

Student part of a team. And the work that members do provides freedom and autonomy,
the opportunity to use different skills and talents, the ability to complete a
Learning whole and identifiable task or product, and work that has a substantial impact
Centre on others. Finally, effective teams have members who believe in the team’s
capabilities and are committed to a common plan and purpose, specific team
goals, a manageable level of conflict and a minimal degree of social loafing.
Reviewing the learning objectives Learning Objective 4 Discuss contemporary issues

in managing teams.
Learning Objective 1 Define a group, and describe
The challenges of managing global teams can be seen in team composition
the stages of group development. factors, especially the diverse cultural characteristics; in team structure, especially
A group is two or more interacting and interdependent individuals who come conformity, status, social loafing and cohesiveness; in team processes, especially
together to achieve specific goals. Formal groups are work groups that are with communication and managing conflict; and in the manager’s role in making
defined by the organisation’s structure and have designated work assignments it all work.
and specific tasks directed at accomplishing organisational goals. Informal Managers also need to know when teams aren’t the answer. They can do this
groups are social groups. by assessing whether the work can be done better by more than one person; by
The forming stage consists of two phases: joining the group and defining the whether the work creates a common purpose or set of goals for the members of
group’s purpose, structure and leadership. The storming stage is one of intragroup the team; and by the amount of interdependence among team members.
conflict over who will control the group and what the group will be doing. The
norming stage is when close relationships and cohesiveness develop as norms
are determined. The performing stage is when group members work on the Discussion questions
group’s task. The adjourning stage happens when the group prepares to disband. ❶ Think of a group to which you belong (or have belonged). Trace its
development through the stages of group development as shown in Figure
Learning Objective 2 Describe the main concepts of 23.1. How closely did its development parallel the group development
group behaviour. model? How might the group development model be used to improve this
A role is a set of behaviour patterns expected of someone occupying a given group’s effectiveness?
position in a social unit. At any given time, employees adjust their role behaviours ➋ Contrast (a) self-managed and cross-functional teams, and (b) virtual and
to the group of which they are a part. Norms are standards shared by group face-to-face teams.
members. They informally convey to employees which behaviours are acceptable ➌ How do you explain the popularity of work teams in countries such as
and which are unacceptable. Status is another factor to be aware of because Australia and the United States, whose national cultures place a high value
it can be a significant motivator and needs to be congruent. Also, group size on individualism?
affects group behaviour in a number of ways. Smaller groups are generally faster ➍ ‘All work teams are work groups, but not all work groups are work teams.’
at completing tasks than are larger ones. However, larger groups are frequently Do you agree or disagree with this statement? Discuss.
better at fact finding because of their diversified input. As a result, larger groups ➎ Would you prefer to work alone or as part of a team? Why?
are generally better at problem solving. Finally, group cohesiveness is important ➏ ‘To have a successful team, first find a great leader.’ What do you think of
because of its impact on a group’s effectiveness at achieving its goals. this statement? Do you agree? Why or why not?
➐ What traits do you think good team players have? Do some research to
Learning Objective 3 Discuss how groups are turned answer this question and write a short report detailing your findings using a
into effective teams. bulleted list format.
Effective teams have common characteristics. They have adequate resources, ➑ Contrast the pros and cons of diverse teams.
effective leadership, a climate of trust and a performance evaluation and ➒ How do you think scientific management theorists would react to the
reward system that reflects team contributions. These teams have individuals increased use of teams in organisations? How would behavioural science
with technical expertise as well as problem-solving, decision-making and theorists react?
interpersonal skills and the right traits, especially conscientiousness and openness ❿ What challenges do managers face in managing global teams? How should
to new experiences. Effective teams also tend to be small, preferably of diverse those challenges be handled?
backgrounds. They have members who fill role demands and who prefer to be
9780655702412_CH23.indd 648 3/3/20 11:14 AM


UNDERSTANDING HOW TEAMS WORK
Organisations have become increasingly designed around teams. Twenty years ago, the individual was the basic building block of an organisation; today it’s teams. As
the manager, you need to be able to effectively lead and coach a team. Without those skills, you’re likely to have a short tenure in your management position.

PERSONAL
P I A INVENTORY
ASSESSMENT
Diagnosing the need for team building

Part of being a team leader who wants to create and manage an effective team means knowing when a team needs help. Use this PIA to assess teams you’re
leading or are part of.
Skill basics improvement. Use a collaborative style by allowing team members to

Effective work team managers provide instruction, guidance, advice and participate in identifying and choosing among improvement ideas. Break
encouragement to help team members improve their job performance. You can difficult tasks down into simpler ones. Model the qualities you expect from
learn to be a good team leader by practising the following behaviours: your team. If you want openness, dedication, commitment and responsibility
• Analyse ways to improve the team’s performance and capabilities. A team from your team members, demonstrate these qualities yourself.
leader looks for opportunities for team members to expand their capabilities Practising the skill
and improve performance. You can do this by using the following behaviours. Read through the scenario and follow the directions at the end of it.
Observe your team members’ behaviours on a day-to-day basis. Ask questions
You’re the leader of a five-member project team that’s been assigned the task of
of them: Why do you do a task this way? Can it be improved? What other
moving your engineering firm into the growing area of high-speed intercity rail
approaches might be used? Show genuine interest in team members as
construction. You and your team members have been researching the field,
individuals, not merely as employees. Respect them individually. Listen to each
identifying specific business opportunities, negotiating alliances with equipment
employee.
vendors, and evaluating high-speed rail experts and consultants from around the
• Create a supportive climate. It’s the team leader’s responsibility to reduce
world. Throughout the process, Tonya, a highly qualified and respected engineer,
barriers to development and to facilitate a climate that encourages personal
has challenged a number of things you’ve said during team meetings and in the
performance improvement. You can achieve this by creating a climate that
workplace. For example, at a meeting two weeks ago, you presented the team
contributes to a free and open exchange of ideas. Offer help and assistance.
with a list of 10 possible high-speed rail projects and started evaluating your
Give guidance and advice when asked. Encourage your team. Be positive and
organisation’s ability to compete for them. Tonya contradicted virtually all your
upbeat. Don’t use threats. Ask, ‘What did we learn from this that can help us
comments, questioned your statistics and was quite pessimistic about the
in the future?’ Reduce obstacles. Assure team members that you value their
possibility of getting contracts on these projects. After this latest display of
contribution to the team’s goals. Take personal responsibility for the outcome,
displeasure, two other group members, Bryan and Maggie, came to you and
but don’t rob team members of their full responsibility. Validate team
complained that Tonya’s actions were damaging the team’s effectiveness. You
members’ efforts when they succeed. Point to what was missing when they
originally put Tonya on the team for her unique expertise and insight. You’d like
fail.
to find a way to reach her and get the team on the right track to its fullest
• Influence team members to change their behaviour. The ultimate test of a
potential.
team leader’s effectiveness is whether an employee’s performance improves.
You must encourage ongoing growth and development. How can you do this? Form three-member teams in class. Each team should analyse the leader’s
Try the following behaviours. Recognise and reward small improvements and problem and suggest solutions. Each team should be prepared to present its
treat coaching as a way of helping employees to continually work towards conclusions to the class.
9780655702412_CH23.indd 649 3/3/20 11:14 AM

Mini cases
23.1 Working together anywhere, anytime
Choosing your space to suit your work
When Commonwealth Bank Australia (CBA) moved 6500 staff into a project work easier because project teams can simply pick a certain area to
custom-built workspace near Darling Harbour in Sydney, it was undertaking be ‘their’ location and agree to work there until the project is finished.
the largest-ever corporate relocation in Australia.58 But the most amazing For people new to activity-based workspaces, complete freedom to
thing about its new workspace was that no one – not even managers – has choose their location can sometimes result in a feeling of ‘homelessness’.
a permanently allocated desk or office. Commonwealth Bank Place is an So, CBA allocates each team a ‘home zone’ where their lockers and
activity-based workplace, which means people locate themselves wherever immediate colleagues are based. Colour schemes are used to delineate
they need to be. Staff are issued with a laptop, a mobile phone and a locker different zones while integrating them into the larger whole. Staff concerns
to store their belongings, and can then work in whatever kind of about the lack of suitable areas for confidential conversations were
environment they need to suit the kind of work they are doing. Options addressed by designing the building’s acoustics to muffle voices in quiet
include cubicle-style areas for independent work, ‘plaza’ areas for group zones, and by providing meeting pods for more private discussions.
work, library rooms for quiet work (in which mobile phones are banned),
CBA says the shift to activity-based workspaces has been ‘a cultural
cafés and outdoor working areas.
journey that replaced the traditional managerial emphasis on control and
CBA adopted an activity-based workplace for three key reasons: (1) to attendance with a focus on trust and output’. To help employees make that
better support business and employee needs; (2) to operate more efficiently; journey, CBA established teams of ‘superheroes’ to provide technical
and (3) to facilitate collaboration ‘through the provision of world class work support and advice while staff adjusted to working with the new mobile
environments for our people’. When CBA reviewed its traditional office technology. New cultural norms were also necessary to move away from the
layouts it learned that at any given time, about half of its desks were idea that desks ‘belong’ to people. When people tried to informally claim
unoccupied. By moving to an activity-based workplace, CBA could reduce particular desks as ‘theirs’ by sitting at the same ones day after day, CBA
the amount of desks and spaces it needed and provide more flexible ways decided not to create a ‘police culture’ to force them to move. Instead, it
of working. To facilitate collaborative work, Commonwealth Bank Place has adopted a collective approach and encouraged employees to get their
workstations fitted with adjustable docking stations and collaborative friends to move desks each day, even if only to the next one over.
screens so employees wanting to work together can simply pick a desk,
❶ What would be the benefits of activity-based
workplaces for
dock their laptop and get started. ‘Smart’ boards are provided for developing
encouraging staff to work in groups and teams?
and delivering presentations, and shared printing points are available if
➋ Could an activity-based workplace actually hamper the effectiveness of
anything needs to be printed in hardcopy. The open-plan layouts enhance
groups and teams? How? How could issues be overcome?
visibility. This means that a team working on a problem that needs Maria’s
➌ How might group norms affect people’s behaviour in an activity-based
expertise can find Maria and bring her into the conversation. CBA has found
workplace? How could norms be used to encourage activity-based
this provides valuable flexibility in accommodating groups and teams.
working?
Previously, when a work group grew too big for its seating area, it would
➍ What challenges might a manager face when s upervising a team in an
have to find and configure a new space and then move everyone in. Now,
activity-based work environment?
groups just locate themselves in the space that they need. It also makes
23.2 Intel inside . . . and far away

Connecting up for creative thinking
As the world’s largest semiconductor manufacturer, Intel’s components are Intel’s headquarters are located in California but some 28 per cent of
used in more than 80 per cent of the world’s desktop and notebook the company’s R&D employees are located in more than 20 countries
computers and computer servers. Its technological capabilities are known outside the United States. Intel’s Israel Development Centre (IDC), located in
the world over. For example, a Russian bus manufacturer shortened vehicle Haifa on the Mediterranean coast, was established in 1974 as the
development cycles and boosted product quality using Intel-based servers. company’s first development centre outside the United States.59 The Israeli
Telecommunications provider Telefónica used Intel processors to launch its team of engineers has been instrumental in developing many of the
cloud services. And footwear company Adidas turned to Intel to help it company’s most successful innovations. The technology behind the highly
create a virtual footwear wall. successful Centrino chips for laptops came out of this lab, as have processors
9780655702412_CH23.indd 650 3/3/20 11:14 AM

23.2 Intel inside . . . and far away continued

for servers, PCs and laptops. The group atmosphere at IDC, although quite common time to meet. For example, setting up a virtual retrospective
confrontational, actually helped Centrino get off the ground and become a between IDC and an Intel team in the United States meant accommodating
marketplace and financial success for Intel. During the initial design stages a 10-hour time difference. But the teams were able to resolve it by
of Centrino, the focus, as always, was on processor chip speed. But the compromising: the Israeli team members agreed to shift their work day and
reality is that fast chips consume more power and shorten battery life. And start the retrospective at 5 p.m. Haifa time, which was 7 a.m. in the United
when designing a product for use in wireless computers, that’s not a good States.
thing. An engineer at IDC came to the team leader and suggested that by Another challenge is that these virtual meetings usually last longer than
giving up half the chip speed power consumption could be halved as well. normal, simply because the teams usually have numerous issues to discuss.
Such a suggestion probably wouldn’t have survived long at the home office Also, team leaders need to take into account cultural differences (speaking
because it involved challenging everything the company stood for. However, styles, family commitments), safety (establishing an environment where all
here in a location where the group wasn’t bound by such cultural participants feel free to express observations and opinions) and fairness
constraints, it led to the development of a winning product. Another benefit (locations with a large number of participants can dominate the discussion
of having design groups thousands of kilometres away from Intel’s and limit input from sites with fewer participants).
headquarters in California is that these offsite locations don’t suffer from
Despite the challenges, Intel’s project managers have found that having
bureaucratic inertia associated with constant meetings and committees.
a way for their geographically dispersed teams to collaborate and connect is
A major challenge for Intel’s geographically dispersed teams is that vital and valuable.
when team members live and work in different c ountries, varying time
❶ What challenges have Intel’s managers faced in connecting their
zones, diverse cultures and dissimilar languages make it more difficult to be
geographically dispersed teams? How have they dealt with these
a successful team. Yet, Intel’s managers have found ways to keep the teams
challenges?
connected and the innovations flowing. One thing that has worked for Intel
➋ Would a ‘confrontational’ atmosphere be appropriate in all team
is the virtual retrospective. A retrospective is ‘a formal method for evaluating
situations? Explain.
project performance, extracting lessons learned, and making
➌ Discuss how roles, norms, status, group size and cohesiveness might
recommendations for the future’. Because Intel’s design teams are
affect these geographically dispersed teams.
geographically dispersed, they collaborate virtually over an audio or video
➍ Compare the team characteristics described here with the characteristics
connection. Such retrospectives allow Intel’s teams to connect and
of effective teams as shown in F igure 23.5 (see p. 640). Which ones
collaborate. The main problems, though, are simple things like finding a
does the IDC team appear to have?
References
1 B. W. Tuckman and M. C. Jensen, ‘Stages of Small-Group Development Revisited’, Group 10 See, for example, R. A. Henry, J. Kmet and A. Landa, ‘Examining the Impact of
and Organizational Studies, December 1977, pp. 419–27; and M. F. Maples, ‘Group Interpersonal Cohesiveness on Group Accuracy Interventions: The Importance of
Development: Extending Tuckman’s Theory’, Journal for Specialists in Group Work, Fall Matching versus Buffering’, Organizational Behavior and Human Decision Processes,
1988, pp. 17–23. January 2002, pp. 25–43.
2 G. Kruger, ‘Happy Returns for Flight Boss’, The Age, 28 August 2014, p. 22. 11 Managing for Sustainability box based on B. McManus, ‘How to Build a Green Team:
3 L. N. Jewell and H. J. Reitz, Group Effectiveness in Organizations (Glenview, IL: Scott, The First Steps to Sustainability’, Green Biz, May 2009; D. Fleischer, ‘10 Best Practices
Foresman, 1981); and M. Kaeter, ‘Repotting Mature Work Teams’, Training, April 1994, for Building Green Teams’, Green Biz, December 2009; D. Bray, Corporate Green
pp. 54–6. Teams: A New Social Trend at Work? (San Francisco: Alta Terra Research Network,
4 S. E. Asch, ‘Effects of Group Pressure upon the Modification and Distortion of 2008); Monash Sustainable Development Institute, Green Teams That Work, <www.
Judgments’, in H. Guetzkow (ed.), Groups, Leadership and Men (Pittsburgh, PA: greensteps.edu.au/news/>, accessed 26 September 2017.
Carnegie Press, 1951), pp. 177–90. 12 J. Bersin, ‘New Research Shows Why Focus on Teams, Not Just Leaders, is Key to
5 From the Past to the Present box based on S. S. Wang, ‘Under the Influence: How the Business Performance’, Forbes, 3 March 2016.
Group Changes What We Think’, Wall Street Journal, 3 May 2011, pp. D1+; M. E. Shaw, 13 See, for example, S. A. Mohrman, S. G. Cohen and A. M. Mohrman, Jr, Designing Team-
Group Dynamics: The Psychology of Small Group Behavior (New York: McGraw-Hill, Based Organizations (San Francisco: Jossey-Bass, 1995); P. MacMillan, The Performance
1975); and E. J. Thomas and C. F. Fink, ‘Effects of Group Size’, Psychological Bulletin, Factor: Unlocking the Secrets of Teamwork (Nashville, TN: Broadman & Holman, 2001);
July 1963, pp. 371–84. and E. Salas, C. A. Bowers and E. Eden (eds), Improving Teamwork in Organizations:
6 S. E. Asch, ‘Effects of Group Pressure upon the Modification and Distortion of Applications of Resource Management Training (Mahwah, NJ: Lawrence Erlbaum,
Judgments’, in H. Guetzkow (ed.), Groups, Leadership and Men (Pittsburgh, PA: 2002).
Carnegie Press, 1951), pp. 177–90. 14 Information for this section is based on J. R. Katzenbach and D. K. Smith, The Wisdom
7 R. Albanese and D. D. Van Fleet, ‘Rational Behavior in Groups: The Free Riding of Teams (Boston: Harvard Business School Press, 1993), pp. 21, 45, 85; and D. C.
Tendency’, Academy of Management Review, April 1985, pp. 244–55. Kinlaw, Developing Superior Work Teams (Lexington, MA: Lexington Books, 1991), pp.
8 M. E. Shaw, Group Dynamics: The Psychology of Small Group Behaviour, 3rd edn (New 3–21.
York: McGraw-Hill, 1981). See also N. Nicholson (ed.) Encyclopaedic Dictionary of 15 S. Adams and L. Kydoniefs, ‘Making Teams Work: Bureau of Labor Statistics Learns What
Organizational Behaviour (Oxford, UK: Blackwell, 1995), p. 199. Works and What Doesn’t’, Quality Progress, January 2000, pp. 43–9.
9 L. Berkowitz, ‘Group Standards, Cohesiveness and Productivity’, Human Relations, 16 T. Capozzoli, ‘How to Succeed with Self-Directed Work Teams’, Supervision, February
November 1954, pp. 509–19. 2002, pp. 25–7.
9780655702412_CH23.indd 651 3/3/20 11:14 AM

17 See, for example, E. Sunstrom, DeMeuse and D. Futrell, ‘Work Teams: Applications and Maznevski, ‘Understanding Our Differences: Performance in Decision-Making Groups
Effectiveness’, American Psychologist, February 1990, pp. 120–33. with Diverse Members’, Human Relations, May 1994, pp. 531–52; L. Strach and L.
18 M. Cianni and D. Wanuck, ‘Individual Growth and Team Enhancement: Moving Toward Wicander, ‘Fitting In: Issues of Tokenism and Conformity for Minority Women’, SAM
a New Model of Career Development’, Academy of Management Executive, February Advanced Management Journal, Summer 1993, pp. 22–5; C. R. Bantz, ‘Cultural
1997, pp. 105–15. Diversity and Group Cross-Cultural Team Research’, Journal of Applied Communication
19 J. P. Millikin, P. W. Hom and C. C. Manz, ‘Self-Management Competencies in Self- Research, February 1993, pp. 1–19; and L. Copeland, ‘Making the Most of Cultural
Managing Teams: Their Impact on Multi-Team System Productivity’, Leadership Differences at the Workplace’, Personnel, June 1988, pp. 52–60.
Quarterly, October 2010, pp. 687–702; O. Turel and Y. Zhang, ‘Does Virtual Team 26 R. I. Sutton, ‘The Boss as Human Shield’, Harvard Business Review, September 2010,
Composition Matter? Trait and Problem-Solving Configuration Effects on Team pp. 106–9; and D. E. Hyatt and T. M. Ruddy, ‘An Examination of the Relationship
Performance’, Behavior & Information Technology, July–August 2010, pp. 363–75; between Work Group Characteristics and Performance: Once More into the Breech’,
J. S. Bunderson and P. Boumgarden, ‘Structure and Learning in Self-Managed Teams: Personnel Psychology, Autumn 1997, p. 577.
Why “Bureaucratic” Teams Can Be Better Learners’, Organization Science, May–June 27 M. E. Palanski, S. S. Kahai and F. J. Yammarino, ‘Team Virtues and Performance: An
2010, pp. 609–24; and G. M. Spreitzer, S. G. Cohen and G. E. Ledford, Jr, ‘Developing Examination of Transparency, Behavioral Integrity and Trust’, Journal of Business Ethics,
Effective Self-Managing Work Teams in Service Organizations’, Group & Organization March 2011, pp. 201–16; H. H. Chang, S. S. Chuang and S. H. Chao, ‘Determinants of
Management, September 1999, pp. 340–66. Cultural Adaptation, Communication Quality and Trust in Virtual Teams’ Performance’,
20 R. Enmers, ‘The Other Side of Leadership: Leadership Disciplines that Matter’, <www. Total Quality Management and Business Excellence, March 2011, pp. 305–29; A. C.
academyleadership.com>, April 2012, accessed 29 September 2014. Costa and N. Anderson, ‘Measuring Trust in Teams: Development and Validation of a
21 ‘Virtual Team Collaboration and Innovation in Organizations’, Team Performance Multifaceted Measure of Formative and Reflective Indicators of Team Trust’, European
Management, March 2011, pp. 109–19; M. Flammia, Y. Cleary and D. M. Slattery, Journal of Work & Organizational Psychology, February 2011, pp. 119–54; M. Mach,
‘Leadership Roles, Socioemotional Strategies and Technology Use of Irish and U.S. S. Dolan and S. Tzafrir, ‘The Differential Effect of Team Members’ Trust on Team
Students in Virtual Teams’, IEEE Transactions on Professional Communication, June Performance: The Mediation Role of Team Cohesion’, Journal of Occupational and
2010, pp. 89–101; A. Malhotra, A. Majchrzak and B. Rosen, ‘Leading Virtual Teams’, Organizational Psychology, September 2010, pp. 771–94; B. A. DeJong and T. Elfring,
Academy of Management Perspectives, February 2007, pp. 60–70; B. L. Kirkman ‘How Does Trust Affect the Performance of Ongoing Teams? The Mediating Role of
and J. E. Mathieu, ‘The Dimensions and Antecedents of Team Virtuality’, Journal of Reflexivity, Monitoring and Effort’, Academy of Management Journal, June 2010, pp.
Management, October 2005, pp. 700–18; J. Gordon, ‘Do Your Virtual Teams Deliver 535–49; M. Williams, ‘In Whom We Trust: Group Membership as an Affective Context
Only Virtual Performance?’, Training, June 2005, pp. 20–5; L. L. Martins, L. L. Gilson for Trust Development’, Academy of Management Review, July 2001, pp. 377–96; and
and M. T. Maynard, ‘Virtual Teams: What Do We Know and Where Do We Go from K. T. Dirks, ‘Trust in Leadership and Team Performance: Evidence from NCAA Basketball’,
Here?’, Journal of Management, December 2004, pp. 805–35; S. A. Furst, M. Reeves, Journal of Applied Psychology, December 2000, pp. 1004–12.
B. Rosen and R. S. Blackburn, ‘Managing the Life Cycle of Virtual Teams’, Academy of 28 R. R. Hirschfeld, M. J. Jordan, H. S. Field, W. F. Giles and A. A. Armenakis, ‘Becoming
Management Executive, May 2004, pp. 6–20; B. L. Kirkman, B. Rosen, P. E. Tesluk and Team Players: Team Members’ Mastery of Team Knowledge as a Predictor of Team Task
C. B. Gibson, ‘The Impact of Team Empowerment on Virtual Team Performance: The Proficiency and Observed Teamwork Effectiveness’, Journal of Applied Psychology, vol.
Moderating Role of Face-to-Face Interaction’, Academy of Management Journal, April 91, no. 2 (2006), pp. 467–74.
2004, pp. 175–92; F. Keenan and S. E. Ante, ‘The New Teamwork’, Business Week e.biz, 29 S. T. Bell, ‘Deep-Level Composition Variables as Predictors of Team Performance: A
18 February 2002, pp. EB12–16; and G. Imperato, ‘Real Tools for Virtual Teams’, Fast Meta-Analysis’, Journal of Applied Psychology, vol. 92, no. 3 (2007), pp. 595–615; and
Company, July 2000, pp. 378–87. M. R. Barrick, G. L. Stewart, M. J. Neubert and M. K. Mount, ‘Relating Member Ability
22 See, for example, D. C. Jones and T. Kato, ‘The Impact of Teams on Output, Quality and and Personality to Work-Team Processes and Team Effectiveness’, Journal of Applied
Downtime: An Empirical Analysis Using Individual Panel Data’, Industrial and Labor Psychology, June 1998, pp. 377–91.
Relations Review, January 2011, pp. 215–40; A. Gilley, J. W. Gilley, C. W. McConnell 30 M. Costello, ‘Team Weaver’, People Management, January 2011, pp. 26–7; and C.
and A. Veliquette, ‘The Competencies Used by Effective Managers to Build Teams: Margerison and D. McCann, Team Management: Practical New Approaches (London:
An Empirical Study’, Advances in Developing Human Resources, February 2010, pp. Mercury Books, 1990).
29–45; M. A. Campion, G. J. Medsker and C. A. Higgs, ‘Relations between Work Group 31 K. H. T. Yu and D. M. Cable, ‘Unpacking Cooperation in Diverse Teams’, Team
Characteristics and Effectiveness: Implications for Designing Effective Work Groups’, Performance Management, March 2011, pp. 63–82; A. Nederveen Pieterse, D. van
Personnel Psychology, Winter 1993, pp. 823–50; and J. R. Hackman, ‘The Design Knippenberg and W. P. van Ginkel, ‘Diversity in Goal Orientation, Team Reflexivity and
of Work Teams’, in J. W. Lorsch (ed.), Handbook of Organizational Behavior (Upper Team Performance’, Organizational Behavior and Human Performance, March 2011,
Saddle River, NJ: Prentice Hall, 1987), pp. 315–42. pp. 153–64; M. E. Roberge and R. van Dick, ‘Recognizing the Benefits of Diversity:
23 This model is based on M. A. Campion, E. M. Papper and G. J. Medsker, ‘Relations When and How Does Diversity Increase Group Performance’, Human Resource
between Work Team Characteristics and Effectiveness: A Replication and Extension’, Management Review, December 2010, pp. 295–308; and E. Mannix and M. A. Neale,
Personnel Psychology, Summer 1996, pp. 429–52; D. E. Hyatt and T. M. Ruddy, ‘An ‘What Differences Make a Difference: The Promise and Reality of Diverse Teams in
Examination of the Relationship between Work Group Characteristics and Performance: Organizations’, Psychological Science in the Public Interest, October 2005, pp. 31–55.
Once More into the Breech’, Personnel Psychology, Autumn 1997, pp. 553–85; S. G. 32 A. Deutschman, ‘Inside the Mind of Jeff Bezos’, Fast Company, August 2004, pp. 50–8.
Cohen and D. E. Bailey, ‘What Makes Teams Work: Group Effectiveness Research from 33 D. E. Hyatt and T. M. Ruddy, ‘An Examination of the Relationship between Work Group
the Shop Floor to the Executive Suite’, Journal of Management, September 1997, pp. Characteristics and Performance: Once More into the Breech’, Personnel Psychology,
239–90; L. Thompson, Making the Team (Upper Saddle River, NJ: Prentice Hall, 2000), Autumn 1997, pp. 553–85; J. D. Shaw, M. K. Duffy and E. M. Stark, ‘Interdependence
pp. 18–33; and J. R. Hackman, Leading Teams: Setting the Stage for Great Performance and Preference for Group Work: Main and Congruence Effects on the Satisfaction and
(Boston: Harvard Business School Press, 2002). Performance of Group Members’, Journal of Management, June 2000, pp. 259–79;
24 See M. Mattson, T. V. Mumford and G. S. Sintay, ‘Taking Teams to Task: A Normative and S. A. Kiffin-Peterson and J. L. Cordery, ‘Trust, Individualism and Job Characteristics
Model for Designing or Recalibrating Work Teams’, paper presented at the National of Employee Preference for Teamwork’, International Journal of Human Resource
Academy of Management Conference, Chicago, August 1999; and G. L. Stewart and M. Management, February 2003, pp. 93–116.
R. Barrick, ‘Team Structure and Performance: Assessing the Mediating Role of Intrateam 34 J. S. Bunderson and P. Boumgarden, ‘Structure and Learning in Self-Managed Teams:
Process and the Moderating Role of Task Type’, Academy of Management Journal, April Why “Bureaucratic” Teams Can Be Better Learners’, Organization Science, May–June
2000, pp. 135–48. 2010, pp. 609–24; and R. Wageman, ‘Critical Success Factors for Creating Superb Self-
25 Managing for Diversity box based on K. B. Dahlin, L. R. Weingart and P. J. Hinds, Managing Teams’, Organizational Dynamics, Summer 1997, p. 55.
‘Team Diversity and Information Use’, Academy of Management Journal, December 35 M. A. Campion, E. M. Papper and G. J. Medsker, ‘Relations between Work Team
2005, pp. 1107–23; B. L. Kirkman, P. E. Tesluk and B. Rosen, ‘The Impact of Characteristics and Effectiveness: A Replication and Extension’, Personnel Psychology,
Demographic Heterogeneity and Team Leader–Team Member Demographic Fit on Summer 1996, p. 430; B. L. Kirkman and B. Rosen, ‘Powering up Teams’, Organizational
Team Empowerment and Effectiveness’, Group & Organization Management, June Dynamics, Winter 2000, pp. 48–66; and D. C. Man and S. S. K. Lam, ‘The Effects of
2004, pp. 334–68; K. Lovelace, D. L. Shapiro and L. R. Weingart, ‘Maximizing Cross- Job Complexity and Autonomy on Cohesiveness in Collectivist and Individualist Work
Functional New Product Teams’ Innovativeness and Constraint Adherence: A Conflict Groups: A Cross-Cultural Analysis’, Journal of Organizational Behavior, December 2003,
Communications Perspective’, Academy of Management Journal, August 2002, pp. pp. 979–1001.
779–93; J. Jusko, ‘Diversity Enhances Decision Making’, IndustryWeek, 2 April 2001, 36 A. Mehta, H. Feild, A. Armenakis and N. Mehta, ‘Team Goal Orientation and Team
p. 9; F. Rice, ‘How to Make Diversity Pay’, Fortune, 8 August 1994, pp. 78–86; M. L. Performance: The Mediating Role of Team Planning’, Journal of Management, August
9780655702412_CH23.indd 652 3/3/20 11:14 AM

2009, pp. 1026–46; K. Blanchard, D. Carew and E. Parisi-Carew, ‘How to Get Your ‘Performance Implications of Leader Briefings and Team Interaction for Team Adaptation
Group to Perform Like a Team’, Training and Development, September 1996, pp. to Novel Environments’, Journal of Applied Psychology, December 2000, p. 971.
34–7; K. D. Scott and A. Townsend, ‘Teams: Why Some Succeed and Others Fail’, HR 45 C. Garvey, ‘Steer Teams with the Right Pay: Team-Based Pay Is a Success When It Fits
Magazine, August 1994, pp. 62–7; K. Hess, Creating the High-Performance Team Corporate Goals and Culture and Rewards the Right Behavior’, HR Magazine, May
(New York: Wiley, 1987); and J. R. Katzenbach and D. K. Smith, The Wisdom of Teams 2002, pp. 71–7.
(Boston: Harvard Business School Press, 1993), pp. 43–64. 46 F. Niederman and F. B. Tan, ‘Emerging Markets Managing Global IT Teams: Considering
37 H. van Emmerik, I. M. Jawahar, B. Schreurs and N. de Cuyper, ‘Social Capital, Team Cultural Dynamics’, Communications of the ACM, April 2011, pp. 24–7; R. M. B. Boyle
Efficacy and Team Potency: The Mediating Role of Team Learning Behaviors’, Career and S. Nicholas, ‘Cross-Cultural Group Performance’, The Learning Organization,
Development International, February 2011, pp. 82–99; T. Lewis, ‘Assessing Social March 2011, pp. 94–101; G. K. Stahl, M. L. Maznevski, A. Voigt and K. Jonsen,
Identity and Collective Efficacy as Theories of Group Motivation at Work’, International ‘Unraveling the Effects of Cultural Diversity in Teams: A Meta-Analysis of Research
Journal of Human Resource Management, February 2011, pp. 963–80; K. Tasa, G. J. on Multicultural Work Groups’, Journal of International Business Studies, May 2010,
Sears and A. C. H. Schat, ‘Personality and Teamwork Behavior in Context: The Cross- pp. 690–709; and M. R. Haas, ‘The Double-Edged Swords of Autonomy and External
Level Moderating Role of Collective Efficacy’, Journal of Organizational Behavior, Knowledge: Analyzing Team Effectiveness in a Multinational Organization’, Academy of
January 2011, pp. 65–85; J. A. Goncalo, E. Polman and C. Maslach, ‘Can Confidence Management Journal, October 2010, pp. 989–1008.
Come Too Soon? Collective Efficacy, Conflict and Group Performance Over Time’, 47 R. Bond and P. B. Smith, ‘Culture and Conformity: A Meta-Analysis of Studies Using
Organizational Behavior & Human Decision Processes, September 2010, pp. 13–24; Asch’s [1952, 1956] Line Judgment Task’, Psychological Bulletin, January 1996, pp.
K. Tasa, S. Taggar and G. H. Seijts, ‘The Development of Collective Efficacy in Teams: A 111–37.
Multilevel and Longitudinal Perspective’, Journal of Applied Psychology, January 2007, 48 I. L. Janis, Groupthink, 2nd edn (New York: Houghton Mifflin Company, 1982), p. 175.
pp. 17–27; C. B. Gibson, ‘The Efficacy Advantage: Factors Related to the Formation 49 ‘What is India’s Caste System?’, <www.bbc.com/news/world-asia-india-35650616>,
of Group Efficacy’, Journal of Applied Social Psychology, October 2003, pp. 2153–86; accessed 17 January 2018.
and D. I. Jung and J. J. Sosik, ‘Group Potency and Collective Efficacy: Examining Their 50 See P. C. Earley, ‘Social Loafing and Collectivism: A Comparison of the United States
Predictive Validity, Level of Analysis and Effects of Performance Feedback on Future and the People’s Republic of China’, Administrative Science Quarterly, December 1989,
Group Performance’, Group & Organization Management, September 2003, pp. pp. 565–81; and P. C. Earley, ‘East Meets West Meets Mideast: Further Explorations of
366–91. Collectivistic and Individualistic Work Groups’, Academy of Management Journal, April
38 K. C. Kostopoulos and N. Bozionelos, ‘Team Exploratory and Exploitative Learning: 1993, pp. 319–48.
Psychological Safety, Task Conflict and Team Performance’, Group & Organization 51 N. J. Adler, International Dimensions of Organizational Behavior, 4th edn (Cincinnati,
Management, June 2011, pp. 385–415; K. J. Behfar, E. A. Mannix, R. S. Peterson and OH: Southwestern, 2002), p. 142.
W. M. Trochim, ‘Conflict in Small Groups: The Meaning and Consequences of Process 52 K. B. Dahlin, L. R. Weingart and P. J. Hinds, ‘Team Diversity and Information Use’,
Conflict’, Small Group Research, April 2011, pp. 127–76; R. S. Peterson and K. J. Behfar, Academy of Management Journal, December 2005, pp. 1107–23.
‘The Dynamic Relationship between Performance Feedback, Trust and Conflict in 53 N. J. Adler, International Dimensions of Organizational Behavior, 4th edn (Cincinnati,
Groups: A Longitudinal Study’, Organizational Behavior and Human Decision Processes, OH: Southwestern, 2002), p. 142.
September–November 2003, pp. 102–12; and K. A. Jehn, ‘A Qualitative Analysis of 54 S. Paul, I. M. Samarah, P. Seetharaman and P. P. Mykytyn, ‘An Empirical Investigation of
Conflict Types and Dimensions in Organizational Groups’, Administrative Science Collaborative Conflict Management Style in Group Support System-Based Global Virtual
Quarterly, September 1997, pp. 530–57. Teams’, Journal of Management Information Systems, Winter 2005, pp. 185–222.
39 O. A. Alnuaimi, L. P. Robert, Jr and L. M. Maruping, ‘Team Size, Dispersion and Social 55 This section is based on S. P. Robbins and T. A. Judge, Organizational Behavior, 14th edn
Loafing in Technology-Supported Teams: A Perspective on the Theory of Moral (Upper Saddle River, NJ: Pearson Prentice Hall, 2011).
Disengagement’, Journal of Management Information Systems, Summer 2010, pp. 56 C. E. Naquin and R. O. Tynan, ‘The Team Halo Effect: Why Teams Are Not Blamed for
203–30; C. Cheshire and J. Antin, ‘None of Us is as Lazy as All of Us’, Information, Their Failures’, Journal of Applied Psychology, April 2003, pp. 332–40.
Communication & Society, June 2010, pp. 537–55; R. van Dick, J. Stellmacher, 57 A. B. Drexler and R. Forrester, ‘Teamwork – Not Necessarily the Answer’, HR Magazine,
U. Wagner, G. Lemmer and P. A. Tissington, ‘Group Membership Salience and Task January 1998, pp. 55–8. See also R. Saavedra, P. C. Earley and L. Van Dyne, ‘Complex
Performance’, Journal of Managerial Psychology, vol. 24, no. 7 (2009), pp. 609–26; Interdependence in Task-Performing Groups’, Journal of Applied Psychology, February
A. Jassawalla, H. Sashittal and A. Malshe, ‘Students’ Perceptions of Social Loafing: 1993, pp. 61–72; and K. A. Jehn, G. B. Northcraft and M. A. Neale, ‘Why Differences
Its Antecedents and Consequences in Undergraduate Business Classroom Teams’, Make a Difference: A Field Study of Diversity, Conflict and Performance in Work
Academy of Management Learning & Education, March 2009, pp. 42–54; K. H. Groups’, Administrative Science Quarterly, December 1999, pp. 741–63.
Price, D. A. Harrison and J. H. Gavin, ‘Withholding Inputs in Team Contexts: Member 58 A. Chandler, ‘Bank Workers Lose Their Desks’, BRW, July 2011; L. Tay, ‘Inside
Composition, Interaction Processes, Evaluation Structure and Social Loafing’, Journal CommBank’s Activity-Based Workplace’, IT News, September 2011; L. Tay, ‘7 Lessons
of Applied Psychology, December 2006, pp. 1375–84; and R. Albanese and D. D. from the Move to Commonwealth Bank Place, Australia’s Biggest-Ever Corporate
Van Fleet, ‘Rational Behavior in Groups: The Free Riding Tendency’, Academy of Relocation’, Business Insider, 11 September 2013; Frost Collective, ‘CBA: A Modern
Management Review, April 1985, pp. 244–55. Office’, <www.frostcollective.com.au>, accessed 19 December 2014; and C. Herrick,
40 ‘Helping Hands’, HR Magazine, May 2011, p. 18; M. O’Neil, ‘Leading the Team’, ‘Commonwealth Bank Shifts to Activity-Based Work Culture, Swanky New Head Office’,
Supervision, April 2011, pp. 8–10; J. Beeson, ‘Build a Strong Team’, Leadership CIO, <www.cio.com.au>, accessed 21 September 2011.
Excellence, February 2011, p. 15; S. Brutus and M. B. L. Donia, ‘Improving the 59 J. Terzakis, ‘Virtual Retrospectives for Geographically Dispersed Software Teams’, IEEE
Effectiveness of Students in Groups with a Centralized Peer Evaluation System’, Computer Society, May–June 2011, pp. 12–15; ‘Virtual Teams Must Function Correctly’,
Academy of Management Learning & Education, December 2010, pp. 652–62; and N. Strategic Direction, April 2011, pp. 22–4; C. Scovotti and L. D. Spiller, ‘Cross-Border
H. Woodward, ‘Make the Most of Team Building’, HR Magazine, September 2006, pp. Student Collaborations: Opportunities for Videoconferencing’, Marketing Education
73–6. Review, Spring 2011, pp. 57–61; E. Markowitz, ‘Are the Best Leaders Revolutionaries?’
41 R. M. Yandrick, ‘A Team Effort’, HR Magazine, June 2001, pp. 136–41. Inc. Online, 28 March 2011; L. J. Gressgård, ‘Virtual Team Collaboration and Innovation
42 R. M. Yandrick, ‘A Team Effort’, HR Magazine, June 2001, pp. 136–41. in Organizations’, Team Performance Management, March 2011, pp. 102–19; L.
43 National Critical Care and Trauma Response Centre, ‘AUSMAT’, <https://www. Tischler, ‘Intel’s Virtual Footwear Wall for Adidas Turns Boutiques into Shoe-Topias’,
nationaltraumacentre.nt.gov.au/what-we-do/disaster-management/ausmat>, accessed Fast Company Online, 11 January 2011; A. Gupta, S. Seshasai, R. Aron and S. Pareek,
14 October 2017. ‘The 24-Hour Knowledge Factory: Work and Organizational Redesign and Associated
44 ‘How Should We Recognize Team Goals over Individual?’, Workforce Management Challenges’, Information Resources Management Journal, October–December
Online, February 2011; S. J. Goerg, S. Kube and R. Zultan, ‘Treating Equals Unequally: 2010, pp. 40–56; M. R. Haas, ‘The Double-Edged Swords of Autonomy and External
Incentives in Teams, Workers’ Motivation and Production Technology’, Journal of Knowledge: Analyzing Team Effectiveness in a Multinational Organization’, Academy
Labor Economics, October 2010, pp. 747–72; T. Taylor, ‘The Challenge of Project Team of Management Journal, October 2010, pp. 989–1008; O. Coren, ‘Israel Offers Intel
Incentives’, Compensation & Benefits Review, September–October 2010, pp. 411–19; $110 Million for Commitment to Stay in the Country’, Haaretz.com, 26 August 2010;
M. J. Pearsall, M. S. Christian and A. P. J. Ellis, ‘Motivating Interdependent Teams: M. B. O’Leary, ‘Go (Con)figure: Subgroups, Imbalance and Isolates in Geographically
Individual Rewards, Shared Rewards, or Something in Between?’, Journal of Applied Dispersed Teams’, Organization Science, January–February 2010, pp. 115–31; and R.
Psychology, January 2010, pp. 183–91; M. A. Marks, C. S. Burke, M. J. Sabella and S. R. Nelson, ‘Project Retrospectives: Evaluating Project Success, Failure and Everything in
J. Zaccaro, ‘The Impact of Cross-Training on Team Effectiveness’, Journal of Applied Between’, MIS Quarterly Executive, September 2005, pp. 361–72.
Psychology, February 2000, pp. 3–14; and M. A. Marks, S. J. Zaccaro and J. E. Mathieu,
9780655702412_CH23.indd 653 3/3/20 11:14 AM

9780655702412_CH23.indd 654 3/3/20 11:14 AM

SESSION Control and change
12
management
• Foundations of control
• Managing change and innovation
• Entrepreneurship module: Managing
entrepreneurial ventures.
9780655702412_CH24.indd 655 3/3/20 11:12 AM

656
Chapter
24 Foundations of control
While high employee turnover is almost always dysfunctional, low turnover isn’t necessarily a desirable
goal. An absence of turnover can mean that performance isn’t being managed well enough. With an
effective organisational control system, managers can identify and replace employees who are performing
poorly. Low levels of employee turnover can be desirable, but only if the right people – those who are the
weakest performers – are the ones leaving.
Controlling is the final step in the management process. Managers must monitor whether goals that
were established as part of the planning process are being accomplished efficiently and effectively. That’s
what they do when they control. Appropriate controls can help managers look for specific performance gaps
and areas for improvement. Things don’t always go as planned. But that’s why controlling is so important!
In this chapter, we’ll look at the fundamental elements of controlling, including the control process, the
types of controls that managers can use, and contemporary issues in control.
Learning Objective 1 Explain the nature and importance of control.

What is control, and why is it important? pp. 658–59
Learning Learning Objective 2 Describe the three steps in the control process.
Objectives What takes place as managers control? pp. 659–64
Learning Objective 3 Discuss the types of controls organisations and managers use.
What should managers control? pp. 664–68
Learning Objective 4 Discuss contemporary issues in control.
What contemporary control issues do managers confront? pp. 668–74
9780655702412_CH24.indd 656 3/3/20 11:12 AM

Chapter 24 Foundations of control 657
LO 1
Explain the nature
and importance of
control.
fact or fiction?
LO 2
Describe the three
steps in the control
process.
A lack of employee turnover

LO 3
is a sign of a good manager.
Discuss the
types of controls
organisations and
managers use.
fiction
LO 4
Discuss
contemporary issues
in control.
9780655702412_CH24.indd 657 3/3/20 11:12 AM

658 Session 12 Control and change management
What is control, and why

is it important?
‘Bailout’ was the magic word that cost Domino’s Pizza 11,000 free pizzas. The company had prepared
an Internet coupon for an ad campaign that was considered but not approved. However, when someone
apparently typed ‘bailout’ into a Domino’s promotional code window and found it was good for a free
medium pizza, the word spread like wildfire on the Web. Somewhere, somehow, a lack of control cost the
company big time.1
What is control?
How do you know a control system is effective?
Look at whether goals are being achieved!
control Control is the management function that involves monitoring activities to ensure that they’re being
Management function accomplished as planned and correcting any significant deviations. Managers can’t really know whether their
that involves monitoring
units are performing properly until they’ve evaluated what activities have been done and have compared
activities to ensure
that they’re being the actual performance with the desired standard. An effective control system ensures that activities are
accomplished as planned completed in ways that lead to the attainment of the organisation’s goals. The effectiveness of a control
and correcting any system is determined by how well it facilitates goal achievement. The more a control system helps managers
significant deviations
achieve their organisation’s goals, the better it is.
Why is control important?

Planning can be done, an organisational structure created to facilitate efficient achievement of goals, and
employees motivated through effective leadership. But there’s no assurance that activities are going as
planned and that the goals employees
and managers are working towards
are, in fact, being attained. Control is
important, therefore, because it’s the
only way that managers know whether
organisational goals are being met and
if not, the reasons why. The value of the
control function can be seen in three
specific areas:
• Planning. In Chapter 16, we described
goals, which provide specific direction
to employees and managers, as the
foundation of planning. However,
just stating goals or having employees
accept goals doesn’t guarantee that
the necessary actions to accomplish
those goals have been taken. As
the old saying goes, ‘The best-laid
In the Lorna Jane command centre, digital strategists monitor posts about the company’s
two main competitors on Twitter, Facebook, Pinterest and Instagram to get immediate plans often go awry.’ The effective
real-time insights into what customers want and how the company can compete more manager follows up to ensure that
effectively. what employees are supposed to do
© Tribune Content Agency LLC/Alamy
is, in fact, being done and goals are
9780655702412_CH24.indd 658 3/3/20 11:12 AM

Planning
Goals
Objectives
Strategies
Plans
Controlling
Organising
Standards
Structure
Measurements
Human resource
Comparison management
Actions
Leading
Motivation
Leadership
Communication
Individual and
group behaviour
Figure 24.1 Planning–controlling link
being achieved. As the final step in the management process, controlling provides the critical link back to
planning (see Figure 24.1). If managers didn’t control, they’d have no way of knowing whether their goals
and plans were being achieved and what future actions to take.
• E
mpowering employees. The second reason controlling is important is because of employee empowerment.
Many managers are reluctant to empower their employees because they fear something will go wrong
for which they would be held responsible. But an effective control system can provide information and
feedback on employee performance and minimise the chance of potential problems.
• Protecting the workplace. The final reason that managers control is to protect the organisation and its
assets.2 Organisations face threats from natural disasters, financial pressures and scandals, workplace
violence, supply chain disruptions and security breaches. Managers must protect organisational assets
in the event that any of these should happen. Comprehensive controls and backup plans will help
minimise work disruptions.
What takes place as managers

control?
The control process is a three-step process of (1) measuring actual performance, (2) comparing actual control process
performance against a standard, and (3) taking managerial action to correct deviations or to address A three-step process
of measuring actual
inadequate standards (see Figure 24.2). The control process assumes that performance standards already
performance, comparing
exist, and they do. They’re the specific goals created during the planning process. actual performance
against a standard, and
Specific goals ARE taking managerial action
to correct deviations
the performance standards.
1 What is ‘measuring’?
To determine actual performance, a manager must first get information about it. Thus, the first step in
control is measuring.
9780655702412_CH24.indd 659 3/3/20 11:12 AM

Is standard Y
Yes Do
Compare being attained? nothing
actual
performance
with standard No
Is variance Y
Yes Do
acceptable? nothing
Measure No
Goals Standard actual
per formance
Identify
Is standard Y
Yes
cause of
acceptable? variation
N
No
Revise Correct
standard per formance
Figure 24.2 The control process
How do managers measure?
Four common sources of information frequently used to measure
These days, managers can’t physically observe everything actual performance include personal observation, statistical reports,
their employees do. But technology is providing new ways oral reports and written reports. Each has its own particular strengths
to monitor what employees do and where they are doing
and weaknesses, but using a combination of them increases both the
it. GPS technology can track employee movements and
routes. Keystroke-monitoring software provides feedback number of input sources and the probability of receiving reliable
about when and how long people are actively using their information.
work computers. All at the touch of a button. Personal observation provides first-hand, intimate knowledge
Discuss this: of the actual activity – information that isn’t filtered through
• Is surveillance less invasive or more acceptable when it’s a others. It permits intensive coverage because minor as well as
computer watching instead of a human?
major performance activities can be observed, and it provides
• How could organisations make sure they’re being ethical
in monitoring employees? opportunities for the manager to read between the lines.
Management by walking around (MBWA) is a phrase used
to describe when a manager is out in the work area, interacting
management by directly with employees and exchanging information about what’s going on. Management by walking
walking around around can pick up factual omissions, facial expressions and tones of voice that may be missed by other
(MBWA) sources. Unfortunately, in a time when quantitative information suggests objectivity, personal observation
When a manager
is out in the work is often considered an inferior information source. It is subject to perceptual biases; what one manager sees,
area interacting with another might not. Personal observation also consumes a good deal of time. Finally, this method suffers
employees from obtrusiveness. Employees might interpret a manager’s overt observation as a lack of confidence or a
sign of mistrust.
9780655702412_CH24.indd 660 3/3/20 11:12 AM

The widespread use of computers has led managers to rely increasingly on statistical reports for measuring
actual performance. This measuring device, however, isn’t limited to computer outputs. It also includes
graphs, bar charts and numerical displays of any form that managers can use for assessing performance.
Although statistical information is easy to visualise and effective for showing relationships, it provides
limited information about an activity. Statistics report on only a few key areas and may often ignore other
important, often subjective, factors.
Information can also be acquired through oral reports – that is, through conferences, meetings, one-
to-one conversations or telephone calls. In employee-oriented organisations where employees work
closely together, this approach may be the best way to keep tabs on work performance. For example,
at the Ken Blanchard Companies in Escondido, California, managers are expected to hold one-on-one
meetings with each of their employees at least once every two weeks.3 The advantages and disadvantages
of this method of measuring performance are similar to those of personal observation. Although the
information is filtered, it is fast, allows for feedback, and permits expression and tone of voice as well as
words themselves to convey meaning. Historically, one of the main drawbacks of oral reports has been
the problem of documenting information for later reference. However, our technological capabilities
have progressed in the past couple of decades to the point where oral reports can be efficiently taped and
become as permanent as if they were written.
Actual performance may also be measured by written reports. Like statistical reports, they are slower yet
more formal than first-hand or second-hand oral measures. This formality also often gives them greater
comprehensiveness and conciseness than found in oral reports. In addition, written reports are usually easy
to catalogue and reference.
Given the varied advantages and disadvantages of each of these four measurement techniques, managers
should use all four for comprehensive control efforts.
What do managers measure?

What managers measure is probably more critical to the control process than how they measure. Why? The
selection of the wrong criteria can result in serious dysfunctional consequences. Besides, what we measure
determines, to a great extent, what
people in the organisation will attempt
to excel at.4 For example, assume that
your instructor has required a total of 10
writing assignments from the exercises at
the end of each textbook chapter. When
you ask them about this, you learn that
the writing assignments are for your
own enlightenment and don’t affect your
grade for the course; grades are solely
determined by how well you perform
on the three exams. We predict that you
would, not surprisingly, exert most, if not
all, of your effort towards doing well on
the three exams.
Some control criteria are applicable
to any management situation. For
Greeting customers with a handshake, a smile and a warm welcome is a practice Apple
example, because all managers, by stores adopted from Ritz-Carlton, the luxury hotel chain known as the gold standard
definition, direct the activities of others, of customer service. Apple benchmarked with the Ritz-Carlton because it wants its
criteria such as employee satisfaction or employees to excel at customer service that leads to customer loyalty.
Nati Harnik/ASSOCIATED PRESS
turnover and absenteeism rates can be
9780655702412_CH24.indd 661 3/3/20 11:12 AM

Benchmarking: Learning from others

We introduced benchmarking in the planning chapter (Chapter 16) Today, managers in diverse industries such as health care,
as a way for organisations to promote quality.5 Not surprisingly, education and financial services are discovering what manufacturers
since planning and controlling are so closely linked, it also has have long recognised – the benefits of benchmarking. For example,
implications for control. Benchmarking has been a highly utilised QPS Benchmarking helps organisations that provide aged care,
management tool. Although Xerox is often credited with the first community care and day surgery to evaluate their performance
widespread benchmarking effort in the United States, the practice against industry benchmarks. Organisations such as AGL, ANZ,
can actually be traced back much further. Australian Unity and Mitchell Communications also benchmark
The benefits of benchmarking have long been recognised in their corporate contributions to community investment. At its
the manufacturing industry. At the Midvale Steel Company plant most basic, benchmarking means learning from others. However,
where he was employed, Frederick W. Taylor (of scientific as a tool for monitoring and measuring organisational and work
management fame) used concepts of benchmarking to find the performance, benchmarking can be used to identify specific
‘one best way’ to perform a job and to find the best worker to performance gaps and potential areas of improvement.
perform the job. Even Henry Ford recognised the benefits. Based Discuss this:
on the techniques used at Chicago slaughterhouses where • What are the benefits of benchmarking?
carcasses were hung from hooks mounted on a monorail, with
• What are the challenges in doing it?
each man performing his job and then pushing the carcass to the
next workstation, Ford’s assembly line used the same concept for
producing cars, beginning in 1913. ‘The idea that revolutionised
manufacturing was imported from another industry.’
measured. Most managers have budgets for their area of responsibility set in monetary units (dollars, euros,
yen, and so on). Keeping costs within budget is, therefore, a fairly common control measure. However, any
comprehensive control system needs to recognise the diversity of activities among managers. For example,
a production manager in a shoe manufacturing plant might use measures of the quantity of shoes produced
per day, shoes produced per labour hour or percentage of rejects returned by customers. A team manager
in a call centre might consider cost efficiency, the length of time customers are on hold and customer
satisfaction ratings. Marketing managers often use measures such as percentage of market held, number of
customer visits per salesperson or number of customer impressions per advertising medium.
As you might imagine, some activities are more difficult to measure in quantifiable terms. It’s more
difficult, for example, for a manager to measure the performance of a medical researcher than of a person
who sells life insurance. But most activities can be broken down into objective segments that allow for
measurement. The manager needs to determine what value a person, department or unit contributes to the
organisation and then convert the contribution into standards.
Most jobs and activities can be expressed in tangible and measurable terms. When a performance
indicator cannot be stated in quantifiable terms, managers should look for and use subjective measures.
Certainly, subjective measures have significant limitations. Still, they are better than having no standards at
all and ignoring the control function. If an activity is important, the excuse that it’s difficult to measure is
inadequate. In such cases, managers should use subjective performance criteria. Of course, any analysis or
decisions made on the basis of subjective criteria should recognise the limitations of the data.
range of variation 2 How do managers compare actual performance

The acceptable to planned goals?
parameters of variance
The comparing step determines the variation between actual performance and the standard. Although some
between actual
performance and a variation in performance can be expected in all activities, it’s critical to determine an acceptable range of
standard variation (see Figure 24.3). Deviations outside this range need attention. Let’s work through an example.
9780655702412_CH24.indd 662 3/3/20 11:12 AM

Acceptable
upper limit
•
Standard • • Acceptable
range of
variation
•
Acceptable
• •
lower limit
t t+1 t+2 t+3 t+4 t+5
Figure 24.3 Acceptable range of variation
Table 24.1 Example of determining significant variation

Green Earth Gardening Supply – June Sales
Product Standard Actual Over (Under)
Vegetable plants 1075 913 (162)
Perennial flowers 630 634 4
Annual flowers 800 912 112
Herbs 160 140 (20)
Flowering bulbs 170 286 116
Flowering bushes 225 220 (5)
Heirloom seeds 540 672 132
Total 3600 3777 177
Robert Redwood is a sales manager for Green Earth Gardening Supply, a distributor of specialty plants
and seeds in South Australia. Robert prepares a report during the first week of each month that describes
sales for the previous month, classified by product line. Table 24.1 displays both the sales goals (standard)
and actual sales figures for the month of June. After looking at the numbers, should Robert be concerned?
Sales were a bit higher than originally targeted, but does this mean there were no significant deviations?
That depends on what Robert thinks is significant – that is, outside the acceptable range of variation. Even
though overall performance was generally quite favourable, some product lines need closer scrutiny. For
example, if sales of heirloom seeds, flowering bulbs and annual flowers continue to be over what was
expected, Robert might need to order more product from nurseries to meet customer demand. Because
sales of vegetable plants were 15 per cent below goal, Robert may need to run a special on them. As this
example shows, both over-variance and under-variance may require managerial attention, which is the third
step in the control process.
9780655702412_CH24.indd 663 3/3/20 11:13 AM

3 What managerial action can be taken?
Managers can choose among

three possible courses of action:
• Do nothing (self-explanatory).
• Correct actual performance.
• Revise the standards.
How do you correct actual performance?

Depending on what the problem is, a manager could take different corrective actions. For example, if
unsatisfactory work is the reason for performance variations, the manager could correct it using training
programs, disciplinary action, changes in compensation practices, and so on. One decision that a manager
immediate must make is whether to take immediate corrective action, which corrects problems at once to get
corrective action performance back on track or to use basic corrective action, which looks at how and why performance
Corrective action that deviated before correcting the source of deviation. It’s not unusual for managers to rationalise that they
addresses problems at
once to get performance don’t have time to find the source of a problem (basic corrective action) and continue to perpetually ‘put
back on track out fires’ with immediate corrective action. Effective managers analyse deviations and, if the benefits justify
it, take the time to pinpoint and correct the causes of variance.
basic corrective
action How do you revise the standard?
Corrective action that
looks at how and why It’s possible that the variance was a result of an unrealistic standard – too low or too high a goal. In such
performance deviated cases, it’s the standard that needs corrective action, not the performance. If performance consistently
before correcting the exceeds the goal, then a manager should look at whether the goal is too easy and needs to be raised. On
source of deviation
the other hand, managers must be cautious about revising a standard downwards. It’s natural to blame the
goal when an employee or a team falls short. For example, students who get a low score on a test often say
the test was too hard. Rather than accept the fact that their performance was inadequate, they will argue
that the standards are unreasonable. Likewise, salespeople who don’t meet their monthly quota often
want to blame what they think is an unrealistic quota. The point is that when performance isn’t up to par,
don’t immediately blame the goal or standard. If you believe the standard is realistic, fair and achievable,
tell employees that you expect future work to improve, and then take the necessary corrective action to
help make that happen.
What should managers control?

Cost efficiency. The length of time customers are kept on hold. Customers being satisfied with the service
provided. These are just a few of the important performance indicators that executives in the intensely
competitive call-centre service industry measure. To make good decisions, managers in this industry want
and need this type of information so they can control work performance.
How do managers know what to control? In this section, we’re first going to look at the decision of what
to control in terms of when control takes place. Then, we’re going to discuss some different areas in which
managers might choose to establish controls.
When does control take place?

Management can implement controls before an activity commences, during the activity or after the activity
has been completed. The first type is called feedforward control, the second is concurrent control and the
last is feedback control (see Figure 24.4).
9780655702412_CH24.indd 664 3/3/20 11:13 AM

Input Processes Output
Feedforward Concurrent Feedback

control control control
Anticipates Corrects problems Corrects problems

problems as they happen after they occur
Figure 24.4 When does control take place?
What is feedforward control?

The most desirable type of control – feedforward feedforward
control – prevents problems because it takes control
Control that takes place
place before the actual activity.6 For example, when
before a work activity
McDonald’s began doing business in Moscow, it sent is done
company quality control experts to help Russian farmers
learn techniques for growing high-quality potatoes
and to help bakers learn processes for baking high-
quality breads. Why? McDonald’s demands consistent
product quality no matter the geographical location.
They want french fries in Moscow to taste like those
in Perth. Still another example of feedforward control
is the scheduled preventive maintenance programs on
aircraft done by the major airlines. These schedules are
Adaptive traffic control systems are concurrent controls that make traffic
designed to detect, and hopefully to prevent, structural flows quicker and more efficient.7 Vehicle detectors in the road surface
damage that might lead to an accident. collect data about which way the traffic is flowing and the system adjusts
The key to feedforward controls is taking managerial traffic signals accordingly. For example, if there are no cars waiting to turn
through an intersection, the turning arrow signal doesn’t flash on.
action before a problem occurs. That way, problems can
A.S.U.Photo/Shutterstock
be prevented rather than having to correct them after
any damage – poor-quality products, lost customers, lost
revenue, and so on – has already been done. However, these controls require timely and accurate information
that isn’t always easy to get. Thus, managers frequently end up using the other two types of control.
When is concurrent control used?

Concurrent control, as its name implies, takes place while a work activity is in progress. For example, the concurrent
director of business product management at Google and his team keep a watchful eye on one of Google’s control
most profitable businesses – online ads. They watch ‘the number of searches and clicks, the rate at which Control that takes place
while a work activity is in
users click on ads, the revenue this generates – everything is tracked hour by hour, compared with the data progress
from a week earlier and charted’.8 If they see something that’s not working particularly well, they fine-tune it.
Fifty-five per cent of employees say that micromanaging

decreases their productivity.9
9780655702412_CH24.indd 665 3/3/20 11:13 AM

Technical equipment (such as computers and computerised machine controls) can be designed to
include concurrent controls. For example, you’ve probably experienced this with word-processing software
that alerts you to a misspelled word or incorrect grammatical usage. Also, many organisational quality
programs rely on concurrent controls to inform workers whether their work output is of sufficient quality
to meet standards.
The best-known form of concurrent control, however, is direct supervision. All managers can benefit
from using concurrent control because they can correct problems before they become too costly. MBWA,
which we described earlier in this chapter, is a great way for managers to do this.
In what areas might managers need controls?

Most organisations consist of countless activities taking place in different locations and functional areas of
the organisation. Controlling it all is complicated! Let’s look at some of the specific areas and control tools
that managers can use.
How is an organisation’s information controlled?

Managers deal with information controls in two ways: (1) as a tool to help them control other organisational
activities, and (2) as an organisational area they need to control.
Managers need the right information at the right time and in the right amount to help them monitor and
measure organisational activities. In measuring actual performance, managers need information about what is
happening within their area of responsibility and about the standards in order to be able to compare actual
performance with the standard. They also rely on information to help them determine whether deviations
are acceptable. Finally, they rely on information to help them develop appropriate courses of action. Most
of the information tools that managers use come from the organisation’s management information system.
management A management information system (MIS) provides managers with needed information on a
information regular basis, usually through computer-supported applications. Organisations today are like well-stocked
system (MIS) libraries. They contain a huge amount of data that need to be available to the right people when they need
A system used to
provide management it. A MIS collects data (raw, unanalysed facts) and turns them into relevant information (processed and
with needed information analysed data), for managers to use.
on a regular basis Because information is critically important to everything an organisation does, managers must have
comprehensive and secure controls in place to protect that information. Such controls can range from
data encryption to system firewalls to data backups and other techniques.10 Problems can lurk in places
that an organisation might not even have considered, such as search engines. Sensitive, defamatory,
confidential or embarrassing organisational information has found its way into search engine results.
Equipment such as laptop computers and even radio-frequency identification (RFID) tags are vulnerable
to viruses and hacking. Needless to say, information controls should be monitored regularly to ensure
that all possible precautions are in place to protect important information.
How do managers keep track of finances?

Financial controls help managers ensure that sufficient cash is available to pay ongoing expenses, that debt
levels haven’t become too high and that assets are being used productively. Table 24.2 summarises some of
the most popular financial ratios that managers will analyse to get feedback on the organisation’s financial
position. Because you’ve probably studied these ratios in your accounting or finance courses, or will in
the near future, we won’t elaborate on how they’re calculated. We mention them here to remind you that
managers use such ratios as internal control tools.
Budgets are another type of financial control tool that are used for planning and controlling. When a
budget is formulated, it’s a planning tool because it indicates which work activities are important and what
and how many resources should be allocated to those activities. But budgets are also used for controlling
since they provide managers with quantitative standards against which to measure and compare resource
9780655702412_CH24.indd 666 3/3/20 11:13 AM

Table 24.2 Popular financial ratios

Objective Ratio Calculation Meaning
Liquidity: determining whether the Current ratio Current assets Tests the organisation’s ability to meet
organisation can cover its debts Current liabilities short-term obligations
Acid test Current assets – inventories Tests liquidity more accurately when
Current liabilities inventories turn over slowly or are difficult
to sell
Leverage: how the organisation is Debt to assets Total debt The higher the ratio, the more leveraged the
using debt Total assets organisation
Times interest earned Profits before interest and taxes Measures how many times the organisation is
Total interest charges able to cover its interest expenses
Activity: how assets and inventory are Inventory turnover Sales The higher the ratio, the more efficiently
being used to generate sales Inventory inventory assets are being used
Total asset turnover Sales The fewer assets used to achieve a given level
Total assets of sales, the more efficiently management is
using the organisation’s total assets
Profitability: how much profit the Profit margin on sales Net profit after taxes Identifies the profits that are being generated
organisation is generating Total sales
Return on investment Net profit after taxes Measures the efficiency of assets to generate
Total assets profits
consumption. If deviations are significant enough to require action, the manager examines what has
happened and tries to uncover why. With this information, necessary action can be taken. For example, if
you use a personal budget for monitoring and controlling your monthly expenses, you might find that one
month your miscellaneous expenses were higher than you had budgeted for. At that point, you might cut
back spending in another area or work extra hours to earn more income.
Effectively controlling financial activity and business expenses is crucial for managing organisational
cash flows and profitability; these days, digital technology can help.11 Smartphone apps can be used to
link digital systems to enable quicker and more accurate recording and analysis of financial activity.
One app enables salespeople on the road to upload receipts for expenses directly into company systems,
eliminating the need to fill out expense reports. Another, used by Naomi Simson, founder of gift-
giving company RedBalloon, generates a dashboard of metrics to provide real-time feedback about
RedBalloon’s sales activity and business costs such as the average sale price, average margin on sales, and
commissions being paid to suppliers. This helps her track expenditure, manage cash flow and understand
the organisation’s activities because, as Naomi explains, ‘you know the rhythm of the business and you can
feel the rhythm of the business’. Technological systems such as cloud computing and electronic banking
mean organisations can link their business and banking systems to enhance expense management, record
keeping and financial planning. For example, using electronic banking and expense management systems
managers can review expenditures over a specified amount, or paid offshore, or to specified contractors
or merchants, which enhance planning and control by providing new insights into the organisation’s
business activities.
What is the balanced scorecard approach to control?

The balanced scorecard approach is a way to evaluate organisational performance from more than balanced
just the financial perspective.12 Traditionally, a balanced scorecard looked at four areas that contribute to scorecard
a company’s performance: financial, customer, internal processes and people/innovation/growth assets.13 A performance
measurement tool that
These days, however, many organisations also include criteria related to the environment and/or the looks at more than just
community.14 According to this approach, managers should develop goals in each of the four areas and then the financial perspective
measure whether the goals are being met.
9780655702412_CH24.indd 667 3/3/20 11:13 AM

Although a balanced scorecard makes sense, managers tend to focus on areas that drive their
organisation’s success and use scorecards that reflect those strategies.15 For example, if strategies are
customer centred, then the customer area is likely to get more attention than the other three areas. Yet, you
can’t focus on measuring only one performance area because others are affected as well. For example, at
IBM Global Services in the United States, managers developed a scorecard around an overriding strategy
of customer satisfaction. However, the other areas (financial, internal processes and people/innovation/
growth) support that central strategy. The division manager described it as follows: ‘The internal processes
part of our business is directly related to responding to our customers in a timely manner, and the learning
and innovation aspect is critical for us since what we’re selling our customers above all is our expertise. Of
course, how successful we are with those things will affect our financial component.’16
The triple bottom line of sustainability

Managing for sustainability involves finding ways to measure, evalu- and Fairtrade demonstrate to certified organisations how they
ate, compare and monitor the impact of an organisation’s activities. were evaluated, and demonstrate to customers and other stake-
This has led many organisations to use a triple bottom line (TBL) holders the standards that the certified organisations have met. But,
approach to measure the social, economic and environmental con- as with any tool, TBL approaches are built on certain assumptions
sequences of their actions.17 The concept of the TBL was originally that can affect how they contribute to control processes.TBL mea-
developed in the field of economics as a way to refocus attention sures, like other control systems, can lead people to treat indicators
away from the traditional single ‘bottom line’ of profitability to as an end rather than a means and encourage a focus on ‘generating
broader considerations of social and environmental ‘bottom lines’, the right indicators and then tailoring the solution in order to get
and to provide a mechanism to measure and compare impacts the indicators “back on track”’.18 Because TBL measures are based
upon all three bottom lines. on economic logic, they can establish economic views of activities as
Using a TBL approach to sustainability helps organisations to the dominant perspective in people’s thinking by considering social
demonstrate that they have considered the economic, social and and environmental impacts in economic terms when other criteria
environmental impacts of their activities. It also helps them to might be more appropriate. So, managers need to be aware of the
demonstrate how they have measured and evaluated sustainability assumptions and focus of TBL approaches so that they understand
considerations. For example, the TBL measures used in sustainability how to use them accurately, appropriately and effectively.
standards and certification systems such as the Rainforest Alliance
Why is feedback control so popular?

feedback control The most popular type of control relies on feedback. In feedback control, the control takes place after
Control that takes place the activity is done. The main problem with this kind of control is that by the time a manager has the
after a work activity is
information, the problems have already occurred, leading to waste or damage. However, in many work
done
areas, the financial area being one example, feedback is the only viable type of control.
Feedback controls do have two advantages.19 First, feedback gives managers meaningful information on
how effective their planning efforts were. Feedback that shows little variance between standard and actual
performance indicates that the planning was generally on target. If the deviation is significant, a manager
can use that information to formulate new plans. Second, feedback can enhance motivation. People want to
know how well they’re doing, and feedback provides that information.
What contemporary control issues

do managers confront?
Today’s workplaces present considerable control challenges for managers. From monitoring employees’
computer usage at work to protecting the workplace against disgruntled employees intent on doing harm,
managers need controls to ensure that work can be done efficiently and effectively as planned.
9780655702412_CH24.indd 668 3/3/20 11:13 AM

Using feedback to control employee performance

Ask a manager about the performance feedback they give employees and you’re likely to get a qualified
answer. If the feedback is positive, it’s likely to be given promptly and enthusiastically. Negative feedback is
often treated differently20 because, like most of us, managers fear offending the receiver or having to deal
with their emotions. The result is that negative feedback is often avoided, delayed or substantially distorted.
But both kinds of feedback can be valuable for controlling employee performance.
Positive feedback is more readily and accurately perceived than negative feedback. Positive feedback
fits what most people wish to hear and already believe about themselves. Furthermore, whereas positive
feedback is almost always accepted, negative feedback often meets resistance because people want to hear
good news and block out the rest.21 This means that you need to be aware of potential resistance and
learn to use negative feedback in situations in which it’s most likely to be accepted.22 Research indicates
that negative feedback is most likely to be accepted when it comes from a credible source or is objective.
In other words, negative feedback that’s supported by hard data – numbers, specific examples, and the
like – is more likely to be accepted. Subjective impressions carry weight only when they come from a
person with high status and credibility.23 Negative feedback that’s subjective can be a meaningful tool
for experienced managers, particularly those in upper levels of the organisation who have built the trust
and earned the respect of their employees. From less experienced managers, those in the lower ranks
of the organisation and those whose reputations haven’t yet been established, negative feedback that’s
subjective in nature isn’t likely to be well received. We provide more pointers about providing feedback
to employees on page 73.
Do controls need to be adjusted for cultural

differences?
The concepts of control that we’ve discussed are appropriate for organisational units that aren’t
geographically distant or culturally distinct. But what about global organisations? Would control systems
be different, and what should managers know about adjusting controls for national differences?
Methods of controlling employee behaviour and operations can be quite different in different countries. In
fact, the differences in organisational control systems of global organisations are primarily in the measurement
and corrective action steps of the control process.
In a global corporation, for example, managers of
foreign operations tend not to be closely controlled
by the home office if for no other reason than that
distance keeps managers from being able to observe
work directly. Because distance creates a tendency
for formalised controls, the home office of a global
company often relies on extensive, formal reports
for control. The global company may also use
information technology to control work activities.
For example, Seven and i Holdings (Japan’s biggest
retail conglomerate and parent company of
7-Eleven) uses automated cash registers not only
to record sales and monitor inventory but also to
schedule tasks for store managers and to track their
Yum! Brands, a global restaurant firm, established tighter control systems in
use of the built-in analytical graphs and forecasts.
China after learning that some of its poultry suppliers for its KFC restaurants
If managers don’t use them enough, they’re told to violated company rules on the use of drugs to fatten chickens. Corrective actions
increase their activities.24 of its control process included strengthening the oversight of its suppliers and
Technology’s impact on control is most evident establishing the principle of zero tolerance in food safety.
Zhou Junxiang/AP Images
in comparisons of technologically advanced
9780655702412_CH24.indd 669 3/3/20 11:13 AM

nations with countries that aren’t as technologically advanced. Organisations in technologically advanced
nations such as Australia, the United States, Japan, Canada, Great Britain and Germany use indirect
control devices – particularly computer-related reports and analyses – in addition to standardised rules and
direct supervision to ensure that activities are going as planned. In less technologically advanced countries,
direct supervision and highly centralised decision making are the basic means of control.
Also, constraints on what corrective action managers can take may affect managers in foreign countries
because laws in some countries don’t allow managers the option of closing facilities, laying off employees
or bringing in a new management team from outside the country. Finally, another challenge for global
companies in collecting data is comparability. For example, a company’s manufacturing facility in Vietnam
might produce the same products as a facility in New Zealand. However, the Vietnamese facility might be
much more labour intensive than its New Zealand counterpart (to take advantage of lower labour costs in
Vietnam). If top-level executives were to control costs by, for example, calculating labour costs per unit or
output per worker, the figures wouldn’t be comparable. Managers in global companies must address these
types of global control challenges.
What challenges do managers face in controlling

the workplace?
Controlling the use of workplace technology
What can your employer find out about you and your work? You might be surprised at the answers! Employers
can (and do), among other things, read your email (even those marked ‘personal’ or ‘confidential’), monitor
your work by computer, store and review computer files, and track your whereabouts in a company vehicle.
In fact, some 26 per cent of companies have fired workers for misusing the Internet, another 25 per cent
have terminated workers for email misuse, and 6 per cent have fired employees for misusing office phones.25
Managers feel that they need to monitor what employees are doing because recreational on-the-job
Web surfing is thought to cost billions of dollars in lost work productivity annually. For example, in a study
of Internet use in the workplace nearly one in four employees (24 per cent) admitted spending more than
four hours per week on personal surfing from a corporate-owned desktop or laptop computer.26 Watching
online video has become an increasingly serious problem, because of the time being wasted by employees
and because it clogs already strained corporate computer networks.27
Another reason that managers monitor employee email and computer usage is that they don’t want to
risk being fined for creating a workplace environment in which employees could be offended by offensive
messages or inappropriate images displayed on a colleague’s computer screen. Concerns about racial or
sexual harassment are one reason companies might want to monitor or keep backup copies of all email.
Electronic records can help establish what actually happened so managers can react quickly.28
Finally, managers want to ensure that company secrets aren’t being leaked.29 In addition to typical email
and computer usage, companies are monitoring instant messaging, blogs and other social media outlets.
Managers need to be certain that employees are not, even inadvertently, passing information on to others
who could use that information to harm the company.
Because of the potentially serious costs, and given the fact that most jobs now entail computers, many
companies have workplace monitoring policies. Such policies should control employee behaviour in a non-
demeaning way, and employees should be informed about those policies.
Controlling employee theft

Up to 85 per cent of all organisational theft and fraud is committed by employees, not outsiders.30
employee theft Employee theft is defined as any unauthorised taking of company property by employees for their
Any unauthorised taking personal use.31 It can range from embezzlement to fraudulent filing of expense reports to removing
of company property
by employees for their
equipment, parts, software or office supplies from organisational premises. Retail businesses have
personal use long faced serious potential losses from employee theft but now loose financial controls and the ready
availability of information technology have made employee stealing an escalating problem in all kinds
9780655702412_CH24.indd 670 3/3/20 11:13 AM

and sizes of organisations. It’s a control issue that managers need to educate
themselves about and be prepared to deal with.32
Why do employees steal? The answer depends on the person being asked.33
Experts in various fields – industrial security, criminology, clinical psychology –
have different perspectives. The industrial security people propose that people
steal because the opportunity presents itself through lax controls and favourable
circumstances. Criminologists say that it’s because people have financial-based
pressures (such as personal financial problems) or vice-based pressures (such as
gambling debts). The clinical psychologists suggest that people steal because they
can rationalise whatever they’re doing as being correct and appropriate behaviour
(‘everyone does it’, ‘they had it coming’, ‘this company makes enough money and
they’ll never miss anything this small’, ‘I deserve this for all that I put up with’, and
so on).34 Although each approach provides compelling insights into employee theft
and has been instrumental in attempts to deter it, unfortunately employees continue
to steal. What can managers do?
The concept of feedforward, concurrent and feedback control is useful for
identifying measures to deter or reduce employee theft.35 Figure 24.5 summarises Employee theft includes theft of property such
as stationery, computers or power tools, but
several possible managerial actions. it can also include theft of data and intellectual
property, fraud, undercharging for company
Controlling workplace conflict products, doctoring company documents,
The ability to manage conflict is undoubtedly one of the most important skills falsifying time records and using company time
for personal matters.36
a manager needs to possess.37 A study of middle- and top-level executives by the
Africa Studio/Shutterstock
FEEDFORWARD CONCURRENT FEEDBACK

Make sure employees
know when theft or fraud has
Use careful prehiring Treat employees with
occurred – not naming names,
screening. respect and dignity.
but letting people know this
isn’t acceptable.
Establish specific
policies defining theft Openly communicate Use the services of
and fraud and discipline the costs of stealing. professional investigators.
procedures.
Let employees know on

Involve employees a regular basis about their
Redesign control measures.
in writing policies. successes in preventing
theft and fraud.
Evaluate your organ-

Educate and train Use video surveillance
isation’s culture and the
employees about the equipment if conditions
relationships of managers
policies. warrant.
and employees.
Install ‘lock-out’ options on computers,

Have a professional telephones and email.
review of your internal
Use corporate hotlines for reporting incidences.
security controls.
Set a good example.
Figure 24.5 Controlling employee theft

Source: Stephen P. Robbins and Mary Coulter, Management, 13th edn, © 2016, p. 541. Reprinted and electronically reproduced by permission of Pearson Education, Inc.,
New York.
9780655702412_CH24.indd 671 3/3/20 11:13 AM

conflict American Management Association revealed that the average manager spends approximately 20 per cent of
Perceived differences their time dealing with conflict.38 The importance of conflict management is reinforced by a survey of the
resulting in interference
or opposition
topics managers consider most important in management development programs; conflict management
was rated as more important than decision making, leadership or communication skills.39 For almost all of
traditional view of us the term conflict has a negative connotation, yet evidence demonstrates that in some situations an increase
conflict in conflict is constructive.40 So, controlling workplace conflict isn’t just about minimising or resolving
The view that all conflict
is bad and must be conflict. It’s also about stimulating conflict when it is useful, valuable and necessary. Conflict is perceived
avoided incompatible differences resulting in some form of interference or opposition. Whether the differences are
real is irrelevant. If people perceive that differences exist, then there is conflict.
human relations
view of conflict Three different views have evolved regarding conflict.41 The traditional view of conflict argues
The view that conflict that conflict must be avoided, that it indicates a problem within the group. Another view, the human
is natural and inevitable relations view of conflict, argues that conflict is a natural and inevitable outcome in any group and
and has the potential to need not be negative, but has the potential to be a positive force in contributing to a group’s performance.
be a positive force
The third and most recent view, the interactionist view of conflict, proposes that not only can
interactionist conflict be a positive force in a group but also that some conflict is absolutely necessary for a group to
view of conflict perform effectively.
The view that some
The interactionist view doesn’t suggest that all conflicts are good. Some conflicts – functional
conflict is necessary
for an organisation to conflicts – are constructive and support an organisation’s goals and improve performance. Other
perform effectively conflicts – dysfunctional conflicts – are destructive and prevent organisations from achieving their
goals. Figure 24.6 illustrates the challenge facing managers.
functional
conflicts
Conflict that’s
High
constructive
and supports an
Level of organisational performance
organisation’s goals
dysfunctional
conflicts
Conflict that’s
destructive and prevents
an organisation from
achieving its goals
A
C
B
•
Low High
Low
Level of conflict
Organisation's Level of
Level of Type of internal organisational
Situation
conflict conflict characteristics performance
A Low Dysfunctional Apathetic Low

or Stagnant
none Unresponsive to change
Lack of new ideas
B Optimal Functional Viable High
Self-critical
Innovative
C High Dysfunctional Disruptive Low
Chaotic
Uncooperative
Figure 24.6 Conflict and organisational performance
9780655702412_CH24.indd 672 3/3/20 11:13 AM

Whether conflict is functional or dysfunctional depends on the type of conflict.42 Task conflict relates task conflict
to the content and goals of the work. Relationship conflict focuses on interpersonal relationships. Conflict that relates to
the content and goals of
Process conflict refers to how the work gets done. Research shows that relationship conflicts are almost work
always dysfunctional because the interpersonal hostilities increase personality clashes and decrease mutual
understanding and so the tasks don’t get done. On the other hand, low levels of process conflict and low- relationship
to-moderate levels of task conflict are functional. For process conflict to be productive, it must be minimal. conflict
Conflict that focuses
Otherwise, intense arguments over who should do what may become dysfunctional since they can lead to on interpersonal
uncertainty about task assignments, increase the time to complete tasks and lead to members working at relationships
cross-purposes. However, a low-to-moderate level of task conflict consistently has a positive effect on group
process conflict
performance because it stimulates discussion of ideas that help groups be more innovative.43 Conflict that refers to
There is no clear demarcation between functional and dysfunctional conflict, and no definitive method how the work gets done
for determining when conflict is needed. However, an affirmative answer to one or more of the following
questions may suggest a need for conflict stimulation:44
• Are you surrounded by ‘yes’ people?
• Are employees afraid to admit ignorance and uncertainties to you?
• Are decision makers so focused on reaching a compromise that they lose sight of values, long-term
objectives or the organisation’s welfare?
• Do managers believe that it’s in their best interest to maintain the impression of peace and cooperation
in their unit, regardless of the price?
• Are decision makers excessively concerned about hurting the feelings of others?
• Do managers believe that popularity is more important for obtaining organisational rewards than
competence and high performance?
• Do managers put undue emphasis on obtaining consensus for their decisions?
• Do employees show unusually high resistance to change?
• Is there a lack of new ideas?
So, how can a manager stimulate functional conflict when that is necessary? The following are some
preliminary suggestions that managers can use.45
The initial step is for managers to convey to employees the message, supported by actions, that conflict
has its legitimate place. This step may require changing the culture of the organisation. Individuals who
challenge the status quo, suggest innovative ideas, offer divergent opinions and demonstrate original
thinking need to be rewarded visibly with promotions, salary increases and other positive reinforcers.
Another widely used method for shaking up a stagnant unit or organisation is to bring in new people
with backgrounds, values, attitudes or managerial styles that differ from those of present members. Many
large corporations have used this technique during the past decade to fill vacancies on their boards of
directors. Women, minority group members, consumer advocates, and others whose backgrounds and
interests differ significantly from those of the rest of the board have been selected to add a fresh perspective.
We also know that structural variables are a source of conflict. It is therefore only logical that managers
look to structure as a conflict stimulation device. Centralising decisions, realigning work groups, increasing
formalisation, and increasing interdependencies between units are all structural devices that disrupt the
status quo and increase conflict levels.
Which conflicts do you handle?

When group conflict levels are too high, managers can select from five conflict management options:
avoidance, accommodation, forcing, compromise and collaboration.46 (See Table 24.3 for a description
of these techniques.) Keep in mind that no one option is ideal for every situation. Which approach to
use depends on the circumstances.
Regardless of our desires, reality tells us that some conflicts are unmanageable.47 When antagonisms
are deeply rooted, when one or both parties wish to prolong a conflict or when emotions run so high that
constructive interaction is impossible, your efforts to manage the conflict are unlikely to meet with much
9780655702412_CH24.indd 673 3/3/20 11:13 AM

Table 24.3 Conflict management: What works best and when

Strategy Best used when . . .
Avoidance Conflict is trivial, emotions are running high and time is needed to cool them down, or when the
potential disruption from an assertive action outweighs the benefits of resolution
Accommodation The issue under dispute isn’t that important to you or when you want to build up credits for later
issues
Forcing You need a quick resolution on important issues that require unpopular actions to be taken and when
commitment by others to your solution isn’t critical
Compromise Conflicting parties are about equal in power, it is desirable to achieve a temporary solution to a
complex issue, or time pressures demand an expedient solution
Collaboration Time pressures are minimal, all parties seriously want a win–win solution, and the issue is too
important to be compromised
success. Don’t be lured into the naïve belief that a good manager can resolve every conflict effectively. Some
aren’t worth the effort; some are outside your realm of influence; and still others may be functional and, as
such, are best left alone.
Using controls to increase diversity

The Australian Securities Exchange Council requires that Imposing this type of external control does appear to be
companies listed on the Australian Securities Exchange (ASX) helping companies increase and better support workforce
report their aims, targets, policies and accomplishments diversity.A recent KPMG analysis of listed companies’ compliance
regarding the promotion of gender diversity.48 Under the with the guidelines found that flexible workplace arrangements,
guidelines, companies are specifically required to report: diversity recruitment, education about harassment, bullying,
• the proportions of men and women on the board of discrimination, diversity awareness and unconscious bias,
directors, in senior executive positions and across the domestic violence support policies, and mentoring and support
company as a whole programs were commonly used by listed companies of all sizes.
• the company’s diversity policy Moreover, the report noted that 90 per cent of listed companies
• measureable objectives for achieving gender diversity had now gone beyond supporting gender diversity to also
• company progress towards achieving diversity objectives explicitly support age and ethnic diversity, suggesting that
support for gender diversity will generate positive flow-on
• the company’s Gender Equality Indicators, if it is a company to
effects for other forms of diversity because initiatives such as
whom the Workplace Gender Equality Act applies.
unconscious bias training and flexible work practices help many
Companies that don’t confirm with the council’s types of employees.
requirements are also required to provide an ‘if not why not’
explanation of the how and why they don’t conform.
9780655702412_CH24.indd 674 3/3/20 11:13 AM

Student on a regular basis. Others include comprehensive and secure controls, such
as data encryption, system firewalls, data backups and so on, that protect the
Learning organisation’s information. Also, balanced scorecards provide a way to evaluate
Centre an organisation’s performance in four different areas rather than just from the
financial perspective.
Learning Objective 4. Discuss contemporary issues

Reviewing the learning objectives in control.
Managers can use positive and negative feedback to control employee
Learning Objective 1. Explain the nature and
performance. Adjusting controls for cross-cultural differences may be needed
importance of control.
primarily in the areas of measuring and taking corrective actions.
Control is the management function that involves monitoring activities to ensure Controlling the use of workplace technology, employee theft and workplace
that they’re being accomplished as planned and correcting any significant conflict requires managers to have policies in place to control inappropriate
deviations. actions and ensure that work is being done efficiently and effectively.
As the final step in the management process, controlling provides the link
back to planning. If managers didn’t control, they’d have no way of knowing
whether goals were being met.
❶ What is the role of control in management?
Control is important because (1) it’s the only way to know whether goals are
❷ Describe four methods managers can use to acquire information about
being met and, if not, why; (2) it provides information and feedback so managers
actual work performance.
feel comfortable empowering employees; and (3) it helps protect an organisation
➌ How are planning and control linked? Is the control function linked to the
and its assets.
organising and leading functions of management? Explain.
➍ Contrast feedforward, concurrent and feedback controls.
Learning Objective 2. Describe the three steps in
❺ Why do you think feedback control is the most popular type of control?
the control process.
Justify your response.
The three steps in the control process are measuring, comparing and taking
❻ In Chapter 25 we discuss the ‘white-water rapids’ view of change. Do you
action. Measuring involves deciding how to measure actual performance and
think it’s possible to establish and maintain effective standards and controls
what to measure. Comparing involves looking at the variation between actual
in this type of environment? Discuss.
performance and the standard (goal). Deviations outside an acceptable range of
❼ Why is it that what is measured is more critical to the control process than
variation need attention.
how it is measured?
Taking action can involve doing nothing, correcting the actual performance
❽ ‘Every individual employee in an organisation plays a role in controlling
or revising the standards. Doing nothing is self-explanatory. Correcting the
work activities.’ Do you agree with this statement, or do you think control is
actual performance can involve different corrective actions, which can either be
something that only managers are responsible for? Explain.
immediate or basic. Standards can be revised by either raising or lowering them.
❾ What are some work activities in which the acceptable range of variation
might be higher than average? What about lower than average? (Hint: Think
Learning Objective 3. Discuss the types of controls
in terms of the output from the work activities, whom it might affect and
organisations and managers use.
how it might affect them.)
Feedforward controls take place before a work activity is done. Concurrent ❿ How could you use the concept of control in your personal life? Be specific.
controls take place while a work activity is being done. Feedback controls take (Think in terms of feedforward, concurrent and feedback controls, as well as
place after a work activity is done. specific controls for the different aspects of your life – school, work, family
Financial controls that managers can use include financial ratios (liquidity, relationships, friends, hobbies, etc.)
leverage, activity and profitability) and budgets. One information control
managers can use is an MIS, which provides managers with needed information
9780655702412_CH24.indd 675 3/3/20 11:13 AM


DISCIPLINING DIFFICULT
EMPLOYEES
Almost all managers will, at one time or another, have to deal with employees who are difficult. There is no shortage of characteristics that can make someone difficult
to work with. Some examples include being: short-tempered, demanding, abusive, angry, defensive, complaining, intimidating, aggressive, narcissistic, arrogant and rigid.
Successful managers have learned how to cope with difficult people.
PERSONAL

ASSESSMENT
Workplace discipline indicator

Disciplining, especially with difficult employees, is usually not a manager’s favourite thing to do. But it’s important. Take this PIA and discover how you prefer to
discipline employees.
Skill basics frustrations because others will be confirming your perception and can offer
No single approach is always effective in dealing with difficult people. However, support. Second, people in the organisation with authority to reprimand
we can offer several suggestions that are likely to lessen the negative effect these are more likely to act when complaints are coming from multiple sources.
people create in your life and may have some influence in reducing their difficult And third, the difficult person is more likely to feel pressure to change when
behaviour.49 a group is speaking out against their behaviour than they would if the
• Don’t let your emotions rule your behaviour. Our first response to a difficult complaint is coming from a single source.
person is often emotional. We get angry. We show frustration. We want to Practising the skill
lash out at them or ‘get even’ when we think they’ve insulted or demeaned Read through the scenario and follow the directions at the end of it.
us. This response isn’t likely to reduce your anger and may escalate the other Your career has progressed even faster than you thought possible. After
person’s negative behaviour. So, fight your natural tendencies and keep your graduating from university with an accounting degree, you worked three years
cool. Stay rational and thoughtful. for a major accounting firm. Two employers and four jobs later, you’ve just been
• Attempt to limit contact. If possible, try to limit your contact with the hired by a large mining company as their finance manager. What you didn’t
difficult person. Avoid places where they hang out and limit nonessential expect in the new job was having to deal with Mark Hundley.
interactions. Also, use communication channels – such as email and text
Mark is the operations manager. He has been with the company for eight
messaging – that minimise face-to-face contact and verbal intonations.
years. Your first impression of Mark was that he was a ‘know-it-all’. He was quick
• Try polite confrontation. If you can’t avoid the difficult person, consider
to put you down and acted as if he was your superior rather than an equal. Based
standing up to them in a civil but firm manner. Let them know that you’re
on comments you’ve heard around the offices, it seems you’re not alone. Other
aware of their behaviour, that you find it unacceptable, and that you won’t
executives all seemed to agree that Mark is a brilliant engineer and operations
tolerate it. For people who are unaware of the effect their actions have
manager but very difficult to work with. Specific comments you’ve heard include
on others, confrontation could make them aware of the need to alter their
that he has ‘an abrasive attitude’, ‘talks down to people’, is ‘arrogant’, ‘thinks
behaviour. For those who are acting purposefully, taking a clear stand might
everyone is stupid’ and is ‘a poor listener’. In your short time in the new job,
make them think twice about the consequences of their actions.
you’ve already had several run-ins with Mark. You’ve even talked to your boss,
• Practise positive reinforcement. We know that positive reinforcement is a
the managing director, about him. The managing director’s response wasn’t
powerful tool for changing behaviour. Rather than criticising undesirable
surprising: ‘Mark isn’t easy to deal with. But no one knows this company’s
behaviours, try reinforcing desirable ones with compliments or other positive
operations like he does. If he ever leaves, I don’t know how we’d replace him.
comments. This focus will tend to weaken and reduce the exhibiting of the
But, that said, he gives me a lot of grief. Sometimes he makes me feel like I work
undesirable behaviours.
for him rather than the other way around.’
• Recruit fellow victims and witnesses. We know that strength lies in numbers.
If you can get others who are also offended by the difficult person to support Describe what you could do to improve your ability to work with Mark.
your case, several positive things can happen. First, it’s likely to lessen your
9780655702412_CH24.indd 676 3/3/20 11:13 AM

Mini cases
24.1 In the can
Monitoring productivity has enhanced creativity and problem solving
You’ve probably heard the saying that ‘what gets measured, gets managed’. Wales), Mill Park (Melbourne) and Northgate (Brisbane). And its benefits for
At Kraft Heinz, they believe that what gets measured, gets improved.50 enhancing productivity were already becoming apparent. At the Brisbane
Kraft Heinz is a global company that manufactures three main types of factory, improvements have been particularly dramatic. The factory produces
food products: sauces, convenience meals and infant nutrition products canned pineapples as well as bottles and boxes of pineapple juice. It has a
(baby food). (It was previously known as Heinz but was taken over by permanent workforce of 400, which swells to 600 between February and
Kraft in 2015.) The company employs more than 41,000 staff worldwide June – the peak of the pineapple season.
and generates over US$26 billion in sales per year. To facilitate continuous The HGPS has instituted a new focus on constantly monitoring
improvement to its products and processes, Heinz (as it then was) developed performance and improving processes. Before each shift, team members
the Heinz Global Performance System (HGPS). The HGPS was designed to meet to discuss the achievements of the previous shift, calculate savings
establish a globally consistent approach to improving productivity and achieved by productivity improvements and address any issues that affected
embed it in the organisation’s culture. The system has two elements: (1) production. In the factory, charts display hourly production rates, and
improving productivity at each factory, and (2) establishing a global system red, green and yellow colour markers indicate how production levels are
for managing performance improvements across all the company’s factories. tracking against targets so that employees always know how the factory is
In individual factories, the HGPS improves productivity by fostering performing. Improvements made under the program have directly increased
employee ideas about minimising wastage and loss, improving production pineapple yield – the amount of the pineapple that goes into the can or
scheduling and planning, maximising the use of manufacturing assets bottle – saving Kraft Heinz $4 million per year. But the biggest changes
and reducing downtime. The first step is engaging and empowering have been to the culture in the factory itself. Encouraging staff to focus
the entire workforce to focus on continually improving efficiency and more closely on productivity has generated a new emphasis on creativity
productivity. This involves teaching staff how to engage in continuous and problem solving in which employees are more comfortable making
improvement processes, training work teams in problem-solving techniques suggestions about ways to improve production processes. So much so that
and training improvement facilitators to act as change leaders. Then a site the Brisbane factory has ‘gone from the bottom of the ladder to playing
assessment determines the opportunities for improving factory productivity in the finals’, according to Simon Leonard, Kraft Heinz’s general manager
through techniques such as a loss and waste analysis and identifying profit of operations, and winning ‘Factory of the Year’ two years running at the
improvement projects. company’s annual awards.
The global system tracks the performance at every individual factory, ❶ How has Kraft Heinz used the HGPS to execute the control process?
including its progress in implementing its roadmap and achieving ❷ How could the Brisbane factories use (a)
feedforward controls,
productivity improvements. This allows the company to compare the (b) concurrent controls and (c) feedback controls to improve pineapple
performance of factories in different locations and lets individual factories yields?
benchmark themselves against other factories in their region. ➌ How has Kraft Heinz developed a new control-oriented culture focused
Within two years of its introduction, the HGPS was being used across on improving productivity?
the company’s operations in Europe, North America and Asia, including the ➍ What goals, measures and standards could Kraft Heinz develop to
four Australian factories in Echuca (Victoria), Wagga Wagga (New South enhance productivity?
9780655702412_CH24.indd 677 3/3/20 11:13 AM

24.2 Driving better decisions

Faster decisions mean faster deliveries
It’s the world’s largest package delivery company with the instantly of alternatives. The human mind can’t even begin to figure it out. But the
recognisable trucks.51 Every day, United Parcel Service (UPS) transports more ORION algorithm, which has taken 10 years and an estimated hundreds of
than 19 million packages and documents throughout the United States and millions of dollars to build, can do that. IT experts have described ORION as
to more than 220 countries and territories, including every address in North the largest investment in operations research ever by any company.
America and Europe. (Total worldwide delivery volume in 2016 was 4.9 So, what does ORION do? Instead of searching for the one best answer,
billion packages and documents.) Delivering those packages efficiently and ORION is designed to refine itself over time, leading to a balance between
on time is what UPS gets paid to do, and that takes a massive effort in an optimum result and consistency to help drivers make the best possible
helping drivers to make decisions about the best routes to follow. Efficiency decisions about route delivery. Considering how many kilometres UPS
and uniformity have always been important to UPS. The importance of work drivers travel every day, saving a dollar or two here and there can add up
rules, procedures and analytic tools is continually stressed to drivers through quickly. When a driver ‘logs on’ their delivery information acquisition device
training and retraining. For example, drivers are taught to hold their keys (DIAD) at the beginning of their shift, what comes up are two possible ways
on their littlest finger so they don’t waste time fumbling in their pockets for to make the day’s package deliveries: one that uses ORION and one that
the keys. And for safety reasons, they’re taught not to reverse their trucks. uses the ‘old’ method. The driver can choose to use either one but if ORION
Now, however, the company has been testing and rolling out a quantum isn’t chosen, the driver is asked to explain the decision. The roll-out of
leap in its long-used business model of uniformity and efficiency. It goes by ORION hasn’t been without challenges. Some drivers have been reluctant to
the name ORION, which stands for On-Road Integrated Optimization and give up autonomy; others have had trouble understanding ORION’s logic –
Navigation. What it boils down to is helping UPS drivers shave millions of why deliver a package in one neighborhood in the morning and come back
kilometres off their delivery routes using decision algorithms built by a team to the same neighbourhood later in the day. But despite the challenges, the
of mathematicians. company is committed to ORION, saying that ‘a driver together with ORION
Consider that each UPS driver makes an average of 120 stops per day. is better than each alone’.
The efficiency challenge is deciding what is the best order for making all those ❶ Why is efficiency and safety so important to UPS?
stops (6,689,502,913,449,135 + 183 zeroes of possible alternatives) – ❷ Does ORION use feedforward control, concurrent control or feedback
taking into consideration ‘variables such as special delivery times, road control? Explain.
regulations, and the existence of private roads that don’t appear on a map’. ➌ What might be some downsides to using ORION to determine delivery
Another description of the logistics decision challenge: there are more routes?
ways to deliver packages along an average driver’s route ‘than there are ➍ How is UPS being a sustainable corporation?
nanoseconds that Earth has existed’. Any way you look at it, that’s a lot
References
1 ‘Domino’s Delivered Free Pizzas’, Springfield, Missouri News-Leader, 3 April 2009, p. 3B. 7 ‘Adaptive traffic control’, <www.aldridgetrafficcontrollers.com.au/Products/SCATS-
2 J. F. Van Niekerk and R. Von Solms, ‘Information Security Culture: A Management Urban-Traffic-Control/Adaptive-Traffic-Management>, accessed 21 January 2018.
Perspective’, Computers & Security, June 2010, pp. 476–86; T. Vinas and J. Jusko ‘5 8 M. Helft, ‘The Human Hands behind the Google Money Machine’, New York Times
Threats that Could Sink Your Company’, Industry Week, September 2004, pp. 52–61; Online, 2 June 2008.
‘Workplace Security: How Vulnerable Are You?’, Special section in Wall Street Journal, 9 J. Yang and S. Music, ‘Micromanaging’, USA Today, 8 August 2014, p. 1B.
29 September 2003, pp. R1–8; P. Magnusson, ‘Your Jitters Are Their Lifeblood’, 10 B. Grow, K. Epstein and C-C. Tschang, ‘The New E-Spionage Threat’, BusinessWeek,
BusinessWeek, 14 April 2003, p. 41; and T. Purdum, ‘Preparing for the Worst’, Industry 21 April 2008, pp. 32–41; S. Leibs, ‘Firewall of Silence’, CFO, April 2008, pp. 31–5; J.
Week, January 2003, pp. 53–5. Pereira, ‘How Credit-Card Data Went out Wireless Door’, Wall Street Journal, 4 May
3 B. Nelson, ‘Long-Distance Recognition’, Workforce, August 2000, pp. 50–2. 2007, pp. A1+; and B. Stone, ‘Firms Fret as Office E-Mail Jumps Security Walls’, New
4 S. Kerr, ‘On the Folly of Rewarding A, While Hoping for B’, Academy of Management York Times Online, 11 January 2007.
Journal, December 1975, pp. 769–83; and N. F. Piercy, D. W. Cravens, N. Lane and D. W. 11 This section adapted from ‘No Costly Surprises’, BRW, 17 October – 20 November
Vorhies, ‘Driving Organizational Citizenship Behaviors and Salesperson In-Role Behavior 2013, pp. 56–64.
Performance: The Role of Management Control and Perceived Organizational Support’, 12 R. S. Kaplan and D. P. Norton, ‘How to Implement a New Strategy without Disrupting Your
Journal of the Academy of Marketing Science, Spring 2006, pp. 244–62. Organization’, Harvard Business Review, March 2006, pp. 100–9; L. Bassi and D. McMurrer,
5 From the Past to the Present box based on H. Min and H. Min, ‘Benchmarking the ‘Developing Measurement Systems for Managers in the Knowledge Era’, Organizational
Service Quality of Fast-Food Restaurant Franchises in the USA’, Benchmarking: An Dynamics, May 2005, pp. 185–96; G. M. J. DeKoning, ‘Making the Balanced Scorecard
International Journal, April 2011, pp. 282–300; R. Pear, ‘AMA to Develop Measure Work (Part 2)’, Gallup Brain, <http://brain.gallup.com>, 12 August 2004; G. J. J. DeKoning,
of Quality of Medical Care’, New York Times Online, 21 February 2006; A. Taylor ‘Making the Balanced Scorecard Work (Part 1)’, Gallup Brain, <http://brain.gallup.com>,
III, ‘Double Duty’, Fortune, 7 March 2005, pp. 104–10; C. Bogan and D. Callahan, 8 July 2004; K. Graham, ‘Balanced Scorecard’, New Zealand Management, March 2003,
‘Benchmarking in Rapid Time’, Industrial Management, March–April 2001, pp. 28–33; pp. 32–4; K. Ellis, ‘A Ticket to Ride: Balanced Scorecard’, Training, April 2001, p. 50; and
and L. D. McNary, ‘Thinking about Excellence and Benchmarking’, Journal for Quality T. Leahy, ‘Tailoring the Balanced Scorecard’, Business Finance, August 2000, pp. 53–6.
and Participation, July–August 1994. 13 L. L. Burney and N. J. Swanson, ‘The Relationship between Balanced Scorecard
6 H. Koontz and R. W. Bradspies, ‘Managing through Feedforward Control’, Business Horizons, Characteristics and Managers’ Job Satisfaction’, Journal of Managerial Issues, Summer
June 1972, pp. 25–36. 2010, pp. 166–81.
9780655702412_CH24.indd 678 3/3/20 11:13 AM

14 D. Brown, D. Bedford and P. Sivabalan, ‘A New State of Balance’, Intheblack, October 37 M. Delahoussaye, ‘Don’t Get Mad, Get Promoted’, Training, June 2002, p. 20; and
2008, pp. 56–9. C. Tinsley and J. Brett, ‘Managing Workplace Conflict in the United States and Hong
15 T. Leahy, ‘Tailoring the Balanced Scorecard’, Business Finance, August 2000, pp. 53–6. Kong’, Organizational Behavior and Human Decision Processes, July 2001, pp. 360–2.
16 T. Leahy, ‘Tailoring the Balanced Scorecard’, Business Finance, August 2000, pp. 53–6. 38 K. W. Thomas and W. H. Schmidt, ‘A Survey of Managerial Interests with Respect to
17 Managing for Sustainability box based on ‘Sustainable Development’, Wikipedia, Conflict’, Academy of Management Journal, June 1976, pp. 315–18.
accessed 10 October 2012; ‘Circles of Sustainability’, Wikipedia, accessed 10 October 39 K. W. Thomas and W. H. Schmidt, ‘A Survey of Managerial Interests with Respect to
2012; and A. Scerri and P. James, ‘Accounting for Sustainability: Combining Qualitative Conflict’, Academy of Management Journal, June 1976, pp. 315–18.
and Quantitative Research in Developing “Indicators” of Sustainability’, International 40 See, for example, D. Tjosvold and D. W. Johnson, Productive Conflict Management
Journal of Social Research Methodology, February 2010, pp. 41–53. Perspectives for Organizations (New York: Irvington Publishers, 1983).
18 A. Scerri and P. James, ‘Accounting for Sustainability: Combining Qualitative and 41 This section is adapted from S. P. Robbins, Managing Organizational Conflict: A
Quantitative Research in Developing “Indicators” of Sustainability’, International Nontraditional Approach (Upper Saddle River, NJ: Prentice Hall, 1974), pp. 11–14. Also
Journal of Social Research Methodology, February 2010, p. 42. see D. Wagner-Johnson, ‘Managing Work Team Conflict: Assessment and Preventative
19 W. H. Newman, Constructive Control: Design and Use of Control Systems (Upper Saddle Strategies’, Center for the Study of Work Teams, University of North Texas, <www.
River, NJ: Prentice Hall, 1975), p. 33. workteams.unt.edu>, 3 November 2000; and M. Kennedy, ‘Managing Conflict in
20 See, for example, K. Leung, S. Su and M. W. Morris, ‘When is Criticism Not Constructive? Work Teams’, Center for the Study of Work Teams, University of North Texas, <www
The Roles of Fairness Perceptions and Dispositional Attributions in Employee .workteams.unt.edu>, 3 November 2000.
Acceptance of Critical Supervisory Feedback’, Human Relations, September 2001, 42 See K. A. Jehn, ‘A Multimethod Examination of the Benefits and Detriments of
p. 1155; and C. A. Walker, ‘Saving Your Rookie Managers from Themselves’, Harvard Intragroup Conflict’, Administrative Science Quarterly, June 1995, pp. 256–82; K.
Business Review, April 2002, pp. 97–103. A. Jehn, ‘A Qualitative Analysis of Conflict Type and Dimensions in Organizational
21 D. Ilgen, C. D. Fisher and M. S. Taylor, ‘Consequences of Individual Feedback on Behavior Groups’, Administrative Science Quarterly, September 1997, pp. 530–57; K. A. Jehn,
in Organizations’, Journal of Applied Psychology, August 1979, pp. 349–71. ‘Affective and Cognitive Conflict in Work Groups: Increasing Performance through
22 F. Bartolome, ‘Teaching about Whether to Give Negative Feedback’, The Organizational Value-Based Intragroup Conflict’, in C. DeDreu and E. Van deVliert (eds), Using Conflict
Behavior Teaching Review, vol. 9, no. 2 (1986/87), pp. 95–104. in Organizations (London: Sage Publications, 1997), pp. 87–100; K. A. Jehn and E. A.
23 K. Halperin, C. R. Snyder, R. J. Schenkel and B. K. Houston, ‘Effect of Source Status Mannix, ‘The Dynamic Nature of Conflict: A Longitudinal Study of Intragroup Conflict
and Message Favorability on Acceptance of Personality Feedback’, Journal of Applied and Group Performance’, Academy of Management Journal, April 2001, pp. 238–51;
Psychology, February 1976, pp. 85–8. C. K. W. DeDreu and A. E. M. Van Vianen, ‘Managing Relationship Conflict and the
24 Information on Hoovers Online, <www.hoovers.com>, 17 June 2011; and N. Shirouzu Effectiveness of Organizational Teams’, Journal of Organizational Behavior, May 2001,
and J. Bigness, ‘7-Eleven Operators Resist System to Monitor Managers’, Wall Street pp. 309–28; and J. Weiss and J. Hughes, ‘Want Collaboration? Accept – and Actively
Journal, 16 June 1997, p. B1. Manage – Conflict’, Harvard Business Review, March 2005, pp. 92–101.
25 AMA/ePolicy Institute, ‘2005 Electronic Monitoring & Surveillance Survey’, American 43 C. K. W. DeDreu, ‘When Too Little or Too Much Hurts: Evidence for a Curvilinear
Management Association, <www.amanet.org>. Relationship between Task Conflict and Innovation in Teams’, Journal of Management,
26 ‘Websense Launches Web@Work Survey in Asia Pacific and Latin America, Conducted February 2006, pp. 83–107.
by Dynamic Markets’, Websense, <http://investor.websense.com>, 2 August 2005, 44 S. P. Robbins, ‘Conflict Management and Conflict Resolution are Not Synonymous
accessed 19 October 2010. Terms’, California Management Review, Winter 1978, p. 71.
27 B. White, ‘The New Workplace Rules: No Video-Watching’, Wall Street Journal, 4 March 45 See E. Van de Vliert, A. Nauta, E. Giebels and O. Janssen, ‘Constructive Conflict at
2008, pp. B1+. Work’, in L. N. Dosier and J. B. Keys (eds), Academy of Management Best Paper
28 P-W. Tam, E. White, N. Wingfield and K. Maher, ‘Snooping E-Mail by Software is Now a Proceedings, 8–13 August 1997, pp. 92–6; S. P. Robbins, Managing Organizational
Workplace Norm’, Wall Street Journal, 9 March 2005, pp. B1+; D. Hawkins, ‘Lawsuits Spur Conflict: A Nontraditional Approach (Upper Saddle River, NJ: Prentice Hall, 1974),
Rise in Employee Monitoring’, US News & World Report, 13 August 2001, p. 53; and L. pp. 78–89; and S. Berglas, ‘Innovate: Harmony is Death. Let Conflict Reign’, Inc., May
Guernsey, ‘You’ve Got Inappropriate Mail’, New York Times, 5 April 2000, pp. C1+. 1997, pp. 56–8.
29 S. Armour, ‘More Companies Keep Track of Workers’ E-Mail’, USA Today, 13 June 2005, 46 K. W. Thomas, ‘Conflict and Negotiation Processes in Organizations’, in M. D. Dunnette
p. 4B; and E. Bott, ‘Are You Safe? Privacy Special Report’, PC Computing, March 2000, and L. M. Hough (eds), Handbook of Industrial and Organizational Psychology, 2nd edn,
pp. 87–8. vol. 3 (Palo Alto, CA: Consulting Psychologists Press, 1992), pp. 651–717.
30 A. M. Bell and D. M. Smith, ‘Theft and Fraud May be an Inside Job’, Workforce Online, 47 L. Greenhalgh, ‘Managing Conflict’, Sloan Management Review, Summer 1986, pp. 45–51.
3 December 2000. 48 Managing for Diversity box based on KPMG, ‘ASX Corporate Governance Council
31 J. Greenberg, ‘The STEAL Motive: Managing the Social Determinants of Employee Theft’, Principles and Recommendations on Diversity, 2016’, <www.asx.com.au/documents/>,
in R. Giacalone and J. Greenberg (eds), Antisocial Behavior in Organizations (Newbury accessed 16 November 2017; Australian Securities Exchange, ‘Corporate Governance
Park, CA: Sage, 1997), pp. 85–108. Council’, <www.asx.com.au>, accessed 16 November 2017; ASX Corporate
32 B. E. Litzky, K. A. Eddleston and D. L. Kidder, ‘The Good, the Bad and the Misguided: Governance Council, ‘Corporate Governance Principles and Recommendations’, 3rd edn
How Managers Inadvertently Encourage Deviant Behaviors’, Academy of Management (2014), <www.asx.com.au>, accessed 16 November 2017.
Perspective, February 2006, pp. 91–103; ‘Crime Spree’, BusinessWeek, 9 September 49 Based on N. Pelusi, ‘Dealing with Difficult People’, Psychology Today, September–
2002, p. 8; B. P. Niehoff and R. J. Paul, ‘Causes of Employee Theft and Strategies that HR October 2006, pp. 68–9; and R. I. Sutton, The No Asshole Rule: Building a Civilized
Managers Can Use for Prevention’, Human Resource Management, Spring 2000, pp. Workplace and Surviving One That Isn’t (New York: Business Plus, 2007).
51–64; and G. Winter, ‘Taking at the Office Reaches New Heights: Employee Larceny is 50 ‘HJ Heinz Australia’, BRW, 6 December 2012, p. 23; G. Thomas, ‘The Few and the
Bigger and Bolder’, New York Times, 12 July 2000, pp. C1+. Proud’, <www.etracc.net>, accessed 7 January 2013; ‘Heinz Performance System
33 This section is based on J. Greenberg, Behavior in Organizations: Understanding and the Key to Leveraging Golden Circle Brand’, Manufacturers’ Monthly, 1 September
Managing the Human Side of Work, 8th edn (Upper Saddle River, NJ: Prentice Hall, 2010; B. Sperber, ‘2011 Processor of the Year HJ Heinz Co: A Global Standard for
2003), pp. 329–30. Local Performance’, Food Processing, 30 November 2011; M. Ashcroft, ‘HJ Heinz: From
34 A. H. Bell and D. M. Smith, ‘Why Some Employees Bite the Hand that Feeds Them’, Project to Process’, Business Excellence, 6 June 2010; ‘Heinz Baby’, <www.heinzbaby.
Workforce Online, 3 December 2000 com>, accessed 7 January 2013; Heinz, Annual Report 2012, <www.heinz.com>,
35 B. E. Litzky, K. A. Eddleston and D. L. Kidder, ‘The Good, the Bad and the Misguided: accessed 7 January 2013; Kraft Heinz, ‘Company’, <www.kraftheinzcompany.com/
How Managers Inadvertently Encourage Deviant Behaviors’, Academy of Management company.html>, accessed 29 October 2017; and G. Colvin, ‘Buy, Squeeze, Repeat’,
Perspective, February 2006, pp. 91–103; A. H. Bell and D. M. Smith, ‘Protecting the Forbes, 9 January 2017.
Company against Theft and Fraud’, Workforce Online, 3 December 2000; J. D. Hansen, 51 S. Rosenbush and L. Stevens, ‘At UPS, the Algorithm is the Driver’, Wall Street Journal,
‘To Catch a Thief’, Journal of Accountancy, March 2000, pp. 43–6; and J. Greenberg, 17 February 2015, pp. B1+;
‘The Cognitive Geometry of Employee Theft’, in Dysfunctional Behavior in Organizations: D. Zax, ‘Brown Down: UPS Drivers vs. the UPS Algorithm’, Fast Company, 3 January
Nonviolent and Deviant Behavior (Stamford, CT: JAI Press, 1998), pp. 147–93. 2013; T. Bingham and P. Galagan, ‘Delivering “On-Time, Every Time” Knowledge and
36 G. Bryant, ‘Caught Red Handed?’, Sydney Morning Herald, 2 July 2013; M. Demarco Skills to a World of Employees’, T&D, July 2012, pp. 32–7; J. Levitz, ‘UPS Thinks outside
and A. Ford, ‘Theft in the Workplace – What Are the Costs to Employers and How the Box on Driver Training’, Wall Street Journal, 6 April 2010, pp. B1+; K. Kingsbury,
Should it Be Managed?’, <www.cbp.com.au>, 13 June 2014, accessed 21 November ‘Road to Recovery’, Time, 8 March 2010; and United Parcel Service, ‘UPS Fact Sheet’,
2014. <https://pressroom.ups.com/>, accessed 29 October 2017.
9780655702412_CH24.indd 679 3/3/20 11:13 AM

Chapter
25 Managing change and innovation
There are numerous causes of stress. Cutbacks, increased workloads, work/life conflicts and 24/7
communication access are just a few of the forces that have increased stress on the job. However,
organisations haven’t been ignoring this problem. While some stressors are outside the reach of
management, many are not. Astute managers are redesigning jobs, realigning schedules and introducing
employee assistance programs to help employees cope with the increasing stresses in their work and in
balancing their work and personal lives.
Change is a constant for organisations, and thus for managers and for employees. Large companies,
small businesses, entrepreneurial startups, universities, hospitals and even the armed forces are changing
the way they do things. Although change has always been part of a manager’s job, it’s become even more so
in recent years. Since change can’t be eliminated, managers must learn how to manage it successfully. Stress
can be an unfortunate consequence of change and anxiety, both at work and personally. In this chapter,
we’re going to look at how managers can stimulate innovation in their organisations, organisational
change efforts and how to manage them, and the ways that managers can deal with the stress that exists
in organisations.
Learning Objective 1 Discuss techniques for stimulating innovation.

How can managers encourage innovation in an organisation? pp. 682–86
Learning Learning Objective 2 Define organisational change, and compare and contrast views on the
Objectives change process.
What is change, and how do managers deal with it? pp. 687–92
Learning Objective 3 Explain why change might be unsuccessful.
Reasons why change fails pp. 693–95
Learning Objective 4 Describe what managers need to know about employee stress.
What reaction do employees have to organisational change? pp. 695–98
9780655702412_CH25.indd 680 3/3/20 11:15 AM

Chapter 25 Managing change and innovation 681
LO 1
Discuss techniques
for stimulating
innovation.
LO 2
Define
fact or fiction?
organisational
change, and
compare and
There’s nothing managers can

contrast views on
the change process.
do to reduce the stress inherent

LO 3
in today’s jobs.
Explain why
change might be
unsuccessful.
fiction
LO 4
Describe what
managers need
to know about
employee stress.
9780655702412_CH25.indd 681 3/3/20 11:15 AM

How can managers encourage

innovation in an organisation?
In the dynamic, chaotic world of global competition, organisations must create new products and services
and adopt state-of-the-art technology if they’re going to compete successfully.1
What companies come to mind when you think of successful innovators? Maybe Apple, with all
its cool work and entertainment gadgets. Maybe Facebook, for its 2 billion-plus users. Maybe Physee,
whose technology converts windows into solar panels, meaning people can charge their mobile phones
by plugging them into a window.2 Or even maybe Foursquare, a startup that revved up the social-local-
mobile trend by having users ‘check in’ at locations, unlocking quirky badges and special offers from
merchants.3 What’s the secret to the success of these innovator champions? What can other managers do
to make their organisations more innovative? In the following pages, we’ll try to answer those questions
as we discuss the factors behind innovation.
How are creativity and innovation related?

creativity Creativity refers to the ability to combine ideas in a unique way or to make unusual associations between
The ability to produce ideas.4 A creative organisation develops unique ways of working, or novel solutions to problems. But
novel and useful ideas
creativity by itself isn’t enough. The outcomes of the creative process need to be turned into useful products
innovation or work methods, which is defined as innovation. Thus, the innovative organisation is characterised by
The process of taking a its ability to channel creativity into useful outcomes. When managers talk about changing an organisation
creative idea and turning
to make it more creative, they usually mean they want to stimulate and nurture innovation.
it into a useful product,
service or method of
operation
How can organisations stimulate creativity?
People differ in their inherent creativity. Einstein, Edison, Dali and Mozart were individuals of exceptional
creativity. Not surprisingly, exceptional creativity is scarce. A study of lifetime creativity of 461 men and
women found that fewer than 1 per cent were exceptionally creative. But 10 per cent were highly creative
and about 60 per cent were somewhat creative. These findings suggest that most of us have creative
potential, if we can learn to unleash it.
Given that most people have the capacity to be
at least moderately creative, what can individuals and
organisations do to stimulate employee creativity?
The best answer to this question lies in the three-
component model of creativity, which is based on an
extensive body of research.5 The model proposes that
individual creativity essentially requires expertise,
creative-thinking skills and intrinsic task motivation.
Studies confirm that the higher the level of each of
these three components, the higher the creativity.
Expertise is the foundation of all creative work.
Dali’s understanding of art and Einstein’s knowledge
of physics were necessary conditions for them to be
able to make creative contributions to their fields. You
Former Apple engineers Matt Rogers (left) and Tony Fadell, who helped wouldn’t expect someone with a minimal knowledge
develop the iPod and iPhone, channelled their creativity into a useful of programming to be highly creative as a software
product. As co-founders of Nest Labs, they designed an innovative digital engineer. The potential for creativity is enhanced when
‘learning thermostat’ that saves energy and gives consumers an easy way to
individuals have abilities, knowledge, proficiencies
control home heating and cooling.
Handout/MCT/Newscom and similar expertise in their fields of endeavour.
9780655702412_CH25.indd 682 3/3/20 11:15 AM

The second component, creative-thinking skills, encompasses personality characteristics associated

with creativity, the ability to use analogies, as well as the talent to see the familiar in a different light.
For example, the following individual traits have been found to be associated with the development of
creative ideas: intelligence, independence, self-confidence, risk taking, internal locus of control, tolerance
for ambiguity, and perseverance in the face of frustration.
The final component in our model is intrinsic task motivation – the desire to work on something
because it’s interesting, involving, exciting, satisfying or personally challenging. This motivational
component is what turns creative potential into actual creative ideas. It determines the extent to which
individuals fully engage their expertise and creative skills. So, creative people often love their work, to the
point of seeming obsessed. Importantly, an individual’s work environment and the organisation’s culture
(which we discussed in Chapter 15) can have a significant effect on intrinsic motivation. Specifically, five
organisational factors have been found that can impede your creativity: (1) expected evaluation – focusing
on how your work is going to be evaluated; (2) surveillance – being watched while you’re working; (3)
external motivators – emphasising external, tangible rewards; (4) competition – facing win–lose situations
with your peers; and (5) constrained choices – being given limits on how you can do your work.
What’s involved in turning creativity into innovation?

Some people believe that creativity is inborn; others believe that with training, anyone can be creative.
The latter group views creativity as a four-part process.6
1 Perception involves the way you see things. Being creative means seeing things from a unique
perspective. One person may see solutions to a problem that others cannot or won’t see at all.
The movement from perception to reality, however, doesn’t occur instantaneously.
2 Instead, ideas go through a process of incubation. Sometimes employees need to sit on their
ideas, which doesn’t mean sitting and doing nothing. Rather, during this incubation period,
employees should collect massive amounts of data that are stored, retrieved, studied, reshaped
and, finally, moulded into something new. During this period, it’s common for years to pass.
Think for a moment about a time you struggled for an answer on a test. Although you tried
hard to jog your memory, nothing worked. Then suddenly, like a f lash of light, the answer
popped into your head. You found it!
3 Inspiration in the creative process is similar. Inspiration is the moment when all your efforts
successfully come together. Although inspiration leads to euphoria, the creative work isn’t
complete. It requires an innovative effort.
4 Innovation involves taking that inspiration and turning it into a useful product, service or way
of doing things. Thomas Edison is often credited with saying, ‘Creativity is 1 per cent
inspiration and 99 per cent perspiration.’ That 99 per cent, or the innovation, involves testing,
evaluating and retesting what the inspiration found. It’s usually at this stage that an individual
involves others more in what they have been working on. Such involvement is critical because
even the greatest invention may be delayed, or lost, if an individual cannot effectively deal
with others in communicating and achieving what the creative idea is supposed to do.
How can a manager foster innovation?

The systems model (inputs → transformation process → outputs) can help us understand how organisations
become more innovative.7 If an organisation wants innovative products and work methods (outputs), it has
to take its inputs and transform them into those outputs. Those inputs include creative people and groups
within the organisation. But, as we said earlier, having creative people isn’t enough. The transformation
process requires having the right environment to turn those inputs into innovative products or work
methods. This ‘right’ environment – that is, an environment that stimulates innovation – includes three
variables: the organisation’s structure, culture and human resource practices (see Figure 25.1).
9780655702412_CH25.indd 683 3/3/20 11:15 AM

Structural variables
• Organic structures
• Abundant resources
• High inter-unit
communication
• Minimal time pressure
• Work and non-work support Human resource variables
• High commitment to
training and development
• High job security
STIMULATE • Creative people
INNOVATION
Cultural variables
• Acceptance of ambiguity
• Tolerance of the impractical
• Low external controls
• Tolerance of risks
• Tolerance of conflict
• Focus on ends
• Open-system focus
• Positive feedback
Figure 25.1 Innovation variables
How do structural variables affect innovation?

Research shows five main effects of structural variables on innovation.8
● An organic-type structure positively inf luences innovation. Because this structure is low in
formalisation, centralisation and work specialisation, it facilitates the f lexibility and sharing of
ideas that are critical to innovation.
● The availability of plentiful resources provides a key building block for innovation. With an
abundance of resources, managers can afford to purchase innovations, can afford the cost of
instituting innovations and can absorb failures.
● Frequent communication between organisational units helps break down barriers to
innovation.9 Cross-functional teams, task forces and other such organisational designs
facilitate interaction across departmental lines and are widely used in innovative organisations.
● Extreme time pressures on creative activities are minimised despite the demands of fast-paced
environments. Although time pressures may spur people to work harder and may make them
feel more creative, studies show that it actually causes them to be less creative.10
● When an organisation’s structure explicitly supports creativity, employees’ creative
performance can be enhanced. Beneficial kinds of support include encouragement, open
communication, readiness to listen and useful feedback.11
9780655702412_CH25.indd 684 3/3/20 11:15 AM

How does an organisation’s culture affect innovation?

Innovative organisations tend to have similar cultures.12 They encourage experimentation; reward both
successes and failures; and celebrate mistakes. An innovative organisation is likely to have the following
characteristics.
● Accepts ambiguity. Too much emphasis on objectivity and specificity constrains creativity.
● Tolerates the impractical. Individuals who offer impractical, even foolish, answers to what-if
questions aren’t stif led. What at first seems impractical might lead to innovative solutions.
● Keeps external controls minimal. Rules, regulations, policies and similar organisational controls
are kept to a minimum.
● Tolerates risk. Employees are encouraged to experiment without fear of consequences should
they fail. Mistakes are treated as learning opportunities.
● Tolerates conf lict. Diversity of opinions is encouraged. Harmony and agreement between
individuals or units are not assumed to be evidence of high performance.
● Focuses on ends rather than means. Goals are made clear, and individuals are encouraged to
consider alternative routes towards meeting the goals. Focusing on ends suggests that there
might be several right answers to any given problem.
● Uses an open-system focus. Managers closely monitor the environment and respond to changes
as they occur. For example, at Starbucks, product development depends on ‘inspiration field
trips to view customers and trends’. When Michelle Gass (currently Kohl’s Corporation’s idea champions
chief customer officer) was in charge of Starbucks’ marketing, she ‘took her team to Paris, Individuals who actively
Düsseldorf and London to visit local Starbucks and other restaurants to get a better sense of and enthusiastically
support new ideas,
local cultures, behaviours and fashions’. She says, ‘You come back just full of different ideas
build support for and
and different ways to think about things than you would had you read about it in a magazine overcome resistance
or email.’13 to innovations, and
● Provides positive feedback. Managers provide positive feedback, encouragement and support, so ensure that they are
implemented
employees feel that their creative ideas receive attention.
Which human resource variables

affect innovation?
In this category, we find that innovative organisations
(1) actively promote the training and development of
their members so their knowledge remains current,
(2) offer their employees high job security to reduce
the fear of being fired for making mistakes, and (3)
encourage individuals to become idea champions,
actively and enthusiastically supporting new ideas,
building support for and overcoming resistance to
innovations, and ensuring that they are implemented.
Research finds that idea champions have common
personality characteristics: extremely high self-
confidence, persistence, energy and a tendency
towards risk taking. They also display characteristics
associated with dynamic leadership. They inspire
Netflix co-founder and CEO Reed Hastings has created a culture of
and energise others with their vision of the potential innovation that encourages employees to become idea champions.
of an innovation and through their strong personal Netflix gives employees the freedom to come up with new ideas and the
conviction in their mission. They’re also good at responsibility to implement them by engaging employees from different
departments and by forming groups to ‘socialise’ their ideas.
Robin Utrecht/ABACAPRESS/Newscom
9780655702412_CH25.indd 685 3/3/20 11:15 AM

gaining the commitment of others to support their mission. In addition, idea champions have jobs that
provide considerable decision-making discretion. This autonomy helps them introduce and implement
innovations in organisations.14 For example, Chantelle Masci, business manager at Masci Hair and Spa,
has developed an organisational culture in which all staff are focused on continuously developing new
innovations to ‘delight and surprise’ their clients.15 These range from big innovations like the ‘Know
Your Client’ training every staff member undertakes to deliver highly individualised service to customers,
to small touches such as escorting customers to their cars with an umbrella on rainy days so that their
newly styled hair isn’t ruined by the rain.
How does design thinking influence innovation?

We introduced you to the concept of design thinking in Chapter 20. Undoubtedly, there’s a strong
connection between design thinking and innovation. It’s been said that ‘design thinking can do
for innovation what TQM did for quality’.16 Just as TQM provides a process for improving quality
throughout an organisation, design thinking can provide a process for coming up with things that don’t
exist. When a business approaches innovation with a design thinking mentality, the emphasis is on getting
a deeper understanding of what customers need and want. It entails knowing customers as real people
with real problems – not just as sales targets or demographic statistics. But it also entails being able to
convert those customer insights into real and usable products. For example, when Commonwealth Bank
of Australia (CBA) realised that many Australians were frustrated with the process of buying a home, they
looked deeper and found this was often because people couldn’t understand what they could actually
afford to buy. So, CBA developed the CommBank Property app to help buyers ‘move into the home
they love, knowing they can afford it’.17 Like many property-related apps, it provides information about
the property market in general and details about the likely sale price of specific properties. However,
the CommBank app links this information to financial position, so buyers can search for properties
and determine how to afford a particular one (e.g. by using the savings calculator). It also integrates
information about the various factors that influence affordability, such as property values, upfront costs
of purchasing a home and lenders’ mortgage insurance, so buyers can calculate how these factors will
affect their financial position. The app even lets buyers apply for conditional eligibility for a loan so they
know whether they are actually able to get the mortgage they would need to buy the property. In the first
year after it was launched, the app had attracted over 350,000 visits. That’s how design thinking works
in innovation.
Listening to everyone
Creativity and innovation both involve embracing new and business can post and comment on ideas about the business
different possibilities. But as we have discussed in this chapter, and its clients. A dedicated team at Zinc then evaluates the
sometimes people need a little extra reassurance that posts on Spark to find the best ideas and help develop and
everyone’s ideas are valued and welcomed. Zinc, an Australian implement them. Three nights a week the company also hosts
marketing agency, does this by fostering curiosity and ‘We’re here for you’ sessions, in which any employee with ideas,
communication.18 Zinc’s company culture is founded on trust, issues or suggestions can discuss them directly with the
openness and authenticity, so that ‘team members are the same leadership team. The payoff for the company is a workforce
people they are at work as they are on the weekend’. To that feels engaged and appreciated, which has resulted in Zinc
encourage open communication, the company uses an online having a 93 per cent retention rate and consistently ranking as
idea generation platform, Spark, where everyone in the one of the ‘greatest places to work in Australia’.
9780655702412_CH25.indd 686 3/3/20 11:15 AM

What is change, and how do managers

deal with it?
If it weren’t for change, a manager’s job
would be relatively easy.
Change makes a manager’s job more challenging. Without it, managing would be relatively easy.
Planning would be easier because tomorrow would be no different from today. The issue of organisation
design would be solved because the environment would be free from uncertainty and there would be
no need to adapt. Similarly, decision making would be dramatically simplified because the outcome of
each alternative could be predicted with near pinpoint accuracy. It would also simplify the manager’s
job if competitors never introduced new products or services, if customers didn’t make new demands,
if government regulations were never modified, if technology never advanced or if employees’ needs
always remained the same. But that’s not the way it is.
Change is an organisational reality. Most managers, at one point or another, will have to change some
things in their workplace. We call these changes organisational changes, which are any alteration or organisational
adaptation of an organisation’s structure, technology or people (see Figure 25.2). Let’s look more closely change
Any alteration of an
at each of these.
organisation’s structure,
● Changing structure. Includes any change in authority relationships, coordination mechanisms, technology or people
degree of centralisation, job design or similar organisation structure variables. Examples
might be restructuring work units, empowering employees, decentralising, widening spans of
control, reducing work specialisation or creating work teams. All of these may involve some
type of structural change.
● Changing technology. Encompasses modifications in the way work is done or the methods and
equipment used. Examples might be computerising work processes and procedures, adding
robotics to work areas, equipping employees with mobile communication tools, implementing
social media tools or installing a new computer operating system.
● Changing people. Refers to changes in employee attitudes, expectations, perceptions or
behaviours. Examples might be changing employee attitudes and behaviours to better support
a new customer service strategy, using team building efforts to make a team more innovative,
or training employees to adopt a ‘safety-first’ focus.
Structure People
Technology
Authority relationships Attitudes
Work processes
Coordinating mechanisms Expectations
Work methods
Job redesign Perceptions
Equipment
Spans of control Behaviour
Figure 25.2 Categories of organisational change
9780655702412_CH25.indd 687 3/3/20 11:15 AM

Why do organisations need to change?

In Chapter 15, we pointed out that both external and internal forces constrain managers. These same
forces also bring about the need for change. Let’s briefly review these factors.
What external forces create a need for change?

The external forces that create the need for organisational change come from various sources. In recent
years, the marketplace has affected firms such as Dell, Samsung and Sony because consumers have changed
the way they view television programs.19 With so many programs now available online to download or
stream, televisions have been adapted to directly access the Internet. Government laws and regulations are
also an impetus for change. For example, when the Goods and Services Tax was introduced into Australia,
businesses had to alter their financial management practices in order to be able to track GST on sales and
pay it on to the Australian Taxation Office.
Technology also creates the need for organisational change. The Internet has changed the way we get
information, how products are sold and how we get our work done. Technological advancements have
created significant economies of scale for many organisations. For example, Nike and Adidas use 3D
printing to test new design ideas for running shoes, enabling them to develop new products more quickly
and cheaply.20 The assembly line in many industries has also undergone dramatic change as employers
replace human labour with technologically advanced mechanical robots. Also, the fluctuation in labour
markets forces managers to initiate changes. For example, skills shortages are prompting employer
associations such as the Victorian Chamber of Commerce and Industry to lobby state and
federal governments to raise the average retirement age, increase the workforce participation
of disadvantaged groups and boost skilled migration to ensure that organisations can access
the labour they need.
As the news headlines remind us, economic changes affect almost all organisations. For
example, prior to the global financial crisis in 2008, low interest rates led to significant growth
in the US and Australian housing markets. This growth meant more jobs, more employees
hired, and significant increases in sales in other businesses that supported the building
industries. However, when the economy soured, it had the opposite effect as credit markets
dried up and businesses found it difficult to get the capital they needed to operate.
Which internal forces create a need to change?

Internal forces can also create the need for organisational change. These internal forces tend
to originate primarily from the internal operations of the organisation or from the impact of
external changes. (It’s also important to recognise that such changes are a normal part of the
Evolving technology has created organisational life cycle.21)
many new marketplaces and When managers redefine or modify an organisation’s strategy, that action often introduces
business opportunities. Nicole a host of changes. For example, Nokia bringing in new equipment is an internal force for
Kersh created Australia’s first
change. Because of this action, employees may face job redesign, undergo training to operate
trade-based ecommerce store
at the age of 17 to sell cabling the new equipment, or be required to establish new interaction patterns within their work
and other IT accessories. Within groups. Another internal force for change is that the composition of an organisation’s workforce
10 years her company, 4Cabling, changes in terms of age, education, gender, nationality and so on. A stable organisation in
was one of Australia’s biggest
ecommerce businesses. Kersh now which managers have been in their positions for years might need to restructure jobs in
uses the knowledge she gained order to retain more ambitious employees by affording them some upward mobility. The
about how to make websites thrive compensation and benefits systems might also need to be reworked to reflect the needs of
to help other companies improve
a diverse workforce and market forces in which certain skills are in short supply. Employee
their ecommerce strategies and
systems.22 attitudes, such as increased job dissatisfaction, may lead to increased absenteeism, resignations
Jim Rice/Fairfax and even strikes. Such events will, in turn, often lead to changes in organisational policies and
practices.
9780655702412_CH25.indd 688 3/3/20 11:15 AM

Who initiates organisational change?

Organisational changes need a catalyst.
People who act as catalysts and assume the responsibility for managing the change process are called
change agents.23 A change agent could be a manager within the organisation, an internal staff specialist, change agents
or an outside consultant whose expertise is in change implementation. For major system-wide changes, an People who act as
change catalysts and
organisation will often hire outside consultants for advice and assistance. Because these consultants come
assume the responsibility
from the outside, they offer an objective perspective that insiders usually lack. However, the problem is for managing the change
that outside consultants may not understand the organisation’s history, culture, operating procedures process
and personnel. They’re also prone to initiating more drastic changes than insiders – which can be either
a benefit or a disadvantage – because they don’t have to live with the repercussions after the change is
implemented. In contrast, internal managers who act as change agents may be more thoughtful (and
possibly more cautious) because they must live with the consequences of their actions.
How does organisational change happen?

We often use two metaphors in describing the change process.24 They represent distinctly different
approaches to understanding and responding to change. Let’s take a closer look at each one.
What is the ‘calm waters’ metaphor?

The ‘calm waters’ metaphor envisions the organisation as a large ship crossing a calm sea. The ‘calm waters’
ship’s captain and crew know exactly where they’re going because they’ve made the trip many times metaphor
A description of
before. Change appears as the occasional storm, a brief distraction in an otherwise calm and predictable
organisational change
trip. Until recently, the ‘calm waters’ metaphor dominated the thinking of practising managers and that likens such change
academics. The prevailing model for handling change in such circumstances is best illustrated in Kurt to a large ship making
Lewin’s three-step description of the change process (see Figure 25.3).25 a predictable trip
across a calm sea
According to Lewin, successful change requires unfreezing the status quo, changing to a new state and experiencing an
and freezing the new change to make it permanent. The status quo can be considered an equilibrium occasional storm
state. Unfreezing is necessary to move from this equilibrium. It can be achieved in one of three ways:
● Increase the driving forces, which direct behaviour away from the status quo.
● Decrease the restraining forces, which hinder movement from the existing equilibrium.
● Do both.
Unfreezing Refreezing
Changing
Figure 25.3 The three-step change process
9780655702412_CH25.indd 689 3/3/20 11:15 AM

Once the situation has been ‘unfrozen’, the change itself can be implemented. However, just introducing
change doesn’t mean it’s going to take hold. The new situation needs to be ‘frozen’ so that it can be
sustained over time. Unless this last step is done, the change is likely to be short-lived with employees
reverting to the previous equilibrium state. The objective, then, is to freeze at the new equilibrium state
and stabilise the new situation by balancing the driving and restraining forces. (See the From the Past to
the Present box for more information on Lewin and his organisational research.)
Note how Lewin’s three-step process treats change as a break in the organisation’s equilibrium state.26
The status quo has been disturbed, and change is necessary to establish a new equilibrium state. Although
this view might have been appropriate to the relatively calm environment faced by most organisations
during the 20th century, it’s now increasingly obsolete as a description of the kinds of ‘seas’ that current
managers have to navigate.
What is the ‘white-water rapids’ metaphor?

As former chair of Nielsen Media Research (the company best known for its TV ratings, which are
frequently used to determine how much advertisers pay for TV commercials), Susan Whiting had to
tackle significant industry changes. Video-on-demand services, streaming technologies, smartphones,
tablet computers, and other changing technologies have made data collection much more challenging
for the media research business. Here’s what she had to say about the business environment: ‘If you
look at a typical week I have, it’s a combination of trying to lead a company in change in an industry in
change.’28 That’s a pretty accurate description of what change is like in our second change metaphor –
‘white-water
rapids’ metaphor white-water rapids. It’s also consistent with a world that’s increasingly dominated by information, ideas
A description of and knowledge.29
organisational change In the ‘white-water rapids’ metaphor, the organisation is seen as a small raft navigating a
that likens such change raging river with uninterrupted white-water rapids. Aboard the raft are half a dozen people who have
to a small raft navigating
a raging river never worked together before, who are totally unfamiliar with the river, who are unsure of their eventual
Lewin’s ideas have helped us better understand organisational change

Who is Kurt Lewin? • Changes are more readily accepted when people feel they have
• German-American psychologist, known for his studies of group an opportunity to be involved in the change rather than being
dynamics. simply asked or told to change.
• Often called the father of modern social psychology (a discipline • Force field analysis – a framework for looking at the factors
that uses scientific methods to understand and explain how (forces) that influence a change situation.
individuals’ thoughts, feelings and behaviours ‘are influenced by — Forces either drive or block movement towards a goal.
the actual, imagined or implied presence of other human — What makes change work, and how can managers overcome
beings’).27 resistance? Increase the driving forces, decrease the blocking
forces, or both.
What did he do?
Discuss this:
• Described group behaviour as an intricate set of symbolic
interactions and forces that affect group structure and modify • When Lewin conducted his studies, managers played specific
individual behaviour. roles in facilitating change. Do managers play those same roles in
• One particular study of how to modify family food habits during change processes today?
World War II provided new and important insights into how • If change is constant and continuous for today’s organisations,
best to introduce change. how can managers use Lewin’s ideas to help them manage
change effectively?
Major lessons from his work:
• Changes are more easily introduced through group decision
making than through lectures and individual appeals.
9780655702412_CH25.indd 690 3/3/20 11:15 AM

destination and who, as if things weren’t bad enough, are travelling at night. In the white-water rapids
metaphor, change is the status quo and managing change is a continual process.
To get a feeling of what managing change might be like in a white-water rapids environment,
consider attending a university that had the following rules: Courses vary in length. When you sign
up, you don’t know how long a course will run. It might go for two weeks or 30 weeks. Furthermore,
the instructor can end a course at any time with no prior warning. If that isn’t challenging enough, the
length of the class changes each time it meets: Sometimes the class lasts 20 minutes; other times it runs
for three hours. And the time of the next class meeting is set by the instructor during this class. There’s
one more thing. All exams are unannounced, so you have to be ready for a test at any time. To succeed
in this type of environment, you’d have to respond quickly to changing conditions. Students who were
overly structured or uncomfortable with change wouldn’t succeed.
Does every manager face a world of constant and chaotic change?

No, but it is becoming more the norm. The stability and predictability of the ‘calm waters’ metaphor
don’t exist. Disruptions in the status quo aren’t occasional and temporary, and they’re not followed by a
return to calm waters. Many managers never get out of the rapids. Like Susan Whiting, just described,
they face constant forces in the environment (external and internal) that bring about the need for planned
organisational change.
Most organisational changes don’t happen

by chance. organisation
development
(OD)
How do organisations implement planned changes? Efforts that assist
We know that most changes employees experience in an organisation don’t happen by chance. Often organisational members
with a planned change
managers make a concerted effort to alter some aspect of the organisation. Whatever happens – especially by focusing on their
in terms of structure or technology – ultimately affects the organisation’s people. Efforts to assist attitudes and values
organisational members with a planned change are
referred to as organisation development (OD).
In facilitating long-term, organisation-wide
changes, OD focuses on constructively changing the
attitudes and values of organisation members so that
they can more readily adapt to and be more effective
in achieving the new directions of the organisation.30
When OD efforts are planned, organisation leaders
are, in essence, attempting to change the organisation’s
culture.31 However, a fundamental issue of OD is
its reliance on employee participation to foster an
environment in which open communication and trust
exist.32 Persons involved in OD efforts acknowledge
that change can create stress for employees. Therefore,
OD attempts to involve organisational members in
changes that will affect their jobs and seeks their input As president of DeNA Company, a Japanese Internet firm, Isao Moriyasu
manages in a white-water rapids environment where change is the status
about how the change is affecting them (just as Lewin quo and managing change is a continual process. Moriyasu is rapidly
suggested). acquiring firms and developing new services as DeNA expands from its
Any organisational activity that assists with base in Japan to countries worldwide.
Bloomberg via Getty Images
implementing planned change can be viewed as an
9780655702412_CH25.indd 691 3/3/20 11:15 AM

OD technique. The more popular OD efforts in organisations rely heavily on group interactions and
cooperation and include:
survey feedback ● Survey feedback. Employees are asked their attitudes about and perceptions of the change
A method of assessing they’re encountering. Employees are generally asked to respond to a set of specific questions
employees’ attitudes
towards and perceptions regarding how they view such organisational aspects as decision making, leadership,
of a change communication effectiveness, and satisfaction with their jobs, co-workers and management.33
The data that a change agent obtains are used to clarify problems that employees may be
process facing. As a result of this information, the change agent takes some action to remedy the
consultation problems.
Using outside ● Process consultation. Outside consultants help managers perceive, understand and act on
consultants to assess
organisational processes they’re facing.34 These elements might include, for example,
organisational processes
such as workflow, workf low, informal relationships among unit members and formal communications channels.
informal intra-unit Consultants give managers insight into what is going on. It’s important to recognise that
relationships and formal consultants aren’t there to solve these problems. Rather, they act as coaches to help managers
communication channels
diagnose the interpersonal processes that need improvement. If managers, with the
team building consultants’ help, cannot solve the problem, the consultants will often help managers find
Using activities to experts who can.
help work groups
set goals, develop
● Team building. In organisations made up of individuals working together to achieve goals,
positive interpersonal OD helps them become a team. How? By helping them set goals, develop positive interpersonal
relationships, and relationships, and clarify the roles and responsibilities of each team member. It’s not always
clarify the roles and
necessary to address each area because the group may be in agreement and understand what’s
responsibilities of each
team member expected. The primary focus of team building is to increase members’ trust and openness
towards one another.35
intergroup ● Intergroup development. Different groups focus on becoming more cohesive. That is,
development intergroup development attempts to change attitudes, stereotypes and perceptions that one
Activities that attempt
to make several work group may have towards another group. The goal? Better coordination among the various
groups more cohesive groups.
Embedding sustainability in organisational thinking

For many (if not most) organisations, managing for sustainability performing their usual activities but in more sustainable ways.
requires changes in organisational thinking, action and design. To Pioneering might involve establishing an organisational strategy for
achieve this, an organisation must identify and then implement the sustainability, setting targets for improving organisational
changes required. Julie Newman, director of sustainability for sustainability (such as reducing carbon emissions) and establishing
Massachusetts Institute of Technology, suggests that this can occur new levels of leadership within the organisation on sustainability
by managing change through three phases: awakening, pioneering issues.
and transformation.36 In the transformation phase, sustainability principles are embedded
Awakening means creating awareness of the importance of into every aspect of the organisation, including its core mission, goals
sustainability and getting sustainability issues onto the organisation’s and primary functions. In a transformed organisation, the entire
radar. This might occur by fostering discussions about sustainability strategic alignment of the organisation and its environment is
issues, instigating projects or task forces to examine sustainability adjusted, requiring new decision processes, structures and systems.
concerns, or hiring people who are passionate about sustainability. Managing each phase and the transition between phases requires
Pioneering is the integration of sustainability into the organisation’s managers to understand change processes and how they might be
culture, structure and activities so that a sustainability focus diffuses affected by unanticipated barriers, resistance to change and the
through the whole organisation. In this phase, organisations focus on organisational learning that occurs along the way.
9780655702412_CH25.indd 692 3/3/20 11:15 AM

Reasons why change fails

Change isn’t easy for any organisation and many change efforts are unsuccessful. Sometimes, people
resist change because they find it disruptive and scary. Other times, changes are made but don’t stick and
people revert to their old ways. In this section, we examine these barriers to successful change and the
strategies that managers can use to overcome them.
Resistance to change is well documented.37 The main reasons for it include failure to see the need for
change, uncertainty about adopting new methods, concern over personal loss, the belief that the change
isn’t in the organisation’s best interest and a limited tolerance for change.38
People resist change even if

it might be beneficial!
People resist change when they don’t see the need for it and believe it is unnecessary. This belief may
be the result of powerful mental maps, simplistic views of the past, present and future, or an instinctive
desire to maintain equilibrium.39 Mental maps are cognitive maps or images about how the world mental maps
operates, which people use to make sense of their environment and act within it. Mental maps create Cognitive maps or
images about how the
habitual patterns for thinking about and behaving in certain situations. Maps become powerful when world operates
they produce positive consequences and work well over a long time. Powerful maps reinforce existing
world views, preventing people from seeing the need to do things differently. Simplistic views of the
past, present and future prevent people from seeing the need for change by leading them to assume that
actions and perspectives that have worked before will also work now and into the future. They don’t
see any differences between past situations, current circumstances and future scenarios, so they apply
existing approaches and assume that these will keep being successful. People may also fail to see the need
for change, or push back against change, because they have an instinctive desire to maintain equilibrium.
Consequently, forces for change can cause people to strengthen their commitment to existing ways of
doing things.
People also resist change when they are uncertain about adopting new methods. This may be
uncertainty about the requirements of change, the change itself or the outcomes of the change.40
Uncertainty about the requirements of change means that people are uncertain that they have the skills,
knowledge, tools or ability to make the change. Uncertainty about the change itself relates to uncertainty
about how they should now behave. Uncertainty about the outcomes of the change refers to uncertainty
about the results that the change will produce. If people don’t believe they can change, lack a clear
alternative course of action or are unsure of what will happen if they adopt changes, they will keep doing
what they know even if they know it’s flawed.
Resistance may also be based on the fear of losing something already possessed. Change threatens the
investment that people have already made in the status quo. The more they have invested in the current
system, the more they resist change. They fear losing status, money, authority, friendships, personal
convenience or other benefits that they value. This helps explain why older workers tend to resist change
more than younger workers since they generally have more invested in the current system and more to
lose by changing.
People may also resist change when they believe that the change is incompatible with the goals and
interests of the organisation. This may be because they are assessing the situation differently than those
around them, or because they are using different information.41 This type of resistance can actually be
beneficial to the organisation if expressed in a positive way and if it brings up new issues for consideration.
A final cause of resistance is people’s limited tolerance for change.42 People can only change so much.
Organisations sometimes require more change than people can make. They may be unable to alter their
9780655702412_CH25.indd 693 3/3/20 11:15 AM

behaviour to the extent that is required, or they may be ‘burned out’ from previous change efforts. For
this reason, organisations need to carefully manage the amount of change they introduce so as to ensure
they don’t exceed people’s limits.
Even when people see the need for change and successfully alter their behaviour, the change process
may still fail if they revert to their old ways. Research shows that people return to past habits when new
methods fail to produce instant, positive consequences.43 This may occur because a new approach takes
a while to master and doesn’t immediately produce positive results. It may also be because the process
of mastering a new approach can make people feel lost and unsure about whether they are improving.
If they are uncertain about whether the effort they are investing in the change is working, they will give
up. When changes fail to produce immediate results, the past positive consequences of old behaviours
outweigh the pressure to use new ones and people revert to their previous habits.
What are some techniques for overcoming barriers

to organisational change?
To overcome barriers to successful change, managers can choose from a range of tactics summarised
here and described in Table 25.1. Managers should view these techniques as tools and use one(s)
most appropriate for the type and source of the barrier. These approaches include education and
communication, participation, facilitation and support, negotiation, manipulation and cooptation, and
coercion.
Education and communication can overcome barriers to change by helping employees see the logic of
the change effort. This technique can be used to overcome resistance caused by misinformation or poor
communication, and to discourage reversion to old ways.
Participation involves bringing those individuals directly affected by the proposed change into the
decision-making process. Their participation allows these individuals to express their feelings, increase
the quality of the process and increase employee commitment to the final decision.
Table 25.1 Techniques for overcoming barriers to change

Technique When used Advantage Disadvantage
Education and To overcome resistance due to Clears up misunderstandings May not work when mutual trust and
communication misinformation credibility are lacking
To show the need for change Shows need for and benefits of change May not work if resisters have alternative
Overcomes uncertainty information
When resisters are uncertain about the May not work if results are unavailable or
nature, requirements or outcomes of poor
change Increases awareness of progress
To reinforce the value of new methods and positive outcomes
Participation When resisters have the expertise Increases involvement and acceptance Time-consuming; has potential for a poor
to make a contribution solution
Facilitation and support When resisters are fearful and anxiety Can facilitate needed adjustments Expensive; no guarantee of success
ridden Positively reinforces new behaviour May not work if results are unavailable or
Provides feedback on progress poor
Negotiation When resistance comes from a powerful Can ‘buy’ commitment Potentially high cost; opens doors for
group others to apply pressure too
Manipulation and When a powerful group’s endorsement is Inexpensive, easy way to gain support Can backfire, causing a change agent to
co-optation needed lose credibility
Coercion When a powerful group’s endorsement is Inexpensive, easy way to gain support May be illegal; may undermine change
needed to gain support agent’s credibility
9780655702412_CH25.indd 694 3/3/20 11:15 AM

Facilitation and support involve helping employees deal with the fear and anxiety associated with the
change effort. This help may include employee counselling, therapy, new skills training or a short paid
leave of absence.
Negotiation involves exchanging something of value for an agreement to lessen the resistance to the
change effort. This technique may be quite useful when the resistance comes from a powerful source.
Manipulation and cooptation refers to covert attempts to influence others about the change. It may
involve twisting or distorting facts to make the change appear more attractive.
Finally, coercion can be used to deal with resistance to change. Coercion involves the use of direct
threats or force against the resisters.
What reaction do employees have

to organisational change?
For many employees, change creates stress. A dynamic and uncertain environment characterised
by restructurings, downsizings, empowerment and personal life matters has caused large numbers of
employees to feel overworked and ‘stressed out’. In this section, we’ll review specifically what is meant by
the term stress, what the symptoms of stress are, what causes stress and what managers can do to reduce
anxiety.
What is stress?
Stress is the adverse reaction people have to excessive pressure placed on them from extraordinary stress
demands, constraints or opportunities. When people face extraordinary demands, constraints or
44 The adverse reaction
people have to excessive
opportunities, they experience positive stress (known as eustress) or negative stress (known as distress).45
pressure placed on them
Eustress is functional stress that motivates action; people experience functional stress when they perceive from extraordinary
that new circumstances represent a positive change that offers a potential gain. For example, functional demands, constraints or
stress allows an athlete, stage performer or employee to perform at their highest level at crucial times. opportunities
However, when people perceive that new circumstances will impose high demands, reduce their
control over their environment or lead to undesirable outcomes, then they experience distress, which is
dysfunctional stress. It’s this negative response to stress that we’ll focus on for the rest of our discussion
because, as we explain below, this form of stress can have a wide range of negative consequences for
individuals and organisations. Too much stress can even have tragic consequences. In Japan, there’s a stress
phenomenon called karoshi (pronounced kah-roe-she), which is translated as death from overwork. karoshi
One other thing to understand about stress is that just because the conditions are right for stress A Japanese term for
sudden death caused by
to surface doesn’t always mean it will. Two conditions are necessary for potential stress to become actual overworking
stress:46 there must be uncertainty over the outcome; and the outcome must be important.
In the workplace, stress is often associated with high job strain. High job strain results from a
combination of high job demands and low control over how the job is done. Organisational change
increases job strain when it means that employees are required to do more but reduces their control over
how they deal with those extra demands. For example, if an employee is given extra responsibilities but
no extra resources or assistance to deal with those responsibilities, they will experience high job strain.
High job strain has been shown to be harmful to cardiovascular and mental health, and has even been
shown to increase the risks of mental health issues such as depression and anxiety.47 So, understanding
how organisational changes increase job strain and cause employee stress is critical to managing change
successfully.
What are the symptoms of stress?

We see stress in a number of ways. For example, an employee who is experiencing high stress may
become depressed, accident prone or argumentative; may have difficulty making routine decisions; may
9780655702412_CH25.indd 695 3/3/20 11:15 AM

Physical
Psychological
Changes in metabolism, SYMPTOMS

increased heart and OF
breathing rates, raised Job-related dissatisfaction,
blood pressure, headaches STRESS tension, anxiety, irritability,
and potential of heart boredom and
attacks. procrastination.
Behavioural
Changes in productivity, absenteeism, job

turnover, changes in eating habits, increased
smoking or consumption of alcohol, rapid
speech, fidgeting and sleep disorders.
Figure 25.4 Symptoms of stress
be easily distracted, and so on. As Figure 25.4 shows, stress symptoms can be grouped under three general
categories: physical, psychological and behavioural. All of these can significantly affect an employee’s
work.
What causes stress?

stressors Stress can be caused by personal factors and by job-related factors called stressors. Job-related stressors
Factors that cause stress can include pressures to avoid errors or complete tasks in a limited time period, job insecurity, bullying,
organisational injustice and a lack of social support at work.48 Let’s look at five categories of organisational
stressors: task, role and interpersonal demands; organisation structure; and organisational leadership.
Task demands are factors related to an employee’s job. They include the design of a person’s job
(autonomy, task variety, degree of automation), working conditions and the physical work layout. Work
quotas can put pressure on employees when their ‘outcomes’ are perceived as excessive.49 The more
interdependence between an employee’s tasks and the tasks of others, the more potential stress there
is. Autonomy, on the other hand, tends to lessen stress as people perceive that they have more control
over their situation. Jobs in which temperatures, noise or other working conditions are dangerous or
undesirable can increase anxiety. So, too, can working in an overcrowded room or in a visible location
where interruptions are constant.
role ambiguity Role demands relate to pressures placed on an employee as a function of the particular role they play
When role expectations in the organisation. Role ambiguity is created when role expectations aren’t clearly understood and
aren’t clearly
the employee isn’t sure what they are to do. Role conflicts create expectations that may be hard to
understood
reconcile or satisfy. Role overload is experienced when the employee is expected to do more than time
role conflicts permits. The following example illustrates the distinctions between these three concepts. Jingjing is a
Work expectations that customer service officer in a call centre. During her training she learned that she is expected to be a one-
are hard to satisfy stop shop for customer problems but also to make sure she spends no more than five minutes handling
any one call. Jingjing’s uncertainty about how to be a ‘one-stop shop’ is an example of role ambiguity.
role overload
Having more work to The conflicting demands to resolve customer problems and take five minutes or less to do so illustrate
accomplish than time role conflict. The pressure of resolving customer problems in less than five minutes creates role overload.
permits Interpersonal demands are pressures created by other employees. Lack of social support from colleagues
and poor interpersonal relationships can cause considerable stress, especially among employees with a
high social need.
Organisation structure can increase stress. Excessive rules and an employee’s lack of opportunity to
participate in decisions that affect them are examples of structural variables that might be potential
sources of stress.
9780655702412_CH25.indd 696 3/3/20 11:15 AM

Organisational leadership represents the supervisory style of the organisation’s managers. Some
managers create a culture characterised by tension, fear and anxiety. They establish unrealistic pressures
to perform in the short run, impose excessively tight controls and routinely fire employees who don’t
measure up. This style of leadership flows down through the organisation and affects all employees.
Personal factors that can create stress include family issues, personal economic problems and inherent
personality characteristics. Because employees bring their personal problems to work with them, a full
understanding of employee stress requires a manager to be understanding of these personal factors.50
Type A
Evidence also indicates that employees’ personalities have an effect on how susceptible they are to stress. personality
The most commonly used labels for these personality traits are Type A and Type B. People who have a
Type A personality is characterised by chronic feelings of a sense of time urgency, an excessive chronic sense of urgency
and an excessive
competitive drive, and difficulty accepting and enjoying leisure time. The opposite of Type A is Type B
competitive drive
personality. Type Bs never suffer from time urgency or impatience. Both personality types are
susceptible to stressors, but Type A personalities are more likely to demonstrate symptoms of stress. Type B
personality
That makes it important for managers not to assume that Type B employees aren’t stressed or are less
People who are relaxed
stressed than Type A employees. and easygoing and
accept change easily
How can stress be reduced?
As mentioned earlier, stress can be functional when it motivates employees. But exposure to job stressors
can also lead to burnout, anxiety disorders, dependence on alcohol and even suicide.51 So, you can see
why it’s so important that managers understand how stress affects employees and how to reduce job
stressors! Managers want to reduce the stress that leads to dysfunctional work behaviour by controlling
certain organisational stressors and, to a more limited extent, offering help for personal stress. Studies
have shown that the most effective way that managers can prevent stress and its negative impacts is
to take an integrated approach and focus on reducing job stressors while also improving employees’
resilience and ability to cope with stress.52
Things that managers can do in terms of job-related factors begin with employee selection. Man-
agers need to ensure that an employee’s abilities match the requirements of their job. When employees
are in over their heads, their stress levels typically will
be high. A realistic job preview during the selection
process can minimise stress by reducing ambiguity
over job expectations. Improved organisational com-
munications will keep ambiguity-induced stress to a
minimum. Similarly, a performance planning pro-
gram such as management by objectives (MBO) will
clarify job responsibilities, provide clear performance
goals and reduce ambiguity through feedback. Job re-
design is also a way to reduce stress. If stress can be
traced to boredom or to work overload, jobs should
be redesigned to increase challenge or to reduce the
workload. Redesigns that increase opportunities for
employees to participate in decisions and to gain so- Wang Zhiqian stands before the Airbus A320 aircraft she will fly as the
cial support also have been found to lessen stress.53 For first female pilot for Sichuan Airlines, a regional Chinese carrier. As a
commercial airline pilot, Zhiqian has a career that ranks high on the list of
example, at UK pharmaceutical maker GlaxoSmith-
the most stressful jobs. Task demands make commercial pilots’ jobs very
Kline, a team-resilience program in which employees stressful because pilots are responsible for the lives of their passengers
can shift assignments depending on their workloads and crews every time they fly. In the event of an emergency, pilots must
and deadlines has helped reduce work-related stress handle unexpected and rapidly changing situations ranging from poor
weather conditions to equipment malfunctions.
by 60 per cent. 54
Liu Jin/Agence France Presse/Getty Images Australia Pty Ltd
9780655702412_CH25.indd 697 3/3/20 11:15 AM

No matter what you do to eliminate organisational stressors,

A question of ethics some employees will still be ‘stressed out’ due to personal stressors.
Stress from an employee’s personal life raises two problems. First,
One in five companies offers some form of stress it’s difficult for the manager to control directly. Second, there are
management program.59 Although such programs are
ethical considerations as to whether managers have the right to
available, many employees may choose not to participate.
They may be reluctant to ask for help, especially if a major intrude – even in the most subtle ways – in an employee’s personal
source of that stress is job insecurity. After all, there’s still a life. If a manager believes it’s ethical and the employee is receptive,
stigma associated with stress. Employees don’t want to be there are a few approaches the manager can consider.
perceived as being unable to handle the demands of their
To help deal with these issues, many companies offer employee
job. Although they may need stress management now more
than ever, few employees want to admit that they’re stressed. assistance and wellness programs.55 These employer-sponsored
What can be done about this paradox? programs are designed to assist employees in areas where they
Discuss this: might be having difficulties, such as financial planning, legal
• What is the ethical dilemma here? What problems do matters, health, fitness or stress.56
organisations face if employees need help but don’t ask for Employee assistance programs (EAPs) are work-
it?
based programs designed to detect, identify and help resolve
• What options do organisations have in this situation?
work and personal problems that affect employee wellbeing and
performance.57 Programs usually offer counselling services to
wellness programs employees, but may also include mediation and training, and are often also made available to employee
Programs offered by family members. Many EAPs focus on assisting employees with personal issues, and some also address
organisations to help work-related trauma or stress. For example, ANZ Bank’s EAP includes trauma counselling for employees
employees prevent
health problems who are victims of armed hold-ups. The return on investment in EAPs can include greater job satisfaction,
higher morale and a reputation as a good employer, as well as reductions in sick and stress leave, fewer or
employee less-costly compensation claims and less absenteeism. Research on the usage of EAPs in Australia found
assistance that the improvements to employee productivity that result from accessing an EAP equated to an average
programs (EAPs) return on investment of over $10,000 per employee.58
Programs offered by
organisations to help
employees overcome
personal and health-
related problems
9780655702412_CH25.indd 698 3/3/20 11:15 AM

Student
Learning support (giving employees the support they need to implement the change),
negotiation (exchanging something of value to reduce resistance), manipulation
Centre and cooptation (using negative actions to influence), selecting people who are
open to and accept change, and coercion (using direct threats or force).
Learning Objective 4. Describe what managers need

Reviewing the learning objectives to know about employee stress.
Stress is the adverse reaction people have to excessive pressure placed on them
Learning Objective 1. Discuss techniques for
from extraordinary demands, constraints or opportunities. The symptoms of stress
stimulating innovation.
can be physical, psychological or behavioural. Stress can be caused by personal
Creativity is the ability to combine ideas in a unique way or to make unusual
factors and by job-related factors. To help employees deal with stress, managers
associations between ideas. Innovation is turning the outcomes of the creative
can address job-related factors by ensuring that an employee’s abilities match
process into useful products or work methods. An innovative environment
the requirements of their job, improving organisational communications, using
encompasses structural, cultural and human resource variables.
a performance planning program or redesigning jobs. Addressing personal
Important structural variables include an organic-type structure, abundant
stress factors is trickier, but managers could offer employee counselling, time
resources, frequent communication between organisational units, minimal time
management programs and wellness programs.
pressure and support. Important cultural variables include accepting ambiguity,
tolerating the impractical, keeping external controls minimal, tolerating risk,
tolerating conflict, focusing on ends not means, using an open-system focus and
providing positive feedback. Important human resource variables include high
❶ Why is managing change an integral part of every manager’s job?
commitment to training and development, high job security and encouraging
➋ Contrast the ‘calm waters’ and ‘white-water rapids’ metaphors of change.
individuals to be idea champions.
Which of these would you use to describe your current life? Explain your
Design thinking can also play a role in innovation. It provides a process for
answer.
coming up with products that don’t exist.
➌ Describe Lewin’s three-step change process. How is it different from the
change process needed in the ‘white-water rapids’ metaphor of change?
Learning Objective 2. Define organisational change,
➍ How are opportunities, constraints and demands related to stress? Give an
and compare and contrast views on the change
example of each.
process.
➎ Organisations typically have limits to how much change they can absorb.
Organisational change is any alteration of an organisation’s people, structure As a manager, what signs would you look for that might suggest your
or technology. The ‘calm waters’ metaphor of change suggests that change is organisation has exceeded its capacity to change?
an occasional disruption in the normal flow of events and can be planned and ➏ Why is organisation development planned change? Explain how planned
managed as it happens, using Lewin’s three-step change process (unfreezing, change is important for organisations in today’s dynamic environment.
changing and freezing). The ‘white-water rapids’ view of change suggests that ➐ How do creativity and innovation differ? Give an example of each.
change is ongoing, and managing it is a continual process. ➑ Research information on how to be a more creative person. Write down
suggestions in a bulleted list format and be prepared to present your
Learning Objective 3. Explain why change might be
information in class.
unsuccessful.
➒ How does an innovative culture make an organisation more effective? Could
Change efforts may be unsuccessful either because people resist change or an innovative culture ever make an organisation less effective? Why or why
because changes don’t become permanent. Resistance to change can be caused not?
by a failure to see the need for change, uncertainty about adopting new methods, ❿ When you find yourself experiencing dysfunctional stress, write down what’s
concern over personal loss, the belief that the change isn’t in the organisation’s causing the stress, what stress symptoms you’re exhibiting, and how you’re
best interest and a limited tolerance for change. Reverting to old ways prevents dealing with the stress. Keep this information in a journal and evaluate how
changes from becoming permanent, and usually occurs because new methods well your stress reducers are working and how you could handle stress
fail to produce instant, positive consequences. Techniques for overcoming better. Your goal is to get to a point where you recognise that you’re stressed
barriers to change include education and communication (educating employees and can take positive actions to deal with the stress.
about and communicating to them the need for the change), participation
(allowing employees to participate in the change process), facilitation and
9780655702412_CH25.indd 699 3/3/20 11:15 AM


STRESS MANAGEMENT
It’s no secret that employees, in general, are more stressed out today than previous generations. Heavier workloads, longer hours, continual reorganisations, technology
that breaks down traditional barriers between work and personal life, and reduced job security are among the factors that have increased employee stress. This stress
can lead to lower productivity, increased absenteeism, reduced job satisfaction and higher quit rates. When stress is excessive, managers need to know how to reduce it.

PERSONAL
P I A INVENTORY
ASSESSMENT
Controlling workplace stress

Workplace stress is a reality and managers can do something about it. In this PIA, you’ll assess how you control workplace stress.
Skill basics • Use physical exercise. A large body of evidence indicates that non-competitive
Eliminating all stress at work isn’t going to happen – and it shouldn’t. Stress is physical exercise can help you to release tension that builds up in stressful
an unavoidable consequence of life. It also has a positive side – when it focuses situations. These activities include aerobics, walking, jogging, swimming and
concentration and creativity. But when it brings about anger, frustration, fear, cycling. Physical exercise increases heart capacity, lowers the at-rest heart
sleeplessness and the like, it needs to be addressed. rate, provides a mental diversion from work pressures and offers a means to
Many organisations have introduced stress-reduction interventions for ‘let off steam’.
employees. These include improved employee selection and placement, helping • Practise relaxation training. You can teach yourself to reduce tension through
employees set realistic goals, training in time management, redesign of jobs, meditation, deep-breathing exercises and guided imaging. These techniques
increased involvement of employees in decisions that affect them, expanded work by taking your mind off the sources of stress, achieving a state of deep
social support networks, improved organisational communications, and relaxation and releasing body tension.
organisationally supported wellness programs. But what can you do, on your • Expand your social support network. Having friends, family or work colleagues
own, to reduce stress if your employer doesn’t provide such programs or if you to talk to provides an outlet when stress levels become excessive. Expanding
need to take additional action? The following individual interventions have been your social support network can therefore be a way to reduce tension. It
suggested: provides you with someone to listen to your problems and to offer a more
• Implement time-management techniques. Every person can improve their use objective perspective on the situation.60
of time. Time is a unique resource in that, if it’s wasted, it can never be Practising the skill
replaced. While people talk about saving time, it can never actually be saved. Read through the scenario and follow the directions at the end of it.
And if it’s lost, it can’t be retrieved. The good news is that it’s a resource we all
Dana had become frustrated in her job at Taylor Books – a chain of 22 bookstores
have in equal amounts. Everyone gets the same 24 hours a day, 7 days a
in Victoria and South Australia. After nearly 13 years as director of marketing, she
week to use. When tasks seem to exceed the hours you have available, stress
felt she needed new challenges. When she was offered the job as senior account
often results. But effective management of time can reduce stress. Time-
supervisor for Dancer Advertising in Sydney, she jumped at the opportunity. Now,
management training can, for example, teach you how to prioritise tasks by
after four months on the job, she’s not so certain she made the right move.
importance and urgency, schedule activities according to those priorities,
At Taylor, she worked a basic 8-to-5 day. She was easily able to balance her
avoid confusing actions with accomplishments, and understand your
work responsibilities with her personal responsibilities as a wife and the mother
productivity cycle so that you can handle the most demanding tasks during
of two children – ages four and seven. But her new job is very different. Clients
the high part of your cycle when you are most alert and productive.
call anytime – day, night and weekends – with demands. Colleagues in Dancer’s
• Create personal goals. Goal setting is designed to help you better prioritise
creative department are constantly asking for her input on projects. And Dana’s
your activities and better manage how you direct your efforts. Goals become,
boss expects her not only to keep her current clients happy, but also to help
in effect, a personal planning tool. For example, setting long-term goals
secure new clients by preparing and participating in presentations and working
provides general direction; while short-term goals – such as weekly or daily
up budgets. Last month, alone, Dana calculated that she spent 67 hours in the
‘to do’ lists – reduce the likelihood that important activities will be overlooked
office plus another 12 at home working on Dancer projects. Short on sleep,
and help you to maximise the use of your time.
9780655702412_CH25.indd 700 3/3/20 11:15 AM

frazzled by the hectic pace, having no time for her family or chores, she’s lost five have you back here but we filled your position. We could find something for you
kilograms and developed a rash. Her doctor told her the rash was stress-induced in marketing but you wouldn’t be director and the pay would be at least a third
and that she needed to reduce her stress levels. less.’
Dana really likes her job as an account executive, but she is feeling If you were Dana, what would you do? Be specific.
overwhelmed by the position’s demands. Yesterday she called her old boss at
Taylor Books and enquired about coming back. He replied, ‘Dana, we’d love to
Mini cases
25.1 Turning Coles around
Poor performance forces change
When Wesfarmers bought the Coles supermarket chain in 2007 for $19 demand and actual sales. Reviewing supply chains with suppliers helped
billion, many people wondered if it was getting value for its money. Coles Coles identify where they could be made more efficient and improve quality,
had been performing poorly against Woolworths, its main rival, for over a while collaborating with transport partners and consolidating distribution
decade and big changes were needed if the company was to turn itself centres made delivery systems more efficient.
around. To lead those changes, Wesfarmers appointed Ian McLeod as McLeod also practised management-by-walking-around to reinforce
Coles’s managing director in May 2008. McLeod quickly realised that Coles’s a new quality-focused and customer-centric organisational culture. He
problems included broken supply chains, poor-quality products, a weak regularly visited stores to listen to customers and staff provide valuable
culture, inefficient and ineffective management systems, and customers who feedback about the company’s products and stores, because, he said, ‘If
were unhappy with the high price of groceries. ‘We recognised that . . . we you don’t listen to customers, that’s when the rot sets in.’ It also meant
had to deliver much better value to the customer.’61 he could see how well the changes were being implemented on the shop
The first step in McLeod’s change management strategy was to stabilise floor and lead by example. He explained: ‘I’m out there checking the quality
Coles as an organisation and to engage regularly with senior store staffs. of bananas and squeezing avocados to see if they’re at the right level. If it
The next step was to create better value for customers by improving the matters to me as MD, then it should matter to our staff.’
stores, product quality and pricing. Store entrances were refurbished, layouts McLeod’s changes certainly paid off for Coles. By the time he stepped
redesigned and super-stores developed, and features such as sushi bars, down as managing director in 2014, Coles had increased its customer
bakeries and patisseries were added to make stores more attractive to traffic by 4 million customers per week, lifted its same store sales by over
customers. Self-serve checkouts were introduced to reduce waiting times. 20 per cent and increased its profits by $600 million. But as McLeod himself
Prices across stores were aligned to help rebuild revenues and trust with said, ‘You can never stand still in retail. A competitive market stimulates
customers, who, McLeod admits, knew they were paying different prices for and motivates you to improve – to push and develop even further. That
groceries depending on where they shopped. The introduction of a range of makes the job enjoyable.’ Under its new CEO, John Durkan, the company
private branded products that were 20–30 per cent cheaper than branded also adopted a new change strategy of becoming ‘a little better every day’.
alternatives helped Coles offer better value for customers, as did developing Within three years of McLeod’s departure the company had grown into a
‘value meal solutions’ for families. But arguably the biggest change was a national network of 787 supermarkets, 865 liquor stores, 89 hotels and 690
refocus on the quality of Coles’s fresh produce. Increasing the floor space convenience outlets, and diversified its liquor, petrol, insurance and finance
for fresh produce meant fruit and vegetables could be better presented, and businesses.
staff were retrained in how to handle and manage fresh food to improve ❶ Why did Coles need to change its supermarket operations?
product quality and minimise wastage. The company also rebuilt its supply ➋ What changes did McLeod produce in Coles’s structures, technology
chains so that produce reached stores as quickly as possible, and increased and people? How did he do that?
its quality control checks at distribution centres from 4000 per year to ➌ Was Coles using a ‘calm waters’ or a ‘white-water rapids’ approach to
60,000 to better supervise the quality of produce being shipped into its organisational change?
supermarkets. Automating store ordering systems reduced gaps on shelves ➍ What external forces continue to create a need for Coles to change?
and improved product availability by ordering products according to forecast
9780655702412_CH25.indd 701 3/3/20 11:15 AM

25.2 Saving mates

Everyone can be part of a solution for saving lives
Mates in Construction (MIC) is using Australia’s strong tradition of ‘mateship’ Training is complemented by pathways to support. These include an
to foster positive change that helps to save lives. The charity organisation assistance hotline, case management processes for connecting individuals
has one simple but important purpose: to reduce suicide incidence in the in need to support services, and onsite support from field officers who visit
building and construction industry.62 construction sites. Field officers also provide support after critical incidents
Suicide incidence in the industry is worryingly high. An average of 190 and accidents, or after the suicide of a worker or a worker’s family member.
construction workers commit suicide each year. This means that they are In these instances, program members focus on helping people to deal with
six times more likely to die from suicide than from a workplace accident. grief and emotional reactions to trauma, and on helping Connectors and
One reason for this is that the building and construction industry employs ASSIST workers to identify and support people in need of help.
a lot of young males. Death by suicide accounts for a third of all deaths A big part of MIC’s work is helping workers and the industry to
among young Australian males, who are three times more likely to die from acknowledge and change some of the factors that contribute to suicide
intentional self-harm than females. Young male construction workers are in the industry. This includes recognising that the transient and uncertain
more than twice as likely to commit suicide than other young Australian nature of employment in building and construction contributes to stress and
men. anxiety related to lack of job and financial security. MIC is also working to
To change this, Mates in Construction operates from the premise address perceptions and behaviours within the industry that isolate people
that ‘suicide is everyone’s business’, and that everyone can be part of the or make them less likely to seek help. These include reluctance to talk about
solution. The organisation’s goals are: to raise awareness of suicide and of feelings and emotions, perceptions that individuals who acknowledge they
ways to prevent it; to build the capacity of individuals to help themselves are having problems will be perceived as ‘not manly’, and the belief that
and of workplaces and communities to help people who need support; and individuals who intend to commit suicide don’t discuss it with others or
to provide help to individuals by connecting workers to practical and useful show signs of needing help.
services. These include employee assistance programs, financial counselling, Changing such entrenched cultural attitudes isn’t easy, but the program
drug and alcohol services, grief counselling, and family and relationship is enabling workers in the industry to more openly and proactively help
counselling. others to get support. By the end of 2017, the MIC program had trained
The two key components of the MIC program are training and support. nearly 121,000 people and managed over 6000 cases. It was also piloting
Training is used to raise awareness of the social problem of suicide within a program, Mates in Mining, to provide similar support to workers in the
the industry, the contributing factors, and the ways in which the problem mining industry.
can be addressed. General awareness training is delivered en masse and ❶ What types of change is Mates in Construction trying to facilitate?
on building sites to at least 80 per cent of workers. Connector training is ➋ How is MIC facilitating organisational development on building and
provided to people who volunteer to be Connectors, and focuses on training construction sites?
them to be able to provide assistance onsite by keeping someone who is in a ➌ What barriers might prevent MIC from successfully fostering change?
crisis safe and helping them to connect to professional help. ASSIST training How could those barriers be overcome?
teaches ASSIST workers how to talk to someone who is contemplating ➍ How could mining and construction companies reduce the stresses
suicide, how to help them stay safe, and address their worries and concerns, experienced by workers in the industry?
and how to help them develop a ‘safe plan’.
References
1 R. M. Kanter, ‘Think Outside the Building’, Harvard Business Review, March 2010, 5 T. M. Amabile, ‘Motivating Creativity in Organizations’, California Management Review,
p. 34; T. Brown, ‘Change by Design’, BusinessWeek, 5 October 2009, pp. 54–6; J. E. Fall 1997, pp. 39–58.
Perry-Smith and C. E. Shalley, ‘The Social Side of Creativity: A Static and Dynamic Social 6 C. Vogel and J. Cagan, Creating Breakthrough Products: Innovation from Product
Network Perspective’, Academy of Management Review, January 2003, pp. 89–106; Planning to Program Approval (Upper Saddle River, NJ: Prentice Hall, 2002).
and P. K. Jagersma, ‘Innovate or Die: It’s Not Easy, but It Is Possible to Enhance Your 7 R. W. Woodman, J. E. Sawyer and R. W. Griffin, ‘Toward a Theory of Organizational
Organization’s Ability to Innovate’, Journal of Business Strategy, January–February Creativity’, Academy of Management Review, April 1993, pp. 293–321.
2003, pp. 25–8. 8 T. M. Egan, ‘Factors Influencing Individual Creativity in the Workplace: An Examination
2 T. Pultarova, ‘More Than a View: Windows Double as Solar Panels’, LiveScience, 3 July of Quantitative Empirical Research’, Advances in Developing Human Resources, May
2017. 2005, pp. 160–81; N. Madjar, G. R. Oldham and M. G. Pratt, ‘There’s No Place Like
3 Fast Company, ‘The World’s 50 Most Innovative Companies’, Fast Company, March Home? The Contributions of Work and Nonwork Creativity Support to Employees’
2011, pp. 66+; and G. Colvin, ‘The World’s Most Admired Companies’, Fortune, 21 Creative Performance’, Academy of Management Journal, August 2002, pp. 757–67;
March 2011, pp. 109+. T. M. Amabile, C. N. Hadley and S. J. Kramer, ‘Creativity under the Gun’, Harvard Business
4 These definitions are based on T. M. Amabile, Creativity in Context (Boulder, CO: Review, August 2002, pp. 52–61; J. B. Sorensen and T. E. Stuart, ‘Aging, Obsolescence
Westview Press, 1996). and Organizational Innovation’, Administrative Science Quarterly, March 2000,
9780655702412_CH25.indd 702 3/3/20 11:15 AM

pp. 81–112; G. R. Oldham and A. Cummings, ‘Employee Creativity: Personal and 27 From the Past to the Present box based on D. A. Wren and A. G. Bedeian, The Evolution
Contextual Factors at Work’, Academy of Management Journal, June 1996, pp. 607–34; of Management Thought, 6th edn (Hoboken, NJ: John Wiley & Sons, Inc., 2009);
and F. Damanpour, ‘Organizational Innovation: A Meta-Analysis of Effects of Determinants ‘Biography and Quotes of Kurt Lewin’, About.com, <psychology.about.com>, 15 July
and Moderators’, Academy of Management Journal, September 1991, pp. 555–90. 2009; and K. T. Lewin, ‘The Dynamics of Group Action’, Educational Leadership, January
9 P. R. Monge, M. D. Cozzens and N. S. Contractor, ‘Communication and Motivational 1944, pp. 195–200.
Predictors of the Dynamics of Organizational Innovations’, Organization Science, May 28 D. Lieberman, ‘Nielsen Media Has Cool Head at the Top’, USA Today, 27 March 2006,
1992, pp. 250–74. p. 3B.
10 T. M. Amabile, C. N. Hadley and S. J. Kramer, ‘Creativity under the Gun’, Harvard 29 L. S. Lüscher and M. W. Lewis, ‘Organizational Change and Managerial Sensemaking:
Business Review, August 2002, pp. 52–61. Working through Paradox’, Academy of Management Journal, April 2008, pp. 221–40;
11 N. Madjar, G. R. Oldham and M. G. Pratt, ‘There’s No Place Like Home? The F. Buckley and K. Monks, ‘Responding to Managers’ Learning Needs in an Edge-of-
Contributions of Work and Nonwork Creativity Support to Employees’ Creative Chaos Environment: Insights from Ireland’, Journal of Management, April 2008, pp.
Performance’, Academy of Management Journal, August 2002, pp. 757–67. 146–63; and G. Hamel, ‘Take it Higher’, Fortune, 5 February 2001, pp. 169–70.
12 See, for example, J. E. Perry-Smith, ‘Social Yet Creative: The Role of Social Relationships 30 S. Hicks, ‘What is Organization Development?’, Training and Development, August
in Facilitating Individual Creativity’, Academy of Management Journal, February 2006, 2000, p. 65; and H. Hornstein, ‘Organizational Development and Change Management:
pp. 85–101; C. E. Shalley, J. Zhou and G. R. Oldham, ‘The Effects of Personal and Don’t Throw the Baby Out with the Bath Water’, Journal of Applied Behavioral Science,
Contextual Characteristics on Creativity: Where Should We Go from Here?’, Journal of June 2001, pp. 223–7.
Management, vol. 30, no. 6 (2004), pp. 933–58; J. E. Perry-Smith and C. E. Shalley, ‘The 31 J. Wolfram and S. Minahan, ‘A New Metaphor for Organization Development’, Journal of
Social Side of Creativity: A Static and Dynamic Social Network Perspective’, Academy Applied Behavioral Science, June 2006, pp. 227–43.
of Management Review, January 2003, pp. 89–106; J. M. George and J. Zhou, ‘When 32 See, for example, H. B. Jones, ‘Magic, Meaning and Leadership: Weber’s Model and the
Openness to Experience and Conscientiousness Are Related to Creative Behavior: An Empirical Literature’, Human Relations, June 2001, p. 753.
Interactional Approach’, Journal of Applied Psychology, June 2001, pp. 513–24; J. 33 G. Akin and I. Palmer, ‘Putting Metaphors to Work for a Change in Organizations’,
Zhou, ‘Feedback Valence, Feedback Style, Task Autonomy and Achievement Orientation: Organizational Dynamics, Winter 2000, pp. 67–79.
Interactive Effects on Creative Behavior’, Journal of Applied Psychology, vol. 83 (1998), 34 J. Grieves, ‘Skills, Values or Impression Management: Organizational Change and the
pp. 261–76; T. M. Amabile, R. Conti, H. Coon, J. Lazenby and M. Herron, ‘Assessing the Social Processes of Leadership, Change Agent Practice and Process Consultation’,
Work Environment for Creativity’, Academy of Management Journal, October 1996, Journal of Management Development, May 2000, p. 407.
pp. 1154–84; S. G. Scott and R. A. Bruce, ‘Determinants of Innovative People: A Path 35 M. McMaster, ‘Team Building Tips’, Sales & Marketing Management, January 2002, p.
Model of Individual Innovation in the Workplace’, Academy of Management Journal, 140; and ‘How To: Executive Team Building’, Training and Development, January 2002,
June 1994, pp. 580–607; R. Moss Kanter, ‘When a Thousand Flowers Bloom: Structural, p. 16.
Collective and Social Conditions for Innovation in Organization’, in B. M. Staw and L. L. 36 Based on J. Newman, ‘An Organisational Change Framework for Sustainability’, Greener
Cummings (eds), Research in Organizational Behavior, vol. 10 (Greenwich, CT: JAI Press, Management International, vol. 57 (2012), pp. 65–75.
1988), pp. 169–211; and T. M. Amabile, Creativity in Context (Boulder, CO: Westview 37 See, for example, J. D. Ford, L. W. Ford and A. D’Amelio, ‘Resistance to Change: The
Press, 1996). Rest of the Story’, Academy of Management Review, April 2008, pp. 362–77; A.
13 J. McGregor, ‘The World’s Most Innovative Companies’, BusinessWeek, 24 April 2006, Deutschman, ‘Making Change: Why Is it So Hard to Change Our Ways?’, Fast Company,
p. 70. May 2005, pp. 52–62; S. B. Silverman, C. E. Pogson and A. B. Cober, ‘When Employees
14 J. Ramos, ‘Producing Change that Lasts’, Across the Board, March 1994, pp. 29–33; at Work Don’t Get It: A Model for Enhancing Individual Employee Change in Response
T. Stjernberg and A. Philips, ‘Organizational Innovations in a Long-Term Perspective: to Performance Feedback’, Academy of Management Executive, May 2005, pp.
Legitimacy and Souls-of-Fire as Critical Factors of Change and Viability’, Human 135–47; C. E. Cunningham, C. A. Woodward, H. S. Shannon, J. MacIntosh, B. Lendrum,
Relations, October 1993, pp. 1193–2023; and J. M. Howell and C. A. Higgins, D. Rosenbloom and J. Brown, ‘Readiness for Organizational Change: A Longitudinal
‘Champions of Change’, Business Quarterly, Spring 1990, pp. 31–2. Study of Workplace, Psychological and Behavioral Correlates’, Journal of Occupational
15 ‘Setting New Standards in Customer Service’, <www.business.vic.gov.au/case-studies/ and Organizational Psychology, December 2002, pp. 377–92; M. A. Korsgaard,
setting-new-standards-in-customer-service>, accessed 18 September 2017. H. J. Sapienza and D. M. Schweiger, ‘Beaten Before Begun: The Role of Procedural
16 J. Liedtka and T. Ogilvie, Designing for Growth: A Design Thinking Tool Kit for Managers Justice in Planning Change’, Journal of Management, vol. 28, no. 4 (2002), pp.
(New York: Columbia Business School Press, 2011). 497–516; R. Kegan and L. L. Lahey, ‘The Real Reason People Won’t Change’, Harvard
17 ‘50 Most Innovative Companies 2016: Commonwealth Bank of Australia’, Australian Business Review, November 2001, pp. 85–92; S. K. Piderit, ‘Rethinking Resistance
Financial Review, 18 August 2016. and Recognizing Ambivalence: A Multidimensional View of Attitudes Toward an
18 Great Place to Work, ‘Zinc’, 2016 Best Places to Work, 2016, p. 22; Zinc, <www. Organizational Change’, Academy of Management Review, October 2000, pp. 783–94;
zincgroup.com/>, accessed 15 November 2017; ‘Five Tips to Creating a Great Work C. R. Wanberg and J. T. Banas, ‘Predictors and Outcomes of Openness to Changes in a
Place (By Someone Who Created a Great Place to Work)’, B& T, 31 August 2017. Reorganizing Workplace’, Journal of Applied Psychology, February 2000, pp. 132–42;
19 J-V. Douglas, ‘Down the Tube’, Business Review Weekly, 12–18 February 2009, pp. A. A. Armenakis and A. G. Bedeian, ‘Organizational Change: A Review of Theory and
40–1. Research in the 1990s’, Journal of Management, vol. 25, no. 3 (1999), pp. 293–315;
20 ‘Nike Uses 3D Printers to Create New Running Shoes’, <https://3dprinting.com/news/>, and B. M. Staw, ‘Counterforces to Change’, in P. S. Goodman and Associates (eds),
28 February 2014, accessed 17 January 2018. Change in Organizations (San Francisco: Jossey-Bass, 1982), pp. 87–121.
21 K. Grzbowska, ‘The Social Aspect of Introducing Changes into the Organization’, 38 A. Reichers, J. P. Wanous and J. T. Austin, ‘Understanding and Managing Cynicism
International Journals of Human Resources Development and Management, 2 February About Organizational Change’, Academy of Management Executive, February 1997,
2007, p. 67; and I. M. Jawahar and G. L. McLaughlin, ‘Toward a Descriptive Stakeholder pp. 48–57; P. Strebel, ‘Why Do Employees Resist Change?’, Harvard Business Review,
Theory: An Organizational Life Cycle Approach’, Academy of Management Review, July May–June 1996, pp. 86–92; and J. P. Kotter and L.A. Schlesinger, ‘Choosing Strategies
2001, pp. 397–415. for Change’, Harvard Business Review, March–April 1979, pp. 107–9.
22 <http://nicolekersh.com.au/>, accessed 18 September 2017; A. Priestley, ‘Nicole Kersh: 39 See, for example, P. M. Senge, The Fifth Discipline: The Art and Practice of the
The Female Entrepreneur Who Sold up Big – and is Starting all Over Again’, Smart Learning Organisation (Sydney: Random House, 1990); P. S. Barr, J. L. Stimpert and A.
Company, 20 November 2014. S. Huff, ‘Cognitive Change, Strategic Action and Organizational Renewal’, Strategic
23 E. Shannon, ‘Agent of Change’, Time, 4 March 2002, p. 17; B. Kenney, ‘SLA Head Management Journal, Summer Special issue, 1992, pp. 15–36; K. E. Weick and M.
Shaffer Resigns Abruptly: Did “Change Agent” Move Too Fast in Aggressive Boughton, ‘Organizations as Cognitive Maps: Charting Ways to Success and Failure’, in
Restructuring?’, Library Journal, 15 March 2002, pp. 17–19; and T. Mudd, ‘Rescue H. P. Sims, D. A. Gioia and Associates (eds), The Thinking Organization (San Francisco:
Mission’, Industry Week, 1 May 2000, pp. 30–7. Jossey-Bass, 1986), pp. 95–120; E. Laszlo, Introduction to Systems Philosophy (New
24 The idea for these metaphors came from P. Vaill, Managing as a Performing Art: New York: Gordon and Breach, 1972); J. M. Lembo, When Learning Happens (New York:
Ideas for a World of Chaotic Change (San Francisco: Jossey Bass, 1989). Schocken Books, 1972); D. H. Kim, ‘The Link Between Individual and Organizational
25 K. Lewin, Field Theory in Social Science (New York: Harper & Row, 1951). Learning’, Sloan Management Review, October 1993, pp. 37–50; J. Piaget,
26 R. E. Levasseur, ‘People Skills: Change Management Tools – Lewin’s Change Model’, Structuralism (New York: Basic Books, 1971); F. Gavetti and D. Levinthal, ‘Looking
Interfaces, August 2001, pp. 71–4. Forward and Looking Backward: Cognitive and Experiential Search’, Administrative
9780655702412_CH25.indd 703 3/3/20 11:15 AM

Science Quarterly, March 2000, pp. 113–37; J. Brockner and E. T. Higgins, ‘Regulatory pp. 136–8; C. L. Cooper and S. Cartwright, ‘Healthy Mind, Healthy Organization – A
Focus Theory: Implications for the Study of Emotions at Work’, Organizational Behavior Proactive Approach to Occupational Stress’, Human Relations, April 1994, pp. 455–71;
and Human Decision Processes, September 2001, pp. 35–66. C. A. Heaney et al., ‘Industrial Relations, Worksite Stress Reduction and Employee
40 M. A. Hitt, J. S. Black, L. W. Porter and D. Hanson, Management (Sydney: Pearson, Well-Being: A Participatory Action Research Investigation’, Journal of Organizational
2007). Behavior, September 1993, pp. 495–510; C. D. Fisher, ‘Boredom at Work: A Neglected
41 A. Reichers, J. P. Wanous and J. T. Austin, ‘Understanding and Managing Cynicism About Concept’, Human Relations, March 1993, pp. 395–417; and S. E. Jackson, ‘Participation
Organizational Change’, Academy of Management Executive, February 1997, pp. in Decision Making as a Strategy for Reducing Job-Related Strain’, Journal of Applied
48–57; and J. P. Kotter and L.A. Schlesinger, ‘Choosing Strategies for Change’, Harvard Psychology, February 1983, pp. 3–19.
Business Review, March–April 1979, pp. 107–9. 54 C. Mamberto, ‘Companies Aim to Combat Job-Related Stress’, Wall Street Journal, 13
42 J. P. Kotter and L. A. Schlesinger, ‘Choosing Strategies for Change’, Harvard Business August 2007, p. B6.
Review, March–April 1979, pp. 107–9. 55 ‘EAPs with the Most’, Managing Benefits Plans, March 2003, p. 8; and K. Tyler, ‘Helping
43 R. Cacioppe, ‘Using Team–Individual Reward and Recognition Strategies to Drive Employees Cope with Grief’, HR Magazine, September 2003, pp. 55–8.
Organizational Success’, Leadership and Organizational Development Journal, 56 F. Hansen, ‘Employee Assistance Programs (EAPs) Grow and Expand Their Reach’,
November 1999, pp. 322–31. Compensation and Benefits Review, March/April 2000, p. 13.
44 Adapted from ‘What is Work-Related Stress’, UK National Work Stress Network (2010), 57 Based on T. Russell, ‘Evolution – Not Revolution . . . Employee Assistance Programs’,
<www.workstress.net>, accessed 20 April 2010. Human Resources Leader, 19 August 2009; and ‘What is an Employee Assistance
45 Explanation of eustress and distress taken from M. Le Fevre, G. S. Kolt and J. Matheny, Program?’, Employee Assistance Professional Association of Australasia, 2009, <www.
‘Eustress, Distress and Their Interpretation in Primary and Secondary Occupational eapaa.org.au>, accessed 20 April 2010.
Stress Management Interventions: Which Way First?’, Journal of Managerial Psychology, 58 ‘Low EAP Usage Rate is Damaging the Industry’, Human Capital, 8 September 2014.
vol. 21, no. 6 (2006), pp. 547–65. 59 Question of Ethics box based on D. Cole, ‘The Big Chill’, US News & World Report, 6
46 R. S. Schuler, ‘Definition and Conceptualization of Stress in Organizations’, December 2004, pp. EE2–5.
Organizational Behavior and Human Performance, April 1980, p. 191. 60 Based on J. E. Newman and T. A. Beehr, ‘Personal and Organizational Strategies for
47 A. D. LaMontagne, A. Martin, K. P. Page, N. J. Reavley, A. J. Noblet, A. J. Milner, T. Keegel Handling Job Stress’, Personnel Psychology, Spring 1979, pp. 1–38; M. T. Matteson
and P. M. Smith, ‘Workplace Mental Health: Developing an Integrated Intervention and J. M. Ivancevich, ‘Individual Stress Management Interventions: Evaluation of
Approach’, BMC Psychiatry, vol. 14 (2014), pp. 131–53. Techniques’, Journal of Management Psychology, January 1987, pp. 24–30; and
48 A. D. LaMontagne, A. Martin, K. P. Page, N. J. Reavley, A. J. Noblet, A. J. Milner, T. Keegel K. M. Richardson and H. R. Rothstein, ‘Effects of Occupational Stress Management
and P. M. Smith, ‘Workplace Mental Health: Developing an Integrated Intervention Intervention Programs: A Meta-Analysis’, Journal of Occupational Health Psychology,
Approach’, BMC Psychiatry, vol. 14 (2014), pp. 131–53. January 2008, pp. 69–93.
49 See, for example, ‘Stressed Out: Extreme Job Stress: Survivors’ Tales’, Wall Street 61 A. Black, ‘Ian Macleod’s New Shopping List for Coles’, BRW, 13–19 June 2013, pp.
Journal, 17 January 2001, p. B1. 16–20; W. Ma, ‘Woolworths and Coles Have Taken over Australians’ Lives’, <www.
50 See, for example, S. Bates, ‘Expert: Don’t Overlook Employee Burnout’, HR Magazine, news.com.au>, 16 July 2014, accessed 12 December 2014; and E. Greenbalt,
August 2003, p. 14. ‘Wesfarmers Hands Coles Chief Ian McLeod Plum Job’, Sydney Morning Herald, 19
51 A. D. LaMontagne, A. Martin, K. P. Page, N. J. Reavley, A. J. Noblet, A. J. Milner, T. Keegel February 2014; Coles Supermarkets Australia Pty Ltd, ‘Coles Year in Review 2016’,
and P. M. Smith, ‘Workplace Mental Health: Developing an Integrated Intervention <https://www.coles.com.au/about-coles/annual-reports>, accessed 18 September
Approach’, BMC Psychiatry, vol. 14 (2014), pp. 131–53. 2017.
52 A. D. LaMontagne, A. Martin, K. P. Page, N. J. Reavley, A. J. Noblet, A. J. Milner, T. Keegel 62 S. Parnell, ‘Miners, Builders Have the Nation’s Highest Suicide Rates’, The Australian,
and P. M. Smith, ‘Workplace Mental Health: Developing an Integrated Intervention 4 August 2017; Mates in Construction, ‘How MIC Works’, <http://matesinconstruction.
Approach’, BMC Psychiatry, vol. 14 (2014), pp. 131–53. org.au/about/how-mic-works/>, accessed 29 October 2017; J. Longbottom, ‘Suicide
53 H. Benson, ‘Are You Working Too Hard?’, Harvard Business Review, November 2005, pp. Rates for Young Australians Highest in 10 Years, Researchers Call for New Prevention
53–8; B. Cryer, R. McCraty and D. Childre, ‘Pull the Plug on Stress’, Harvard Business Strategies’, ABC News, 30 November 2016; Australian Bureau of Statistics, ‘Intentional
Review, July 2003, pp. 102–7; C. Daniels, ‘The Last Taboo’, Fortune, October 2002, Self Harm: Key Characteristics’, <www.abs.gov.au/>, accessed 29 October 2017.
9780655702412_CH25.indd 704 3/3/20 11:15 AM

9780655702412_CH25.indd 705 3/3/20 11:15 AM

Entrepreneurship module:
Managing entrepreneurial ventures
Entrepreneurial thinking has brought fresh perspectives and new approaches into many types of
organisation, from entrepreneurial ventures to community organisations and large multinational
corporations. In this module, we’ll examine what entrepreneurship is and then examine entrepreneurship
from the perspective of the four managerial functions: planning, organising, leading and controlling.1
EM.1 Explain who entrepreneurs are and why they create entrepreneurial ventures.
Who engages in entrepreneurship? pp. 707–8
Learning EM.2 Describe the planning that entrepreneurs do.
Objectives What planning do entrepreneurs need to do? pp. 708–10
EM.3 Explain how entrepreneurial ventures can be organised.
What issues are involved in organising an entrepreneurial venture? pp. 710–12
EM.4 Discuss the leadership issues entrepreneurs deal with.
What issues do entrepreneurs face in leading an entrepreneurial venture? pp. 712–13
EM.5 Review the control issues entrepreneurs face.
What controlling issues do entrepreneurs face? pp. 714–15
EM.6 Discuss how entrepreneurs can manage personal challenges.
Why is it important to think about managing personal challenges as an entrepreneur?
p. 715
9780655702412_CH25A.indd 706 3/3/20 11:16 AM

Entrepreneurship module 707
Who engages in entrepreneurship? EM. 1

Explain who
Entrepreneurs are people willing to take risks to pursue opportunities that others either fail to recognise entrepreneurs are
or view as problems or threats.2 In a general sense, entrepreneurs innovate by creating something new, and why they create
entrepreneurial ventures.
something different. They search for change, respond to it and exploit it. Innovation is a defining element
of entrepreneurs and entrepreneurship, whether the innovation is a new product or service or a new
business model.
Entrepreneurship is engaging in dynamic, risk-taking, creative, growth-oriented behaviour, usually
in the context of creating a new business.3 Entrepreneurial ventures are organisations that pursue
opportunities, are characterised by innovative practices, and have growth and profitability as their main
goals.4 Because they often start out as small businesses, many people think that entrepreneurial ventures
and small businesses are the same, but they’re not. To be entrepreneurial means that the business is
innovative and seeks new opportunities and growth, regardless of its size.5 The success of innovative
businesses such as Atlassian and BigCommerce has caused many large organisations to focus on becoming
more entrepreneurial and engage in intrapreneurship. Intrapreneurship is the creation of innovative
products and services by developing entrepreneurial cultures within existing organisations.6 By fostering
entrepreneurial thinking and intrapreneurship, organisations can develop new competitive strengths and
help solve social problems.7 For example, social entrepreneurs use entrepreneurial principles to solve
social problems or to create social change, such as by increasing access to education and technology or
by reducing pollution.8
Who’s starting entrepreneurial ventures?

Entrepreneurial ventures are formed by two types of entrepreneurs: opportunity-based entrepreneurs and
necessity-based entrepreneurs. Opportunity-based entrepreneurs are people who form a new venture
in order to pursue an opportunity.9 Necessity-based entrepreneurs create new ventures because they
have few or no other employment options.10 As you would expect, necessity-based entrepreneurship
increases during difficult economic times because people who have been made
redundant create ventures to give themselves a job or use redundancy packages to
fund their new venture.11
An individual’s personality also seems to influence whether they create
an entrepreneurial venture. An extensive body of research has investigated
relationships between entrepreneurialism and personality characteristics such as
drive for achievement, action orientation, internal locus of control, tolerance for
ambiguity, risk taking, independence, creativity and optimism.12 Trying to pinpoint
specific personality traits that characterise entrepreneurs has the same problem as
identifying the trait theories of leadership – that is, being able to identify specific
personality traits that all entrepreneurs share. However, research has shown Social entrepreneur Ronni Kahn is the founder
of OzHarvest, a not-for-profit ‘food rescue’
that entrepreneurs and managers are characterised by different mind-sets, risk organisation that collects donations of
perceptions and attitudes towards innovation, achievement and personal control.13 perishable food from bakeries, caterers, food
Another development in defining entrepreneurial personality characteristics outlets and catered events (such as film shoots
was the proactive personality scale to predict an individual’s likelihood of pursuing or boardroom functions) and re-distributes it
to charities that support needy people. Using
entrepreneurial ventures. The proactive personality is a personality trait her entrepreneurial skills, Ronni convinced five
describing those individuals who are more prone to take actions to influence their Australian states to change the law to allow
environment – that is, they’re more proactive. Obviously, an entrepreneur is likely food rescue operations, which is why every
month around Australia, OzHarvest is able to
to exhibit proactivity as they search for opportunities and act to take advantage of
deliver over 440,000 meals (about 147 tonnes
those opportunities. Various items on the proactive personality scale were found to of food) to people in need.
be good indicators of a person’s likelihood of becoming an entrepreneur, including Brendan Esposito/AAP
gender, education, having an entrepreneurial parent and possessing a proactive
9780655702412_CH25A.indd 707 3/3/20 11:16 AM

personality. In addition, studies have shown that entrepreneurs have greater risk propensity than do
managers. However, this propensity is moderated by the entrepreneur’s primary goal. Risk propensity is
greater for entrepreneurs whose primary goal is growth versus those whose focus is on producing family
income.
What do entrepreneurs do?

Describing what entrepreneurs do isn’t an easy or simple task! No two entrepreneurs’ work activities are
exactly alike. In a general sense, entrepreneurs create something new, something different. They search
for change, respond to it and exploit it.
Initially, an entrepreneur is engaged in assessing the potential for the entrepreneurial venture and then
dealing with startup issues. In exploring the entrepreneurial context, entrepreneurs gather information,
identify potential opportunities and pinpoint possible competitive advantage(s). Then, armed with this
information, an entrepreneur researches the venture’s feasibility – uncovering business ideas, looking at
competitors and exploring financing options.
After looking at the potential of the proposed venture and assessing the likelihood of pursuing
it successfully, an entrepreneur proceeds to plan the venture. This process includes such activities as
developing a viable organisational mission, exploring organisational culture issues and creating a well-
thought-out business plan. Once these planning issues have been resolved, the entrepreneur must look
at organising the venture, which involves choosing a legal form of business organisation, addressing
other legal issues such as patent or copyright searches, and coming up with an appropriate organisational
design for structuring how work is going to be done.
Only after these startup activities have been completed is the entrepreneur ready to actually launch
the venture. A launch involves setting goals and strategies, and establishing the technology-operations
methods, marketing plans, information systems, financial-accounting systems and cash flow management
systems.
Once the entrepreneurial venture is up and running, the entrepreneur’s attention switches to
managing it. What’s involved with actually managing the entrepreneurial venture? An important activity
is managing the various processes that are part of every business: making decisions, establishing action
plans, analysing external and internal environments, measuring and evaluating performance and making
needed changes. Also, the entrepreneur must perform activities associated with managing people,
including selecting and hiring, appraising and training, motivating, managing conflict, delegating tasks
and being an effective leader. Finally, the entrepreneur must manage the venture’s growth, including such
activities as developing and designing growth strategies, dealing with crises, exploring various avenues for
financing growth, placing a value on the venture and perhaps even eventually exiting the venture.
What planning do entrepreneurs

need to do?
EM. 2
Describe the planning Planning is important to entrepreneurial ventures. Once a venture’s feasibility has been thoroughly
that entrepreneurs do. researched, an entrepreneur then must look at planning the venture. The most important thing that
an entrepreneur does in planning the venture is developing a business plan – a written document that
summarises a business opportunity and defines and articulates how the identified opportunity is to be
seized and exploited. A written business plan can range from basic to thorough. The most basic type of
business plan would simply include an executive summary, sort of a mini-business plan that’s no longer
than two pages. A synopsis-type plan is a little more involved. It’s been described as an ‘executive summary
on steroids’. In addition to the executive summary, it includes a business proposal that explains why the
idea is relevant to potential investors. A summary business plan includes an executive summary and a page
9780655702412_CH25A.indd 708 3/3/20 11:16 AM

Table EM.1 What I wish I’d known before . . . 5 tips from successful
entrepreneurs14
1 Be prepared for slow times. Work out when your peak times and quiet times are, and plan accordingly.
2 Invest in your branding. Make sure your logo, business card, website and social media profiles are generating great-quality
perceptions of you and your business.
3 Strategically market your business. Be helpful and useful to potential clients.
4 Know how to sell yourself in two minutes. Be able to clearly, simply and succinctly explain what you and your business can do.
5 Don’t be too hard on yourself! Make sure you have downtime and space to recharge, deal with doubts, and clear your head.
or so of explanation of each of the key components of a business plan. A full business plan is the traditional
business plan, which we describe fully next. Finally, an operational business plan is the most detailed (50
or more pages) that is used by ventures already operating with an existing strategy. It’s often used to ‘plan
the business’ but also can be used to raise additional money or to attract potential acquirers. It’s important
for entrepreneurs to know which type of business plan they need for their purposes. And as you can see
in Table EM.1, it’s important for entrepreneurs to plan not just how their business will operate, but also
how they will deal with variations in business demand, ‘selling’ their business and their ideas to others,
and the demands of running their own business.
What’s in a full business plan?

For many would-be entrepreneurs, developing and writing a business plan seems like a daunting task.
However, a good business plan is valuable. It pulls together all the elements of the entrepreneur’s vision
into a single coherent document. The business plan requires careful planning and creative thinking. But
if done well, it can be a convincing document that serves many functions. It serves as a blueprint and road
map for operating the business. The business plan is a ‘living’ document, guiding organisational decisions
and actions throughout the life of the business, not just in the startup stage.
If an entrepreneur has completed a feasibility study, much of the information included in it becomes
the basis for the business plan. A good business plan covers six main areas: executive summary, analysis
of opportunity, analysis of the context, description of the business, financial data and projections, and
supporting documentation.
• Executive summary. The executive summary summarises the key points that the entrepreneur
wants to make about the proposed entrepreneurial venture. These might include a brief
mission statement; primary goals; brief history of the entrepreneurial venture, maybe in the
form of a timeline; key people involved in the venture; nature of the business; concise product
or service descriptions; brief explanations of market niche, competitors and competitive
advantage; proposed strategies; and selected key financial information.
• Analysis of opportunity. In this section of the business plan, an entrepreneur presents the details
of the perceived opportunity, which essentially includes: (1) sizing up the market by describing
the demographics of the target market; (2) describing and evaluating industry trends; and (3)
identifying and evaluating competitors.
• Analysis of the context. Whereas the opportunity analysis focuses on the opportunity in a
specific industry and market, the context analysis takes a much broader perspective. Here, the
entrepreneur describes the broad external changes and trends taking place in the economic,
political–legal, technological and global environments.
• Description of the business. In this section, an entrepreneur describes how the entrepreneurial
venture is going to be organised, launched and managed. It includes a thorough description of
9780655702412_CH25A.indd 709 3/3/20 11:16 AM

the mission statement; a description of the desired organisational culture; marketing plans,
including overall marketing strategy, pricing, sales tactics, service-warranty policies, and
advertising and promotion tactics; product development plans such as an explanation of
development status, tasks, difficulties and risks, and anticipated costs; operational plans,
including a description of proposed geographic location, facilities and needed improvements,
equipment, and workflow; human resource plans, including a description of key management
persons, composition of board of directors including their background experience and skills,
current and future staffing needs, compensation and benefits, and training needs; and an
overall schedule and timetable of events.
• Financial data and projections. Every effective business plan contains financial data and
projections. Although the calculations and interpretation may be difficult, they are absolutely
critical. No business plan is complete without financial information. Financial plans should
cover at least three years and contain projected income statements, pro forma cash flow
analysis (monthly for the first year and quarterly for the next two), pro forma balance sheets,
breakeven analysis and cost controls. If major equipment or other capital purchases are
expected, the items, costs and available collateral should be listed. All financial projections and
analyses should include explanatory notes, especially where the data seem contradictory
or questionable.
• Supporting documentation. This is an important component of an effective business plan. The
entrepreneur should back up their descriptions with charts, graphs, tables, photographs or
other visual tools. In addition, it might be important to include information (personal and
work-related) about the key participants in the entrepreneurial venture.
Just as the idea for an entrepreneurial venture takes time to germinate, so does the writing of a good
business plan. It ’s important for an entrepreneur to put serious thought and consideration into the plan.
It’s not an easy thing to do. However, the resulting document should be valuable in current and future
planning efforts.
What issues are involved in organising

an entrepreneurial venture?
EM. 3 Once the startup and planning issues for the entrepreneurial venture have been addressed, the
Explain how entrepreneur is ready to begin organising the venture. The main organising issues an entrepreneur must
entrepreneurial address include the legal forms of organisation, organisational design and structure, and human resource
ventures can be
management.
organised.
What are the legal forms of organisation for

entrepreneurial ventures?
The first organising decision that an entrepreneur must make is a critical one. It’s the form of legal
ownership for the venture. The two primary factors affecting this decision are taxes and legal liability.
An entrepreneur wants to minimise the impact of both of these factors. The right choice can protect the
entrepreneur from legal liability as well as save tax dollars, in both the short run and the long run.
The three basic ways to organise an entrepreneurial venture are sole proprietorship, partnership
and company. A sole proprietorship is a profit-oriented business usually operated by a single person.
Such businesses are easy to start, run and terminate, but because they have unlimited liability the owner’s
personal assets can be used to settle business debts. A partnership is a business operated by two or more
people who agree to each contribute resources and split profits. In a general partnership all partners
9780655702412_CH25A.indd 710 3/3/20 11:16 AM

contribute to the day-to-day running of the business and are liable for its debts. In a limited partnership,
‘limited’ partners don’t participate in operational management and their liability is limited to the amount
of their investment in the business. A company is legally distinct from its owners. This means that if the
company is wound up, the owner’s personal assets can’t be used to settle company debts (unless the owner
continued to operate the business knowing it was insolvent).
The decision regarding the legal form of organisation is important because it has significant tax and
liability consequences. Although the legal form of organisation can be changed, it’s not easy to do. An
entrepreneur needs to think carefully about what’s important, especially in the areas of flexibility, taxes
and amount of personal liability in choosing the best form of organisation.
What type of organisational structure should

entrepreneurial ventures use?
The choice of an appropriate organisational structure is also an important decision when organising
an entrepreneurial venture. At some point, successful entrepreneurs find that they can’t do everything.
They need people. The entrepreneur must then decide on the most appropriate structural arrangement
for effectively and efficiently carrying out the organisation’s activities. Without a suitable type of
organisational structure, an entrepreneurial venture may soon find itself in a chaotic situation.
In many small firms, the organisational structure tends to evolve with very little intentional and
deliberate planning by the entrepreneur. For the most part, the structure may be very simple – one person
does whatever is needed. As an entrepreneurial venture grows and the entrepreneur finds it increasingly
difficult to go it alone, employees are brought on board to perform certain functions or duties that the
entrepreneur can’t handle. As the company continues to grow, these individuals tend to perform those
same functions. Soon, each functional area may require managers and employees.
As the venture evolves to a more deliberate structure, an entrepreneur faces a whole new set of
challenges. All of a sudden, they must share decision-making and operating responsibilities, which are
typically the most difficult things for an entrepreneur to do – letting go and allowing someone else to
make decisions. After all, they reason, how can anyone know this business as well as I do? Also, what might
have been a fairly informal, loose and flexible atmosphere that worked well when the organisation was
small may no longer be effective. Many entrepreneurs are greatly concerned about keeping that ‘small
company’ atmosphere alive even as the venture grows and evolves into a more structured arrangement.
But having a structured organisation doesn’t necessarily mean giving up flexibility, adaptability and
freedom. In fact, the structural design may be as fluid as the entrepreneur feels comfortable with and yet
still have the rigidity it needs to operate efficiently.
Organisational design decisions in entrepreneurial ventures also revolve around the six elements
of organisational structure discussed in Chapter 18: work specialisation, departmentalisation, chain
of command, span of control, amount of centralisation–decentralisation and amount of formalisation.
Decisions about these six elements will determine whether an entrepreneur designs a more mechanistic
or organic organisational structure. When would each be preferable? A mechanistic structure would
be preferable when cost efficiencies are critical to the venture’s competitive advantage; when more
control over employees’ work activities is important; if the venture produces standardised products in a
routine fashion; and when the external environment is relatively stable and certain. An organic structure
would be most appropriate when innovation is critical to the organisation’s competitive advantage; for
smaller organisations where rigid approaches to dividing and coordinating work aren’t necessary; if the
organisation produces customised products in a flexible setting; and where the external environment is
dynamic, complex and uncertain.
9780655702412_CH25A.indd 711 3/3/20 11:16 AM

What human resource management (HRM) issues

do entrepreneurs face?
As an entrepreneurial venture grows, additional employees must be hired to perform the increased
workload. As employees are brought on board, two HRM issues of particular importance are employee
recruitment and employee retention.
An entrepreneur wants to ensure that the venture has the people to do the required work. Recruiting
new employees is one of the biggest challenges that entrepreneurs face. In fact, the ability of small firms
to successfully recruit appropriate employees is consistently rated as one of the most important factors
influencing organisational success.
Entrepreneurs, particularly, look for high-potential people who can perform multiple roles during
various stages of venture growth. They look for individuals who ‘buy into’ the venture’s entrepreneurial
culture – individuals who have a passion for the business. Unlike their corporate counterparts who
often focus on filling a job by matching a person to the job requirements, entrepreneurs look to fill in
critical skills gaps. They’re looking for people who are exceptionally capable and self-motivated, flexible,
multiskilled and who can help grow the entrepreneurial venture. While corporate managers tend to focus
on using traditional HRM practices and techniques, entrepreneurs are more concerned with matching
characteristics of the person to the values and culture of the organisation; that is, they focus on matching
the person to the organisation.
Getting competent and qualified people into the venture is just the first step in effectively managing
the human resources. An entrepreneur wants to keep the people they have hired and trained. A unique and
important employee retention issue entrepreneurs must deal with is compensation. Whereas traditional
organisations are more likely to view compensation from the perspective of monetary rewards (base
pay, benefits and incentives), smaller entrepreneurial firms are more likely to view compensation from
a total rewards perspective. For these firms, compensation encompasses psychological rewards, learning
opportunities and recognition, in addition to monetary rewards (base pay and incentives).
What issues do entrepreneurs face in

leading an entrepreneurial venture?
EM. 4 Leading is an important function of entrepreneurs. As an entrepreneurial venture grows and people are
Discuss the leadership
issues entrepreneurs brought on board, an entrepreneur takes on a new role – that of a leader. In this section, we want to look
deal with. at what’s involved with that. First, we’re going to look at how entrepreneurs can motivate their staff. Then
we’re going to discuss the important role entrepreneurs play in leading the venture and employee teams.
How can entrepreneurs motivate employees?

Having motivated employees is an important goal for any entrepreneur, and employee empowerment is
an important motivational tool entrepreneurs can use.
Although it’s not easy for entrepreneurs to do, employee empowerment – giving employees the
power to make decisions and take actions on their own – is an important motivational approach because
successful entrepreneurial ventures must be quick and nimble, ready to pursue opportunities and go off
in new directions. Empowered employees can provide that flexibility and speed. When employees are
empowered, they often display stronger work motivation, better work quality, higher job satisfaction and
lower turnover.
Empowerment is a philosophical concept that entrepreneurs have to ‘buy into’. It doesn’t come easily.
In fact, it’s hard for many entrepreneurs to do. Their life is tied up in the business. They’ve built it
from the ground up. But continuing to grow the entrepreneurial venture is eventually going to require
9780655702412_CH25A.indd 712 3/3/20 11:16 AM

handing over more responsibilities to employees. How can entrepreneurs empower

employees? For many entrepreneurs, it’s a gradual process.
Entrepreneurs can begin by using participative decision making in which
employees provide input into decisions. Although getting employees to participate
in decisions isn’t quite taking the full plunge into employee empowerment, at least
it’s a way to begin tapping into the collective array of employees’ talents, skills,
knowledge and abilities.
Another way to empower employees is through delegation – the process of
assigning certain decisions or specific job duties to employees. By delegating
decisions and duties, the entrepreneur is turning over the responsibility for To empower his employees, Tristan White,
founder of The Physio Co, set up ten-year and
carrying them out.
three-year business goals so staff had a vision
When an entrepreneur is finally comfortable with the idea of employee to motivate and inspire them. He also adjusted
empowerment, fully empowering employees means redesigning their jobs so they his own role ‘to make the complex as simple
have discretion over the way they do their work. It’s allowing employees to do their as possible’ so his team can stay focused on
achieving the company’s core purpose.
work effectively and efficiently by using their creativity, imagination, knowledge
Gary Medlicott/Fairfax
and skills.
If an entrepreneur implements employee empowerment properly – that is, with
complete and total commitment to the program and with appropriate employee
training – results can be impressive for the entrepreneurial venture and for the empowered employees.
The business can enjoy significant productivity gains, quality improvements, more satisfied customers,
increased employee motivation and improved morale. Employees can enjoy the opportunities to do a
greater variety of work that is more interesting and challenging.
How can entrepreneurs be leaders?

The entrepreneur has certain leadership responsibilities in leading the venture and in leading employee
work teams. The way an entrepreneur leads the venture should draw the best out of other individuals,
even given the unpredictability of the situation. One way an entrepreneur does this is through the vision
they create for the organisation. In fact, the driving force through the early stages of the entrepreneurial
venture is often the visionary leadership of the entrepreneur. The entrepreneur’s ability to articulate a
coherent, inspiring and attractive vision of the future is a key test of their leadership. But if an entrepreneur
can do this, the results can be worthwhile. A study contrasting visionary and non-visionary companies
showed that visionary companies outperformed the non-visionary ones by six times on standard financial
criteria, and their stocks outperformed the general market by 15 times.
As we know from Chapter 23, many organisations – entrepreneurial and otherwise – are using
employee work teams to perform organisational tasks, create new ideas and resolve problems. The three
most common types of employee work teams in entrepreneurial ventures are empowered teams (teams
that have the authority to plan and implement process improvements), self-directed teams (teams that
are nearly autonomous and responsible for many managerial activities) and cross-functional teams (work
teams composed of individuals from various specialties who work together on various tasks).
Developing and using teams is necessary because technology and market demands are forcing
entrepreneurial ventures to make better products more quickly and more cheaply. Tapping into the
collective wisdom of a venture’s employees and empowering them to make decisions just may be one of the
best ways to adapt to change. In addition, a team culture can improve the overall workplace environment
and morale. For team efforts to work, however, entrepreneurs must shift from the traditional command-
and-control style to a coach-and-collaboration style.
9780655702412_CH25A.indd 713 3/3/20 11:16 AM

What controlling issues do

EM. 5 entrepreneurs face?
Review the control Entrepreneurs must look at controlling their venture’s operations in order to survive and prosper in both
issues entrepreneurs
face. the short run and long run. The unique control issues that entrepreneurs face include managing growth,
managing downturns, exiting the venture, and managing personal life choices and challenges.
How is growth managed?

Growth is a natural and desirable outcome for entrepreneurial ventures. Growth is what distinguishes
an entrepreneurial venture. Entrepreneurial ventures pursue growth. Growing slowly can be successful,
but so can rapid growth.
Growing successfully doesn’t occur randomly or by luck. Successfully pursuing growth typically
requires an entrepreneur to manage all the challenges associated with growing, which entails planning,
organising and controlling for growth.
How are downturns managed?

Although organisational growth is a desirable and important goal for entrepreneurial ventures, what
happens when things don’t go as planned – when the growth strategies don’t result in the intended
outcomes and, in fact, result in a decline in performance? There are challenges, as well, in managing the
downturns.
Nobody likes to fail, especially entrepreneurs. However, when an entrepreneurial venture faces times
of trouble, what can be done? How can downturns be managed successfully? The first step is recognising
that a crisis is brewing. An entrepreneur should be alert to the warning signs of a business in trouble.
Some signals of potential performance decline include inadequate or negative cash flow, excess number
of employees, unnecessary and cumbersome administrative procedures, fear of conflict and taking risks,
tolerance of work incompetence, lack of a clear mission or goals and ineffective or poor communication
within the organisation.
Although an entrepreneur hopes never to have to deal with organisational downturns, declines or
crises, these situations do occur. After all, nobody likes to think about things going bad or taking a turn
for the worse. But that’s exactly what the entrepreneur should do – think about it before it happens.
(Remember feedforward control from Chapter 24.) It’s important to have an up-to-date plan for covering
crises. It’s like mapping exit routes from your home in case of a fire. An entrepreneur wants to be prepared
before an emergency hits. This plan should focus on providing specific details for controlling the most
fundamental and critical aspects of running the venture – cash flow, accounts receivable, costs and debt.
Beyond having a plan for controlling the venture’s critical inflows and outflows, other actions would
involve identifying specific strategies for cutting costs and restructuring the venture.
What’s involved with exiting the venture?

Getting out of an entrepreneurial venture may seem to be a strange thing for entrepreneurs to do.
However, the entrepreneur may come to a point at which they decide it’s time to move on. That decision
may be based on the fact that the entrepreneur hopes to capitalise financially on the investment in the
venture – called harvesting – or that the entrepreneur is facing serious organisational performance
problems and wants to get out, or even on the entrepreneur’s desire to focus on other pursuits (personal
or business). The issues involved with exiting the venture include choosing a proper business valuation
method and knowing what’s involved in the process of selling a business.
Although the hardest part of preparing to exit a venture may involve valuing it, other factors are
also important. These include being prepared, deciding who will sell the business, considering the tax
9780655702412_CH25A.indd 714 3/3/20 11:16 AM

implications, screening potential buyers and deciding whether to tell employees before or after the sale.
The process of exiting the entrepreneurial venture should be approached as carefully as the process of
launching it. If the entrepreneur is selling the venture on a positive note, they want to realise the value
built up in the business. If the venture is being exited because of declining performance, the entrepreneur
wants to maximise the potential return.
Why is it important to think about EM. 6

managing personal challenges as an Discuss how
entrepreneurs can
entrepreneur? manage personal
challenges.
Being an entrepreneur is extremely exciting and fulfilling, but also extremely demanding. It involves
long hours, difficult demands and high stress. Yet, many rewards can come with being an entrepreneur
as well. In this section, we want to look at how entrepreneurs can make it work – that is, how can they be
successful and effectively balance the demands of their work and personal lives?
Entrepreneurs are a special group. They’re focused, persistent, hardworking and intelligent. Because
they put so much of themselves into launching and growing their entrepreneurial ventures, many may
neglect their personal lives. Entrepreneurs often have to make sacrifices to pursue their entrepreneurial
dreams. However, they can make it work. They can balance their work and personal lives. But how?
One of the most important things an entrepreneur can do is become a good time manager. Prioritise what
needs to be done. Use a planner (daily, weekly, monthly) to help schedule priorities. Some entrepreneurs
don’t like taking the time to plan or prioritise, or they think it’s a ridiculous waste of time. Yet, identifying
the important duties and distinguishing them from those that aren’t so important actually makes an
entrepreneur more efficient and effective. In addition, part of being a good time manager is delegating to
trusted employees those decisions and actions the entrepreneur doesn’t have to be personally involved in.
Although it may be hard to let go of some of the things they’ve always done, entrepreneurs who delegate
effectively will see their personal productivity levels rise.
Another suggestion for finding that balance is to seek professional advice in those areas of business
where it’s needed. Although entrepreneurs may be reluctant to spend scarce cash, the time, energy and
potential problems saved in the long run are well worth the investment. Competent professional advisers
can provide entrepreneurs with information to make more intelligent decisions. Also, it’s important to
deal with conflicts as they arise – both workplace and family conflicts. If an entrepreneur doesn’t deal
with conflicts, negative feelings are likely to crop up and lead to communication breakdowns. When
communication falls apart, vital information may get lost and people (employees and family members)
may start to assume the worst. It can turn into a nightmare situation that feeds on itself. The best strategy
is to deal with conflicts as they come up. Talk, discuss, argue (if you must), but an entrepreneur shouldn’t
avoid the conflict or pretend it doesn’t exist.
Another suggestion for achieving that balance between work and personal life is to develop a network
of trusted friends and peers. Having a group of people to talk with is a good way for an entrepreneur to
think through problems and issues. The support and encouragement offered by these people can be an
invaluable source of strength for an entrepreneur.
Finally, recognise when your stress levels are too high. Entrepreneurs are achievers. They like to
make things happen. They thrive on working hard. Yet, too much stress can lead to significant physical
and emotional problems (as we discussed in Chapter 25). Entrepreneurs have to learn when stress is
overwhelming them and to do something about it. After all, what’s the point of growing and building a
thriving entrepreneurial venture if you’re not around to enjoy it?
9780655702412_CH25A.indd 715 3/3/20 11:16 AM

business plan entrepreneurs intrapreneurship partnership

A written document that People willing to take risks to Developing entrepreneurial A business operated by two or
summarises a business pursue opportunities that cultures within existing more people who agree to
opportunity, and defines and others either fail to recognise organisations. each contribute resources and
articulates how the identified or view as problems or split profits.
opportunity is to be seized and threats. necessity-based
exploited. entrepreneurs proactive personality
entrepreneurship Entrepreneurs who create new A personality trait describing
company Engaging in dynamic, ventures because they have those individuals who are
A business entity that is risk-taking, creative, growth- few or no other employment more prone to take actions to
legally distinct from its oriented behaviour. options. influence their environment.
owners.
harvesting opportunity-based sole proprietorship
entrepreneurial ventures Exiting a venture when an entrepreneurs A profit-oriented business
Organisations that pursue entrepreneur hopes to Entrepreneurs who form a new usually operated by a single
opportunities, are capitalise financially on the venture in order to pursue an person. Because the business
characterised by innovative investment in the venture. opportunity. has unlimited liability, the
practices, and have growth owner’s personal assets can
and profitability as their main be used to settle business
goals. debts.
9780655702412_CH25A.indd 716 3/3/20 11:16 AM

References
1 Entrepreneurship Module based on ‘Russell Simmons’ New Venture Digital Marketing 2 J. Campling, D. Poole, R. Wiesner and J. R. Schermerhorn, Management, 2nd Asia
Launches “Digital-Solutions” Shop Called Narrative’, adage.com, 10 April 2013; T. Pacific edn (Brisbane: John Wiley & Sons, 2006), p. 36.
Padgett, ‘Russell Simmons: Getting Rich Is So Simple’, CNNMoney.com, 29 April 2011; 3 J. R. Schermerhorn, Exploring Management, 2nd edn (New York: John Wiley & Sons,
R. Schmidt and P. O’Connor, ‘Def Jam’s Founder Out-Lobbies Big Banks’, Bloomberg 2010), p. 400.
BusinessWeek, 28 June 2010, pp. 21–2; R. A. Smith, ‘From Phat to Skinny’, Wall 4 J. W. Carland, F. Hoy, W. R. Boulton and J. C. Carland, ‘Differentiating Entrepreneurs
Street Journal, 1 May 2010, p. W7; J. Dean, ‘The Endless Flow of Russell Simmons’, from Small Business Owners: A Conceptualisation’, Academy of Management Review,
Entrepreneur, September 2009, pp. 24–8; S. Page, ‘Top 25 Influential People’, USA vol. 9, no. 2 (1984), pp. 354–9.
Today, 4 September 2007, p. A10; S. Berfield, ‘Hip-Hop Nation’, BusinessWeek, 13 5 J. W. Carland, F. Hoy, W. R. Boulton and J. C. Carland, ‘Differentiating Entrepreneurs
June 2005, p. 12; R. Kurtz, ‘Russell Simmons, Rush Communications’, Inc., April from Small Business Owners: A Conceptualisation’, Academy of Management Review,
2004, p. 137; J. Reingold, ‘Rush Hour’, Fast Company, November 2003, pp. 68–80; vol. 9, no. 2 (1984), pp. 354–9.
S. Berfield, ‘The CEO of Hip Hop’, BusinessWeek, 27 October 2003, pp. 90–8; J. L. 6 G. Rodrigues, ‘Intrapreneurship in a Fast Growing Economy: A Study of the Emirates of
Roberts, ‘Beyond Definition’, Newsweek, 28 July 2003, pp. 40–3; C. Dugas, ‘Hip-Hop Dubai’, The Business Review, Summer 2010, pp. 144–51.
Legend Far Surpassed Financial Goals’, USA Today, 15 May 2003, p. 6B; ‘Jobless 7 C. Molina and J. Callahan, ‘Fostering Organizational Performance: The Role of Learning
Entrepreneurship Tarnishes Steady Rate of US Startup Activity, Kauffman Study Shows’, and Intrapreneurship’, Journal of European Industrial Training, vol. 33, no. 5 (2009), pp.
<www.kauffman.org>, 7 March 2011; ‘Frequently Asked Questions’, US Small 388–400.
Business Administration, September 2008; D. E. Gumpert, ‘The Right Business Plan 8 See J. Mair, J. Robinson and K. Hockerts, Social Entrepreneurship (Basingstoke, UK:
for the Job’, BusinessWeek Online, 7 January 2008; W. H. Stewart, ‘Risk Propensity Palgrave, 2006); and L. C. Prierto, J. K. Osiri and J. Gilmore, Jr, ‘Developing Social
Differences between Entrepreneurs and Managers: A Meta-Analytic Review’, Journal of Entrepreneurs for Developing Pan-African Nations’, Business Renaissance Quarterly,
Applied Psychology, February 2001, pp. 145–53; I. O. Williamson, ‘Employer Legitimacy Summer 2009, pp. 41–57.
and Recruitment Success in Small Businesses’, Entrepreneurship Theory and Practice, 9 J. Block and P. Sandner, ‘Necessity and Opportunity Entrepreneurs and Their Duration in
Fall 2000, pp. 27–42; R. L. Heneman, J. W. Tansky and S. M. Camp, ‘Human Resource Self-employment: Evidence from German Micro Data’, Journal of Industrial Competitive
Management Practices in Small and Medium-Sized Enterprises: Unanswered Questions Trade, vol. 9 (2009), pp. 117–37.
and Future Research Perspectives’, Entrepreneurship Theory and Practice, Fall 2000, pp. 10 J. R. Schermerhorn, Exploring Management, 2nd edn (New York: John Wiley & Sons,
11–26; T. L. Hatten, Small Business: Entrepreneurship and Beyond (Upper Saddle River, 2010).
NJ: Prentice Hall, 1997), p. 5; L. W. Busenitz, ‘Research on Entrepreneurial Alertness’, 11 M. Meece, ‘On to Plan B: Starting a Business’, New York Times Online, 23 August 2009.
Journal of Small Business Management, October 1996, pp. 35–44; J. M. Crant, ‘The 12 C. Liang and P. Dunn, ‘Entrepreneurial Characteristics, Optimism, Pessimism and
Proactive Personality Scale as Predictor of Entrepreneurial Intentions’, Journal of Realism – Correlation or Collision?’, Journal of Business and Entrepreneurship, March
Small Business Management, July 1996, pp. 42–9; J. C. Collins and J. I. Porras, Built 2010, pp. 1–21.
to Last: Successful Habits of Visionary Companies (New York: HarperBusiness, 1994); 13 A. Malach-Pines, A. Sadeh, D. Dvir and O. Yafe-Yanai, ‘Entrepreneurs and Managers:
M. Depree, Leadership Jazz (New York: Currency Doubleday, 1992), pp. 8–9; P. B. Similar Yet Different’, The International Journal of Organizational Analysis, vol. 10, no. 2
Robinson, D. V. Simpson, J. C. Huefner and H. K. Hunt, ‘An Attitude Approach to the (2002), pp. 172–90.
Prediction of Entrepreneurship’, Entrepreneurship Theory and Practice, Summer 1991, 14 J. Carrigan, ‘What I Wish I Knew . . . Three Entrepreneurs Tell All’, Business Victoria,
pp. 13–31; P. F. Drucker, Innovation and Entrepreneurship: Practice and Principles (New <www.business.vic.gov.au/case-studies/>, 18 January 2016, accessed 21 October
York: Harper & Row, 1985); and J. W. Carland, F. Hoy, W. R. Boulton and J. C. Carland, 2017.
‘Differentiating Entrepreneurs from Small Business Owners: A Conceptualization’,
Academy of Management Review, vol. 9, no. 2 (1984), pp. 354–9.
9780655702412_CH25A.indd 717 3/3/20 11:16 AM

9780655702412_CH25A.indd 718 3/3/20 11:16 AM

Appendix
1
Case
studies
Marketing is much more than the sum of its parts. The case studies in this appendix Realestate.com.au explores the journey of two Australian entrepreneurs who
show how the various marketing activities come together to shape businesses’ grew their online property business from its start in their garage to a publicly listed
direction and performance. A brief overview of each case study is presented here, Australian company with an annual turnover of $500 million, in less than 20 years.
along with a table showing how these case studies are linked to and integrated The entrepreneurs leveraged an understanding of changes in the technological
with the chapters in the first half of the book. environment, together with insights into how to create value for their real-estate
Patagonia designs and sells high-quality outdoor clothing, with stores in business customers – the website does not sell property but, instead, provides a space
Queensland, New South Wales and Victoria as well as throughout the United for their customers to market that property. Launching this business when the internet
States. The case study shows how Patagonia is able to create and capture value was relatively new, Google was just starting and YouTube did not exist, presented a
in the incredibly competitive outdoor-clothing market by understanding its target massive challenge. The case explores the challenges of new product adoption, and
market and their needs. The case takes you on a journey through the company’s highlights how future success will come from continued engagement with property
mission and marketing strategy, segmentation and differentiation of this successful buyers.
business. The company has strong corporate social-responsibility goals and the The final case takes you to Tasmania and an eco-walking business.
case illustrates how having such goals can be a differentiating and value-creating The business offers unique holiday experiences for their customers in Tasmania’s
marketing feature – and not just something good to do. World Heritage-listed national park. The case shows the importance of
The case study ‘Supermarket Wars’ takes you into the challenging marketing understanding the target market, positioning and socially responsible product
battleground of fast-moving consumer goods. The case explores how Woolworths decisions to create and capture customer value. Insights about the customer allow
and Coles have responded to changes in the marketing environment, with not the the company owners to develop a digital and direct integrated communication
least of these changes being increased competition – both from new entrants, strategy that reaches out to customers and which enables the business to enrich
such as ALDI, and from older competitors, such as IGA (Independent Grocers of the customer experience from before they arrive for their holiday to well after
Australia). The case highlights the importance of marketing information to shape they return home.
company responses as well as the responses themselves, from product assortment, The following table outlines how these four case studies link with the content
to pricing, sales promotion and distribution. of the chapters.
Supermarket
Realestate.
Tasmanian
Patagonia
Company
Walking
Chapter com.au
wars
number Chapter title

1 Marketing: Creating and capturing customer value ✓
2 Sustainable marketing: Social responsibility, ethics and legal compliance ✓ ✓
3 The marketplace and customers: Analysing the environment ✓ ✓
4 Buyer behaviour: Understanding consumer and business buyers ✓
5 Marketing analytics: Gaining customer insights ✓
6 Customer-driven marketing strategy: Creating value for target customers ✓ ✓ ✓
7 Products, services and brands: Offering customer value ✓ ✓ ✓
8 New products: Developing and managing innovation ✓ ✓
9 Pricing: Capturing customer value ✓ ✓
10 Placement: Customer value fulfilment ✓
11 Communicating customer value: Advertising and public relations ✓ ✓
12 Salespeople and sales promotion: Creating value in relationships ✓
13 Direct and digital marketing: Interactivity and fulfilment ✓ ✓
9780655702412_APP1.indd 719 3/3/20 11:17 AM

720 Appendix 1 Case studies
Patagonia: Hiking a value trail of and you might be asking yourself, ‘What makes Patagonia different from other
outdoor-adventure apparel and equipment companies?’ In fact, Patagonia prides
marketing responsibility itself on being anything but a traditional company. Accordingly, this case study
discusses how Patagonia uses its non-traditional marketing approach to craft
David Fleischman, PhD
authentic value-creation opportunities. It also examines how Patagonia builds
University of the Sunshine Coast, Australia
relationships with consumers, and communicates and integrates its corporate
social-responsibility initiatives with its products, to create long-term value for all
of its stakeholders.
Marketing approach and value

creation
The marketing success of any company’s products centres on creating value with
consumers. While many companies overlook the notion that consumption and,
indeed, value creation comprise a process, Patagonia excels at creating value
with consumers across the entire consumption experience. From the materials,
manufacturing processes, transport and logistics, promotional communication,
purchase and disposal of its products, Patagonia provides opportunities for
consumers to be involved in the value-creation process.
Patagonia’s application of value creation in the consumption process stems
from a genuine understanding of its target consumers, and crafting a value
proposition that appeals to their needs and wants. Patagonia understands that
much of its consumer base has a desire to know how its products are sourced
and produced, along with maintaining a premium quality standard. For example,
before a consumer purchases a Patagonia product, he or she can explore what
materials the product is made from, how it is made, how it is transported
and ultimately made available for him or her to purchase. Patagonia provides
consumers with opportunities to gain product knowledge and interact via its
website and communication campaigns. Providing this information offers a
pathway to create value via educating and sharing knowledge with consumers in
the pre-consumption phase.
Once a consumer purchases a product, Patagonia’s main goal is to deliver
a premium quality product for the consumer to experience. Maintaining a level
of premium quality allows Patagonia to achieve a high standard of value while
consumers use (value-in-use) its products. The craftsmanship of its products is
guaranteed. Patagonia believes in the quality of its products so much that it offers
Courtesy of Patagonia
consumers the option (and actually prefers they take up that option) to fix products
that have simply worn out, rather than having them buy new products. Through
its ‘Repair is Radical Act’ and ‘Worn Wear’ initiatives, Patagonia builds more value
with consumers by providing them with instructions on how to maintain, care
for and repair their products. To many consumers, this is a sign of a high-quality
Background
Founded and headquartered in Ventura, California, USA, Patagonia is a privately
held company that is renowned for designing high-quality outdoor clothing and
equipment for sports such as skiing, snowboarding, mountaineering, rock climbing,
surfing, hiking and fishing. There are 32 Patagonia stores in the United States and
Courtesy of Patagonia
36 internationally. Three are located in Australia – at Burleigh Heads, Queensland;

Byron Bay, New South Wales; and Torquay, Victoria. In addition to its physical retail
stores, Patagonia offers an online store with its full range of products, which can be
ordered from anywhere in the world. With annual revenue nearing US$750 million,
it would seem that Patagonia is a typical commercial outdoor-clothing company
9780655702412_APP1.indd 720 3/3/20 11:17 AM

product and represents value for money in the consumption process. It also marks (See <www.patagonia.com/pdf/en_US/bcorp_annual_report_2014.pdf>.) Most
a transition to the disposal point in the consumption process that makes Patagonia areas of Patagonia’s business portfolio are accessible at its physical retail outlets
different from many other organisations. and online store to communicate with consumers about the previous and ongoing
Often, when consumers finish using a product it is simply disposed of. Many strategic initiatives. This allows consumers to interact with all facets of Patagonia’s
organisations overlook this opportunity to reconnect or to continue creating value business in person or digitally 24/7.
with consumers. For Patagonia, the disposal point in the consumption process
is perhaps where it creates the most value with consumers. At the disposal Targeting
consumption point, consumers are encouraged not to buy new products they do The result of Patagonia’s mission, and non-traditional strategic objectives, is a clear
not really need – a testament to Patagonia’s focus on designing durable premium position of differentiation from its competition in consumers’ minds. Part of how
products. In addition, opportunities for other consumers to purchase and reuse Patagonia has been able to establish its market position is through understanding
old, but still useable, products and to facilitate the repair or recycling of worn-out its marketing environment and target audience. Much of Patagonia’s growth over
Patagonia gear are provided. Providing opportunities to create value with customers the last seven years occurred during the fall-out of the Global Financial Crisis.
at the disposal point of the consumption process helps build deep and continuous Rather than cut back on its marketing visibility or reduce the quality of products
relationships with consumers. Thus, consumers remain constantly connected to the to offer cheaper products or to achieve better price margins, Patagonia relied on
company, which belies Patagonia’s consumer-centric and sustainable marketing communicating its philosophy and focusing on the enduring quality and value of its
approach. But where does Patagonia’s consumer-oriented, sustainable, non- products. In turn, this fulfilled consumer needs linked to larger sociocultural trends,
traditional marketing approach stem from? such as frugality, value for money, reusing, repairing and recycling, during this time
period. Patagonia understood that many target consumers had a desire to spend
Mission and strategy their discretionary income more wisely on fewer, but high-quality, products that
Akin to most successful organisations, Patagonia’s approach stems from its would last. Consumers appreciated a company that also committed to offering
founder, Yvon Chouinard. As current Patagonia CEO Rose Marcarlo states, ‘Yvon pathways to purchase quality, used products or help them repair products they
Chouinard’s very basic philosophy has always been to make the very best product, already owned. From Patagonia’s understanding of the marketing environment and
make it as durable as possible.’ On the surface, Chouinard’s philosophy seems to be consumer trends during a difficult economic period, it was able to build authentic
product-oriented, which may not seem different from many similar organisations. relationships with its consumers and better position itself against competitors.
However, the market orientation and practice of Patagonia’s philosophy with However, some sceptics question Patagonia’s approach. Some believe
various stakeholders is what makes Chouinard’s approach unique. As he states, ‘… Patagonia’s high prices and promotional materials are targeted to affluent
my lifelong mission is to prove business can indeed have a simpatico relationship consumers who have the luxury of time to pursue adventures in exotic locations,
with the natural world.’ Ultimately, it is this philosophy that underpins Patagonia’s rather than less-affluent budget-conscious consumers looking for value for
market-oriented mission statement: Build the best product, cause no unnecessary money in durable products. Several of Patagonia’s stores are located in high
harm, use business to inspire and implement solutions to the environmental crisis. socioeconomic areas, indicating some potential insight to the latter strategy.
Patagonia’s mission statement sheds light on the purpose, values and experience Others note that Patagonia’s pathways for fixing and purchasing used Patagonia
that the company is trying to create for its stakeholders. equipment are simply marketing strategies that steer consumers towards trading
However, when it comes to setting strategic objectives that support the up and purchasing additional products they might be interested in. Despite some
company’s mission, Patagonia takes what many would consider to be a scepticism on the authenticity of altruism embedded in Patagonia’s initiatives, the
counterintuitive approach. Patagonia’s recent strategy is actually focused on company continues to maintain double-digit growth.
restraining growth. Many would consider this the antithesis of running a successful
company in a capitalistic global market. Ironically, instilling objectives that many Corporate social responsibility (CSR)
would consider to be anti-growth has generated double-digit growth. As founder Along with well-positioned value propositions and consumer value-creation
Chouinard has been quoted, ‘I know it sounds crazy, but every time I have made a opportunities, Patagonia’s corporate social-responsibility initiatives are often
decision that is best for the planet, I have made money. Our customers know that – considered exemplary. Patagonia is widely noted as developing CSR initiatives
and they want to be part of that environmental commitment.’ that go above and beyond most other commercial companies. It has established
Patagonia also continues to diversify other areas of its business portfolio under the Sustainable Apparel Coalition of organisations, which includes companies
the same philosophical mission. For example, Patagonia Provisions is a division such as Target and Walmart. Patagonia founder Yvon Chouinard co-authored an
that looks to source sustainably produced food products designed to be taken on award-winning book, The Responsible Company, which acts as a blueprint for
outdoor excursions. Its aim is to educate consumers about where food comes from organisations that want to improve their CSR. In addition, Patagonia has also
and what is involved with sustainable food production. In addition, Patagonia has provided consultation services to companies, such as Nike, that want advice on
also recently invested in Yerdle, a company that helps people reduce new product enhancing their CSR. Other CSR initiatives Patagonia has developed include: the
consumption. Finally, Patagonia is listed as a ‘B-corp’ or benefit corporation. Footprint Chronicles, which helps educate and connect consumers to the social
This entails being part of a consortium of businesses that share information and and environmental impacts of the products they buy; the Worn Wear initiative,
resources with each other, aiming to create mutual value for all stakeholders in which encourages consumers to fix their worn products by providing them
responsible ways beyond simply maximising profits. A review of Patagonia’s B-corp with guides for caring and repairing products; the 1% for the Planet initiative,
annual report indicates numerous strategic objectives – beyond profit – that which awards funds via its Environmental Grants Department to not-for-profit
exemplify the augmented value the company provides consumers of its products. organisations that promote environmental sustainability and conservation; and
9780655702412_APP1.indd 721 3/3/20 11:17 AM

the Cleanest Line Common Thread initiative, which supports recycling and/or Patagonia’s anti-consumption and anti-growth approach? Would Patagonia’s
reselling and reusing products consumers no longer have a need for. All of these marketing strategy and approach to business be suitable for all organisations?
initiatives contribute to Patagonia’s classification as a B-corp. Indeed, Patagonia’s Justify your answer.
CSR initiatives help further build the sense of value that consumers receive in ❻ What types of CSR marketing initiatives does Patagonia employ? How might
consuming Patagonia products, by satisfying both immediate and future needs Patagonia continue to improve their CSR initiatives?
of its stakeholders.
Beyond developing ethical and impactful CSR initiatives, Patagonia is unique in Sources
‘B-corp annual report – Patagonia’, 2014, available at <www.patagonia.com/pdf/en_US/
the way it embeds CSR into the organisation. Patagonia integrates and promotes bcorp_annual_report_2014.pdf>, accessed 27 February 2016.
its CSR initiatives in tandem with its products to further enhance consumer value. Baer, D, ‘How Patagonia’s new CEO is increasing profits while trying to save the world’, Fast
Many organisations develop CSR initiatives of merit, but few integrate and promote Company, 28 February 2014, available at <www.fastcompany.com/3026713/lessons-
learned/how-patagonias-new-ceo-is-increasing-profits-while-trying-to-save-the-world>,
them in a way that demonstrate value via a connection to the consumer experience accessed 29 February 2016.
of using the products. Building narratives is Patagonia’s strategy for demonstrating Bradley, R, ‘The woman driving Patagonia to be (even more) radical’, Fortune, 14 September
2015, available at <http://fortune.com/2015/09/14/rose-marcario-patagonia/>, accessed
to consumers the connection between its CSR initiatives and product value.
3 March 2016.
For example, Patagonia’s annual catalogue is not simply a glossy magazine Chouinard, Y & Stanely, V, The Responsible Company, 2012, Ventura, CA: Patagonia.
with pictures of its products and information about prices. Its catalogue is put ‘Footprint−Patagonia’, 2016, available at <www.patagonia.com/us/footprint>, accessed
4 March 2016.
together more like a coffee-table book that is filled with stories of people wearing ‘Inside Patagonia – Patagonia’, 2016, available at <www.patagonia.com.au/inside-
Patagonia products, often partaking in adventures that connect with the company’s patagonia>, accessed 3 March 2015.
Mackinnon, J B, ‘Patagonia’s anti-growth strategy’, The New Yorker, 21 May 2015, available
CSR initiatives. Patagonia also produces ‘mini-documentaries’ that demonstrate its
at <www.newyorker.com/business/currency/patagonias-anti-growth-strategy>, accessed
manufacturing process by telling stories about its producers and suppliers in its 2 March 2016.
supply chain through the Footprint Chronicles initiative. Patagonia also encourages PYMNTS, ‘Retail growth by not growing’, PYMNTS, 2 December 2015, accessed
1 March 2016.
consumers to interact on its website and share stories about their personal Ryan, K, ‘The bottom line: Patagonia, North Face, and the myth of green consumerism’,
experiences with Patagonia products. Some stories are then showcased in a short Groundswell Stories, 31 July 2014, available at <http://groundswell.org/the-bottom-line-
patagonia-north-face-and-the-myth-of-green-consumerism/>, accessed 28 February 2016.
documentary about how consumers have worn and repaired Patagonia products
Sacks, D, ‘Patagonia CEO Rose Marcario fights the fights worth fighting’, Fast Company,
over the years, underpinning its Worn Wear CSR initiative. Using promotional 6 January 2015, available at <www.fastcompany.com/3039739/creative-conversations/
elements that not only communicate and create visibility for its products, but also patagonia-ceo-rose-marcario-fights-the-fights-worth-fighting>, accessed 29 February 2016.
Stock, K, ‘Patagonia’s “buy less” plea spurs more buying’, Bloomberg Business, 28 August
incorporate its CSR initiatives, helps make Patagonia’s CSR initiatives more tangible 2013, available at <www.bloomberg.com/bw/articles/2013-08-28/patagonias-buy-less-
for consumers to connect with and become inspired by. plea-spurs-more-buying>, accessed 1 March 2016.
Patagonia continues to be a leader in CSR and to build relationships that ‘Worn wear stories – Patagonia’, 2016, available at <www.patagonia.com/us/worn-
wear-stories?dmmid=54069308&utm_source=em&utm_medium=email&utm_
grow its consumer base through authentic value-creation opportunities across the campaign=112715_ww&ett=1564556750&src=112715_ET_mi5>, accessed
marketing process. It accomplishes this with counterintuitive marketing strategies 28 February 2016.
that are anchored to its mission of creating the best-quality product with as little
impact as possible on the world’s environment. Although some may question
Patagonia’s altruism within its marketing strategies and consider it risky to develop
business strategies that are anti-growth, Patagonia has experienced consistent
growth over the last decade. Patagonia’s dedication to being a responsible
B-corp that designs products and develops CSR initiatives that are integrated and
promoted with a high level of integrity, demonstrates its ability to fulfil short-term
consumer needs and focus on long-term value, which benefits all stakeholders it
influences.
❶ What marketing approach does Patagonia utilise? Justify your answer.
❷ What type of value might consumers associate with Patagonia products?
What are some examples of how Patagonia creates various types of value
with consumers via building relationships?
❸ Thinking about the target marketing process, how does Patagonia segment its
target audience? Describe a profile of a typical Patagonia consumer.
❹ Think about the macro- and microenvironmental factors that influence
organisations. What types of trends has Patagonia observed in the macro- and/
or microlevel environments? How have these trends influenced Patagonia’s
marketing strategy?
❺ What other companies or industries may benefit or not benefit from utilising
9780655702412_APP1.indd 722 3/3/20 11:17 AM

Supermarket wars:The battle from Australian sources (so just who are ‘the fresh food people’?). Both believe in
ethical sourcing, offering sow-stall-free pork and Fairtrade chocolate. Both offer
continues! the convenience of online shopping by delivery or ‘click and collect’ and have the
obligatory smartphone app for ordering.
Jan Charbonneau
Both use traditional (television and flyers) and online (websites and social
University of Tasmania, Australia
media) media for promotion, and make extensive use of their celebrity chefs (Jamie
Every day, a fierce battle rages in Australia. At stake, the $88 billion Aussies spend Oliver for Woolies; Curtis Stone and Heston Blumenthal for Coles) for product
annually on groceries (IBIS World, 2016). Yes … Australian consumers spend development, branding and promotion. And both sponsor popular television-
$88 billion per year on milk, bread, toilet paper, chicken, frozen pizzas, pet food cooking competitions (so, if I want to ‘cook like a Masterchef’, where should I
and chocolate bars. shop?), ensuring maximum exposure for their brands and stores.
Aussies are spoiled for choice when it comes to where they spend their But the main battleground for these two giants is price. Supermarkets are high-
$88 billion, from corner stores to large suburban supermarkets and endless options volume, low-margin businesses. Cost of goods sold typically account for 75 per cent,
in between. Yet, for many years, two main players have dominated Australia’s with overhead, including staff and stores, adding another 18 per cent. That leaves about
supermarket sector – Woolworths and Coles. While figures vary, the estimates are 7 cents out of every $1 of that annual $88 billion sales – and then, of course, there
that this duopoly control 60–80 per cent of the market. By comparison, in the United are taxes and interest to pay! So, keeping customers is vital – but today’s customer
Kingdom, the two major chains (Tesco and Sainsbury) control 48 per cent, and in is extremely price sensitive. According to the 2008 Grocery Inquiry, the majority
the United States, the top two control about 20 per cent (Wal-Mart and Kroger). of consumers are likely to change supermarkets for as little as a 5 per cent price
If you think these two supermarket giants have been around forever, it’s because difference (Australian Competition and Consumer Commission, 2008). Woolworths’
they nearly have. Woolworths – often affectionately called Woolies – opened its own research suggests that 68 per cent of consumers actively look for price discounts,
first outlet in Sydney in 1924 as a ‘handy place where good things are cheap’. with 47 per cent buying on price alone (Woolworths, 2014).
Today, Woolies employs over 111 000 Aussies at its almost 1000 supermarkets. The two giants satisfy their consumers’ price sensitivity through sales promotion
Coles started as Australia’s first variety store in Melbourne in 1914, expanding into pricing, offering regular weekly and daily specials, bulk buys and special promotions,
today’s network of almost 2300 stores and employing over 100 000 Australians such as ‘Buy one, get one free’ and ‘Buy this, get that’. In the last couple of years,
who serve its weekly 20 million customers. however, Coles and Woolies have gone one step further, with ‘everyday low prices’
– no need to wait for a sale, prices on these items are permanently reduced!
Australia’s giants battle it out Since 2011, Coles has permanently reduced the price of 2000 products (Coles,
Since 2008, Woolies and Coles have been locked in a heated battle for each and 2015) and, in 2015, Woolworths invested $200 million in lower prices (Woolworths,
every Aussie supermarket dollar. Previous higher prices and lower quality had lost 2015). To get an idea as to just how competitive these two players are, when Coles
Coles significant market share, something they were determined to fix. As these reduced the everyday price of its roast chickens to $8.00, Woolworths responded
two giants battle it out in each aspect of the marketing mix, it is often difficult to by lowering theirs to $7.90!
determine who is winning as each move by one is countered by the other. The winners in this price battle are clearly the consumers. Coles, for example,
The average supermarket contains between 20 000 and 40 000 SKUs (stock claims its ‘big red hand’ can save Aussie households an average of $640 per year
keeping units, or individual products). Both supermarkets cater for every price (Coles, 2015). But many of these in-store specials or ‘everyday low prices’ are
range, stocking their shelves from floor to ceiling with the big brands Aussies ‘brought to you by’ distributors, suppliers and producers. While supermarkets often
cannot live without; speciality offerings, such as ‘gluten-free’; lower-priced ‘basics’; reduce their margins for special sales, the majority of the price reductions are the
and shelf after shelf of home brands. result of lower wholesale prices.
Both are loyal Aussie companies, accessing 96 per cent of their fresh fruit and So, why would a distributor, supplier or producer reduce its wholesale price,
vegetables, 100 per cent of their fresh milk and 100 per cent of their fresh meat not just for weekly specials as they have historically done, but permanently? Like
martin berry/Alamy
sammybez/Alamy
9780655702412_APP1.indd 723 3/3/20 11:17 AM

their supermarket customers, they are under pressure to generate sales, but with New players entering and old players
the added threat of having shelf allocations changed, ‘shelving costs’ increased or,
changing
worse, their products de-listed and replaced with home brands or parallel imports
While Coles and Woolies are Australia’s undisputed supermarket giants, they are
(brands purchased at lower prices overseas and imported) if they do not support
facing some major competition. Perhaps the biggest threat to these giants is a
price reductions. Next time you are in the supermarket, check out the number of
player that opened its first Australian store in 2001 and offers fewer SKUs (around
home brands and you will quickly realise this is a bona fide threat.
1000) in smaller premises – ALDI. Although a new entrant in the Australian market,
Despite this ongoing competition-based price battle, with each supermarket
ALDI has a comparable history to Coles and Woolies, opening its first store in
trying to best the other with its combination of sales promotion and ‘everyday low’
Germany in 1913. ALDI now has more than 7000 stores across three continents,
pricing, both Coles and Woolworths carefully manage pricing of their entire mix
including over 400 in Australia, with more on the way.
of products to ensure that overall profit does not suffer – thereby playing a very
ALDI stores are smaller – about 830 square metres – compared to Coles’ and
delicate balancing game.
Woolies’ average 4000 square metres (IBIS World, 2016). But ALDI manages to
BUT – and it is a very large ‘but’ – change is afoot in supermarket land.
cram these smaller premises full of bargains on Aussies’ most-demanded and
Consumer demand and shopping behaviours have been changing, and new
popular products, many under its own private label. ALDI bills itself as a ‘discount
competitors are grabbing market share.
supermarket offering great quality at incredibly low prices’. Projections are that
ALDI will hit $15 billion in annual sales by 2020, taking a serious bite out of the
Australia’s changing shoppers giants’ market share (AFN, 2016a).
In 2013, Woolworths commissioned a report analysing the changes to Australian ALDI has already surpassed IGA (Independent Grocers of Australia) to become
supermarket shopping behaviours over the past 25 years (Woolworths, 2013). Australia’s third-largest supermarket with market share of over 12 per cent, and
The report, Trolley Trends, revealed Australia has become a more cosmopolitan society, is a key driver of reduced prices in the sector overall (Chung, 2016). And, for the
with Aussies developing a taste for such foods as lamb kofkas and chicken korma. foreseeable future, each new ALDI store takes market share from existing players,
Even the traditional Aussie ‘roast and three veg’ dinner has changed and is now more rather than cannibalising any existing ALDI stores.
likely to be roast chicken, not beef, with pasta or rice, not potatoes. Today’s shopper While it is no longer number three, don’t rule out IGA just yet. IGA, the
looks for a wider range of fresh and healthy foods and spends more time preparing backbone of many smaller communities, not only has expansion plans – it is now a
restaurant-style foods at home. ‘Superfoods’ such as kale, and ‘exotic’ ingredients such player in the price game. Price reductions across the IGA network are supported by
as lemongrass, are now regularly stocked items. And, believe it or not, the second- the efforts of Metcash, the wholesale, distribution and marketing company that has
best-selling grocery category is fresh fruit, surpassing staples such as milk (Han, 2015). harnessed the purchasing power of 2400 independent grocers and convenience
Aussies have also changed their shopping behaviour, increasingly using stores. IGA is now able to price-match hundreds of routinely purchased products
supermarkets like a pantry. Gone is the big weekly shop, with Aussies now against the lower of Woolworths’ or Coles’ everyday shelf prices, ensuring ‘it
shopping an average of 2.5 times per week and buying, each time, an average pays to shop independent’. Should the big players be worried? IGA shoppers are
9.5 products worth $36. Have you noticed more shopping baskets at store entries, Australia’s most loyal, with 30 per cent of those who mainly shop at IGA only
trolleys getting smaller and even the stores themselves shrinking in size (e.g. shopping at IGA – this compares to 25 per cent for Woolies, 24 per cent for Coles
Woolworths Metro)? and 7 per cent for ALDI (AFN, 2015).
So, what about the supermarket of the future? Woolworths’ 2014 Future of And, in a somewhat ironic twist, upmarket retailer David Jones, owned by
Fresh report suggests that for 2034’s main customers, now labelled Generation South African Woolworths Holdings (not affiliated with Woolworths Australia)
Alpha, supermarket shopping will be more of a social experience. These hyper- intends to move into the premium end of the grocery market, appealing to
connected consumers will view the local shopping centre as their ‘new village Australia’s increasingly discerning ‘foodies’ (AFN, 2016b). In 2008, Woolies tried
green’, a place to connect with friends and neighbours. Their physical shopping to do the same with its own ‘posh grocer’ – Thomas Dux – but could not make it
experience will focus on fresh and local produce and foodstuffs, with common work, eventually closing down the brand. Perhaps another ‘Woolies’ can make it
household items most likely home-delivered (no more lugging 10-kilo bags of dog work – time will tell.
food) and perhaps ordered automatically (via their ‘smart’ refrigerator/pantry). Competition is likely to heat up even further as German discount chain Lidl,
2034’s shoppers will demand a ‘back-to-basics approach – food that is organic, the fourth-largest retailer in the world, has signalled its intention to move ‘down
local, fresh and delivered daily’, focusing on the impact on their personal health. under’, registering trademarks and assessing property.
Buying fresh is already important to four out of five Australians but 2034’s
customer will be increasingly interested in the ‘social health’ aspect of their Innovation for competitive advantage
purchases – the impact on ‘communities, growers, local farmers, and the So, how will Australia’s grocers achieve and sustain competitive advantage?
environment’ – investigating the provenance of their purchases (e.g. its source, Management guru Peter Drucker stated many years ago that the only sustainable
how it was made). Approximately half of all households are forecast to be singles competitive advantage is innovation.
and couples without children so the focus on convenience is expected to continue – Consider the transformation in business models as power has shifted from
watch as Australia’s supermarkets roll out more items designed to ‘save time’, such suppliers to customers. Who would have thought that the world’s major source of
as pre-cut vegetables and healthy takeaway and fresh meals. short-term accommodation would not own one room (think AirBnB) or the world’s
And, interestingly, price and value for money are expected to still remain biggest taxi service would not own a car (think Uber). So, to remain relevant,
paramount – good news for shoppers, but perhaps not such good news for Australia’s supermarkets, from the largest to the smallest, need to innovate in
supermarkets, distributors, suppliers and producers. response to changing shopper behaviours and changing competitors.
9780655702412_APP1.indd 724 3/3/20 11:17 AM

How do they do that? In its 2015 annual report, Woolworths nicely articulated how (and, indeed, if) each could create a unique position and sustainable
the answer for supermarkets: ‘… innovating to meet market challenges and finding competitive advantage in the supermarket sector.
new ways to delight our customers … firmly embedding the customer at the core ❺ The focus on price and value for money is expected to continue into the
of all decision making’. So, for consumers, watch this space: Supermarket wars – foreseeable future, with prices expected to continue going ‘down, down, down’.
the battle continues! Discuss the short-term and long-term impacts of supermarket price wars.
❶ How do Australia’s supermarkets provide value for their customers?
Sources
<www.aldi.com.au>
❷ Access Woolworths’ reports, Trolley Trends and Future of Fresh. Select one <www.coles.com.au>
supermarket and prepare a report indicating how it could take advantage of <www.costco.com.au>
<www.wesfarmers.com.au>
the insights in these two reports. <www.woolworths.com.au>
❸ Identify four family or friends – two of whom do their main shopping (at least <www.woolworthslimited.com.au>
AFN, 2015, ‘Aldi vs IGA: When does loyalty count?’, <www.ausfoodnews.com.au>,
75 per cent) at one of Australia’s main three supermarkets only (Coles, Woolies,
9 September.
ALDI), and the other two who routinely shop in at least two supermarkets. AFN, 2016a, ‘Aldi Australia’s $15 billion sales prediction, Morgan Stanley’, <www.
Interview each to determine: ausfoodnews.com.au>, 20 April.
AFN, 2016b, ‘Will the David Jones entry into premium groceries be a success?’, <www.
• why they are – or are not – ‘store loyal’ ausfoodnews.com.au>, 15 February.
• how they believe each of Australia’s main three supermarkets have Australian Competition and Consumer Commission, 2008, Report of the ACCC Inquiry into
the Competitiveness of Retail Prices for Standard Groceries, <www.accc.gov.au>, July.
responded to changes in the way that Australians shop
Chung, Frank, 2016, ‘Moody’s rings Aldi alarm bell for Coles, Woolies’, <www.news.com.
• which supermarket they believe has the lowest prices, and why au>, 22 April.
• how important they believe price is to supermarket selection Coles, 2015, 2015 Annual Report, <www.coles.com.au>.
Han, Esther, 2015, ‘Australia’s growing love for fresh fruit transforms typical grocery basket’,
• which supermarket they believe is winning ‘supermarket wars’, and why <www.smh.com.au>, 13 September.
• any recommendations they would make to their preferred supermarkets Hogan, Andrea, 2016, ‘The top 20 supermarket brands Australians say they cannot do
(e.g. new products, opening hours, layout and so on). without’, <www.ausfood.com.au>, 23 March.
IBIS World, 2016, Supermarkets and Grocery Stores in Australia: Market Research Report,
Based on the responses, prepare a report for one of the supermarkets as <www.ibisworld.com.au>, February.
to opportunities for competitive advantage. Stuart Alexander, ‘Market overview’, <www.stuartalexander.com.au>.
Woolworths, 2013, Woolworths Trolley Trends, <www.woolworths.com.au>.
❹ Visit <woolworths.com.au>, <coles.com.au> and <aldi.com.au>. Compare
Woolworths, 2014, Future of Fresh, <www.woolworths.com.au>.
and contrast the marketing mixes for these three supermarkets and discuss Woolworths, 2015, Annual Report 2015, <www.woolworths.com.au>.
9780655702412_APP1.indd 725 3/3/20 11:17 AM

Realestate.com.au: From garage The business model: Consumers

start-up to market leader versus customers
Before we review how realestate.com.au became established, it is necessary to
Geoff Fripp clarify the difference between what they call their ‘customers’ and what they call
The University of Sydney, Australia their ‘consumers’, as this will help us understand their business model and strategy.
The firm views the visitors to their website as their consumers. These are people
looking to buy, sell or rent property, as well as those just interested in viewing
Introduction properties for sale. As these consumers access realestate.com.au’s services for
free, they are not classified as customers. Instead, the firm’s customers are the real
estate agents who take out paid subscriptions, as well as the media agencies who
take out advertising space on their website.
It is important to note that while it is the customers that are the main sources of
realestate.com.au
revenue, it is consumers that actually provide the value to the firm. This is because
the greater the number of consumers visiting the website, the greater amount that
the firm is able to charge for its listings and advertising space.
The challenges of new product

Realestate.com.au is an Australian digital advertising business specialising in
residential property listings, and is owned and operated by REA Group (ASX: REA). They
adoption
As you are probably aware, there are many industries that have been ‘disrupted’
are the market leader, with 95 per cent of all properties for sale being placed on their
due to the internet and its capabilities. And there are numerous success stories of
website. They have achieved strong levels of consumer engagement, with their website
new players becoming the market leader during the internet era, such as iTunes,
averaging almost 900 million page views per month in 2015. (REA Group, 2016)
Amazon and even Seek.com.au in Australia.
This is an impressive market position for a firm that was only set up in 1995
But imagine the challenge that realestate.com.au was facing in the late 1990s
and did not start trading as realestate.com.au until 1998. The business was initially
as a service firm trying to sell intangible benefits. They had to convince real estate
established by Marty Howell and Karl Sabljak, who first ran the operation out of
agencies to change from their traditional promotional practices of newspaper
their garage with the help of two family members (Kohler, 2005).
advertising to start spending money on online advertising. It is always difficult to
Fast forward 20 years and, today, realestate.com.au is the prime asset of the
break an established system that is working well for every party involved. Buyers
REA Group, a publicly listed Australian company with an annual turnover in excess
were accustomed to scanning newspaper ads or viewing a real estate business’s
of $600 million and a net profit of $214.5 million in 2015–16 (REA Group, 2016).
shopfront window, and agents were content in getting the property vendor to
The Group have expanded operations into commercial property listings, media
‘invest’ in a newspaper advertising budget that showcased, not only the property,
advertising, strategic partnerships and international operations.
but the real estate agency as well.
So how did a ‘garage start-up’ prove to be so successful and change the way
Therefore, realestate.com.au had to clearly communicate the relative
Australians buy and sell property? And how do they still manage to remain the
advantages of online advertising over traditional advertising. There were several
market leader when their main competitor (Domain, <www.domain.com.au>) is
key benefits that realestate.com.au communicated to agents, including:
a subsidiary of a major media operator in Australia? Let’s review their history and
• Online advertising will promote the property to potential buyers who are
their current marketing strategy to find out the answers to these questions.
outside the geographic reach of the newspaper, such as interstate and
international investors.
The internet world in 1995 • The agents could provide more information for potential buyers, such as
It is likely that most students reviewing this case study would have grown up with photographs and floor plans.
the internet but, back in 1995, the internet was a relatively new concept. At that • This extra information would deliver better-qualified prospects, who were
time, it is estimated that only around 16 million people worldwide were internet already knowledgeable about the property, resulting in a more efficient sales
users, which was less than 1 per cent of the world’s population (Internet World process.
Statistics, 2015). And, keeping in mind that Google was not established until 1998 • Being an online advertiser would create a point-of-difference for the agency
and YouTube only started in 2005 (Hosch, 2015), the launch of the realestate.com. and lead to more clients in the long term.
au business in 1995 demonstrated a lot of foresight regarding the potential impact With its ongoing selling efforts (driven by extra staff numbers), realestate.com.au
of the internet. managed to slowly gain traction and, by 2001, the team had achieved 15 per cent
While there are some advantages of being first to market, it also carries the agent penetration, which represented around 1200 agencies (Baker, 2008).
burden of being responsible for educating the market – in this case, about the But this rate of growth proved expensive and, by the late 1990s, the expenditure of
benefits of this new technology. Fortunately for realestate.com.au, Fairfax Media the firm far exceeded revenues. As a consequence, they needed to bring in equity
(with their Domain website) did not follow them into online property advertising partners (such as Macquarie Bank in 1998), resulting in the founding owners’
for another four years (Delvin, 2005), giving them some breathing space to get share of the company being substantially diluted over a series of capital-raising
established and create their market. transactions.
9780655702412_APP1.indd 726 3/3/20 11:17 AM

The slow-moving dominant player Realestate.com.au have also introduced third-party provided services, such as
Until the mid-1990s, the classified advertising section of the newspaper (property access to a home-loan broker and a utility transfer service (where consumers can
and jobs listings, in particular) were considered to be ‘rivers of gold’ by the major organise relocation of services with all their utility suppliers with one request). These
newspapers. This is because classified advertising generated high and almost services have the dual benefit of improving the overall service to the consumer,
‘guaranteed’ profits, year after year. while also enhancing the firm’s revenue position. As you can see, realestate.com.au
However, with the advent of the internet, the newspapers, like many other are developing their website to become a ‘one-stop shop’ for all consumer needs.
established industry leaders at the time, did not recognise the threat of this new
technology. Typically, industry leaders perceived the online channel as a minor threat
Information and inspiration
Realestate.com.au’s research indicated that many consumers were viewing
due to its low level of consumer usage and much lower profit margins – at the time.
properties for general interest outside of their buying/selling property cycle.
It was not until 1999 that Fairfax Media decided to set up its own online
In other words, the website was starting to become a form of ‘entertainment’ for
property-search website. And, in order to protect its newspaper advertising revenue,
their audience. Management decided to reinforce this perception by developing
they decided to build a new brand and launched with domain.com.au (rather than
engaging content, both online and in television advertising. The firm also decided
leveraging their existing newspaper brand/s). Their initial strategy was built around
to tap into the general interest in property, as demonstrated by the success of
heavy (and free) promotion in their own newspapers. They believed that, with their
television shows such as The Block and Selling Houses Australia. And, in 2015,
strong readership base, they would be able to catch-up and eventually dominate the
they launched their own web series called ‘Australia Lives Here’. This series
online advertising market as well as they did the traditional newspaper advertising
profiles Australian celebrities, sports stars, actors and television chefs, allowing
market. But they had given their competitor a four-year head start in signing up
viewers to ‘tour’ inside their homes and to find out what makes a celebrity’s
agents, and realestate.com.au had around 1000 agency relationships by that time.
property their ‘home’.
Today’s continued success: It’s all They have also launched a lifestyle content section on their website, to give
about consumer engagement consumers personal insights and inspiration about creating and styling a home.
While the above discussion provides an overview of how realestate.com.au achieved These extra facilities represent a move towards branded entertainment, where
its early success, we need to explore how they have managed to maintain their market the website is engaging and entertaining its audience, rather than simply being a
dominance, particularly given the competitive threats they were (and still are) facing. functional information tool. These services encourage consumers to regularly visit
A key success factor for realestate.com.au is their higher level of consumer the website and perhaps start thinking about their next property. And even if such
engagement. This is a competitive advantage that they choose to publicise initiatives do not trigger the need for a property purchase, they bring more traffic to
regularly. For example, here are some key metrics that have appeared in their media the website, which helps drive advertising revenues.
releases and investor presentations (REA Group, 2016):

Using advertising to broaden
• Ninety-five per cent of all properties in Australia are listed with realestate.com.
au, as opposed to 72 per cent for Domain.
positioning
In 2014, Arnold Schwarzenegger became the spokesperson for realestate.com.
• Realestate.com.au averaged 889 million monthly page views in 2016, which
au. Schwarzenegger, as a high-profile Hollywood actor, was virtually guaranteed
is 5 times more than Domain.
to achieve cut-through and most likely to go viral. This advertainment series
• Realestate.com.au calculate that they control 85 per cent ‘share-of-time’ that
consisted of seven television commercials that were humorous in nature, based on
consumers spend on realestate.com.au and Domain.
the premise that Schwarzenegger had confused Australia with his home country
• The realestate.com.au user’s average dwell-time on site is 6.1 times longer
of Austria.
than for Domain.
To launch the television commercial, the firm booked space on all free-to-air
There are two main areas that drive realestate.com.au’s consumer engagement,
channels, plus subscription channels, plus main digital-advertising channels – all
namely product design and website features, and entertainment and information.
at the same time – in order to maximise the commercial’s reach. The firm targeted
Product design and website features the 6.20 pm time slot as this was the peak usage time for technology by Australian
In terms of product design, it is clear that realestate.com.au are a fast adopter of consumers. Accordingly, the television ad was able to reach 2.7 million people in
technology and generally lead the property-advertising market with innovation. the first night alone (realestate.com.au, 2014).
Being at risk of becoming a generic offering, the firm needs to ensure they offer The key goal of the television commercial was not brand awareness, but was
clear service differentiation. In addition to regular improvements to their website designed to broaden the firm’s positioning from being simply a property-search
in terms of simplicity and ease of use, some of the extra functionality they have website to being a full one-stop shop for all property needs.
recently introduced includes:
• a ‘discover’ facility that helps consumers identify suburbs within their financial
Growing revenues: From price
budget penetration to value-added pricing
• a price-lookup service that estimates the value of virtually every property in When the firm first started in the late 1990s, the concept of online advertising
Australia was new and consumers generally turned to newspaper listings for their property
• a ‘find an agent’ guide to help choose the best real estate agency search. This traditional consumer behaviour, as well as the relatively low level of
• a renovation calculator to help consumers estimate the total cost of potential internet penetration at the time, meant that the start-up business had to price its
renovations. services quite low initially.
9780655702412_APP1.indd 727 3/3/20 11:17 AM

Market-penetration pricing is designed to reduce financial risk and remove prospects for the firm domestically without the addition of new services. This is why
price as an obstacle to the sale in order to maximise sales. Like many internet-based the REA Group overall is now pursuing international expansion.
businesses at the time, the firm’s focus was on maximising the customer base, with
the plan of dominating the market and eventually generating strong revenue due Discussion questions
to their large-scale size. (Note: You may be aware that Facebook did not engage in ❶ There are several extra services and website features discussed in the case.
advertising in its first years in order to achieve strong usage levels before doing so.) Outline the firm’s product offering, using the three levels of products model.
Despite a few shaky years where the firm’s investment in growth exceeded In which of the three levels do you think realestate.com.au have achieved their
their revenue and most of their capital injections, the overall revenue plan has greatest degree of service differentiation?
worked. With almost 900 million page views per month, realestate.com.au has the ❷ The case suggests that the firm’s revenues are reaching maturity in the
ability to reach virtually all serious property buyers in the country. And along with Australian market. What new product ideas do you have for the firm? (Please
their 65 per cent audience exclusivity (REA Group, 2016), their dominant position consider both the firm’s consumers and their customers.)
gives the firm the ability to charge higher subscription fees per month to the real ❸ What are the competitive advantages of Fairfax Media (with their Domain
estate agencies, as well as higher rates for their advertisers. website)? What marketing activities would you recommend for them to
Another advantage of their traffic volume is the degree of competition between implement in order to challenge realestate.com.au for the market leadership
real estate agencies. By offering the option for a property to be listed higher in the over time?
consumer’s online search results, realestate.com.au has been able to continue to ❹ The product was adapted over time because of the relative advantages and
grow revenue. Many agents are now choosing this extra option (known as depth extra benefits doing so offered to the market. Other than these superior
products) and, in many cases, passing the extra cost on to the property vendor. This product benefits, what were the other factors that contributed to the success
has the overall effect of increasing the revenue per listing, while having thousands of this new product?
of real estate agents effectively acting as a salesforce selling advertising to the ❺ Do you agree with REA Group’s pricing approach? Why, or why not? As part
end-consumer. of your answer, outline the risks inherent in the firm’s approach to pricing
strategy.
Migration to mobile and their future
Realestate.com.au is tapping into the trend of consumers using multiple devices.
References
Baker, S, 2008. Property Portal Watch [Online], <www.propertyportalwatch.com/2008/08/
Australians now spend more time on their devices than they do watching television, about-realestatecomau/>, accessed 14 February 2016.
and consumers tend to carry a device with them most of the time. The firm has Delvin, D, 2005. Sydney Morning Herald [Online], <www.smh.com.au/news/10-years-online/
how-we-built-our-home-on-the-web/2005/04/07/1112815644831.html>, accessed
recognised that consumers access their website via multiple devices and have 13 February 2016.
provided consumers with the ability to access their realestate.com.au account from Hosch, W L, 2015. Encyclopedia Britannica [Online], <www.britannica.com/topic/Google-
Inc>, accessed 12 February 2016.
any device and automatically sync their preferences and favourite property selections.
Internet World Statistics, 2015. Internet World Stats [Online], <www.internetworldstats.
In 2015, the number of visits to the firm’s website via smartphones accounted com/>, accessed 14 February 2016.
for over 20 per cent of their total traffic (REA Group, 2016). As a result, the firm is Kohler, A, 2005. Sydney Morning Herald [Online], <www.smh.com.au/news/business/slipping-
through-the-classified-net/2005/10/04/1128191717753.html>, accessed
focused upon consumer retention across all devices and technologies. For example, 13 February 2016.
at the start of 2016, the firm announced that their app had been downloaded more REA Group, 2016. REA Group Investor Presentation FY 2016 [Online], <www.rea-group.com/
irm/PDF/1908_0/REAGroupInvestorAnalystPresentation>, accessed 14 February 2016.
than 5 million times (realestate.com.au, 2016). And, in 2015, they were first to
realestate.com.au, 2014. Media release: Arnold Schwarzenegger fronts new realestate.
market with an app for the Apple Watch, which sends property alerts to consumers com.au brand campaign [Online], <www.rea-group.com/IRM/PDF/1269/
for relevant and nearby properties (a form of location-based marketing). ArnoldSchwarzeneggerfrontsnewrealestatecomaucampaign>, accessed 12 February 2016.
realestate.com.au, 2016. Media release: More than 5 million downloads [Online],
It is likely that the digital property-advertising market in Australia is approaching <www.rea-group.com/IRM/PDF/1798/Morethan5milliondownloads
maturity and, with 95 per cent agent penetration, there are only limited growth forAustraliasmostusedpropertyapp>, accessed 11 February 2016.
9780655702412_APP1.indd 728 3/3/20 11:17 AM

Tasmanian Walking Company: the organic skincare range supplied by LI’TYA (Li’tya, 2016). Before introducing this
new activity, TWC had to adapt certain treatments to ensure they maintained their
Balancing luxury and adventure focus on sustainable resource usage. Their outdoor bathing pavilion, for example,
in a sustainable experience was only possible through the installation of additional rainwater tanks. If, during
summer, rainwater is scarce, TWC cease offering this spa treatment.
Gemma Lewis, PhD In 2014, the new owners of TWC achieved their vision of adding a third product
University of Tasmania, Australia to the eco-tourism operation: the Wineglass Bay Sail Walk. This land-and-water
tourism experience guides customers in small groups around Maria Island, Freycinet
Peninsula and Schouten Island. During the day, guests walk among the coastal
wilderness and, of a night, enjoy three-course dinners aboard the company’s luxury
yacht, Lady Eugenie.
In October 2017, the company will launch a fourth eco-tourism product
targeted to the true adventure seeker, the Three Capes Lodge Walk, in Tasmania’s
rugged south. This experience will offer customers a second long-distance and
Tasmanian Walking Company

challenging bushwalk experience, similar to that offered by the Cradle Mountain
Overland Track.
Managing customer expectations and

creating value
Ensuring their guests have realistic expectations and are prepared for walking in
the alpine or coastal wilderness can be challenging for TWC. On the TWC website,
potential customers can click on a page titled, ‘Which walk is right for me?’, where
For over 25 years, the Tasmanian Walking Company (TWC) has been marketing they match up their interests and fitness levels with the three different walks currently
multi-day guided walks; enabling people of all backgrounds and fitness levels on offer. A detailed itinerary for each walk is also available online, so that consumers
to experience some of the world’s most iconic mountain and coastal scenery. can learn about what to expect on each day of their multi-day walk experience.
The founder, Ken Latona, was a pioneer in establishing accommodation-based walks At their company headquarters, TWC’s small marketing and sales team are
in Australia. Using his architectural expertise, he won the right to design and develop responsible for managing the company’s customer database and implementing
the Cradle Mountain huts on Tasmania’s world-famous Overland Track. To this day, their pre- and post-walk communications strategies. Part of this process is gaining
these remain the only private accommodation offering along the track. The Cradle insight into customer needs and identifying opportunities for new target markets
Mountain Huts Walk has been enhanced and improved since its beginning some or new products. The sales team are also responsible for interacting with customers,
30 years ago. The most challenging and, at six days, the longest of TWC’s and managing the online reservations and booking system.
experiences, the walk takes guests into the heart of Tasmania’s World Heritage- Once consumers decide on their walking experience, TWC use pre-walk
listed Cradle Mountain–Lake St Clair National Park. communications and direct marketing to generate the sale and ensure their
TWC’s domestic customer profile comprises of mostly mature (45–65 customers have all the necessary preparatory information. After their initial
years of age) consumers living in urban areas and who are seeking a luxury, enquiry, customers are personally emailed an itinerary, a ‘gear list’ and a link to
adventure- and nature-based experience. They tend to be retired professionals frequently asked questions (FAQs). TWC have also produced short videos (which
(e.g. doctors, lawyers) – in other words individuals with a high disposable income are emailed to customers or made available online) in which their guides explain
and willingness to pay for a guided nature walk, rather than undertaking the the importance of certain equipment, such as proper hiking boots, thermal clothing
experience independently. and gaiters. In most cases, guests will have four to five real-time conversations
In addition to targeting high-income consumers in the Australian states of with TWC prior to arriving for their walk. This approach enables TWC to fully
Victoria, New South Wales and Queensland, TWC target overseas tourists, and have understand the customers’ needs and, in turn, customers can ask questions and
successfully raised their profile (via international trade shows) in the United States, volunteer feedback. TWC’s small marketing team pride themselves on their ability
the United Kingdom and Japan. Interestingly, although Chinese tourists rank to provide this one-to-one interaction and personal service. They understand that
Australian beaches, the Australian wildlife and Australian food and wine as their multi-day walks are out of the comfort zone for many of their customers; hence,
top three attractions (Tourism Australia, 2015), they are not currently a target they place significant emphasis on ensuring guests arrive in Tasmania feeling happy
market for TWC – possibly because they are less interested in consuming these and excited, rather than nervous and anxious.
experiences while undertaking a multi-day adventure walk. When customers arrive at the company’s headquarters to commence their
After many years offering just the one walking experience, TWC added to their walking experience, they are personally greeted by the guides and, over coffee, go
product portfolio in 1999 when they launched the four-day Bay of Fires Lodge Walk. through a hands-on induction process and final briefing. All guests are required to
This walk allows the company to tap into a new market segment – consumers bring appropriate walking gear, which is checked by guides prior to departing for
looking for a beach-walk experience rather than bushwalking (Tasmanian Walking the walking experience. During these formalities, TWC guides are also getting to
Co., 2016). More recently, TWC have built an ecologically sustainable day spa at know the guests and establishing a positive dynamic among the group, which is
the award-winning Bay of Fires Lodge, where guests can enjoy treatments using never more than 10 people.
9780655702412_APP1.indd 729 3/3/20 11:17 AM

TWC guides are subject to intense training to ensure they deliver high levels of Keeping the company’s online community and social media presence up-to-
service and hospitality. They are the company’s most important asset. Their actions, date is time-consuming for a small business and presents additional challenges
knowledge of flora, fauna, history and geology, and their engaging personalities, all in terms of user-controlled content. The high-quality and personal experience on
add significant value to their relationships with customers and between the guests offer does mean that the majority of customer-created content in which TWC is
themselves. TWC staff are profiled on the TWC website and social media so that tagged, is positive. However, like all businesses, TWC must manage the risk of
customers can begin to establish a personal relationship with the guides/company negative word of mouth spreading via this medium. They do so via their post-walk
as they do their research. communications with customers; in addition, guides are instructed to report any
issues with the company in their follow-up reports.
Personal selling and marketing
communications Current and future customer needs
Not surprisingly, guided multi-day walks that combine sustainable adventure travel Understanding customer needs, both now and in the future, is a vital element
and contemporary luxuries are not a product every tourist can afford – for example, of TWC’s marketing success and their new product development strategy. Even
a TWC walk currently retails for approximately $3000 per person. TWC purposely when customers demand new features, such as day spa treatments, within the
avoid targeting mass markets with their product, as maintaining small groups and guided-walk experience, TWC are able to deliver. Collaboration at an industry
a feeling of exclusivity adds value to the consumer experience. Each walk is priced level assists TWC to generate ideas from external sources, and stay on top of
as a package, inclusive of transport to and from the destination, accommodation, market trends. The company are founding members of Great Walks Australia
all meals and a personal guide. Customers are expected to provide all of their own and Great Walks of Tasmania. Both networks comprise only guided walks that
walking equipment, and can pay extra for spa treatments during the Bay of Fires epitomise quality and best practice in the industry. Great Walks of Australia, for
Lodge Walk. example, has just nine walks in their collection, two of which are TWC products
Through attending travel and tourism trade shows, such as the Australian (Great Walks of Australia, 2016). Similarly, Great Walks of Tasmania currently has
Tourism Exchange (ATE), TWC are slowly building up their profile in international and only six members. As a member of these networks, TWC obtain new ideas for
overseas markets. ATE connects Australian tourism businesses with wholesalers and additional services they can add to their product, and benefit from referral activity
retailers from around the world, via a mix of scheduled one-on-one appointments between businesses.
and broader networking events (ATE, 2016). TWC participate in this event on an Although other members of these networks offer similar walking experiences,
annual basis. In preparation for their attendance at the ATE, TWC’s personal selling TWC do not view them strictly as competitors. Instead, by encouraging customers
and sales-promotion activities commence approximately two months prior, as they to experience other walks around Australia, TWC and their fellow network
identify – online – the wholesalers and retailers they would like to meet with at members are adding to demand for the sector as a whole. Once customers have
the actual event. ATE organisers then match up TWC’s preferences with those had their first guided-walking experience, they tend to want to experience a second
wholesalers and retailers that have opted to speak to them. Upon receiving the or third walk in a new location. For example, if a customer has visited Tasmania and
schedule, TWC’s Director of Sales and Marketing prepares herself for a busy four completed a Maria Island walk (a product offered by another walking company),
days of 15-minute meetings with approximately 100 inbound tour operators and their interest and desire to complete a different guided walk on their next trip
wholesalers, such as Flight Centre Global, where she explains the TWC product and is enhanced by the high-quality experience they have already had. TWC invest
what new features are available for the coming tourist season. heavily in managing relationships with their customers so they will return and
In terms of marketing to the domestic market, TWC work closely with public experience another product in the TWC portfolio, or experience the same walk
relations specialists to attract the ‘right’ type of journalists and media personalities again in a few years’ time. They do so by keeping in touch with their customer base
to participate in their guided walks. After immersing themselves in the experience, via e-newsletters and social media, and offer return customers a discounted price
journalists produce stories about the TWC offering, which are published in both on their next TWC walk.
print magazines and online travel blogs. Importantly, TWC can then share these Managing the product life cycle (PLC) is another important aspect of TWC’s
stories, visual imagery and testimonials via their own website and social media. marketing strategy. The Cradle Mountain Huts Walk is the most mature of their
In addition to utilising testimonials by others, TWC encourage their customers
to share their own experiences (post-walk) via social media – and, in particular,
photos they have taken. This type of promotion is a key part of TWC’s advertising
strategy, and helps to engage new and future customers in an online community.
When TWC upload their own imagery and posts, they avoid using hard sales tactics
and can subtly share content that is engaging and educational. TWC also ensure
that any of their company blog and social media posts are relevant according to
the season, so that followers get an accurate idea of what to expect if they were
Tasmanian Walking Company
to experience a certain walk at that time of the year. For example, in winter, TWC
will upload and share images of walkers going through snow and complement this
with comments such as ‘Rug up and get walking’ or ‘With the first autumn snows
falling in the mountains, it’s time to start making your winter plans.’ TWC also share
high-quality educational videos on their Facebook page so potential customers can
learn about native Tasmanian wildlife.
9780655702412_APP1.indd 730 3/3/20 11:17 AM

products; however, TWC prevent sales from going into decline by continually (also known as the ‘Green Army’), to remove weeds from wildlife sanctuaries or
improving – among other things – the sustainable accommodation, food and wine to clean up rubbish from natural areas, such as Forester Beach (along the Bay
on offer. The worldwide reputation of Cradle Mountain also helps TWC maintain of Fires Lodge Walk). Furthermore, when the company require new materials
demand for this product. In addition, TWC maintain their exclusive rights to being such as staff uniforms, they conduct extensive research to ensure they purchase
the only private-accommodation provider along the Overland Track (all other from businesses who share the same values as TWC. Dealing with like-minded
walkers have tents and public huts as their only accommodation option). This gives companies is another important component of TWC’s sustainable marketing
the company a significant advantage in terms of access; even when the weather is strategy, and helps to validate the message that they uphold their environmental
poor, TWC can still offer their customers a comfortable winter-walking experience. and social responsibilities.
Other products in the TWC range are at different stages of the PLC. The Bay
of Fires Lodge Walk and Wineglass Bay Sail Walk, for example, are arguably in Where to next?
the growth phase, while the upcoming Three Capes Walk is still in the product Like any other small, eco-tourism business, TWC are subject to the same challenges
development phase. Having a range of walks at different stages in the PLC helps of seasonality, external market trends and competition. Yet, their clear focus on
ensure that TWC maintain their profits well into the future. Furthermore, renting providing high-quality adventure experiences within the natural environment has
the Bay of Fires Lodge out to other businesses during the off-season for walking, provided them with a source of competitive advantage, which the owners are
such as to photographers to run photography workshops, provides another revenue planning to grow in years to come. Maintaining their points of difference requires
stream for the business. a triple-bottom-line approach to protecting and enhancing nature and making a
profit. Similarly, TWC must attract passionate and authentic staff to deliver their
Social and environmental high-quality experience and uphold their company values. Having recently won
sustainability Gold in the ecotourism category at the Qantas Australian Tourism Awards, TWC’s
Despite changing ownership over the years, TWC’s core values have remained future looks very bright.
the same. The flat-structured company is built on the notion of environmental
sustainability and social responsibility. Their tag-line ‘It’s in our nature’ has a Discussion questions
dual meaning. First, the walks are based in Tasmania, which is the company’s Note: Students are encouraged to visit the TWC website (<www.taswalkingco.
‘natural’ and physical environment. Second, and more importantly, every staff com.au/>) for further and up-to-date information.
member employed by TWC is deeply passionate about environmentally sustainable ❶ Identify what you think makes the TWC market offering unique. What is the
adventure travel, and upholds these values in the luxury experience and knowledge likely combination of tangible goods and pure services involved in each of
they provide. Nature and environmental responsibility are very much integral to the TWC’s guided walking products?
organisation and underpin TWC’s marketing strategy. ❷ What challenges do TWC face in terms of ensuring their product offering
Sustainability is also a key element of the TWC brand. Right from the beginning, and business model remain sustainable? How might a company of this size
the company have used environmentally sustainable practices and materials to manage an increase in demand while also ensuring the natural environment
build their guest accommodation, which is a perfect example of providing modest is protected?
luxury experiences in the natural environment. All buildings are solar powered; ❸ How do TWC use direct marketing to build one-to-one relationships with their
rainwater is collected in tanks and then recycled; heating uses renewable gas; customers? What are the benefits of TWC’s using direct marketing with their
and food and living supplies are brought in and all litter taken away. These actions customers?
have assisted the company to gain Advanced Ecotourism certification, and win ❹ Why are networks and industry relationships important to TWC? What other
numerous awards at a national and state level. The company also follow best- strategies could an eco-tourism business of this size use to source ideas and
practice track guidelines on all of their walks, which ensure customers and guides incorporate into its new product development strategy?
follow designated trails, remove all waste and recycle wherever possible. Given
their location in a World Heritage-listed national park, the Cradle Mountain huts
References
Australian Tourism Exchange (ATE), 2016, ‘About ATE16’, <www.tradeevents.australia.com/
are subject to the highest levels of environmental scrutiny. However, TWC embrace teo3/eventModule/home.do?eventModuleId=29085>, accessed 29 July 2016.
these standards and, through their sustainable marketing, ensure they leave the Great Walks of Australia, 2016, ‘The walks’, <http://greatwalksofaustralia.com.au/walks/>,
accessed 5 August 2016.
natural environment in a better condition than when they arrived. Li’tya, 2016, ‘About Li’tya’, <http://litya.com/about-litya.html>, accessed 29 July 2016.
Through their sustainable marketing initiatives, TWC are focused not only on Tasmanian Walking Co., 2016, ‘Your walking tour guides’, <www.bayoffires.com.au/walk/
guides/>, accessed 29 July 2016.
enhancing the natural environment for future customers to enjoy, but also on
Tourism Australia, 2015, ‘China: Market profile’, <www.tourism.australia.com/documents/
giving back to the community. The company, for example, buy almost all of their Markets/Market_Profile_2015_China.pdf>, accessed 24 October 2016.
produce and supplies locally. They make a point of using local cafés to source
packed lunches for their customers as they travel to the starting point of their Acknowledgements
walk. This helps to support the local economies and business community in remote The author wishes to thank Tasmanian Walking Co., and in particular, Ros Young
Tasmanian towns such as Derby and Sheffield, and provides regular and significant (Director of Sales and Marketing), for generously providing information and
food orders that keep locals employed. In addition, TWC staff regularly volunteer to imagery for the purposes of this case study. For more information on Tasmanian
work with environmental organisations, such as Conservation Volunteers Australia Walking Co., visit their website: <www.taswalkingco.com.au>.
9780655702412_APP1.indd 731 3/3/20 11:17 AM

Appendix
2
The marketing
plan: An
introduction
As a marketing manager, you will need a good marketing plan to provide direction Finally, marketing research helps marketers learn more about their customers’
and focus for your brand, product, company or other type of marketing organisation. requirements, expectations, perceptions and satisfaction levels. This deeper
With a detailed plan, any marketing organisation will be better prepared to meet understanding provides a foundation for building competitive advantage through
demand by launching a new product or building sales for existing offerings. well-informed segmenting, targeting, differentiating and positioning decisions.
Non-profit organisations also use marketing plans to guide their fundraising and Thus, the marketing plan should outline what marketing research will be conducted
outreach efforts. Even government agencies put together marketing plans for and how the findings will be applied.
initiatives such as building public awareness of proper nutrition and stimulating
area tourism. The role of relationships
The marketing plan shows how the company will establish and maintain profitable
The purpose and content of a customer relationships. In the process, however, it also shapes a number of internal
marketing plan and external relationships. First, it affects how marketing personnel work with
Unlike a business plan, which offers a broad overview of the entire organisation’s each other and with other departments to deliver value and satisfy customers.
mission, objectives, strategy and resource allocation, a marketing plan has a more Second, it affects how the company works with suppliers, distributors and strategic
limited scope. It serves to document how the organisation’s strategic objectives alliance partners to achieve the objectives listed in the plan. Third, it influences
will be achieved through specific marketing strategies and tactics, with the the company’s dealings with other stakeholders, including government regulators,
customer as the starting point. It is also linked to the plans of other departments the media and the community at large. All of these relationships are important to
within the organisation. Suppose a marketing plan calls for selling 200 000 units the organisation’s success, so they should be considered when a marketing plan
annually. The production department must gear up to make that many units, the is being developed.
finance department must arrange funding to cover the expenses, the human
resources department must be ready to hire and train staff, and so on. Without From marketing plan to marketing action
the appropriate level of organisational support and resources, no marketing plan Companies generally create annual marketing plans, although some plans
can succeed. cover a longer period. Marketers start planning well in advance of the
Although its exact length and layout will vary from organisation to organisation, implementation date to allow time for marketing research, thorough analysis,
a marketing plan usually contains the sections described in Chapter 3. Smaller management review and coordination between departments. Then, after
businesses may create shorter or less-formal marketing plans whereas corporations each action program begins, marketers monitor ongoing results, compare
frequently require highly structured marketing plans. To guide implementation them with projections, analyse any differences and take corrective steps as
effectively, every part of the plan must be described in considerable detail. needed. Some marketers also prepare contingency plans for implementation if
Sometimes, a company will post its marketing plans on an intranet site, which certain conditions emerge. Because of inevitable and sometimes unpredictable
allows managers and employees in different locations to consult specific sections environmental changes, marketers must be ready to update and adapt
and collaborate on additions or changes. marketing plans at any time.
For effective implementation and control, the marketing plan should
The role of research define how progress towards objectives will be measured. Managers typically
Marketing plans are not created in a vacuum. To develop successful strategies and use budgets, schedules and performance standards for monitoring and
action programs, marketers need up-to-date information about the environment, evaluating results. With budgets, they can compare planned expenditures
the competition and the market segments to be served. Often, analysis of with actual expenditures for a given week, month or other period. Schedules
internal data is the starting point for assessing the current marketing situation, allow management to see when tasks were supposed to be completed –
supplemented by marketing intelligence and research investigating the overall and when they were actually completed. Performance standards track the
market, the competition, key issues, and threats and opportunities. As the plan is outcomes of marketing programs to see whether the company is moving
put into effect, marketers use a variety of research techniques to measure progress towards its objectives. Some examples of performance standards are market
towards objectives and to identify areas for improvement should results fall short share, sales volume, product profitability and customer satisfaction. (See
of projections. Appendix 3.)
9780655702412_APP2.indd 732 3/3/20 11:18 AM

Sample marketing plan for by higher demand for easy-to-use tablets with expanded communications,
entertainment and storage functionality.
SonicaTab tablet
We begin this sample marketing plan by repeating the summary table from
Chapter 3 in Table A2.1. Current marketing situation
This section takes you inside the sample marketing plan for Sonica, a Sonica, founded some eight years ago by two entrepreneurs with experience in the
manufacturer of smartphones and tablets. The company’s first product was the microcomputer market, is about to enter the mature tablet PC market. Multifunction
Sonica Z101, a multimedia, mobile/WiFi-enabled smartphone running Google’s mobile phones, email devices and wireless communication devices such as the
Android operating system (OS). In that market, Sonica entered competition with tablet have become commonplace for both personal and professional use. Research
Apple (iPhones), Microsoft (Lumia), Motorola (Moto G), HTC (One), Samsung shows that between the launch of the iPad in 2010 and mid-2016, Apple sold more
(Galaxy), LG (Optimus) and other well-established rivals in a crowded, fast-changing than 300 million tablets worldwide.1 Where the laptop market grew from 2 million
marketplace for smartphones that combine communication, entertainment and unit sales in 1990 to just 29 million in 10 years, tablets have grown in sales at a
storage functionality. faster rate and are already cannibalising the sales of laptops and e-reader devices
Now, Sonica plans to use its technological expertise and enter the market for such as the Kindle and Kobo, as users want lightweight always-on devices that
tablet PCs with a range of products under a sub-brand – SonicaTab. The competitors
synchronise with and mimic their smartphones in terms of apps and functionality.
are Apple (iPad range), Lenovo (Yoga tablet range), Samsung (Galaxy tablet range),
Competition is therefore more intense even as demand flattens, industry
Sony (Experia), Google (Nexus tablets), among others.
consolidation continues and pricing pressures squeeze profitability. Forrester
We now turn our discussion to explain more about what each section of the
forecast that, by 2017, the greater proportion of the worldwide population will live
plan should contain, and why.
in the Asia-Pacific region and that some 34 per cent of tablet owners will reside
here.2 They also forecast that businesses will own some 20 per cent of these tablets.
Executive summary Moreover, the education system in many countries will either subsidise student
Sonica is preparing to launch its SonicaTab range into a relatively mature market. purchases or give tablets away and, thus, the institutional market is predicted to be
Our product range offers a competitively unique combination of advanced features even larger. To gain market share in the dynamic Asia-Pacific region, Sonica must
and functionality at a value-added price. We are targeting specific segments in carefully target specific segments with features that deliver benefits valued by each
the consumer and business markets, taking advantage of opportunities indicated customer group.
Table A2.1 Contents of a marketing plan

Section Purpose
Executive summary Presents a brief summary of the main goals and recommendations of the plan for management review, helping top
management to find the plan’s major points quickly. A table of contents should follow the executive summary.
Current marketing situation Describes the target market and company’s position in it, including information about the market, product performance,
competition and distribution. This section includes:
• A market description, which defines the market and major segments, then reviews customer needs and factors in the
marketing environment that may affect customer purchasing.
• A product review, which shows sales, prices and gross margins of the major products in the product line.
• A review of competition, which identifies the main competitors and assesses their market positions and strategies for
product quality, pricing, distribution and promotion.
• A review of marketing channels and logistics, which evaluates recent sales trends and other developments in major
distribution channels.
Threats and opportunities analysis Assesses major threats and opportunities that the product might face, helping management to anticipate important positive or
negative developments that might have an impact on the firm and its strategies.
Objectives and issues States the marketing objectives the company would like to attain during the plan’s term and discusses key issues that will affect
their attainment.
Marketing strategy Outlines the broad marketing logic by which the business unit hopes to create customer value and relationships and the
specifics of target markets, positioning and marketing expenditure levels. How will the company create value for customers in
order to capture value from customers in return? This section also outlines specific strategies for each marketing mix element
and explains how each strategy responds to the threats, opportunities and critical issues spelled out earlier in the plan.
Action programs Spells out how marketing strategies will be turned into specific action programs that answer the following questions: What will
be done? When will it be done? Who will do it? How much will it cost?
Budgets Details a supporting marketing budget that is essentially a projected profit and loss statement. It shows expected revenues
(forecasted number of units sold and the average net price) and expected costs of production, distribution and marketing. The
difference is the projected profit. Once approved by higher management, the budget becomes the basis for materials buying,
production scheduling, personnel planning and marketing operations.
Controls Outlines the controls that will be used to monitor progress and allow higher management to review implementation results and
identify products that are not meeting their goals. It includes measures of return on marketing investment.
9780655702412_APP2.indd 733 3/3/20 11:18 AM

734 Appendix 2 The marketing plan: An introduction
Market description • Battery: Built-in 6500mAh battery, giving up to 8 hours video and 60 hours
Sonica’s market consists of consumers, business and institutional users who music
prefer a single device for communication, information storage and exchange, • WiFi: Built-in WiFi 802.11 ac/n/g/b/a, dual-band support (2.4GHz, 5GHz), WiFi
and entertainment on the go. Specific segments being targeted during the first direct, offering wireless web and email and instant messaging
year include professionals, corporations, students, entrepreneurs and medical • Bluetooth 3.0
users. Table A2.2 shows how the SonicaTab201 addresses the needs of targeted • Processor: NVidia Tegra 4 quad core (ARM Cortex–A15) CPU with NVIDEA
consumer and business segments. graphics
Buyers can choose between models based on several different operating • Location: A-GPS for directions and maps
systems, including systems from Apple, Microsoft and Google. Sonica licenses • Sensors: Gyroscope, accelerometer, ambient light sensor, compass
an Android-based system because it is somewhat less vulnerable to attack by • Sound: Stereo headphone jack (3.5 mm), dock connector port with digital
hackers and viruses and is favoured by consumers of such successful models as the music/video/television recording, wireless downloading and playback
Samsung Galaxy Tab range. Hard drives and removable memory cards are popular • Office mobility: Organisation functions, including calendar, address book
tablet options. Sonica is equipping its entry-level 10.1-inch model with an ultra- and synchronisation together with other Google mobile service features and
fast 64Gb (64-gigabyte) external memory card for information and entertainment mobile office suite (Lite)
storage, and WiFi access only. This will allow users to transfer photographs and • Video and pictures: Integrated rear 8MP HD (1080p) digital camera with LED
other data from the tablet to a home or office computer via Bluetooth or to flash and video capability plus 2MP front camera
sync with Cloud-based data storage, such as Google Drive and Dropbox.com. • Style: Interchangeable case/skin wardrobe of different colours and patterns
Technology costs are decreasing even as capabilities are increasing, which makes
value-priced models more appealing to consumers and to business users with Optional extras
older devices who want to trade up to new, high-end multifunction units. • 128Gb external ROM
• LTE chipset for mobile data
Product review • desktop dock and charger
Our base product, the SonicaTab201, offers the following standard features with A higher-priced SonicaTab model – the SonicaTab202 – will offer a 4G (LTE)
the prevailing Android OS version: data SIM card slot (backward compatible) for cellular internet access and a
All models second SIM card slot for telephony, and come with a full mobile office suite of
• Display: 10.1-inch (3200 × 2000 pixels); 16:9 widescreen colour screen for apps (e.g. Docs To Go™ or Microsoft Office and PrinterShare). The camera specs
easy viewing (auto rotating) on this model will be increased to a 13 megapixel rear camera and a 5 megapixel
• Memory: 4Gb internal RAM and 64Gb external ROM front camera.
Table A2.2 Segment needs and corresponding features/benefits of SonicaTabs

Targeted segment Customer need Corresponding feature/benefit
Professionals (consumer market) • Stay in touch conveniently and securely while on the go • Built-in data SIM card slot; wireless email/web access from
• Perform many functions hands-free without carrying anywhere; Android OS less vulnerable to hackers
multiple gadgets • Voice-activated applications are convenient; global
positioning system (GPS) function and dual cameras
add value
Students (consumer market) • Perform many functions without carrying a laptop and • Compatible with numerous applications (apps) and
smartphone peripherals for convenient, cost-effective communication
• Express style and individuality and entertainment, and online course delivery
• Wardrobe of tablet cases and skins
Corporate users (business market) • Security and adaptability for proprietary tasks • Customisable to fit corporate tasks and networks;
• Obtain driving directions to business meetings Android-based OS less vulnerable to hackers
• Built-in GPS allows voice-directed navigation and access to
Google MapsTM
Entrepreneurs (business market) • Organise and access contacts, schedule details, business • Cellular and WiFi access to calendar, address book,
and financial files information files for checking appointments and data,
• Stay in touch connecting with contacts
• Cellular and WiFi, syncing with corporate Windows
Exchange servers for email, calendar and tasks
Medical users (business market) • Update, access and exchange medical records • Removable memory card and data SIM card and WiFi
• Photograph medical situations to maintain a visual record access to information, together with recording, reduces
paperwork and increases productivity
• Built-in dual cameras allow fast and easy photography;
stores images for later retrieval
9780655702412_APP2.indd 734 3/3/20 11:18 AM

First-year sales revenues are projected to be $60 million, based on sales of • Discount retail chains. Chains such as Big W, Kmart and Target will carry the
606 060 SonicaTab201 units at a wholesale price of $99 each. During the second SonicaTab range.
year, we plan to introduce the SonicaTab202, also with the prevailing version of • Electronics specialty stores. Chains such as Harris Technology, Harvey Norman
the Android OS, as a higher-end tablet product offering cellular internet access and and JB Hi-Fi will feature the SonicaTab range.
increased data storage as standard features. • Online retailers. Dick Smith, MobiCity.com.au, DealsDirect.com, dStore.com.
au, Kmart online and Big W Online will carry and, for a promotional fee, will
Competitive review
give the SonicaTab range prominent placement on their homepages during
The emergence of lower-priced 7-inch tablets has increased competitive pressure.
the introduction.
Competition from specialised devices for e-book reading is also a major factor.
Initially, our channel strategy will focus on the Australasian (Australia and New
Key competitors include Apple (iPad range), Lenovo (Yoga and IdeaTab ranges),
Zealand) market; according to demand, we plan to expand into South-East Asia
Samsung (Galaxy Tab range), Google (Nexus tablet range), LG (Optimus range),
and beyond, with appropriate logistical support.
Amazon (Kindle range), Kobo (e-book reader range), Sony (Experia) and those brands,
models and pricing that students complete in Table A2.3 following their own research.
Strengths, weaknesses, opportunities and
Channels and logistics review threats analysis
The SonicaTab range will be distributed through a network of retailers in the top Sonica has several powerful strengths on which to build, but our main weakness
20 Australasian and South-East Asian markets. Among the most important channel is lack of brand awareness and image. While Sonica-brand smartphones have
partners signalling acceptance to the Sonica key account manager are: been on the market for five years, the decision has been made to use a sub-brand
• Office supply stores. Chains such as Officeworks will carry SonicaTab products for the various ranges of products – SonicaTab in the case of the tablet range.
in stores, in catalogues and online. The main opportunity is demand for tablets that deliver a number of valued benefits.
Table A2.3 Self-researched sample of competitive brands, models and pricing

Competitor
brand Model Features Price
A
Hint: See the Android Tablet Review at <www.mobiletechreview.com/Android-Tablet-Reviews.htm> prevailing at the time of your research.
9780655702412_APP2.indd 735 3/3/20 11:18 AM

We also face the threat of ever-higher competition from consumer electronics bought entry-level models are replacing older models with more advanced
manufacturers, as well as downward pricing pressure. Table A2.4 summarises the models that offer more battery time.
SonicaTab201’s main strengths, weaknesses, opportunities and threats. 2. Cost-efficient technology. Better technology is now available at a lower cost
than ever before. Thus, Sonica can incorporate advanced features at a value-
Strengths added price that allows for reasonable profits.
Sonica can build on three important strengths: 3. Anti-establishment image. Millennials (those born between 1977 and 2000)
1. Innovative product. The SonicaTab range of tablets offers a combination of maintain a higher aversion to mass-marketing messages and established
features that would otherwise require customers to carry a laptop computer in global corporations than do Gen Xers and baby boomers.
addition to a smartphone.
2. Security. Our range of tablets uses the Android-based OS, which is less Threats
vulnerable to hackers and other security threats that can result in stolen or We face three main threats at the introduction of the SonicaTab201:
corrupted data. Moreover, there is a considerable base of knowledgeable 1. Increased competition. More companies are entering the Australasian and
users who are willing to help others (e.g. subscribers to xda-developers.com). South-East Asian markets with tablet models that offer some, but not all, of
3. Pricing. Our top-model tablet is priced lower than competing higher-end the features and benefits provided by the SonicaTab product range. Therefore,
models – none of which offer the same bundle of features as this price- Sonica’s marketing communications must stress our clear differentiation and
penetration strategy, which gives us an edge with price-conscious customers. value-added pricing.
A ‘more for less’ positioning strategy. 2. Downward pressure on pricing. Increased competition and market-share
strategies are pushing tablet prices down. Still, our objective of seeking a
Weaknesses 10 per cent profit on second-year sales of the original model is realistic, given
By waiting to enter the tablet market in the hope that some consolidation of the lower margins in this market.
competitors would occur, Sonica has learned from the successes and mistakes of 3. Compressed product life cycle. Like smartphones, tablets have reached the
others. Nonetheless, we have two main weaknesses: maturity stage of their life cycle more quickly than did earlier technology
1. Lack of brand awareness. Sonica (SonicaTab) has no established brand products. We have contingency plans to keep sales growing by adding new
or image, whereas Apple and the others have strong brand recognition. features, targeting additional segments and adjusting prices as needed.
We will address this issue with aggressive marketing communication and
trade promotion. Objectives and issues
2. Physical specifications. The SonicaTab201 is as thin and light as most We have set aggressive but achievable objectives for the first and second years of
competing models even though it incorporates multiple features, offers market entry.
sizeable storage capacity and is compatible with numerous peripheral devices.
However, the higher-end model with more desirable features offered at higher
First-year objectives
During SonicaTab201’s initial year on the market, we are aiming for unit-sales
prices will not be released until year 2. To counteract this weakness, we will
volume of 606 060.
emphasise our base-model product’s benefits and value-added pricing, two
compelling competitive strengths. Second-year objectives
Our second-year objectives are to sell a combined total of one million units of our
Opportunities
two models and to achieve breakeven early in this period.
Sonica can take advantage of three main market opportunçities:
1. Increasing demand for multitasking multimedia tablets. The market for light, Issues
portable, multitasking devices is growing much faster than did the market In relation to the product launch, our major issue is the ability to establish
for single-use devices. Growth will accelerate as dual-mode capabilities SonicaTab as a well-regarded brand name linked to a meaningful positioning.
become mainstream, giving customers the flexibility to interact over mobile or We will invest heavily in marketing to create a memorable and distinctive brand
internet connections. Tablet PCs are already commonplace in public, work and image that projects innovation, quality and value. We also must measure awareness
educational settings, which is boosting primary demand. Also, customers who and response so that we can adjust our marketing efforts as necessary.
Table A2.4 SonicaTab’s strengths, weaknesses, opportunities and threats

Strengths Weaknesses
• Innovative combination of functions in one portable device • Lack of brand awareness and image
• Security due to Android-based OS • Higher-end model not released until year 2
• Value pricing
Opportunities Threats
• Increased demand for multimedia, multifunction tablets • Intense competition
• Cost-efficient technology • Downward pricing pressure
• Compressed product life cycle
9780655702412_APP2.indd 736 3/3/20 11:18 AM

Marketing strategy including Facebook, Google+ and Twitter. The SonicaTab brand will also incorporate
Sonica’s marketing strategy will employ a range of marketing tools and is based location-based services by Facebook to help drive traffic to retail locations. A mobile-
on a product-differentiation positioning strategy. Our primary consumer target phone ad campaign will provide additional support to the online efforts.
is middle- to upper-income professionals who need a portable tablet that There will be coordinated public relations efforts to build the SonicaTab
synchronises with their smartphones and allows them to coordinate their busy brand and support the differentiation message. To create buzz, we will host a
schedules, communicate with family and colleagues, get driving directions, and user-generated video contest on our website in the first three months. To attract,
provides them entertainment on the go using such apps as Tunein radio and Kodi retain and motivate channel partners for a push strategy, we will use trade sales
Media Player. Our secondary consumer target is high-school, university/college and promotions and personal selling. Our personal and digital communications will
graduate students who want a multimedia, responsive device. This segment can be encourage purchases through channel partners rather than from our website until
described demographically by age (16–30 years) and education status. the SonicaTab sub-brand has been established, at which time we will consider
Our primary business target is mid- to large-sized corporations that want employing direct and digital marketing. The SonicaTab domain name has been
to help their managers and employees stay in touch and input or access critical registered in the global (.com) and various Asian domains such as Australia (.com.
data when out of the office. This segment consists of companies with more than au), New Zealand (.co.nz) and Malaysia (.com.my).
$10 million in annual sales and more than 100 employees. We are also targeting
entrepreneurs and small-business owners, as well as medical users who want to People and process: Relationship management
update or access patients’ medical records while reducing paperwork. We plan to use social media, primarily forums such as XDA-Developers.com,
Phandroid.com and Whirlpool.net.au, to assist knowledgeable users whom we
Positioning regard as opinion leaders to provide guidance to other social media users on
Using product differentiation, we are positioning the Sonica as the most versatile, setting up and getting the best performance from the SonicaTab. We also plan to
convenient and value-added model for personal and professional use. Our marketing invite those who buy Sonica products to register with the company via our website.
will focus on the performance of the device with respect to its responsiveness In this way, we will offer specialised assistance and keep users informed of product
in terms of multiple communication, entertainment and information access, thus updates and more via a quarterly SonicaTab newsletter. Marketing channel network
differentiating the SonicaTab201 on the basis of a ‘more for less’ value strategy. partners will be provided with the newsletter and will also be given secure access
to a key-account team-managed forum and inventory system so that they can see
Product strategy stock levels of all Sonica products and accessories. Technical assistance will also be
The SonicaTab201, including all the features described in the earlier ‘Product available to channel partners via this secure website.
review’ section, will be sold with a one-year warranty. We will introduce a high-
end model (the SonicaTab202) during the following year. Building the SonicaTab Marketing research
sub-brand is an integral part of our product strategy. The brand and logo (Sonica’s Using research, we are identifying the specific features and benefits that our target
distinctive yellow thunderbolt) will be displayed on the product and its packaging, market segments value. Feedback from market tests, surveys and focus groups will
and be reinforced by its prominence in the introductory marketing campaign. help us develop the SonicaTab201 and 202 models. We are also measuring and
analysing customers’ attitudes towards competing brands and products. Brand
Pricing strategy awareness research will help us determine the effectiveness and efficiency of
The SonicaTab201 will be introduced at $99 wholesale/$149 estimated retail price our messages and media. We will also reward customers who register with our
per unit. We expect to lower the price of this first model when we expand the database and agree to be surveyed from time to time. Such surveys will allow
product line by launching the SonicaTab202, which are forecast to wholesale at us to monitor customer satisfaction and thereby monitor market reaction to the
$129 per unit. These prices reflect a strategy of (1) attracting desirable channel SonicaTab range as it unfolds.
partners and (2) taking share from other established competitors.
Marketing organisation
Placement strategy Sonica’s chief marketing officer, Jade Nguyen, holds overall responsibility for all
Our placement strategy is to use selective marketing channel partners, thereby making of the company’s marketing activities. Figure A2.1 shows the structure of the
SonicaTab models available through well-known stores and online retailers. During the marketing organisation. Sonica has hired Worldwide Marketing to handle national
first year, we will add channel partners until we have coverage in all major Australian sales campaigns, trade and consumer sales promotions, and public relations efforts.
and New Zealand markets and the product is included in the major electronics
catalogues and websites. We will also target distribution through mobile-phone outlets Action programs
maintained by major carriers such as Optus, Telstra and Vodafone. In support of our The SonicaTab201 will be introduced in February. Following are summaries of the
channel partners, Sonica will provide demonstration products, detailed specification action programs we will use during the first six months of next year to achieve our
handouts, and full-colour photos and displays featuring the product. Finally, we plan stated objectives.
to arrange special payment terms for retailers that place volume orders.
January
Marketing communications strategy We will launch a $200 000 trade sales promotion campaign and exhibit at the
The typical SonicaTab target customer spends more time online than with traditional major industry trade shows to educate dealers and generate channel support for
media channels. A core component for this strategy will be building web and mobile the product launch in February. The brand website and other sites such as Facebook
brand sites, and driving traffic to those sites by creating a presence on social networks, will present teaser information about the product as well as availability dates and
9780655702412_APP2.indd 737 3/3/20 11:18 AM

locations. Also, we will create buzz by providing samples to selected product April
reviewers, opinion leaders, influential bloggers and celebrities. Our training staff We will hold a trade sales contest offering prizes for the salesperson and retail
will work with retail sales personnel at major chains to explain the SonicaTab201’s organisation that sell the most Sonica tablets during the four-week period.
features, benefits and advantages.
May
February A mobile-phone ad campaign will provide additional support, driving web traffic
The full brand website and social network campaign will launch with full efforts to the brand website and social network sites as well as driving traffic to retailers.
on Facebook, Google+ and Twitter. This campaign will drive the ‘Expect more’
slogan as well as illustrate the ways that SonicaTab delivers more than expected. June
The campaign will show how many functions the SonicaTab can perform and We will mount a radio campaign with a new voice-over tagline promoting the
emphasise the convenience of a single, powerful hand-held device that delivers SonicaTab201 as birthday, Mother’s Day and Father’s Day gifts. We will also exhibit
product features, desirable benefits and values. This campaign will be supported by at the semi-annual electronics trade show and provide channel partners with new
point-of-sale signage as well as by online-only ads and video tours. competitive comparison handouts as a sales aid. In addition, we will tally and
analyse the results of customer satisfaction surveys for use in future promotions
March and to provide feedback for product and marketing activities.
As the multimedia advertising campaign continues, we will add consumer
sales promotions, such as a contest in which consumers post videos to Budgets
our website, showing how they use the SonicaTab in creative and unusual Total first-year sales revenue for the SonicaTab201 is projected at $60 million,
ways. We will also distribute new point-of-purchase displays to support our with an average wholesale price of $99 per unit and variable cost per unit of
supporting retailers. $45 for unit-sales volume of 606 060. We anticipate a first-year loss of up to
Jade Nguyen
Chief Marketing
Officer
Janet Wu Gary Grey

Tony Calella Alan Ellis Melissa Wing
Marketing Product
National Sales Product Manager Product Manager
Communications Development
Manager Smartphones SonicaTab
Manager Manager
Carlos Jacob
Val Singh
Website and
Key Account
Social Media
Manager
Developer
Tiffany Charles Katie O’Connell

NSW, QLD & NT Advertising & PR
Sales Manager Manager
Viktor Chenkov Sheila Taggart

VIC, SA, TAS & WA Retail Sales
Sales Manager Analyst
Ray Charlton
Logistics
Manager
Figure A2.1 Sonica Marketing Organisation
9780655702412_APP2.indd 738 3/3/20 11:18 AM

$10 million on the SonicaTab201 model. Breakeven calculations indicate that the Strengths
SonicaTab201 will become profitable after the sales volume exceeds 569 444, Strengths are internal capabilities that can help the company reach its objectives.
late in the product’s first year of sales. Our breakeven analysis of Sonica’s first
tablet product assumes per-unit wholesale revenue of $99 per unit, variable cost of
Weaknesses
Weaknesses are internal elements that may interfere with the company’s ability to
$45 per unit, and estimated first-year fixed costs of $30 750 000. Based on these
achieve its objectives.
assumptions, the breakeven calculation is:
BEP =
30 750 000
= 569 444 units Opportunities
(99 − 45) Opportunities are external elements that the company may be able to exploit to
its advantage.
Controls
We are planning tight control measures to closely monitor quality and customer-service Threats
satisfaction. The latter will be measured with both end-users and marketing channel Threats are current or emerging external elements that could potentially challenge
partners. This will enable us to react very quickly in correcting any problems that may the company’s performance.
occur. Other early warning signals that will be monitored for signs of deviation from
the plan include monthly sales (by segment and channel) and monthly expenses. Objectives and issues
Given the market’s volatility, we are developing contingency plans to address fast- The company’s objectives should be defined in specific terms so that management
moving environmental changes, such as new technology and new competition. can measure progress and plan corrective action if needed to stay on track.
This section describes any major issues that might affect the company’s marketing
Marketing plan tools strategy and implementation.
Turning to additional resources, please note that Pearson (the publisher of this
book) offers two valuable resources to assist you in developing a marketing plan:
Positioning
A positioning built on meaningful differentiation, supported by appropriate strategy
• The Marketing Plan Handbook by Marian Burk Wood explains the process of
and implementation, can help the company build competitive advantage.
creating a marketing plan, complete with detailed checklists and dozens of
real-world examples. Marketing tools
• Marketing Plan Pro is an award-winning software package that includes These sections summarise the broad logic that will guide decisions made about the
sample plans, step-by-step guides, an introductory video, help wizards, and marketing tools to be used during the period covered by the plan.
customisable charts for documenting a marketing plan.
Marketing research
Key terms: A summary This section shows how marketing research will be used to support development,
Executive summary implementation and evaluation of strategies and action programs.
This section summarises the main goals, recommendations and points as an
overview for senior managers who will read and approve the marketing plan. Marketing organisation
Generally, a table of contents follows this section, for management convenience. The marketing department may be organised by function, as in this sample, by
geography, by product or by customer (or some combination).
Current marketing situation
In this section, marketing managers discuss the overall market, identify the market Action programs
segments they will target, and provide information about the company’s current Action programs should be coordinated with the resources and activities of other
situation. departments, including production, finance and purchasing.
Market description Budgets

Describing the targeted segments in detail provides context for the marketing Managers use budgets to project profitability and plan for each marketing
strategies and detailed action programs discussed later in the plan. program’s expenditures, scheduling and operations.
Benefits and product features Controls

Table A2.1 clarifies the benefits that product features will deliver to satisfy the Controls help management assess results after the plan is implemented, identify
needs of customers in each targeted segment. any problems or performance variations, and initiate corrective action.
Product review
The product review summarises the main features for all of the company’s products,
References
1 ‘Global Apple iPad sales from 3rd fiscal quarter of 2010 to second fiscal quarter of 2016
organised by product line, type of customer, market, or order of product introduction. (in million units)’, statista, <www.statista.com/statistics/269915/global-apple-ipad-sales-
since-q3-2010>, accessed June 2016.
Competitive review 2 Michael O’Grady’s Blog, ‘34% of tablet owners worldwide will be in Asia Pacific by 2017’,
The purpose of a competitive review is to identify key competitors, describe their 17 January 2013, Forrester, <blogs.forrester.com/michael_ogrady/13-01-17-34_of_
tablet_owners_worldwide_will_be_in_asia_pacific_by_2017>, accessed June 2016.
market positions and briefly discuss their strategies.
Channels and logistics review

In this section, marketers list the most important channels, provide an overview of
each channel arrangement, and identify developing issues in channels and logistics.
9780655702412_APP2.indd 739 3/3/20 11:18 AM

Appendix Marketing
3 analytics
spotlights
Spotlight 1: An overview of measures UK study wherein they showed the metrics from two perspectives – one where the
In the foreword to leading business author and academic Tim Ambler’s Marketing level of review (i.e. the metrics are reported to top management) is measured, and
and the Bottom Line, Sir Peter Davis, a former marketing director and CEO of the the other where the level of importance to marketing management is measured.
giant UK retailer, Sainsbury PLC, points out that ‘measurement is the company’s In this appendix, we use the latter perspective only to inform the order in which we
nervous system’, and that while financial metrics are important, on their own they discuss the metrics (analytic measures).
can be misleading. In short, companies must know where they stand in terms of As might be expected, financial measures (largely rearward-looking accounting
customer preference, and they must use many measures to establish this relative measures) are the most widely employed metrics. However, non-financial measures,
position. such as awareness and brand knowledge, are increasingly being used in industry
In this appendix, we explore these analytic measures – also called marketing and in academic research.
metrics – in a very practical way. We begin our investigation of marketing metrics In another study, Professor Farris and his US colleagues list 114 marketing
with an overview of the measures employed by companies, based on their claimed metrics in their summary table. Interestingly, after allowing for terminology
use and their perceived importance to business. First, we discuss briefly the differences, only 12 of the 20 UK measures, set out in terms of importance in
theoretical perspectives that lie behind the use of such measures. Table A3.1.1, have a corresponding entry in the Farris summary table. Given the space
• Control theory. Here, the aim is to monitor a set of measures as a particular limitations in this book, we examine the individual measures shown in Table A3.1.1,
strategic plan, and subsidiary operational plans, are implemented, and to adjust with the justification that their importance to marketing management warrants
the implementation where necessary. In the process, the company examines their inclusion. We acknowledge that the many other metrics we are not including
its strategic goals, checks whether they are being achieved, identifies where may well be of higher importance in some industries.
the company makes or loses money and, lastly, notes the return on investment Source: Quotation concerning measurement from Dan Taylor, ‘A case for analytics’, Social
Media, 15 April 2012, <thenextweb.com/socialmedia/2012/04/15/a-case-for-analytics-if-
in various marketing mix elements. youre-not-measuring-youre-not-marketing>, accessed January 2016.
• Agency theory. Here, the implication is that ‘when it is more difficult to
evaluate marketing results, more reliance is likely to be placed on marketing Spotlight 2: Consumer attitudes
expenditure controls … [and] … specialist marketers are likely to propose
metrics that will justify prospective expenditure (budgets) and past activities’.
2.1 Awareness
As we indicated in Spotlight 1, we walk you through each of the analytic measures
• Institutional theory. This theory suggests that ‘the cultural values and the
mentioned in Table A3.1.1. The first of these is awareness. We tend to think of a
history of the specific company, as well as those of its industry sector’ will
hierarchy of effects model whereby, for many products, customers move stepwise
determine the action the business takes in selecting particular metrics, and
from gaining awareness of products (e.g. from a free trial pack of dental floss
which are reported to top management.
inserted in a magazine) in a product category (e.g. oral hygiene) to brand(s) in that
• Market orientation. Here, the extent to which top management are focused
category (e.g. Colgate), to forming attitudes towards the category and brands, and
on customers and competitors influences the metrics used and which are
from there to using the product and hopefully our brand.
reported to top management. This will vary by industry, particularly between
Awareness is one of the basic measures of marketing communication
consumer-products marketers and business-to-business (B2B) marketers.
effectiveness – basic in the sense that, if you have never heard of dental floss, you
• Brand equity. This intangible asset represents the degree to which using a
are unlikely to consider this product as a solution to a problem such as bad breath.
particular brand (as opposed to using no brand at all) means that the company’s
If you are not aware of a brand and its meaning, you are unlikely to trust it enough
products are less affected by competitors’ price movements. While we can
to buy it – and you certainly are unlikely to recommend it to others. In other words,
measure a brand’s value in financial terms – its asset value, if you will – this is not
you are unaware of the brand in the context of this product category.
the same thing as brand equity. Nevertheless, there is growing pressure to
Professor Farris and his colleagues define awareness thus:
measure the value of this intangible asset.
There are many measures employed by companies in various industry sectors, Awareness: The percentage of potential customers or consumers
and they may be collapsed into primary groups. These companies are working on who recognise – or name – a given brand.
the basis that ‘if you’re not measuring, you’re not marketing’. Marketers tend to use approaches to measuring awareness that are both aided
We have presented the groups in Table A3.1.1 as ‘Spotlights’. In part, these (ad awareness – ‘Have you seen this ad …?’) and unaided (top of mind – ‘Which
analytic constructs are the outcome of Tim Ambler and his team’s major two-stage brands of dental floss come to mind?’). Consumers may be asked to complete a
9780655702412_APP3.indd 740 3/3/20 11:19 AM

Table A3.1.1 Marketing analytic measures

Spotlight no. Analytic construct Analytic measures
1 Overview
2 Consumer attitudes Awareness
Perceived quality
Relevance to customer
Customer satisfaction
Perceived differentiation
Brand/product knowledge
3 Customer behaviour Number of new customers
Loyalty leads generated
Conversions
4 Trade customer Distribution/availability and stockturns
Customer satisfaction
Number of complaints
5 Relative to competitor Relative customer satisfaction
Relative perceived quality
Share of voice
6 Innovation Number of new products
Demand estimates
Forecasting
7 Digital marketing metrics Search engine marketing
Digital marketing measures ranging from average views per visit to average mobile page
views per visit and measures of engagement
8 Accounting for marketing Pricing and breakeven analysis
Sales and gross margins
Profit and marketing budget
Analytic ratios
Financial analysis of marketing tactics
Source: Adapted from research by Tim Ambler, Flora Kokkinaki & Stefano Putoni, ‘Assessing marketing performance: Reasons for metrics selection’, Journal of Marketing Management,
20, 2004, p. 491. Copyright © Westburn Publishers Limited, reprinted by permission of Taylor & Francis Ltd, www.tandfonline.com, on behalf of Westburn Publishers Limited.
Quotations from Tim Ambler, Flora Kokkinaki & Stefano Putoni, ‘Assessing marketing performance: Reasons for metrics selection’, Journal of Marketing Management, 20, 2004,
pp. 475–98. See also Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006;
and Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003.
positioning statement as a measure of brand knowledge – for example, ‘Zoom- if they intend to purchase the product. Taking a quantitative research approach, a
Zoom …’ (where the indicator of the consumer’s knowledge of this brand of motor mail survey or omnibus diary survey may contain the statements and rating scales
vehicle would be ‘Mazda’). to assess attitudes shown in Table A3.2.1.
In this Spotlight, we move from awareness to examining perceived quality as The response in this attitudinal survey is that the potential buyer agrees that
part of a discussion of measuring attitudes. We also discuss usage, but leave the the Google Pixel XL mobile phone has many desirable features. However, it seems
main measures concerning how we account for brand usage to Spotlight 8. it is a brand of mobile phone that people may not like others to see them using,
Sources: Definition from Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, nor is the Google Pixel XL a mobile phone this female respondent would like to
Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, use. Certainly, the perceived quality relative to other brands is higher. This female
2006, p. 35. See also Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times
Prentice Hall: London, 2003.
mobile-phone user sees the Pixel XL to be a very large handset with its 5.5-inch
display. The respondent does not see the brand/product as being relevant to her
2.2 Perceived quality as she indicates she would not choose this brand or model over all other brands.
and The question here is why the potential buyer agrees the Pixel XL has many
2.3 Relevance to customer desirable features and is a high-quality offering (perceived quality) but still does
In Analytic measure 2.1, we discussed the first of the important measures of not see the Pixel XL as a mobile phone she would buy (relevance to customer).
marketing performance set out in Table A3.1.1 – awareness. Here, we move Questions that further research would need to answer come to mind: Is the size of
forward and examine the related analytic measures: perceived quality, relative the handset an issue? If so, and if this view is found to be widely held then Google
perceived quality and relevance of the product to customers. would need to promote the smaller Pixel 5.0-inch. Another question relates to the
Advertising agencies and/or their clients often monitor attitudes to brands (e.g. manufacturer’s name. Previous Google Android mobile phones – branded with the
Samsung) and products (e.g. Galaxy S7) to establish what current and potential Nexus name – were made by HTC, Samsung, LG and Huawei. The Nexus 6P was
users believe, and how strongly they hold these beliefs. Marketers want to know if the first from Huawei. The Nexus 5X was made by LG, as was the earlier Nexus 5.
consumers like the brand and see it as being relevant to them, or perhaps as fitting In reality, such monitoring may be undertaken before, during and after a
their image (as they perceive it and/or want to be seen by others) and, ultimately, promotional campaign for a new product. The campaign may have been designed
9780655702412_APP3.indd 741 3/3/20 11:19 AM

742 Appendix 3 Marketing analytics spotlights
Table A3.2.1 Perceived quality

Disagree Agree
Disagree Disagree Agree Agree
very Neutral very
strongly somewhat somewhat strongly
Please circle your response strongly strongly
Google Pixel XL has many desirable features. 1 2 3 4 5 6 7
Google Pixel XL is a brand of mobile phone people
1 2 3 4 5 6 7
like to be seen using.
Google Pixel XL is a mobile-phone brand for people
1 2 3 4 5 6 7
like me.
Google has made sure that Pixel XL is a high-
1 2 3 4 5 6 7
quality mobile phone.
Google Pixel XL is a higher-quality mobile phone
1 2 3 4 5 6 7
than other brands.
Google Pixel XL is a very large handset. 1 2 3 4 5 6 7
I would choose the Google Pixel XL over all other
1 2 3 4 5 6 7
brands.
to prove the superiority of Google’s so-called ‘pure’ Pixel mobile phones over those Jones and Sasser identified them) will make repeat purchases (remain loyal to
of competitors and may involve resellers competing with plans that prove that the our product/brand); and, second, there is a greater likelihood that totally satisfied
Pixel offers ‘more for the same’ as competing brands. customers will recommend the favoured brand/product to others. We could put
We see from this hypothetical response to an attitudinal survey that there this another way and say that there is a much greater likelihood that dissatisfied
are various components to the overall metric of consumer attitude, with relative customers will tell many others of their poor experience, for bad news can travel
perceived quality and relevance to the customer being two particularly important around the world in the time it takes good news to cross the street. Because of
analytic measures. We also see that such attitudinal research may not answer the ease with which negative word of mouth can spread, particularly in the digital
all the questions that arise, and that quantitative research may need to follow age, we need to establish the extent of customer satisfaction and the customers’
qualitative research. intentions of recommending the brand or product.
Using the sample survey-based ‘rating scale’ presented in Table A3.2.2 is one
2.4 Customer satisfaction way of monitoring performance at various points in the experience of customers at
In Analytic measures 2.2 and 2.3, we examined marketing performance in terms of a hypothetical hotel – the Big’n’Bright Hotel.
attitude tracking and discussed the highly related measures of perceived quality and It can be seen from the statements employed in ascertaining customer
relative perceived quality, and relevance of the product to customers. We now turn satisfaction that the hotel would like to know how satisfied customers are with
to an examination of the next important analytic measure set out in Table A3.1.1 – the various aspects of their stay. We might view this satisfaction survey as akin to
customer/consumer satisfaction. monitoring the ‘moments of truth’ for the hotel. When the CEO of Scandinavian
Whatever the product, customer satisfaction is an important performance Airlines (SAS), Jan Carlzon, spoke of the 50 million 15-second moments of truth, he
measure. Note that, while we are using the term customer interchangeably with was referring to the annual number of points when customers interact with service
consumer, in practice ‘customer’ covers buyers/users in both consumer markets staff. From our customer’s point of view in this example, the overall experience
and business-to-business markets, whereas ‘consumer’ is a term usually limited to was marred somewhat by the check-in experience, and it seems that the business
buyers/users of consumer products, such as groceries. office facilities were not to his liking. Nevertheless, he rated the overall experience
Customer satisfaction is an important measure for two reasons. First, we are positively and, although he was not asked about ‘likeability’, we could say that he
more assured that satisfied customers (preferably totally satisfied customers, as liked the hotel.
Table A3.2.2 Customer satisfaction

Please circle your response for Neither
each aspect of your stay with the Totally Somewhat satisfied nor Somewhat Totally
Big’n’Bright Hotel dissatisfied dissatisfied dissatisfied satisfied satisfied
Check-in 1 2 3 4 5
Suite presentation 1 2 3 4 5
Bedding 1 2 3 4 5
Restaurant service 1 2 3 4 5
Food quality 1 2 3 4 5
Business office facilities 1 2 3 4 5
Checkout 1 2 3 4 5
Overall, how do you rate your stay with us? 1 2 3 4 5
9780655702412_APP3.indd 742 3/3/20 11:19 AM

Table A3.2.3 Possible recommendation to other business people
Please circle your response Very unlikely Unlikely Neutral Likely Very likely
I would recommend the Big’n’Bright
1 2 3 4 5
Hotel to other business people.
Sources: Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006, p. 35. See also
Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003; Orville T Jones & Earl Sasser, Jr, ‘Why satisfied customers defect’, Harvard Business Review,
November–December 1995, pp. 88–99.
But will he recommend the hotel to other business people? (See Table A3.2.3.) important when making their purchase decision. Let us examine the Adelaide-based
From the responses given in Table A3.2.2, it would seem that, while relatively chocolate marketer, Haigh (<haighschocolates.com.au>), and speculate how a newer
satisfied, the customer was not totally satisfied and, because he experienced no competitor, Cacao (<cacao.com.au>), might position its brand in order to effectively
‘wow factor’, he is unlikely to act as an ‘apostle’ or advocate and refer the hotel to compete against Haigh and others, such as Koko Black. All three firms market high-
others. He could just as easily talk about his poor experience in the business office quality chocolates through their own stores and online, but Cacao promises a five-
as about how good a night’s sleep he had, and in all probability he will talk about hour delivery in Melbourne metro area (only). Moreover, Cacao offers a range of
the negative aspect of his stay rather than any positive experience. French macarons and other French pastries. In this latter regard, Cacao completes
It is important to note that the scale in Table A3.2.3 targets the business with such smaller companies as Mosaic Patisserie (<mosaicpatisserie.com.au>).
segment, as it is often necessary to think in terms of customer segments and not In this mini case study, we take the hypothetical situation where Cacao conducts
the overall market. Moreover, such tracking needs to be carried out continuously to blind taste-tests with individuals in the Melbourne CBD and establishes the likelihood
ensure that customer satisfaction levels are maintained or improving. of their buying the brands tasted. The results are summarised in Table A3.2.4.
In going head-to-head with hand-crafted packaged quality chocolates in this
2.5 Perceived differentiation manner, the question becomes how the two companies differentiate themselves
In Analytic measures 2.2 and 2.3, we discussed the related measures perceived from each other, and from competitors such as Koko Black. Cacao markets a range
quality and relative perceived quality, and relevance of the product to customers. of chocolates, patisseries and exquisite macarons, both online and through its
We now examine the next important analytic measure set out in Table A3.1.1 – own boutique stores located in Melbourne in St Kilda, Westfield Doncaster and
perceived differentiation. Highpoint Shopping Centre. Haigh, on the other hand, has some 14 outlets in
This measure is strongly related to the topic of segmentation, targeting and three Australian states, is located in four stores in the Melbourne CBD, as well as in
positioning, which is the focus of Chapter 6. You will see more clearly in that Toorak and Hawthorn, and also sells online.
chapter that no marketing organisation can successfully meet the demands of the Clearly, brands such as Haigh and Cacao wish to be perceived as ‘exclusive’
entire market. Even if the organisation thinks it can, and may even do so with brands, and since each has a limited number of distribution outlets, each is
an innovative new product for a short time, it may be stopped in its ambitions therefore unable to afford media coverage; in fact, it would be wasteful if Cacao
by competitors. It can be said that success breeds competitors, and one or all did try to position the brand via mass media advertising. Rather, Cacao tends to use
competitors may force the issue by targeting the most profitable segment or the direct customer approaches. For example, Cacao also markets directly to five-star
highest-growth segment that offers strong future profits. hotels, airlines and major corporations. Nevertheless, Cacao could be positioned up
In highly contested markets, such as the market for specialty chocolates, each against, or away from, the Haigh brand.
competitor will usually set about ascertaining which criteria customers regard as being The research study established that most purchases were for gifts, and the
summary (see Table A3.2.4) relates to this main reason for purchasing quality
chocolates. From the summary table it can be seen that, for each of the three
product groupings, subjects have indicated they are more likely to purchase Haigh
than Cacao. This is perhaps one reason that Cacao also offers gift vouchers.
Discussions recorded during the focus groups indicated that subjects saw
Haigh as an Australian brand of some long-standing, whereas they saw Cacao as
a somewhat lower-quality brand and one they would not be as keen to give as a
present. When asked about their ‘ideal brand’, most subjects indicated that Haigh
was closest to their ideal gift brand of chocolates and one with which they had
an emotional attachment. From this commentary, we can conclude that the two
brands are perceived to be differently positioned relative to their ideal gift brand.
There is more research that each of these companies could, and no doubt would,
do to predict future sales in various geographic markets and among segments with
different reasons for purchasing chocolates – for example, to treat oneself.
Cacao, cacao.com.au
Sources: <cacao.com.au>, accessed 8 February 2016; <haighschocolates.com.au>,

accessed 8 February 2016; Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial
Times Prentice Hall: London, 2003. For details of the Juster probability scale portrayed, see
Mike Brennan & Don Esslemont, ‘The accuracy of the Juster scale for predicting purchase
rates of branded, fast-moving consumer goods’, Marketing Bulletin, 5, 1994, pp. 47–52.
9780655702412_APP3.indd 743 3/3/20 11:19 AM

744
Table A3.2.4 Chocolate type purchase probability

No chance, Certain,
almost no Very slight Slight Some Fair Fairly good Good Very practically
Purchase chance possibility possibility possibility possibility possibility possibility Probable probable Almost sure certain
probability (1 in 100) (1 in 10) (2 in 10) (3 in 10) (4 in 10) (5 in 10) (6 in 10) (7 in 10) (8 in 10) (9 in 10) (99 in 100)
9780655702412_APP3.indd 744
Cacao wooden gift
boxes 0 1 2 3 4 5 6 7 8 9 10
Haigh gift boxes

0 1 2 3 4 5 6 7 8 9 10
Cacao milk, dark or

truffle selections 0 1 2 3 4 5 6 7 8 9 10
Haigh premium
chocolate tablets 0 1 2 3 4 5 6 7 8 9 10
Appendix 3 Marketing analytics spotlights
Cacao party boxes

of hand-made 0 1 2 3 4 5 6 7 8 9 10
chocolates
Haigh hand-made
chocolates 0 1 2 3 4 5 6 7 8 9 10
3/3/20 11:19 AM
2.6 Brand/product knowledge The client’s brand knowledge was gained by word of mouth from a specialist –
In the discussion earlier, we saw that most companies track analytic measures of the personal trainer, Samantha – rather than from advertising. The question for
brand awareness, attitudes towards the brand, intentions to purchase and usage. Brooks’ marketing management is to ascertain the percentage of running-shoe users,
When discussing awareness in Analytic measure 2.1, the hierarchy of effects model and potential users, who hold this brand knowledge. The outcome of quantitative
was introduced. This model relates to the notion that buyers move from a state of research in the form of a survey containing word association measures, such as
unawareness of a product category (e.g. products for runners) to awareness of a those in Table A3.2.5, will soon let marketing management know whether they need
set of brands (e.g. Adidas, Brooks, Fila, Nike, Puma and so on) to developing a liking to communicate this message more widely. If the brand knowledge that Brooks’
for one brand, trialling and developing a preference for one brand, and repeatedly running shoes are well suited to those with gait and other problems is widely held,
using that brand more often than others. That is, they become brand loyal. then they need to reinforce this brand knowledge. It may be necessary to ascertain the
Most buyers of products for runners are aware of Nike, ASICS and Brooks. They have brand knowledge of personal trainers and other fitness professionals – lead users –
probably bought at least one pair of each brand over time and may even like (i.e. hold to ensure they are spreading this knowledge. Usually, such knowledge is more
positive attitudes towards) each brand for different reasons. But what is their brand believable when it comes from trusted others, rather than via paid advertising.
knowledge? This is the important analytic measure we examine here. Professor Farris This is one reason why online communities of interest/practice, such as Coolrunning
and his colleagues provide an easily understood definition of brand/product knowledge: Australia, <coolrunning.com.au>, have risen to prominent usage.
Brand knowledge is associated with the overall brand equity a firm builds up
‘The percentage of surveyed customers who demonstrate specific
when positioning its brand or brands with particular market segments. Associated
knowledge or beliefs about a brand or product.’
brand equity metrics include brand awareness, brand familiarity (also known as
At this point, we eavesdrop on a group of joggers working with Samantha, a
brand salience), brand relevance, brand preference, brand availability, brand
self-employed personal trainer. In response to a question from one of her clients
leadership and brand loyalty. It is important to note that marketing management
about why the client’s ankles are troubling her, Samantha says: ‘You have a moderate
finds it necessary to measure the standing of their brand relative to competitors.
over-pronation, and you need to consider running shoes that will provide you with
For example, Coca-Cola has built considerable brand equity over time based on
extra cushioning and more active stability. I tend to favour Brooks for people in your
people’s awareness of the brand through advertising the packaged product, market
situation. Take a look at their website for the Brooks model best suited to your needs.’
leadership and its wide product distribution, which makes it readily available in
At home later that day, the client visits the Brooks website to look for a shoe model
both packaged and post-mix forms.
suitable for joggers in her situation: <www.brooksrunning.com.au/shoeadvisor/>.
Table A3.2.5 Brand knowledge using word association

Please complete the sentence by inserting a brand name of your choice in the right-hand column
1. The brand of running shoe that is best suited to those who have a gait problem and require active
stability solutions is __________.
2. The model of running shoe that is best suited to those who have a gait problem and require active
stability solutions is __________.
3. Air Zoom Odyssey is a stability running shoe carrying the __________ brand.
4. Supernova Sequence boost 8 is a stability running shoe carrying the __________ brand.
5. __________ has enabled connection of a person’s running shoes to an iPod to collect running
information.
And so on …
Sources: Brooks website, <brooks.com.au>, accessed 8 February 2016; Nike website, <nike.com>, accessed 8 February 2016; Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J
Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006, p. 36. See also Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial
Times Prentice Hall: London, 2003; Roger J Best, Market-Based Management: Strategies for Growing Customer Value and Profitability, 4th edn, Prentice Hall: Upper Saddle River, NJ, 2005.
Answers: 1. Brooks; 2. Adrenaline GTS 14; 3. Nike; 4. Adidas; 5. Nike.
Spotlight 3: Customer behaviour As most markets are of finite size – whether we refer to customer numbers,
3.1 Number of new customers economic standing or willingness to spend – companies face a strategic decision
We examined the importance of brand knowledge in Spotlight 2 (Analytic when they target new customers. Such a decision may provoke competitors to
measure 2.6) and now turn our attention to the importance of gaining new mount marketing programs designed to retain their best customers.
customers. While a great deal of criticism has been levelled at marketing scientists Another reason why it may be profitable to target new customers is where
and practitioners for focusing on gaining new customers to the apparent a company has developed an innovation after determining that there is latent or
exclusion of retaining existing customers, the reality is that both groups require unmet demand for a new product. This innovation might take the form of a complete
attention. breakthrough product. Or it might be a discontinuous innovation, such as the
Marketing organisations need to retain profitable customers, and also need to incandescent light bulb, which the development of electricity enabled. Alternatively,
innovate so as to sell more of their product portfolio to existing customers. However, it might be a continuous innovation, such as a new flavour of carbonated beverage
they also need to draw new, preferably profitable, customers to their products. that might appeal to an older age group as a mixer drink. The development of such
9780655702412_APP3.indd 745 3/3/20 11:19 AM

new products is often high-risk, given that many products – consumer products in 3.2 Loyalty leads generated
particular – fail at one of the many stages from conceptualisation through to full We turn now to a discussion of a very important aspect of marketing that is
commercialisation. connected with customer loyalty – the generation of loyalty leads.
In some instances, the introduction of a new product is accompanied by Marketing organisations may deal with repertoire markets, where customers
growing market share or an increased percentage of measured demand for the rarely buy a single brand (e.g. Colgate Fluorogard) in a particular category (e.g. oral
product category. But, rather than retaining customers, new customers are trialling hygiene). These customers are more likely to buy from a limited set of brands they
the new product, but not repeating their initial purchase. In short, such a product like – evoked set – and sometimes from even more than one product category.
is doomed. If marketing management does not withdraw such a product, retail These customers may be relatively loyal to a brand if they purchase it more often
category managers will soon delete the brand. than they purchase other brands in the set. Where organisations operate in
The marketing annals are replete with case studies where a new use for an subscription markets (e.g. mobile phones, subscriber television, magazines, direct
existing product has seen existing customers buy more of the product, and also and online database marketing generally), loyalty is relatively easily measured in a
drawn new customers to the product category and brand. One example is US Arm more straightforward manner: What do customers buy, how frequently and do they
& Hammer. After many years of promoting its baking soda brand for baking, it buy products offering the firm the highest profit margin? The simplest measure of
attracted new customers by promoting the product’s benefits as a deodorant for loyalty is behavioural: Is the customer repeat purchasing? Intention to purchase,
refrigerators. The original brand was retained and sub-brands introduced: new or purchase probability (see the Juster purchase probability scale in Table A3.3.1),
deodoriser products such as carpet deodoriser and cat litter, and then personal- is often used as a measure in situations where there is a relatively long interval
care products, household cleaners and industrial products to leverage off the initial between purchases, as in the case of consumer durables or motor vehicles. Another
success of the Arm & Hammer brand. measure of loyalty is also a measure of satisfaction – willingness to recommend
The need to acquire profitable new customers has become evident to many that others adopt the brand, as in the responses in Table A3.3.2.
marketing organisations. Take the example of a bank that offers nine products to Tim Ambler, senior fellow in marketing with the London Business School, uses
the market. Each of these financial products is based on the simple notion that the term in-the-head metric to describe brand loyalty. He does so because, while we
borrowers can make better use of the bank’s money than can lenders to the bank – may measure overt behaviour by analysing databases, in some business sectors it
that is, the borrowers can create more wealth than the lenders can. Any bank makes more sense to use ‘in-the-head’ measures, such as those shown in Tables A3.3.1
needs to ensure that new products do not cannibalise profits earned from existing and A3.3.2. Repeat purchase behaviour may be habitual or even indicate customer
customers using existing products, and that any new customers attracted to the inertia. Alternatively, such behaviour may indicate complete satisfaction with a
new product are likely to take up existing products as well. That is, the bank can particular brand. So, it is often wise to supplement behavioural measures with
gain a ‘high share of wallet’. ‘in-the-head’ measures.
As can be seen, the number of new customers gained in a particular period is The database marketer is in a rather different situation to repertoire marketers,
an important marketing metric that needs to be carefully considered by marketing even though the latter – particularly retailers – are increasingly integrating
managers. The acquisition of new customers goes hand in hand with retaining marketing research and database information to gain customer insights.
them. It is also related to many other facets of marketing. The database marketer can more easily monitor purchase behaviour and may even
Sources: See Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing introduce mechanisms, such as ‘spotters fees’, designed to have completely satisfied
Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006;
Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London,
customers provide leads to new customers. Financial services organisations, such as
2003; Roger J Best, Market-Based Management: Strategies for Growing Customer Value and American Express and even insurance companies, have employed these techniques.
Profitability, 4th edn, Prentice Hall: Upper Saddle River, NJ, 2005. Great care has to be taken to ensure that the benefits or commissions or incentives
Table A3.3.1 A Juster probability scale

How likely are you to attend at least one Socceroos match in the coming season?
Please circle the number that corresponds with the likelihood of your attendance.
10 Certain, practically certain
9 Almost sure
8 Very probable
7 Probable
6 Good possibility
5 Fairly good possibility
4 Fair possibility
3 Some possibility
2 Slight possibility
1 Very slight possibility
0 No chance, almost no chance
9780655702412_APP3.indd 746 3/3/20 11:19 AM

Table A3.3.2 Measuring loyalty with ‘in-the-head’ metrics

Disagree
very Disagree Disagree Agree Agree Agree very
Please circle your response strongly strongly somewhat Neutral somewhat strongly strongly
1. When I next buy a new car, I plan to
1 2 3 4 5 6 7
buy another Mazda.
2. I would recommend Mazda to my
1 2 3 4 5 6 7
friends.
on offer are not so attractive as to entice the buyer to make the first payment on marketing organisations can indeed hold the ‘right’ customers – in other words,
behalf of the person who is supposedly being signed up. those customers who might represent the ‘heavy half’, or those where the marketing
While there are many unproven aspects of the claims of greater profitability organisation holds a ‘higher share of wallet’ – and whether these customers are
that supposedly derives from retaining customers, potential customers are more indeed associated with higher profitability.
likely to adopt a product when there is positive word of mouth for a brand, and Nevertheless, the fact remains that, at any point in time, every marketing organisation
marketing organisations will benefit where completely satisfied customers provide faces a market where customers fall along a spectrum shown in Figure A3.3.1 from
leads to these potential customers. being unaware of the need for a product category and brand, to either purchasing a
Sources: See Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing repertoire of brands or perhaps solely purchasing our brand or a competitor’s brand.
Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006,
Those who are unaware of a need or problem are converted to product category use
pp. 43–4. See also Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times
Prentice Hall: London, 2003, pp. 133–4; Roger J Best, Market-Based Management: Strategies and ultimately to one or more brands within a category.
for Growing Customer Value and Profitability, 4th edn, Prentice Hall: Upper Saddle River, NJ, We tend to think of mass media communication and social media as the means
2005.
of converting the unknowing to various points along the spectrum in the case
of fast-moving consumer goods. Often, this notion is presented as a hierarchy of
3.3 Conversions effects model. However, here, we are simply presenting the idea that all brands face
In our discussion of analytic measures thus far, we have stressed the need to such a divided marketplace at any point in time. The question becomes a matter of
completely satisfy customers, right from the beginning of the relationship. We have what it takes to convert the unaware, or indeed to convert those in any group to
emphasised that the marketing focus in earlier times on gaining new customers another group further along the spectrum.
has given way to engaging with customers at various levels and retaining them. Taking a business-to-business marketer as our example – a medical equipment
We noted that there are diverging views among researchers as to whether company marketing a new synthetic-bone product – the company would find that
Aware and demand or ‘subscribe’ Aware and demand or ‘subscribe’

to a competitor’s brand to our brand exclusively
Aware but use our brand in a

‘repertoire’ of brands
Aware but don’t

use our brand
Aware but don’t use

our product category
Unaware of
want/problem
Figure A3.3.1 The spectrum of awareness and brand use
9780655702412_APP3.indd 747 3/3/20 11:19 AM

it may need to communicate en masse with surgeons with different specialisations days at 0–4°C in the case of fresh chickens and a much shorter time period for
via their professional magazines but, in the main, sales representatives are needed staples such as fresh milk and bread. Chicken stocks are replenished twice a week in
to make one-to-one representations and ultimately close the sale. Let us assume large supermarkets, but only once a week in smaller stores. This product experiences
the medical representatives involved can only visit one specialist a day because 100 stockturns (turnover rate) each year and is an important and profitable product
much of the representatives’ time – at least half of each day – is spent in operating category for retailers both large and small. When expressed in sales units, ‘100
theatres guiding surgeons in the use of their products. Let us assume further that stockturns’ means that the entire stock turns over twice each week:
the typical representative costs the marketing organisation $200 000 per annum, Chicken stockturns in units = Unit sales x twice weekly = 100 stockturns
including on-costs such as superannuation and motor vehicle costs, and that they per annum
work 48 weeks per year, taking four weeks’ annual leave each year. One more Not only are there high stockturns involved with such short-shelf-life products
piece of information is needed – how many half-day equivalent calls does it take as chicken, but there is also a relatively high gross margin for the retailer (say
to convert a surgeon to trialling the marketer’s product, and to using it exclusively? 30 per cent) when expressed as a percentage of their selling price:
If it takes six (half-day) calls at approximately $417 per call, and leaving aside
Gross margin $3.00
any other marketing costs, then the cost of the conversion in this instance is $2502. Retailer gross margin percentage = = = 0.30 = 30%
Unit selling price $10.00
If the marketing organisation has a profit margin of 50 per cent, then the sales
representative needs to sell this surgeon $5004 of the product to simply break even Returning to stockturns, the inventory turnover rate is the number of times
on the cost of converting the surgeon. As you can see, conversions are an important an inventory turns over or is sold during a specified time period (usually one year).
analytic measure. This is because it is the multiple conversions in the static-sized This rate indicates how quickly a business is moving inventory through the
markets that such organisations face that lead to continued profitability and the organisation. Higher rates indicate that lower investments in inventory are made,
very existence of these organisations. thus freeing-up funds for other investments. Inventory turnover rate may be
Sources: For more on the implications of salesforce costs, see Spotlight 8. See Tim Ambler, computed on a cost, selling price or unit basis. The formula based on cost is:
Flora Kokkinaki & Stefano Putoni, ‘Assessing marketing performance: Reasons for metrics
selection’, Journal of Marketing Management, 20, 2004, p. 491; Paul W Farris, Neil T Bendle, Cost of goods sold
Inventory turnover rate =
Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Average inventory at cost
Master, Wharton School Publishing, 2006; Tim Ambler, Marketing and the Bottom Line, 2nd
edn, Financial Times Prentice Hall: London, 2003; Roger J Best, Market-Based Management: Please turn to Spotlight 8, Analytic measure 8.4, for more on analytic ratios,
Strategies for Growing Customer Value and Profitability, 4th edn, Prentice Hall: Upper Saddle
River, NJ, 2005; and Graham R Dowling & Mark Uncles, ‘Do customer loyalty programs really such as gross margin percentage and net profit percentage.
work?’, Sloan Review, 38, Summer, 1997, pp. 71–82. Given that marketing organisations, such as the biscuit maker Arnott’s <www.
arnotts.com.au>, carry an extensive product range under a raft of sub-brands (e.g.
Spotlight 4: Trade customer Tim Tam, Tiny Teddy, Vita-Weat), they must monitor distribution levels and stock
levels to ensure they do not lose shelf-space to competitors and house brands,
4.1 Distribution/availability and stockturns
which would quickly mean an erosion of their brand’s market share and, ultimately,
Much of the commentary concerning analytic measures involves measuring
profits.
performance against strategic objectives. One of the most important measures
While distribution level is part of the measure of brand equity for the FMCG
for any marketing organisation, but particularly for fast-moving consumer goods
marketing organisation, it is not the only distribution measure that is important.
(FMCG) marketers, is distribution level, or the level of availability of the firm’s brands
Both the marketing organisation and the retailer are vitally interested in the return
through the distributive trade. In this context, The Nielsen Corporation (formerly
that the particular chain is getting from the cubic metres of shelf-space allocated
known as ACNielsen), <nielsen.com/au/en.html>, is a byword, having expanded
to the particular brand’s product range. Both organisations will have employed
around the world with marketing behemoths, such as Unilever, which needed to
planogram and space-planning tools to budget a particular return and are keen
monitor their distribution levels. Unilever began as Lever Bros with Sunlight Soap
to ensure that this result is achieved. Gone are the days when a marketer could
in the 1890s and, with their advertising agencies, Lintas (an acronym for Lever
claim that an overall retail market share justified a particular shelf-space allocation
International Advertising Services which morphed into Lintas: Worldwide) and
through an individual chain. Retailer category managers are much more interested
J. Walter Thompson (JWT is now J. Walter Thompson Worldwide with 200 offices in
in the planned and actual sales and returns achieved through their own stores,
over 90 countries and part of the WPP group), have expanded their global sphere
and even more so as their own retail brands increase their share of in-store shelf-
of operations.
space allocation. The product manager monitoring distribution levels will also be
From Tim Ambler’s perspective, and from our own, distribution level is one
concerned with stock levels, and with ensuring that out-of-stock situations do not
of the indicators of brand equity. Numeric distribution in terms of the number
occur at store level, particularly if in-store promotions are underway and expensive
of stores stocking is important, but weighted distribution is more important.
gondola end shelf-space has been paid for.
The metric is expressed as:
Distribution level is a less-meaningful term in the business-to-business
the total stores carrying the brand expressed as a percentage of those who marketing of industrial products (e.g. building materials), for the simple reason that
could but also as weighted by size (turnover) of those stores. much of this type of product is delivered direct to the end-user. However, companies
As you can see from this succinct definition, retail store size is important, as it such as CSR deliver products (e.g. Gyprock wall-sheeting) direct to industrial users
influences many other aspects of marketing. For example, such matters as how many but also distribute through the distributive trade (e.g. Bunnings and Mitre 10) to
deliveries are made to stores each week are involved, whether from the retailer’s end-users, who range from the home-DIY person to the tradesperson and small
warehouses or delivered store-to-store by those with short-shelf-life products – nine building company. Unlike the FMCG marketer with its packaged-goods sales and
9780655702412_APP3.indd 748 3/3/20 11:19 AM

distribution-level measurement by The Nielsen Company, it is more difficult to Service levels − percentage of
Deliveries in timeframe promised (#)
monitor distribution levels in business-to-business markets where direct sales to on-time deliveries =
All deliveries in timeframe promised (#)
end-users are not involved.
Other marketers, such as Sigma Pharmaceuticals Ltd, <www.sigmaco.com.au>, Many firms use routing software to ensure that deliveries are made at a time
owner of the Amcal, Guardian and Amcal Max chemist chains, find the task of that suits the customer. Imagine if a Carlton and United Breweries truck turned
monitoring distribution levels somewhat easier. Their distribution systems are linked up to deliver to an off-licence liquor outlet with pallets of beer at 7 am, but the
directly to these stores and to banner member and independent stores, making outlet’s staff only accept deliveries from 10 am to 10 pm. This type of problem
it possible to monitor distribution levels accurately. Thus, it can be seen that the cascades across other outlets if a truck is held up at any one of its deliveries on a
measurement of distribution levels is important, but varies by industry in terms of route. Even the number of traffic lights on a delivery route needs to be taken into
the ease with which it can be monitored. account if schedules and agreed service levels are to be met. This is one reason why
Sources: For more on Unilever, see <unilever.com.au/aboutus/ourhistory/>, accessed a delivery vehicle makes fewer deliveries in Sydney than in Melbourne, although
11 February 2016; and for more on WPP and JWT, see <wpp.com/wpp/>, accessed
this difference between the two locations is closing. Thus, tracking is important.
11 February 2016. Distribution-level metric definition from Tim Ambler, Marketing and the
Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003, p. 134; see also Tim When we turn to examine inventory levels, two metrics are relevant to the
Ambler, Flora Kokkinaki & Stefano Putoni, ‘Assessing marketing performance: Reasons for discussion: inventory days and inventory turns.
metrics selection’, Journal of Marketing Management, 20, April 2004, pp. 475–98; Paul W
Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Days in year (365)
Every Executive Should Master, Wharton School Publishing, 2006; Roger J Best, Market-Based
Inventory days =
Inventory turns (I)
Management: Strategies for Growing Customer Value and Profitability, 4th edn, Prentice Hall:
Upper Saddle River, NJ, 2005. As we saw in Analytic measure 4.1, chicken is delivered to large supermarkets
twice a week, meaning that the average inventory (I) is some 3.5 days. Employing the
4.2 Customer satisfaction inventory days formula (above), we see that 365/3.5 means an inventory turnover
and (also called stockturn) of just over 100. There are many low-margin, high-volume
4.3 Number of complaints products – loose sweets among them – but imagine how delighted retailers must be
In Analytic measure 2.4, we examined customer satisfaction, taking a broad with chicken suppliers because both the gross margin and the sales volume are high.
view of the term customer to include both consumers (end-users) and customers One of the hallmarks of an almost pure service and/or an experiential product
(business buyers/users). When examining use of the distributive trade and is that no inventory is held. In the case of tangible goods, inventory days indicate
assessing distribution levels, we refer to a particular type of customer – marketing how quickly finished-goods inventory moves through the sales process. Another
intermediaries. In this analytic measure, we examine the next important trade measure is employed to analyse inventory turns:
customer performance measure – customer complaints – and what it is that Product revenues ($)
Inventory turns =
dissatisfies marketing intermediaries. Average inventory ($)
In consumer markets, not all dissatisfied people complain to the companies they
The calculation of inventory turns via this method requires consistency in
deal with, even when a warranty may be involved. Many of these consumers may
whether retail selling price or retailer buy price (usually wholesale price) is used
nevertheless spread negative word of mouth about the brand, or about some other
for both revenue and average inventory. Assuming sales of shirts of $2 million in
aspect of the product, such as its performance, delivery or installation. The study
a year, and a beginning-of-year inventory level of $500 000 and an end-of-year
of complaining behaviour draws deeply on the fields of psychology and sociology.
inventory of $600 000, inventory turns would amount to 3.64. Taking this figure
Trade customers are far less likely to be reticent and, while the cause of
into the inventory days formula, we divide 365 by 3.64 and see that the retailer
complaints may lead to lower perceptions of the supplier, its brands and contact
holds some 100 days’ worth of inventory.
people, the real issue is that it often opens the door to a trial of a competitor’s
Retailers that use a centralised warehouse to stock their stores become
brand or product. Such a trial may then lead to its adoption over the original
dissatisfied when inventory levels are too high in relation to turnover for product
supplier’s product.
categories and for the brands within them. If marketing organisations are failing
What problems arise in this context, you ask? And what can be done to remedy
to entice consumers to their brand, retailers become dissatisfied with the brand
the situation? The metrics involved give an inkling of the marketing logistics
marketer’s performance and will ultimately delete the brand.
problems that may cause tensions between suppliers and retailers: out-of-stocks;
Sources: Formulae from Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein,
service levels; and inventory turns. Let us look at each of these metrics and the Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School Publishing,
possible remedies. 2006, pp. 186–8. Also see Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial
Times Prentice Hall: London, 2003; and Fred Selnes, ‘Antecedents and consequences of trust
Retail stores where brand (or product) is listed but unavailable (#) and satisfaction in buyer–seller relationships’, European Journal of Marketing, 32, 1998,
Out-of-stocks =
Total retail stores where brand (or product) is listed (#) pp. 305–22.
While out-of-stocks occur for genuine unplanned reasons, such as when

an accident prevents production continuing at planned levels, in such a case,
Spotlight 5: Relative to competitor
retailers need to be kept appraised of the situation, and should understand the 5.1 Relative customer satisfaction
problems facing the supplier. Arguably, they will still give over more shelf-space In Analytic measure 2.4, we discussed the importance of customer satisfaction and
to a competitor’s brand or product. As academic researchers have pointed out, how a hotel might measure its performance in various areas ranging from check-in,
communication leads to commitment and trust in such business relationships. through to the other services on offer, and finally checkout. Customers invariably
9780655702412_APP3.indd 749 3/3/20 11:19 AM

make comparisons between the offerings they experience, particularly in the same 5.2 Relative perceived quality
category. An example of a company measuring relative customer satisfaction See Analytic measures 2.2 ‘Perceived quality’ and 2.3 ‘Relevance to customer’,
occurs when an airline asks its customers to complete a pencil-and-paper survey noting that when dealing with relative perceived quality, comparative measures
towards the end of a long-haul flight. The airline would ask customers to rate are involved.
various aspects of its service, ranging from check-in to in-flight services such as
entertainment, food and beverages, and flight-crew attentiveness. The presentation 5.3 Share of voice
and comfort of the aircraft would also be included. The main difference between Share of voice is an important analytic measure because it indicates the standout
the instrument used in Analytic measure 2.4 and the instrument used to assess value of the brand or product from marketing communication – traditional
relative customer satisfaction would be in the form of questions that might be advertising and social media word of mouth, in the main – relative to the overall
framed as shown in Table A3.5.1. marketing communication in a category. Marketers, senior management and
It is likely that the survey would be more detailed and broken into sections boards of directors seek ongoing answers to the question: ‘What is the relationship
covering on-ground and in-flight services, as the online examples at <www. between share of voice (SOV) and share of market (SOM)?’
worldairlinesurvey.com/> illustrate. In fact, many airlines, and other companies, This metric is calculated as follows:
track a multitude of variables over time thereby examining performance trends in Brand advertising ($, #)
satisfying customers. Share of voice (%) =
Total market advertising ($, #)
However, it is not until the customer is asked to compare the present flight with the
last airline they flew with that we see there may have been an incident during check-in In the above formula, advertising can be expressed in terms of dollar
that has caused the customer to see the airline in a relatively poor light relative to the expenditure, gross rating points (GRPs) or target audience rating points (TARPs).
last airline used – the hypothetical Airlines of the World (see Table A3.5.2). From this In essence, share of voice entails estimating a company’s brand advertising
customer’s viewpoint, food and beverage service was perceived to be better than relative to the total by all companies in the particular category. Clearly, if more
on the last airline flown. than traditional media advertising is involved – today, that would be online
Constant polling of customers provides airlines and other companies with a marketing communication – then it would be wise to estimate share of voice
dashboard metric of their relative performance across a range of measures from the separately for advertising and online marketing communication. As we discuss
customers’ perspective. This enables the airlines to make adjustments where they in Analytic measure 7.2, different measures of marketing performance are used
find performance slipping. Such adjustments may not be simple and may take time, when assessing digital media.
such as where re-training of personnel is involved. There are few difficulties in calculating a firm’s brand advertising expenditure,
Sources: Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: however it is expressed. However, gaining an estimate of total market advertising
50+ Metrics Every Executive Should Master, Wharton School Publishing, 2006, p. 35. See also dollars is more difficult, and even more difficult when expressed as GRPs or TARPs.
Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London,
For this reason, medium-to-large firms that work with full-service advertising
2003; Orville T Jones & Earl Sasser, Jr, ‘Why satisfied customers defect’, Harvard Business
Review, November–December 1995, pp. 88–99. agencies, or that use media-planning and -buying agencies, find it easiest to
Table A3.5.1 Customer satisfaction

Please provide us with feedback on your Totally Somewhat Neither satisfied Somewhat Totally
experiences during the present flight dissatisfied dissatisfied nor dissatisfied satisfied satisfied
Check-in ease 1 2 3 4 5
Check-in personnel service 1 2 3 4 5
Airport lounge facilities 1 2 3 4 5
Flight attendant service 1 2 3 4 5
Food and beverage quality 1 2 3 4 5
Overall, how do you rate your flight with us? 1 2 3 4 5
Table A3.5.2 Relative customer satisfaction

Thinking about the last airline you flew with, was your Very much Somewhat Much the Somewhat Very much
present flight … worse worse same better better
Check-in ease 1 2 2 4 5
Check-in personnel service 1 2 3 4 5
Airport lounge facilities 1 2 3 4 5
Flight attendant service 1 2 3 4 5
Food and beverage quality 1 2 3 4 5
Which airline did you last fly with? Airlines of the World
9780655702412_APP3.indd 750 3/3/20 11:19 AM

calculate and use the share-of-voice metric. In doing so, it is important to compare Thus far, we have discussed examples of new products that both capitalise on
‘apples’ with ‘apples’; media costs using rate-card prices must be used, or if and further build ‘brand equity’ – the ability of the brand to withstand competitive
discounts are obtained in the firm’s brand advertising, then all media costs should pressure on price. It must, however, be stated that there are many different views
be calculated using the same discounted rates. on the metrics of brand equity, some based on measuring value. The performance
Marketing managers are interested in establishing this ratio, for as Nielsen of such innovation is measured by the ‘number of new products’ released in a
Australia states, ‘All things being equal, a brand whose share of voice (SOV) nominated period. Innovation may also be expressed in terms of actual target unit
is greater than its share of market (SOM) is more likely to gain market share.’ sales, revenue and return on investment. Companies also measure their efficiency
The $64 million question management seeks to answer is: How accurately can they in bringing new products to market relative to the total number of innovations,
predict market share gains from decreasing, maintaining or increasing advertising many of which do not reach the commercialisation stage. (See Chapter 8 for a
expenditure in nominated (accounting) periods? more-detailed discussion on the new-product development process.) Many
Sources: For more on marketing promotion, see Analytic measure 8.5 concerning financial companies benchmark themselves against other firms, often outside their own
analysis of increasing advertising expenditures. For an explanation of GRPs, see ‘Marketing
industry as they take on work outside their so-called traditional line of business.
FAQs’, Marketing Profs, <marketingprofs.com/Faqs/showfaq.asp?ID=134&CatID=1>,
accessed January 2016. For an explanation of TARPs, see ‘Multimedia buying and planning Such moves allowed Harley-Davidson to successfully manufacture motor-vehicle
FAQ/glossary’, <multimediabuying.com.au/faq>, accessed January 2016. For a more-detailed wiring harnesses, and therefore to survive financially, returning to its pre-eminent
discussion of the relationship between SOV and SOM, see Nikki Clarke, ‘Budgeting for the
upturn – Does share of voice matter?’, ACNielsen’s Nielsen Wire, 6 August 2009, available
position in the motorcycle market.
at <nielsen.com/us/en/insights/news/2009/budgeting-for-the-upturn-does-share-of-voice-
matter.html>, accessed 18 February 2016; Paul W Farris, Neil T Bendle, Phillip E Pfeifer &
David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton 6.2 Demand estimates
School Publishing, 2006; and Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial As we illustrate in Chapter 8 during the discussion of product life-cycle strategies,
Times Prentice Hall: London, 2003.
new products are often unprofitable during the development and introduction
stages even though the lack of any effective competitors may enable a higher-
Spotlight 6: Innovation than-normal profit margin to be taken. As sales volumes rise during the growth
stage, in particular, and before competitors arrive on the scene, costs per unit of
6.1 Number of new products
sales decline and profits may rise even though margins may fall while meeting
The three closely related analytic measures number of new products, demand
competitor pricing (see Figure 8.2 in Chapter 8).
estimates and forecasting are dealt with in the present discussion under Spotlight 6
We express ‘revenue on new products’ as the percentage of sales generated by
and also in Spotlight 8 when discussing the profit implications.
products in a nominated period, or sometimes over the past few periods. ‘Margin
Innovation is the lifeblood of most marketing organisations. Many organisations
on new products’ is the dollar or percentage profit margin on new products
have new-business development managers and new-product development
released in a nominated period.
managers. Others have research and development and/or innovation directors.
In our examination of accounting for marketing in Spotlight 8, we introduce a
While many companies have a surfeit of new products under development, the
company manufacturing computer monitors – BCM – to discuss various aspects of
quality of these so-called innovations is often questionable. When we examine
pricing, sales and profits. In the present analytic measure, we employ a different
internal measures, we see that 3M is one company that ensures it measures the
company for illustrative purposes. Here, we discuss SMTV’s plans to launch a
proportion of new-products sales to total sales on an ongoing basis.
dedicated Netflix USB connector that allows digital televisions with USB ports to
So, what do we mean by ‘innovation’? In the marketing context, we highlight
have dedicated high-speed internet for Netflix and Skype services. This product
Tim Ambler’s definition:
allows internet access for these devices where the home is wired with appropriate
Innovation – management inspired changes that alter the firm’s position ethernet cabling from the cable modem supplied by service providers, such as
in the market [in a given period]. Such innovations may be introducing new Telstra’s Bigpond and Optus, or has wireless (WiFi) access throughout the home.
brands and products, finding new customer segments for existing products, SMTV finds that it needs more information regarding demand in order to assess
perhaps overseas, or new ways of selling, servicing or using the brand. the feasibility of attaining the needed sales levels. This information is also needed
Apple is one company that has built its sales on its reputation for innovation. for production and other decisions. For example, production schedules need to be
When Apple’s co-founder, the late Steve Jobs, stood before the ‘faithful’ aficionados developed, and marketing tactics need to be planned.
each year, he was expected to launch a new product. The current CEO, Tim Cook, The total market demand for a product or service is the total volume that would
has continued this practice. In turn, the iPod range, iPhone and iPad each met be bought by a defined consumer group in a defined geographic area in a defined
the market’s expectations and those of the company’s shareholders; however, time period in a defined marketing environment under a defined level and mix of
the company may now be overly reliant on the iPhone. Taiwanese firm HTC industry marketing effort. Total market demand is not a fixed number but a function
meets similar expectations for innovation with various smartphones – which use of the stated conditions. For example, next year’s total market demand for this type
Google’s Android operating system and Windows 10 – to compete with Apple’s of product will depend on how much other companies spend on marketing products,
iPhone. Microsoft Corporation is renowned for innovation, not only in the realm such as Google Chromecast, including the take-up of internet services, ethernet in
of computer and smartphone software, but also in video gaming with the Xbox. the home and smart televisions. It also depends on many environmental factors,
Alphabet, the parent company of Google and other companies, innovates on many government regulations, economic conditions and the level of consumer confidence
fronts – ranging from Google Search and advertising, and Android OS, to Nexus in a given market. The upper limit of market demand is called market potential.
mobile phones, self-driving cars and more. In February 2016, Alphabet became the One general but practical method that SMTV might use for estimating total
world’s most valuable company. market demand uses three variables: (1) the number of prospective buyers, (2) the
9780655702412_APP3.indd 751 3/3/20 11:19 AM

quantity purchased by an average buyer per year and (3) the price of an average certain that its assumptions are reasonable and defendable. As can be seen, the
unit. Using these numbers, SMTV can estimate total market demand as follows: overall market potential in dollar sales can vary widely given the average price
Q=n×q×p used. For this reason, SMTV will use unit sales potential to determine its sales
where estimate for next year. Market potential in terms of units is 293 760.
Q = total market demand Assuming that SMTV forecasts it will have a 5.0 per cent market share in the
n = number of buyers in the market first year after launching this product, then it can forecast unit sales at:
q = quantity purchased by an average buyer per year 293 760 units × 0.05 = 14 688 units
p = price of an average unit At a retail selling price of $99 less the 30 per cent retailers expect as their gross
A variation of this approach is the chain ratio method. This method involves margin per unit, this translates into company sales of:
multiplying a base number by a chain of adjusting percentages. For example, 14 688 units × ($99 × 0.70) = $1 017 878
SMTV’s product is designed for internet-connected homes, whether using ethernet
The calculated unit volume estimate may be well within SMTV’s production
cabling or wireless internal connection. Thus, consumers whose homes already
capacity, but not their expectations. As discussed in Spotlight 8 with a different
have fast-internet connection are potential buyers. These households do not
product example, it comes down to whether this product provides a profit and
need to own smart television sets that are connected to the internet (see <rtings.
whether this profit meets the company’s return on investment expectations.
com/tv/reviews/by-type/smart/best> for examples and explanations). Finally, not
To assess expected profits, we would need to examine the budgeted expenses
all television-owning internet-connected households will be willing and able to
for launching this product. We do this with a different product in Spotlight 8 by
purchase this product. SMTV can estimate demand in Australia using a chain of
preparing a projected profit-and-loss statement and comparing this with the actual
calculations such as the following:
profit-and-loss statement. We also examine various analytic ratios needed for
Of the total number of households in Australia,
management decision-making.
• the percentage of computer-owning households with broadband internet
access using ethernet in the home
• the percentage of smart TV-owning households with broadband internet 6.3 Forecasting
access using ethernet in the home In this analytic measure, we take a mini case-study approach to provide an example
• the percentage of these households willing and able to buy this device. of forecasting. The entrepreneurs behind a new company – Purest Mountain
The Australian Bureau of Statistics estimates there are approximately Water brand, which offers a new flavoured-mineral-water product, sourced from
8.5 million households in Australia. According to ACMA, <acma.gov.au>, households mountain water – decided to adopt a forecasting technique they had used to great
have more than one television set (mean = 2.2), meaning there are over 18 million effect in their previous management roles in larger companies. They had been able
sets in Australian homes. However, it is the main digital television with integrated to use regression analysis to establish that demand for soft drinks in general was
digital tuner (as opposed to a separate digital set-top box or digital television dependent on two variables. The first factor they used was an index of economic
recorder) that interests SMTV. It was estimated that some 80 per cent of the main activity, as predicted by the industry, while the other was a seasonality factor.
televisions in use had an integrated digital tuner. Research showed that many Both entrepreneurs had studied marketing and had been taught that
households had purchased a new television set in the past three years, and that promotional expenditure (levels and quality), in part, determine demand.
this would probably continue, depending on the number of events being broadcast, They had, however, calculated that promotional expenditure levels by the industry
such as the Soccer World Cup. It was estimated that some 60 per cent of televisions were factored up or down depending on the industry’s assessment of overall
were more than four years old and that, of these, 30 per cent could be considered economic activity. That is, if the economy was in growth mode, and consumer
televisions with suitable USB port access. Furthermore, SMTV’s research using ABS confidence was high, then the beverage industry would spend more on marketing
data indicates that nearly 80 per cent of all households had broadband (256 kBps effort in general, and on promotion in particular. If there were predictions for a decline
or greater) connections as opposed to dial-up connections. Finally, the company’s in overall economic activity and a concomitant decline in consumer confidence,
research also reveals that 30 per cent of households possess the discretionary then the beverage industry would reduce its marketing effort accordingly.
income needed, and are willing, to buy a product such as this. The beverages industry association used the Delphi Method, or jury of executive
Then, the total number of households willing and able to purchase this product is: opinion, to obtain a forecast of likely demand from others in the beverages industry as
well as other consumer-goods marketers. This method is often used to predict future
8.5 million households × 0.80 × 0.8 × 0.60 × 30 × 30 = 293 760 households
outcomes where iterative measurement is used, and overcomes direct challenges by
Households need to purchase only one device because it is likely that only
the participants to their forecasts. In this instance, it involved the company planners
the main television would have internet access. Assuming the average retail price
sending in their forecasts of economic activity to the association. The association
across all brands is $99 for this product, the estimate of total market demand is
then prepared an anonymous summary. This summary showing the anonymous
as follows:
predictions (companies not disclosed) was then sent back to the company planners,
293 760 households × 1 device per household × $99.00 = $29 million who were asked to make a further prediction. They were also asked to provide
This simple chain of calculations gives SMTV only a rough estimate of potential explanations where their initial estimates were outside the mid-range of responses
demand. However, more-detailed chains involving additional segments and other and whether they were holding to this figure or thereabouts. This process was
qualifying factors would yield more accurate and refined estimates. Still, these are repeated three times, in this case, at which stage it was decided that the range of
only estimates of market potential. They rely heavily on assumptions regarding responses had converged to the point where a single index figure could be published
adjusting percentages, average quantity and average price. Thus, SMTV must make for the member companies. The index the executives developed took account of
9780655702412_APP3.indd 752 3/3/20 11:19 AM

time-series data in calculating the appropriate mean (100) and from which point that even advanced satellite technology could not allow accurate prediction, other
all other time points would be referenced. This meant that where a downturn in the than El Niño effects, the entrepreneurs also used the ‘art’ of long-range weather
economy was predicted, they would arrive at an index figure below 100, depending forecasters. By taking into account the predictions of the meteorologists as well as
on the predicted severity of the downturn. As an example, their index for July 2016 the predictions of independent forecasters on a 70:30 weighted basis, they would
was 90, while for December 2016 it was 105. Table A3.6.1 indicates the calculated arrive at their index. For different months of the year, they could arrive at an index
index for the second financial year of operation 2016/17, on a monthly basis. figure such that, in the second year of operation, it was predicted there would be
The second factor involved calculating an index that took into account both a cool, wet winter followed by a long, hot, dry summer. Table A3.6.2 details the
the time of year and the input of long-range weather forecasters. Recognising monthly index figures for 2016/17.
Table A3.6.1 Economic index (EI), 2016/17

July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June
90 92 95 95 97 105 107 100 100 102 98 102
Table A3.6.2 Seasonality index (SI), 2016/17

80 83 85 90 93 110 120 125 120 110 90 85
The formula Pure Mountain Water used to forecast demand for the period Overall sales of mineral water (in six-packs of 375-mL bottles) through the
ahead (i + 1, where i is the current period) follows: second half of 2016 are shown in Table A3.6.3.
Forecast demandi + 1 = Actual demandi × EIi+1 × SIi+1 Pure Mountain Water’s market share of the above unit sales is shown in
EIi SIi Table A3.6.4.
Table A3.6.3 Mineral water sales (375-mL six-pack, millions), 2016/17

Victoria, New South Wales, South Australia and Tasmania Actual sales July–Dec 2016, forecast sales Jan–June 2017 not shown
7.71 8.18 8.52 9.78 9.23 12.2
Table A3.6.4 Pure Mountain Water mineral-water market share, 2016/17

Victoria, New South Wales, South Australia and Tasmania Actual share July–Dec 2016, targeted share Jan–June 2017
2.5% 2.6% 3.0% 2.8% 2.9% 3.1% 3.2% 2.7% 2.5% 2.6% 2.2% 1.9%
Sources: For discussion on the financial implications of extending the product line, see Spotlight 8, Analytic measure 8.5. Definition from Tim Ambler, Marketing and the Bottom Line,
2nd edn, Financial Times Prentice Hall: London, 2003, pp. 152–3; and Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should
Master, Wharton School Publishing, 2006.
Spotlight 7: Digital marketing metrics By following such video tutorials, you will learn how to set up and budget
campaigns that are targeted geographically and by time. There are also video
7.1 Search engine marketing tutorials, such as <www.youtube.com/watch?v=7a1pBlZVXPM>, that enable
In Chapter 13, we suggest that many marketing organisations employ strategies you to set up and monitor custom dashboards for a website. Figure A3.7.1
that involve using a combination of more traditional media and direct and digital presents a custom Google metrics dashboard for mobile commerce. More
marketing tools and techniques, or using the latter on their own. While direct and importantly, you will see the metrics available and how to make comparisons
digital marketers are vitally interested in average revenue per user (ARPU), they also with competitive sites and obtain more detailed information on visits to the
monitor performance on such intervening variables as brand awareness, knowledge website in terms of where people come from, and on which days and hours
and intentions to purchase, and satisfaction levels. These are just a few of the analytic they visited. Likewise, detailed information is available on pageviews and other
measures associated with marketing communication and post-purchase loyalty. aspects, such as average time on site (‘dwell-time’). We can also see which
The marketing organisation employing search engine marketing and search engines people use (most will come from Google), the percentage of
using Google Adwords specifically as part of its direct and digital marketing visitors coming from referring sites (click-throughs from websites carrying
communication strategy has analytic tools provided by Google available to them. Google ads) and those visitors coming directly to the site. Analysis of ‘Traffic
There are many online videos available to learn how to set up an Adwords campaign Sources’ also enables us to assess the performance of Keywords, Adwords
and yield results. For example, see <youtube.com/watch?v=zhSnj3jR_6c>. Campaigns, Keyword Positions and much more, including the performance
9780655702412_APP3.indd 753 3/3/20 11:19 AM

Figure A3.7.1 Custom Google metrics dashboard for mobile commerce

Source: Graham Charlton, ‘10 useful Google Analytics custom dashboards’, econsultancy, 30 May 2013, <https://econsultancy.com/blog/62828-10-
useful-google-analytics-custom-dashboards/>, accessed 24 February 2016. Google and the Google logo are registered trademarks of Google Inc., used
with permission.
of the versions of the ads used. Various customisations are possible on the protocol (VOIP) telephones – offering more benefits to salespeople and others in
widgets and dashboard and can also be viewed on the new reporting metrics the company, and thus becoming must-have and often costly tools. It is more a
–for example, new visitors or search traffic. Cost Data Import enables users to case of the task of communicating interactively with customers becoming easier
see the performance of paid marketing channels, including non-Google paid and more productive in subscriber markets, but much more difficult in the case of
searches. repertoire markets faced by the marketers of FMCGs. In the latter case, marketers
We suggest you spend time becoming familiar with the metrics Google provides are finding that customers are turning to many different media channels, and that
by viewing Help Resources provided in the View Reports and other areas at Google. those born between 1977 and 2000 (Generation Y) are very connected with those
We finish with the reminder that, if it cannot be measured, then it is not marketing. they have decided to form relationships with and see technologies, such as mobile
In this context, Google Analytics is a boon to marketing. This is particularly true as phones and the internet, as a means of maintaining and enhancing their social
Google data enable real-time analysis. relationships.
Sources: Jayson DeMers, ‘The definitive guide to Google Analytics for SEO professionals’, A brief summary of the history of the web since it was first used commercially
Search Engine Guide, <searchengineguide.com/jayson-demers/the-definitive-guide-to-
is presented below, from which we see various attempts at using this digital
google-analytics.php>, accessed 19 February 2016. View the Google AdWords Help
Centre, <https://support.google.com/adwords/?hl=en-GB#topic=3119071>, accessed technology to communicate, transact and maintain relationships, with different
19 February 2016, for Adwords Help and the metrics behind search engine marketing. See performance measures used.
also Danny Sullivan, ‘How search engines rank web pages’, SearchEngineWatch,
23 September 2013, <https://searchenginewatch.com/sew/news/2064539/how-search- 1 Web 1.0 to Web 1.5 (about 1994–2006). During this period, the main
engines-rank-web-pages>, accessed 11 February 2016; and Albert-László Barabási & Réka performance measure was eyeballs – that is, the number of people visiting
Albert, ‘Emergence of scaling in random networks’, Science, 286(5439), 1999,
a domaiçn name site (e.g. <www.cocacola.com.au>). Metrics such as hits
pp. 509–12.
soon fell from favour as even a blank spacer graphic (e.g. blank.jpg) was
7.2 Digital marketing measures regarded as a hit. Page impressions (page views), which are downloads
When it comes to digital marketing, change is very noticeable and, in many of particular pages by unique visitors, became a more important website
instances, the changes are quite disruptive. Why is there disruption? It is not just performance measure and are still monitored and recorded in web
a case of new technologies – such as 5G mobile phones and voice-over-internet server log files. Where people signed up to purchase or receive product
9780655702412_APP3.indd 754 3/3/20 11:19 AM

information on an ongoing basis, online marketers were able to develop viewing more pages on single visits to a website (average page views per visit)
customer profiles much as any direct marketer was already doing, but now and by visiting sites more often. Arguably, it is preferable to engage with high-
more easily and less expensively. Stickiness was another way of expressing frequency visitors. Medium- and low-frequency visitors cost more to service and
loyalty. By this we mean that, if the customer keeps coming back to a site may well buy less. While it is possible to measure the transaction aspect of such
to search for information or to purchase, the online marketer can monitor sites in terms of sales and profits (e.g. average revenue per visit), the issue remains
usage of the website in terms of entry pages, upstream and downstream of which website elements most influence such aspects as brand awareness,
sites visited (information provided by network-centric research companies knowledge and liking, and how these in turn influence financial performance
such as Connexity Hitwise) and click-throughs from display and banner ads measures. One aspect that is necessary where mobile app campaigns are involved
to gain information, view videos or purchase, and match this information is to link a website’s AdWords and Google Analytics accounts so as to analyse
to known customer profiles and exit pages. Websites can be customised performance. Additionally, we suggest that content analysis of websites using a
and offer tailored products/services to individual visitors whose profiles validated research tool in tandem with an examination of objective (e.g. third-party
are maintained in databases. Important metrics such as conversion rates financial reports) and subjective (i.e. self-reported by managers) marketing (e.g.
(ratio of visitors to purchases) and channel profitability were, and still market share) and financial performance measures (e.g. sales and profit) is one
are, monitored. answer to this question.
2 Web 2.0 (about 2006–07). During this period, stickiness came to be thought As streaming media is increasingly used in marketing websites, the web
of more in terms of dwell-time on a site. Where people might see a logo for analytics task becomes more complex. RSS and website-delivered commercials for
two seconds at the end of a television commercial, they might see the ‘hero’ PCs and mobile phones are examples of streaming media. Various key performance
brand for a few minutes if product placement in a television series or movie indicators are used when monitoring streaming media, such as the ratio of stream
has been orchestrated. But if people visit a website and their attention is held views to page views, the percentage of completed stream views and average
for (say) 15 minutes on successive pages that feature the brand, then we can mobile page views per visit, among others. As with all marketing effort, it is
say that the attrition rate is lowered. We do not see people defecting to other important to provide updated content that compels people to return to a website.
sites as they move deeper into long scrolling pages (in a magazine format site, The ultimate aim is to convert visitors to subscribers and to convert subscribers into
such as <www.wired.com>) or further along a website (television sequential sales and profits.
images/pages format, such as Coca Cola’s website for Great Britain which is Sources: See ‘Is a mobile-first approach really best? This may be the year mobile eclipses
desktop spend, but should marketers go all in?’, <adage.com/print/302774>, accessed
accessed from their Europe group, <www.cocacola.com>). No matter how the
24 February 2016. See also Graham Charlton, ‘10 useful Google Analytics custom
website is configured, an important metric is provided by clickstream analysis. dashboards’, econsultancy, <https://econsultancy.com/blog/62828-10-useful-google-
Web pages may need to be reconfigured where higher defections, or lower analytics-custom-dashboards/>, accessed 24 February 2016; Michael Wiegand, ‘The perfect
Google Analytics dashboard’, Portent, <www.portent.com/blog/analytics/perfect-google-
click-throughs to a shopping cart, are occurring from particular pages. analytics-dashboard.htm., accessed 24 February 2016; Andrew Keen, The Cult of the
3 Web 2.0 is seen as an approach that uses various tools: search (whether machine Amateur, Nicholas Brealey Publishing: London, 2007. For more on Google’s Accelerated
sifted, sorted and ranked, as Google does, or human edited, as in the case of Mobile Pages project, see <www.ampproject.org/>, accessed 24 February 2016.
<www.mahalo.com>); social networking (which includes specialised websites,

such as Facebook, Instagram and Pinterest, or the approach to engaging visitors
Spotlight 8: Accounting for marketing
and subscribers taken by such sites as Rage <www.abc.net.au/rage> and MTV);
sharing sites (blogs, RSS (i.e. really simple syndication), YouTube, Flickr, Twitter, 8.1 Pricing and breakeven analysis
Tumblr and Technorati); collaborative wikis (Wikipedia and other such sites where In this analytic measure, we examine aspects of pricing strategy – variable and
individuals maintain the sites and it often appears there is ‘mob rule’); widgets fixed costs, new-product margin, retail gross margins, and revenue from new
and Ajax applications (these code-driven tools enhance the browser–website products and breakeven analysis. We look at setting prices, firstly, on the basis
interface for users). Andrew Keane, author of The Cult of the Amateur, makes of costs; secondly, on the basis of external factors by taking into account reseller
telling points when he demonstrates that a lack of moderation of such sites as margins; and thirdly, on the basis of profit goals.
wikis can lead to mob rule. In such a scenario, it is often difficult to see marketing Starting with the determination of costs, you will recall from Chapter 9 that
organisations making money from Web 2.0 tools. there are different types of costs. Fixed costs do not vary with production or
4 The Immersive Web (2008 to the present). At the 2007 World Economic Forum, sales level and include costs such as rent, interest, depreciation, and clerical and
Microsoft founder Bill Gates took part in a discussion during a session on Web 2.0. management salaries. Regardless of the level of output, the company must pay
He said it would show a lack of imagination to term the next period Web 3.0. these costs. Whereas total fixed costs remain constant as output increases, the fixed
We tend to agree. We see the emergence of the Immersive Web, whereby marketing cost per unit (or average fixed cost) will decrease as output increases because the
organisations seek to engage with those who visit their websites – first-timers total fixed costs are spread across more units of output. Variable costs vary directly
and those who return regularly, particularly using data-enabled mobile phones. with the level of production and include costs related to the direct production of
With the advent of Google’s Accelerated Mobile Pages (AMP), which sees the product (such as costs of goods sold, or COGS) and many of the marketing
web pages loading much faster, more companies will integrate their advertising costs associated with selling it. Although these costs tend to be uniform for each
and business models with mobile-phone technology. unit produced, they are called variable because their total varies with the number
The question facing online marketers is how to measure the performance of of units produced. Total costs are the sum of the fixed costs and variable costs for
those sites seeking to engage their users. Visitors demonstrate engagement by any given level of production. For details on setting prices using costs, please revisit
9780655702412_APP3.indd 755 3/3/20 11:19 AM

the two methods discussed in Chapter 9: cost-plus pricing and breakeven pricing. Because BCM will be selling this product to consumers through wholesalers and
We provide a brief summary below. retailers offering competing brands, BCM must consider markup pricing from this
• Cost-plus pricing (or markup pricing) – a standard markup to the cost of the perspective.
product. To illustrate this method, suppose a company manufacturing and Turning our attention to external factors, it must be noted that companies
marketing computer monitors – Best Computer Monitors (BCM) – has fixed do not always set the final price to customers. They may do so when selling
costs of $20 million, variable costs of $125 per unit, and expects unit sales of directly to other businesses but, when selling to consumers through wholesalers
a new product of 1 million items. Thus, the cost per unit is given by: and retailers, they must take the markups of those resellers into account.
Variable costs + Fixed costs $125 + $20 000 000 While wholesalers talk in terms of markup on cost, retailers tend to talk of
Unit cost = = = $145 gross margins – that is, they express their gross margin as a percentage of their
Unit sales 1 000 000
own retail selling price (RSP). (Gross margin is discussed further in Analytic
• Relevant costs – costs that will occur in the future and that will vary across the measure 8.2.)
alternatives being considered. To continue with our example of computer monitor manufacturer BCM, we
• Breakeven price – the price at which total revenue equals total cost and now consider the case of BCM selling through resellers (wholesalers and retailers).
profit is zero. Using the earlier example, if BCM sells the product for $145, In this example, we will suppose that large retailers BCM sells through directly
then the unit selling price is equal to the total cost per unit, and so the want a 30 per cent gross margin percentage, while any wholesalers involved
company only breaks even. If BCM does not want to merely break even, in distributing the product to smaller retailers expect a 10 per cent markup
but wants to earn a 25 per cent markup on sales, the markup price would percentage on cost and the smaller retailers they service expect a 40 per cent
be calculated as follows: gross margin percentage. In the example, the manufacturer (BCM) has a suggested
Unit cost $145 retail selling price by larger retailers of $300, and $350 for smaller retailers buying
Markup price = = = $193.33
1 – Desired return on sales 1 – 0.25 through wholesalers.
• Markup – the difference between a company’s selling price for a product and
• Return on investment (ROI) pricing (or target-return pricing) – a cost-based
its cost to manufacture or purchase it.
pricing method that determines price based on a specified rate of return on
investment. In this case, BCM would take into account any initial investment Dollar markup = Selling price – Cost
(say, $10 million to refurbish their manufacturing facility) but only to Dollar markup
determine the dollar profit goal. Let us suppose that BCM wants a 30 per cent Markup percentage on cost =
Cost
return on investment. The price necessary to satisfy this requirement can be
determined by: • Retailer gross margin – the percentage of the retailer’s selling price for a
product.
ROI investment (0.3 × $10 000 000)
ROI price = Unit cost + = $145 + = $148 • Value-based pricing – offering just the right combination of quality and good
Unit sales 1 000 000
service at a fair price.
That is, if BCM sells its product for $148, it will realise a 30 per cent return on • Markup chain – the sequence of markups used by firms at each level in a
its initial investment of $10 million. channel.
In these pricing calculations, unit cost is a function of the expected sales, BCM might take competitor prices into account in determining value-based
which were estimated to be 1 million units. But what if actual sales were lower? pricing, ensuring that customers perceive value but that the RSP does not suggest
Then the unit cost would be higher because the fixed costs would be spread over low quality relative to competitors. BCM would then work backwards through the
fewer units, and the realised percentage markup on sales or ROI would be lower. markup chain to determine its own prices. Such a markup chain might look as
Alternatively, if sales are higher than the estimated 1 million units, unit cost would shown in Table A3.8.1
be lower than $145, so a lower price would produce the desired markup on sales By deducting the markups for each level in the markup chain, BCM arrives
or ROI. It is important to note that these cost-based pricing methods are internally at a unit price of $210 to large-volume retailers and $213.18 for smaller-volume
focused and do not consider demand, competitors’ prices or reseller requirements. retailers.
Table A3.8.1 Markup chain

Large retailer Wholesaler and smaller retailer
Suggested retail selling price (RSP) $300.00 $350.00
Retailer gross margin $90.00 $115.50
Retailer gross margin percentage 30% 33%
Retailer buy price $210.00 $234.50
Wholesaler markup 10% Not involved $21.32
Manufacturer’s unit selling price $210.00 $213.18
9780655702412_APP3.indd 756 3/3/20 11:19 AM

Breakeven and margin analysis But even if BCM does not know its unit price and unit variable cost, it can calculate
Based on an understanding of costs, consumer value, the competitive the contribution margin from total sales and total variable costs or from knowledge
environment and reseller requirements, BCM has decided to set its price to of the total cost structure. It can set total sales equal to 100 per cent, regardless of
larger retailers at $210. At that price, what sales level will be needed for BCM to the actual absolute amount, and determine the contribution margin:
break even or make a profit on its product? Breakeven analysis determines the 100% – 60% 1 – 0.60
Contribution margin = = = 0.40 or 40%
unit volume and dollar sales needed to be profitable given a particular price and 100% 1
cost structure. At the breakeven point (BEP), total revenue equals total costs
Note that this matches the percentage calculated from the unit price and unit
and profit is zero. Above this point, BCM will make a profit; below it,BCM will
variable cost information. This alternative calculation will be very useful later when
lose money. Breakeven volume is calculated using the following formula:
analysing various marketing decisions.
Fixed costs $20 000 000
Breakeven point = =
Unit selling price – Unit variable cost $210 – $125 Determining ‘breakeven’ for profit goals
Although it is useful to know the breakeven point, most companies are more
= 235 294.12 units
interested in making a profit. Assume our marketer of computer monitors would
Thus, at the given cost and pricing structure, and ignoring the slightly higher
like to realise a $5 million profit in the first year. How many units must it sell at the
selling price to lower-volume wholesalers and retailers, BCM will break even at
$210 price to cover fixed costs, and produce this profit? To determine this, BCM can
235 294 units. If we multiply the breakeven point units by BCM’s unit selling
simply add the profit figure to fixed costs and again divide by the unit contribution
price of $210, we can see that BCM need to achieve sales of $49 411 740 in the
to determine unit sales:
year to break even. Fortunately, BCM is forecasting it will sell 1 000 000 units.
Fixed cost + Profit goal $20 000 000 + $5 000 000
The denominator (unit selling price − unit variable cost) in the BEP equation Unit volume = =
is called unit contribution (sometimes called unit contribution margin). Unit selling price – Variable cost $210 – $125
It represents the amount that each unit contributes to covering fixed costs. = 294 117
Breakeven volume represents the level of output at which all (variable and fixed)
Thus, to earn a $5 million profit, BCM must sell 294 117 units. If we multiply
costs are covered. Using the percentage contribution margin (hereafter referred
this figure by unit selling price, we are able to calculate the dollar sales needed to
to as contribution margin), we can calculate breakeven sales a different way:
achieve a $5 million profit:
Price – Variable cost $210 – $125
Contribution margin = = = 0.405 or 40.5% Dollar sales = 294 117 × $210 = $61 764 570
Price $210
Alternatively, we could use the contribution margin:
Then,
Fixed costs $20 000 000 Dolllar sales = =
Breakeven sales = = = $49 382 716 Contribution margin 0.40
Contribution margin 0.405
= $62 500 000
Note that the difference between the two breakeven dollar sales calculations
Again, note that the difference between the two breakeven calculations (i.e.
($49 411 740, as calculated earlier, and $49 382 716, as calculated here) is due to
$61 764 570 and $62 500 000) is due to rounding.
rounding.
As we saw previously, a profit goal can also be stated as a return-on-
Such breakeven analysis helps the company by showing the unit volume needed
investment goal. For example, recall that BCM wants a 30 per cent return
to cover costs. If production capacity cannot reach this level of output, then BCM
on its $10 million investment. Thus, its absolute profit goal is $3 million
should not launch this product. However, in this case, the unit breakeven volume is
($10 000 000 × 0.30). This profit goal is treated the same way as in the
well within the company’s projected capacity. Of course, the bigger question concerns
previous example:
whether BCM can sell this volume at the $210 price. We address that issue a little later.
Understanding contribution margin is useful in other types of analyses as well, Unit volume = =
particularly if unit prices and unit variable costs are unknown or if a company (say, a Unit selling price – Variable cost $210 – $125
retailer) sells many products at different prices and knows the percentage of total sales = 270 588
that variable costs represent. Whereas unit contribution is the difference between unit
Dollar sales = 270 588 × $210 = $56 823 529
price and unit variable costs, total contribution is the difference between total sales
Or:
and total variable costs. The overall contribution margin can be calculated by: Fixed cost + Profit goal $20 000 000 + $3 000 000
Dolllar sales = =
Total sales – Total variable costs
Overall contribution margin =
Total sales = $57 500 000
Finally, BCM can express its profit goal as a percentage of sales, which we
Regardless of the actual level of sales, if BCM knows what percentage of sales
also saw in previous pricing analyses. Assume BCM desires a 25 per cent return
is represented by variable costs, it can calculate contribution margin. For example,
on sales. To determine the unit volume and sales volume necessary to achieve this
BCM’s unit variable cost is $125, or 60 per cent of the selling price ($125 ÷ $210 =
goal, the calculation is a little different from the previous two examples. In this
0.60). That means for every $1 of sales revenue for BCM, $0.60 represents
case, we incorporate the profit goal into the unit contribution as an additional
variable costs, and the difference ($0.40) represents contribution to fixed costs.
9780655702412_APP3.indd 757 3/3/20 11:19 AM

variable cost. Consider it this way: if 25 per cent of each sale must go toward When marketers think of retailers, they think in terms of the gross margins that
profits, that leaves only 75 per cent of the selling price to cover fixed costs. retailers set. If, for example, a marketing organisation has set a penetration pricing
Thus, the equation becomes: strategy and set a unit selling price to large retailers of $10, and three different
Fixed cost retailers adopt the following gross margins – 20, 25 and 30 per cent – and if the
Unit volume = marketing organisation sells to each retailer at the same price owing to the fact
Price – Variable cost – (0.25 × Price)
Fixed cost that each retailer sells roughly the same volume of similar products, then the retail
= selling prices in each store will be, respectively: $12.50, $13.33 and $14.29. As we
(0.75 × Price) – Variable cost
have already seen, retailers calculate their gross margin off their selling price. The
So: calculation used to arrive at the first of these follows:
$20 000 000
Unit volume = = 615 385 units
(0.75 × $210) – $125 (Retail selling price – Wholesale price)
Retail gross margin = × 100%
Retail selling price
Dollar sales = $129 230 850
Wholesale price $10
Thus, BCM would need more than $129 million in sales to realise a 25 per cent Retail selling price = =
(100% – Retail gross margin) 100% – 20%
return on sales, given its current price and cost structure! Could it possibly achieve
this level of sales? The major point is this: although breakeven analysis can be = $12.50
useful in determining the level of sales needed to cover costs or to achieve a stated We will leave it to you to calculate and confirm the other two retail selling
profit goal, it does not tell BCM whether it is possible to achieve that level of sales prices. On the flipside of this, retailers talk in terms of markdowns, such that a
at the specified price. To address this issue, BCM needs to estimate demand for 25 per cent markdown of a product that normally retails for $13.33 during a sale
this product. results in a $10 selling price:
However, let us stop here and practise applying the concepts covered so far.
$13.33 × 25% = $3.33; and ($13.33 − $3.33) = $10.00
Now that you have seen pricing and breakeven concepts in action as they relate
to the company’s new product, return to Chapter 9 and complete Mini case 9.3.
8.3 Profit and marketing budget
It is important to note that a profit is an absolute amount, such as when the
8.2 Sales and gross margins financial press report that BigBank Limited made a 2016/17 profit of A$4 billion.
Those of you who have studied accounting and financial analysis will be aware Profitability is a matter of relativities, such as when a company reports that its
of the many analytic measures that organisations employ in this category. profitability is falling as sales of large cars fall. This is akin to stating that the
Our interest is not in historical measures but, rather, in assessing performance with company makes higher profits from large cars but that, now these sales are falling,
a view to determining how well the organisation can perform in the future. As such, the company is making or anticipating lower profits.
we discuss measures that management report as being important, commencing Firms are interested in the profitability of various product lines, and the
with sales before returning to gross margins, and then we examine profitability in profitability of their individual customer accounts. As we saw in Analytic measure
Analytic measure 8.3. 4.1, retailers are interested in the profitability of each cubic metre of selling space.
Normally, when firms mention sales, there is a qualifying word associated with Marketing organisations should be interested in the profitability of each marketing
the word sales. The starting point is the sales budget (planned sales) based on some campaign they embark on, regardless of how difficult it may be to attribute sales
method of prediction, ranging from groups prediction methods (e.g. the Delphi and profits to individual promotional tools and individual campaigns. Expressed in
Method), to prediction markets, such as Google’s internal method of predicting its simplest form, such profitability might be calculated as follows (see Table A3.8.2),
many events. We might talk in terms of sales territories (e.g. New South Wales) or where the promotion offers greater profitability than the baseline sales involved.
perhaps in terms of sales targets for individual salespeople or marketing channels There are various measures that managers should consider when examining the
(e.g. discount stores, online and so on); sales volume (units or stock keeping units, performance and contribution of individual products. This is particularly important
SKUs); or sales revenue (dollar sales). Firms are interested in sales units and dollars when projected sales and profits are not achieved by a company.
that result from events such as sales trips; exhibitions; sales promotions; sales from All marketing managers must account for the profit impact of their marketing
known customers, segments, and individual brands and products – among many strategies. A major tool for projecting such profit impact is a projected profit-
others. Thus, sales is an important metric, no matter how it is qualified. and-loss statement (also called an income statement or operating statement).
Table A3.8.2 Probability of a promotion offer

Promotion Baseline
Price 25.00 40.00
Cost 10.00 10.00
Margin 15.00 30.00
Sales volume 50 000 20 000
Profit 750 000 600 000
Profitability of promotion 150 000
9780655702412_APP3.indd 758 3/3/20 11:19 AM

A projected profit-and-loss statement shows projected revenues less budgeted who promote BCM’s new product in their advertising. Thus, the total budgeted
expenses, and estimates the projected net profit for a firm, product or brand during advertising and promotion expenses are $15 million ($10 million for advertising +
a specific planning period, typically a year. It includes direct product production $5 million in co-op allowances). Finally, BCM budgets 10 per cent of net sales, or
costs, marketing expenses budgeted to attain a given sales forecast, and overhead $12.5 million, for freight and delivery charges. In all, total marketing expenses are
expenses assigned to the firm or product. A profit-and-loss statement typically estimated to be $17.5 million + $15 million + $12.5 million = $45 million.
consists of several major components, as described below (and also see Table General and administrative expenses are estimated at $5 million, broken down
A3.8.3, which presents a projected profit-and-loss statement for our computer into $2 million for managerial salaries and expenses for the marketing function and
monitor manufacturer, BCM): $3 million of indirect overhead (such as depreciation, interest, maintenance and
• Net sales – gross sales revenue minus returns and allowances (e.g. trade, cash, insurance) allocated to this product by the corporate accountants. Total expenses
quantity and promotion allowances). Let us assume BCM’s net sales for 2018 for the year, then, are estimated to be $50 million ($45 million in marketing
are estimated to be $125 million. expenses + $5 million in general and administrative expenses).
• Cost of goods sold (sometimes called cost of sales) – the actual cost of In all, as Table A3.8.3 shows, BCM expects to earn a profit on its new product of
the merchandise sold by a manufacturer or reseller. It includes the cost of $12.5 million in 2018. Also note that the percentage of sales that each component
inventory, purchases and other costs associated with making the goods. of the profit-and-loss statement represents is given in the right-hand column.
BCM’s cost of goods sold is estimated to be 50 per cent of net sales, or These percentages are determined by dividing the cost figure by net sales –
$62.5 million. for example, marketing expenses represent 36 per cent of net sales, calculated as
• Gross margin (or gross profit) – the difference between net sales $45 million ÷ $125 million. As can be seen, BCM projects a net profit return on sales of
and cost of goods sold. BCM’s gross margin is estimated to be 10 per cent in the first year after launching this product.
$62.5 million. Now let us fast-forward one year. BCM’s product has been on the market
• Operating expenses – the expenses incurred while doing business. for one year, and management wants to assess its sales and profit performance.
These include all other expenses beyond the cost of goods sold that are One way to assess this performance is to compute performance ratios derived
necessary to conduct business. Operating expenses can be presented from BCM’s profit-and-loss statement (or income statement or operating
in total or broken down in detail. Here, BCM’s estimated operating statement).
expenses include marketing expenses and general and administrative Whereas the pro forma profit-and-loss statement (see Table A3.8.3)
expenses. shows projected financial performance, the profit-and-loss statement given in
• Net profit before taxes – profit earned after all costs are deducted. BCM’s Table A3.8.4 shows BCM’s actual financial performance based on actual sales,
estimated net profit before taxes is $12.5 million. cost of goods sold and expenses during the past year. By comparing the profit-
Let us consider BCM’s projected profit-and-loss statement in more detail. and-loss statement from one period to the next, BCM can gauge performance
Marketing expenses include sales expenses, promotion expenses and distribution against goals, spot favourable or unfavourable trends and take appropriate
expenses. The product will be sold through BCM’s salesforce, so the company corrective action.
budgets $5 million for sales salaries. However, because sales representatives earn The profit-and-loss statement shows that BCM lost $1 million rather than
a 10 per cent commission on sales, BCM must also add a variable component to making the $12.5 million profit projected in the pro forma statement. Why? One
sales expenses of $12.5 million (10 per cent of $125 million net sales), for a total obvious reason is that net sales fell $25 million short of estimated sales. Lower
budgeted sales expense of $17.5 million. BCM sets its advertising and promotion sales translated into lower variable costs associated with marketing the product.
budget to launch this product at $10 million. However, the company also budgets However, both fixed costs and the cost of goods sold, as a percentage of sales,
4 per cent of sales, or $5 million, for cooperative advertising allowances to retailers exceeded expectations. Hence, the product’s contribution margin was 21 per cent
Table A3.8.3 Projected profit-and-loss statement for Best Computer Monitors for the 12-month period
ending 31 December 2018
Percentage of sales
Net Sales $125 000 000 100%
Cost of goods sold 62 500 000 50%
Gross margin 62 500 000 50%
Marketing Expenses
Sales expenses $17 500 000
Promotion expenses 15 000 000
Freight 12 500 000 45 000 000 36%
General and Admin Expenses
Managerial salaries and expenses $2 000 000
Indirect overhead 3 000 000 5 000 000 4%
Net Profit before Income Tax $12 500 00 10%
9780655702412_APP3.indd 759 3/3/20 11:19 AM

Table A3.8.4 Profit-and loss-statement for Best Computer Monitors for the 12-month period ended
31 December 2018
Percentage of sales
Net Sales $100 000 000 100%
Cost of goods sold 55 000 000 55%
Gross margin 45 000 000 45%
Marketing Expenses
Sales expenses $15 000 000
Promotion expenses 14 000 000
Freight 10 000 000 39 000 000 39%
General and Admin Expenses
Managerial salaries and expenses $2 000 000
Indirect overhead 5 000 000 7 000 000 7%
Net Profit before Income Tax ($1 000 00) –1%
rather than the estimated 26 per cent. That is, variable costs represented 79 per cent Note that this percentage is lower than estimated, and this ratio is shown in
of sales (55 per cent for cost of goods sold, 10 per cent for sales commissions, the percentage of sales column in Table A3.8.4. Stating items in the profit-and-
10 per cent for freight and 4 per cent for co-op allowances). Recall that contribution loss statement as a percentage of sales allows managers to quickly spot abnormal
margin can be calculated by subtracting the fraction (79/100) from 1(1 − 0.79 = changes in costs over time. If there were previous history for this product and this
0.21 = 21%). Total fixed costs were $22 million, $2 million more than estimated. ratio was declining, management should examine it more closely to determine why
Thus, the sales that BCM needed to break even given this cost structure can it has decreased (i.e. if the decrease is because of a decrease in sales volume or
be calculated as: price, an increase in costs or a combination of these). In BCM’s case, net sales
Fixed costs $22 000 000 were $25 million lower than projected, and cost of goods sold was higher than
Breakeven sales = = = $104 761 905 estimated (55 per cent rather than the estimated 50 per cent).
The net profit percentage shows the percentage of each sales dollar going to
If BCM had achieved another $5 million in sales, it would have earned a profit. profit. It is calculated by dividing net profits by net sales:
Although BCM’s sales fell short of the forecasted sales, so did overall
Net profit –$1 000 000
industry sales for this product. Overall industry sales were only $2.5 billion. Net profit percentage = = = –0.01 = –1.0%
Net sales $100 000 000
That means that BCM’s market share was 4 per cent ($100 million ÷ $2.5 billion =
0.04 = 4%), which was higher than forecasted. Thus, BCM attained a higher- This ratio is shown in the percentage of sales column. BCM’s new product
than-expected market share, but the overall market sales were not as high as generated negative profits in the first year – not a good situation given that,
estimated. before the product launch, net profits before taxes were estimated at more than
$12 million. Later in this appendix (see Analytic measure 8.5 ‘Financial analysis
8.4 Analytic ratios of marketing tactics’), we discuss further analyses the marketing manager should
The profit-and-loss statement provides the figures needed to compute some crucial conduct to defend the product.
operating ratios – the ratios of selected operating statement items to net sales. The operating expense percentage indicates the portion of net sales going to
These ratios let marketers compare the firm’s performance in one year to that in operating expenses. Operating expenses include marketing and other expenses not
previous years (or with industry standards and competitors’ performance in that directly related to marketing the product, such as indirect overhead assigned to this
year). The most commonly used operating ratios are the gross margin percentage, product. It is calculated by:
the net profit percentage and the operating expense percentage. The inventory
Total expenses $46 000 000
turnover rate and return on investment (ROI) are often used to measure managerial Operating expense percentage = = = 0.46 = 46%
Net sales $100 000 000
effectiveness and efficiency.
The gross margin percentage indicates the percentage of net sales This ratio can also be determined from the percentage of sales column in
remaining after cost of goods sold that can contribute to operating expenses the profit-and-loss statement by adding the percentages for marketing expenses
and net profit before taxes. The higher this ratio, the more a firm has left to and general and administrative expenses (39% + 7% = 46%). Thus, 46 cents of
cover expenses and generate profit. BCM’s gross margin ratio was 45 per cent, every sales dollar went for operations. Although BCM wants this ratio to be as
calculated as: low as possible, and 46 per cent is not an alarming amount, it is of concern if it is
increasing over time or if a loss is realised.
Gross margin $22 000 000
Gross margin percentage = = = 0.45 = 45% We have also seen that another useful ratio is the inventory turnover rate (also
Net sales $100 000 000
called stockturn rate for resellers). The inventory turnover rate is the number of
9780655702412_APP3.indd 760 3/3/20 11:19 AM

times an inventory ‘turns over’ or is sold during a specified time period (often one of net profit before taxes from the profit-and-loss statement includes operating
year). This rate indicates how quickly a business is selling finished-goods inventory. expenses not under marketing’s control, NMC does not. Referring back to BCM’s
Higher inventory turnover rates indicate that lower investments in inventory are profit-and-loss statement given in Table A3.8.4, we can calculate net marketing
made, thus freeing-up funds for other investments. It may be computed on a cost contribution for the product as:
basis, selling price basis or unit basis. The formula based on cost is:
NMC = Net sales – Cost of goods sold – Marketing expenses
Cost of goods sold = $100 million − $55 million − $41 million = $4 million
Inventory turnover rate =
Average inventory at cost
The marketing expenses include sales expenses ($15 million), promotion
Assuming BCM’s beginning and ending inventories were $30 million and expenses ($14 million), freight expenses ($10 million) and the managerial
$20 million respectively, the inventory turnover rate is: salaries and expenses of the marketing function ($2 million), which total
$55 000 000 $55 000 000 $41 million.
Inventory turnover rate = = = 2.2
Thus, the product actually contributed $4 million to BCM’s profits. It was the
($30 000 000 + $20 000 000)/2 $25 000 000
$5 million of indirect overhead allocated to this product that caused the negative
That is, BCM’s inventory turned over 2.2 times in 2016. Normally, the higher
profit. Further, the amount allocated was $2 million more than was estimated in
the inventory turnover rate, the higher the management efficiency and company
the pro forma profit-and-loss statement. Indeed, if only the estimated amount
profitability. However, this rate should be compared with industry averages,
had been allocated, the product would have earned a profit of $1 million rather
competitors’ rates and past performance to determine if BCM is doing well.
than losing $1 million. If BCM drops the product, the $5 million in fixed overhead
A competitor with similar sales but a higher inventory turnover rate will have
expense will not disappear – it will simply have to be allocated elsewhere. However,
fewer resources tied up in inventory, allowing it to invest in other areas of the
the $4 million in net marketing contribution will disappear.
business.
Companies frequently use return on investment (ROI) to measure managerial Marketing return on sales and investment
effectiveness and efficiency. For BCM, ROI is the ratio of net profits to total To get an even deeper understanding of the profit impact of marketing strategy,
investment required to manufacture the new product. This investment includes we now examine two measures of marketing efficiency: marketing return on sales
capital investments in land, buildings and equipment (here, the initial $10 million to (marketing ROS) and marketing return on investment (marketing ROI).
refurbish the manufacturing facility) plus inventory costs (BCM’s average inventory Marketing return on sales (or marketing ROS) shows the percentage of net
totalled $25 million), for a total of $35 million. Thus, BCM’s ROI for this product is: sales attributable to the net marketing contribution. For our product, ROS is:
Net profit before taxes –$1 000 000 Net marketing contribution $4 000 000
Return on investment = = = –0.0286 Marketing ROS = = = 0.04 = 4%
Investment $35 000 000 Net sales $100 000 000
= –2.86% Thus, out of every $100 of sales, the product returns $4 to BCM’s bottom line.
ROI is often used to compare alternatives, and a positive ROI is desired. A high marketing ROS is desirable. But to assess whether this is a good level of
The alternative with the highest ROI is preferred to other alternatives. BCM needs performance, BCM must compare this figure to previous marketing ROS levels for
to be concerned with the ROI realised. One obvious way BCM can increase ROI is to the product, the ROSs of other products in the company’s portfolio, and the ROSs
increase net profit by reducing expenses. Another way is to reduce its investment, of competing products.
perhaps by investing less in inventory and turning it over more frequently. Marketing return on investment (or marketing ROI) measures the marketing
Given the above financial results, you may be thinking that BCM should drop productivity of a marketing investment. In BCM’s case, the marketing investment is
this new product. But what arguments can marketers make for keeping or dropping represented by $41 million of the total expenses. Thus, marketing ROI is:
this product? The obvious arguments for dropping the product are that first-year Net marketing contribution $4 000 000
Marketing ROI = = = 0.0976
sales were well below expected levels and the product lost money, resulting in a Marketing expenses $41 000 000
negative return on investment.
= 9.76%
So, what would happen if BCM did drop this product? Surprisingly, if the
As with marketing ROS, a high value is desirable, but this figure should be
company were to drop the product, the profits for the total organisation would
compared with previous levels for the given product and with the marketing ROIs
decrease by $4 million! How can that be? Marketing managers need to look closely
of competitors’ products. Note from this equation that marketing ROI could be
at the numbers in the profit-and-loss statement to determine the net marketing
greater than 100 per cent. This can be achieved by attaining a higher net marketing
contribution for this product. In BCM’s case, the net marketing contribution for
contribution and/or a lower total marketing expense.
the product is $4 million, and if the company drops this product, that contribution
will disappear as well. Let us look more closely at this concept to illustrate how
marketing managers can better assess and defend their marketing strategies and 8.5 Financial analysis of marketing tactics
programs. In the preceding analytic measure, we estimated market potential and sales,
developed profit-and-loss statements and examined financial measures of
Net marketing contribution performance. We now turn to discuss methods for analysing the impact of various
Net marketing contribution (NMC), along with other analytic measures derived marketing tactics.
from it, measures marketing profitability. It includes only those components of Although the first-year profit performance for BMC’s new product was lower
profitability that are controlled by marketing. Whereas the previous calculation than desired, management believes this attractive market has excellent growth
9780655702412_APP3.indd 761 3/3/20 11:19 AM

opportunities. Although the sales of BMC’s product were lower than initially FC = average frequency of customer calls per customer
projected, they were not unreasonable given the size of the current market. LC = average length of customer call
Thus, BMC wants to explore new marketing tactics to help grow the market for this TA = time an average salesperson has available for selling per year.
product and increase sales for the company. BMC’s sales reps typically call on accounts an average of 20 times per year
For example, the company could increase advertising to promote more for about two hours per call. Although sales reps work 2000 hours per year
awareness of the new product and its category. It could add salespeople to secure (50 weeks per year × 40 hours per week), they spent about 15 hours per week on
greater product distribution. BMC could decrease prices so that more consumers non-selling activities, such as administrative duties and travel. Thus, the average
could afford its product. Finally, to expand the market, BMC could introduce a lower- annual available selling time per sales rep per year is 1250 hours (50 weeks ×
priced model in addition to the higher-priced original offering. Before pursuing any 25 hours per week). We can now calculate how many sales reps BMC will need to
of these tactics, however, BMC must analyse the financial implications of each. cover the anticipated 2500 retail outlets:
2500 × 20 × 2
Increase advertising expenditures NS = = 80 salespeople
1250
BMC is considering boosting its advertising to make more people aware of the
benefits of this product in general and of its own brand in particular. What if Therefore, BMC will need to hire 20 more salespeople. The annual cost
BMC’s marketers recommend increasing national advertising by 50 per cent to to hire these reps will be $1 million (20 salespeople × $50 000 salary per
$15 million (assume no change in the variable cooperative component of promotional salesperson).
expenditures)? This represents an increase in fixed costs of $5 million. What increase What increase in sales will be required to break even on this increase
in sales will be needed to break even on this $5 million increase in fixed costs? in fixed costs? The 10 per cent commission is already accounted for in
A quick way to answer this question is to divide the increase in fixed cost by the contribution margin, so the contribution margin remains unchanged at
the contribution margin, which we found in a previous analysis to be 21 per cent: 21 per cent. Thus, the increase in sales needed to cover this increase in fixed
costs can be calculated by:
Increase in fixed cost $5 000 000
Increase in sales = = = $23 809 524 Increase in fixed cost $1 000 000
Contribution margin 0.21 Increase in sales = = = $4 761 905
Thus, a 50 per cent increase in advertising expenditures must produce a
sales increase of almost $24 million to just break even. That $24 million sales That is, BMC’s sales must increase almost $5 million to break even on this
increase translates into an almost 1 percentage point increase in market share tactic. So, how many new retail outlets will the company need to secure to achieve
(1 per cent of the $2.5 billion overall market equals $25 million). That is, to break this sales increase? The average revenue generated per current outlet is $53 333
even on the increased advertising expenditure, BMC would have to increase its ($100 million in sales divided by 1875 outlets). To achieve the nearly $5 million
market share from 4 per cent to 4.95 per cent ($123 809 524 ÷ $2.5 billion = sales increase needed to break even, BMC would need about 90 new outlets
0.0495, or 4.95 per cent market share). All of this assumes that the total market ($4 761 905 ÷ $53 333 = 89.3 outlets) or about 4.5 outlets per new rep. Given
will not grow, which might or might not be a reasonable assumption. that current reps cover about 31 outlets apiece (1875 outlets ÷ 60 reps), this
seems very reasonable.
Increase distribution coverage

BMC also wants to consider hiring more salespeople in order to call on new Decrease price
retailer accounts and increase distribution through more outlets. Even though BMC is also considering lowering its price to increase sales revenue through
BMC sells directly to wholesalers, its sales representatives call on retail increased volume. The company’s research has shown that demand for most types
accounts to perform other functions in addition to selling, such as training retail of consumer electronics products is elastic – that is, the percentage increase in
salespeople. Currently, BMC employs 60 sales reps who earn an average of the quantity demanded is greater than the percentage decrease in price.
$50 000 in salary plus 10 per cent commission on sales. The product is currently What increase in sales would be necessary to break even on a 10 per cent
sold to consumers through 1875 retail outlets. Suppose BMC wants to increase decrease in price? That is, what increase in sales will be needed to maintain the total
that number of outlets to 2500, an increase of 625 retail outlets. How many contribution that BMC realised at the higher price? The current total contribution
additional salespeople will BMC need, and what sales volume will be necessary can be determined by multiplying the contribution margin by total sales:
to break even on the increased cost?
Current total contribution = Contribution margin × sales
One method for determining what size salesforce BMC will need is the
= 0.21 × $100 million = $21 million
workload method. (See also Figure 12.2.) The workload method uses the following
formula to determine the salesforce size: Price changes result in changes in unit contribution and contribution margin.
Recall that the contribution margin of 21 per cent was based on variable costs
NC × FC × LC
NS = representing 79 per cent of sales. Therefore, unit variable costs can be determined
TA
by multiplying the original price by this percentage: $168 × 0.79 = $132.72 per
where unit. If price is decreased by 10 per cent, the new price is $151.20. However,
NS = number of salespeople variable costs do not change just because price decreases, so the contribution and
NC = number of customers contribution margin decrease are as follows:
9780655702412_APP3.indd 762 3/3/20 11:19 AM

Old New (i.e. reduced 10%)

Price $168.00 $151.20
– Unit variable cost $132.72 $132.72
= Unit contribution $35.28 $18.48
Contribution margin $35.28/168.00 = 0.21 = 21% $18.48/$151.20 = 0.12 = 12%
So, a 10 per cent reduction in price results in a decrease in the contribution

Retail price $250
margin from 21 per cent to 12 per cent. To determine the sales level needed to
minus retail margin (say 30%) –$75
break even on this price reduction, we calculate the level of sales that must be
Retailer’s cost/wholesaler’s price $175
attained at the new contribution margin to achieve the original total contribution
of $21 million: minus wholesaler’s margin (say 20%) –$35
Wholesaler’s cost/BMC’s price $140
New contribution margin × New sales level = Original total contribution
So,
Original contribution $21 000 000 If BMC2’s variable costs are estimated to be $120, then its contribution per
New sales level = = = $175 000 000
New contribution margin 0.12 unit will equal $20 ($140 − $120 = $20). That means for every unit that BMC2
cannibalises from BMC1, BMC will lose $15 in contribution toward fixed costs and
Thus, sales must increase by $75 million ($175 million − $100 million) just to
profit (i.e. contributionBMC2 − contributionBMC1 = $20 − $35 = −$15). You might
break even on a 10 per cent price reduction. This means that BMC must increase
conclude that BMC should not pursue this tactic because it appears as though the
market share to 7 per cent ($175 million ÷ $2.5 billion) to achieve the current level
company would be worse off if it introduced the lower-priced model. However, if
of profits (assuming no increase in the total market sales). The marketing manager
BMC2 captures enough additional sales, BMC will be better off even though some
must assess whether or not this is a reasonable goal.
BMC1 sales are cannibalised. The company must examine what will happen to total
Introduce a lower-priced model contribution, which requires estimates of unit volume for both products.
As a final option, BMC is considering extending its product line by offering a lower- Originally, BMC estimated that next year’s sales of BMC1 would be 600 000
priced model. Of course, the new, lower-priced product would steal some sales units. With the introduction of BMC2, however, it now estimates that 200 000 of
from the higher-priced model. This is called cannibalisation – the situation in which those sales will be cannibalised by the new model. If BMC sells only 200 000 units
one product sold by a company takes a portion of its sales from other company of the new BMC2 model (all cannibalised from BMC1), the company would lose
products. If the new product has a lower contribution than the original product, the $3 million in total contribution (200 000 units × −$15 per cannibalised unit =
company’s total contribution will decrease on the cannibalised sales. However, if −$3 million), which is not a good outcome.
the new product can generate enough new volume, it is worth considering. However, BMC estimates that BMC2 will generate the 200 000 of cannibalised
To assess cannibalisation, BMC must look at the incremental contribution sales plus an additional 500 000 unit sales. Thus, the contribution on these additional
gained by having both products available. Recall that in the previous analysis (see BMC2 units will be $10 million (500 000 units × $20 per unit = $10 million).
‘Decrease price’), we determined that unit variable costs were $132.72 and unit The net effect is that BMC will gain $7 million in total contribution by introducing
contribution was just over $35. Assuming costs remain the same next year, BMC BMC2.
can expect to realise a contribution per unit of approximately $35 for every unit of Table A3.8.5 compares BMC’s total contribution with and without the
the original product sold. introduction of BMC2.
Assume that the first model offered by BMC is called BMC1 and the new, The difference in the total contribution is a net gain of $7 million ($28 million −
lower-priced model is called BMC2. BMC2 will retail for $250, and resellers will $21 million = $7 million). Based on this analysis, BMC should introduce the BMC2
take the same markup percentages on price as they do with the higher-priced model because it results in a positive incremental contribution. However, if fixed
model. Therefore, BMC2’s price to wholesalers will be $140, determined as costs will increase by more than $7 million as a result of adding this model, then
follows: the net effect will be negative and BMC should not pursue this tactic.
Table A3.8.5 Comparison of BMC’s total contribution with and without the introduction of BMC2
BMC1 only BMC1 and BMC2
BMC1 contribution 600 000 units × $35 = $21 000 000 400 000 units × $35 = $14 000 000
BMC2 contribution 0 700 000 units × $20 = $14 000 000
Total contribution $21 000 000 $28 000 000
Sources: Profitability example adapted from Paul W Farris, Neil T Bendle, Phillip E Pfeifer & David J Reibstein, Marketing Metrics: 50+ Metrics Every Executive Should Master, Wharton School
Publishing, 2006, p. 249. Also see Tim Ambler, Marketing and the Bottom Line, 2nd edn, Financial Times Prentice Hall: London, 2003; and Roger J Best, Market-Based Management, 4th edn,
Upper Saddle River, NJ: Prentice Hall, 2005.
9780655702412_APP3.indd 763 3/3/20 11:19 AM

Appendix
4
Careers in
marketing
You may have decided you want to pursue a marketing career because it offers • Diversity. The number of women and people with various cultural backgrounds
constant challenge, stimulating problems, the opportunity to work with people and in marketing continues to grow, and women are advancing rapidly into
excellent advancement opportunities. But you still may not know which part of marketing management. For example, women now outnumber men by nearly
marketing best suits you – marketing is a very broad field offering a wide variety two to one as advertising account executives. Additionally, as companies
of career options. become global in their outlook and operations, the need for cultural diversity
This appendix helps you discover what types of marketing jobs best match your in marketing positions continues to increase, opening new opportunities.
special skills and interests, shows you how to conduct the kind of job search that • Global. Companies such as Coca-Cola, McDonald’s, Google, IBM, Unilever and
will get you the position you want, describes marketing career paths open to you Procter & Gamble have become multinational, with manufacturing and marketing
and suggests other information resources. operations in hundreds of countries. Indeed, such companies often make more
profit from sales made abroad than from local markets. And it is not just the big
Marketing careers today companies that are involved in international marketing. Organisations of all sizes
The marketing field is booming, with many working Australians and New have moved into the global arena. Many new marketing opportunities and careers
Zealanders now employed in marketing-related positions. Marketing salaries will be directly linked to the expanding global marketplace. The globalisation of
may vary by company, position and region, and salary figures change constantly. business also means that you will need more cultural, language and people skills in
In general, entry-level marketing salaries usually are only slightly below those for the marketing world of the 21st century.
engineering and chemistry but equal or exceed starting salaries in other areas of • Not-for-profit organisations. Increasingly, universities, colleges, arts
business and the liberal arts. Moreover, if you succeed in an entry-level marketing organisations, libraries, hospitals, charities and other not-for-profit organisations
position, it is likely you will be promoted quickly to higher levels of responsibility are recognising the need for effectively marketing their ‘products’ and services
and salary. In addition, because of the consumer and product knowledge you will to various publics. This awareness has led to new marketing positions – with
gain in these jobs, marketing positions provide excellent training for the highest these organisations hiring their own chief marketing officers and marketing
levels in an organisation. teams, or using outside marketing specialists.
Overall marketing facts and trends Looking for a job in today’s

In conducting your job search, consider the following facts and trends that are marketing world
changing the world of marketing: To choose and find the right job, you will need to apply the marketing skills you
• Focus on customers. More and more, companies are realising that they have learned in the marketing subjects you study, especially marketing analysis
win in the marketplace only by creating superior value for customers. and planning. Follow these eight steps for marketing yourself: (1) conduct a self-
To capture value from customers, they must first find new and better ways assessment and seek career counselling; (2) examine job descriptions; (3) explore
to solve customer problems and improve customer brand experiences. the job market, follow up and assess opportunities; (4) develop search strategies;
This increasing focus on the customer puts marketers at the forefront in many (5) prepare a curriculum vitae (CV); (6) write a cover letter, follow up, and assemble
of today’s companies. As the primary customer-facing function, marketing’s supporting documents; (7) interview for jobs; and (8) take a follow-up interview.
mission is to get all sections of the organisation to ‘think customer’. We discuss each of these steps below.
• Technology. Technology is changing the way marketers work. For example,
internet, social media, mobile and other digital technologies are rapidly Conduct a self-assessment and seek career
changing the ways marketers interact with and service customers. Technology counselling
is also changing everything from the ways marketers create new products and If you are having difficulty deciding what kind of marketing position is the best fit
advertise them to how marketers access information and recruit personnel. for you, start out by doing some self-testing or seeking career counselling. Self-
Whereas advertising firms have traditionally recruited ‘generalists’ into assessments require that you honestly and thoroughly evaluate your interests,
account management, generalist has now taken on a whole new meaning – strengths and weaknesses. What do you do well (your best and favourite skills)
advertising account executives must now have both broad and specialised and what do you do not so well? What are your favourite interests? What are your
knowledge. career goals? What makes you stand out from other job seekers?
9780655702412_APP4.indd 764 3/3/20 11:20 AM

Your university or college career-counselling, testing and placement services Internships

are there to guide you in making a career assessment. An internship is filled with many benefits, such as gaining experience in a specific
field of interest and building up a network of contacts. The biggest benefit: the
Examine job descriptions potential of being offered a job shortly before or soon after graduation. Those
After you have identified your skills, interests and desires, you need to see which who have completed an internship, whether arranged themselves or as part of a
marketing positions are the best match for them. The Australian government- university degree course, gain by virtue of their experience and often start on a
published Employment Outlook to November 2018 (<cica.org.au/wp-content/ higher salary.
uploads/Employment-Outlook-to-November-2018.pdf>), the Dictionary of Many company websites have separate internship areas. If you know of a
Occupational Titles (<www.occupationalinfo.org>) and SEEK (<www.seek.com. company for which you wish to work, go to that company’s corporate website,
au/marketing-communications-jobs/>) describe the duties involved in various enter the human resources area and check for internships. If none are listed,
occupations, the specific training and education needed and the availability of try emailing the human resources department, asking if internships are offered.
jobs in each field. The SEEK group of companies provides information and help Also, ask at your university or college as most, if not all, have specific divisions that
with employment, education and volunteer businesses across Australia, New can help scope and organise internships for students.
Zealand, China, India, Brazil, Mexico, Indonesia, Nigeria, Bangladesh, Philippines,
Vietnam, Thailand, South Africa, Kenya, Malaysia, Hong Kong and Singapore. Job hunting on the internet
For information concerning probable earnings, Graduate Careers Australia (GCA) A constantly increasing number of websites on the internet deal with job hunting.
publish information online under Graduate Salaries (<www.graduatecareers.com. You can also use the internet to make contact with people who can help you gain
au/research/researchreports/graduatesalaries/>). information on and to research companies that interest you. For example, check out
Your initial career shopping-list should be broad and flexible. Look for Internships Down Under (<www.internshipsdownunder.com/category/internships/
different ways to achieve your objectives. For example, if you want a career in industry/marketing/>), and GoAbroad.com (<www.goabroad.com/intern-abroad>).
marketing management, consider the public as well as the private sector, and Most companies have their own websites on which they post job listings.
local and regional as well as national and international firms. Be open initially This may be helpful if you have a specific and fairly limited number of companies
to exploring many options, then focus on specific industries and jobs, listing your that you are monitoring for job opportunities. But if this is not the case, remember
basic goals as a way to guide your choices. Your list might include ‘a job in a that to find out what interesting marketing jobs the companies themselves are
start-up company, in one of the capital cities, doing new-product planning with a posting, you may have to visit hundreds of corporate sites.
computer software firm’.
Professional networking sites
Many companies have now begun to take advantage of social networking
Explore the job market, follow up and assess sites to find talented applicants. From LinkedIn to Facebook to Google+, social
opportunities networking has become professional networking. Many companies have career
At this stage, you need to look at the market and see what positions are actually pages on LinkedIn (e.g. <www.linkedin.com/company/procter-&-gamble/careers>
available. You do not have to do this alone. Any of the following may assist you. and <www.linkedin.com/company/basf/careers>) to find potential candidates
for entry-level positions. And many other companies have career listings pages
Career development centres
on Facebook in addition to LinkedIn. Further, professional marketing bodies, such
Your university’s or college’s career development centre and its website are
as the Australian Marketing Institute, have sections of their website dedicated to
excellent places to start. For example, the websites of the undergraduate career
workshops, networking events and job-seeking services for their members, including
services centre provide lists of career links that can help to focus your job search.
student members (e.g. <www.ami.org.au/imis15/AMI/Information/Jobs/AMI/
Most schools also provide career coaches and career education courses.
Information_Folder/Jobs.aspx?hkey=95ff8585-6271-45d4-9c81-a24ec7f61ebd>).
In addition, find out everything you can about the companies that interest
For job seekers, online professional networking offers more efficient job targeting
you by consulting company websites, business newspaper and magazine articles,
and reduces associated costs as compared with traditional interaction methods,
online sites, annual reports, business reference books, faculty, career counsellors
such as travelling to job fairs and interviews, printing CVs and other expenses.
and others. Try to analyse the industry’s and the company’s future growth and profit
However, although the internet offers a wealth of resources for searching for
potential, advancement opportunities, salary levels, entry positions, travel time and
the perfect job, be aware that it is a two-way street. Just as job seekers can search
other factors of significance to you.
the internet to find job opportunities, employers can search for information on
Job fairs job candidates. Jobs searches can sometimes be derailed by information mined by
Career development centres often work with corporate recruiters to organise on- potential employers from online social networking sites that reveals unintended or
campus career fairs. You might also use the internet to check on upcoming career embarrassing anecdotes and photographs. Internet searches can sometimes also
fairs in your region. reveal inconsistencies and CV inflation. A recent study found that more than half
of recruiters surveyed have reconsidered a candidate based on his or her social
Networking media profile.
Networking – asking for job leads from friends, family, people in your community
and career centres – is one of the best ways to find a marketing job. Studies Develop search strategies
estimate that 60 to 90 per cent of jobs are found through networking. The idea is Once you have decided which companies you are interested in, you need to contact
to spread your net wide, contacting anybody and everybody. them. One of the best ways is through on-campus interviews. However, not every
9780655702412_APP4.indd 765 3/3/20 11:20 AM

766 Appendix 4 Careers in marketing
company you are interested in will visit your university or college. In such instances, After you have written your internet-ready CV, you need to post it. The following
you can write, email or phone the company directly or ask marketing professors or sites may be good locations to start: Monster (<www.monster.com>), LinkedIn
school alumni for contacts. (<www.linkedin.com/job/home>) and CareerBuilder.com (<www.careerbuilder.
com/jobseeker/postnewresume.aspx>). However, use caution when posting your
Prepare a curriculum vitae CV on various sites. In this era of identity theft, you need to select sites with care so
A curriculum vitae (CV) – sometimes called a resumé – is a concise yet as to protect your privacy. Limit access to your personal contact information, and
comprehensive written summary of your qualifications, including your academic, do not use sites that offer to ‘blast’ your CV into cyberspace.
personal and professional achievements, that showcases why you are the best
candidate for the job. Because an employer will spend on average only 15 to Curriculum vitae tips
20 seconds reviewing your CV, you want to be sure you prepare a good one. • Communicate your worth to potential employers in a concrete manner, citing
In preparing your CV, remember that all information on it must be accurate and examples whenever possible.
complete. CVs typically begin with the applicant’s full name, telephone number, • Be concise and direct.
and mail and email addresses. A simple and direct statement of career objectives • Use active verbs to show you are a doer.
generally appears next, followed by work history and academic data (including • Do not skimp on quality or use gimmicks. Spare no expense in presenting a
awards and internships), and then personal activities and experiences applicable professional CV.
to the job sought. • Have someone critique your work. A single typo can eliminate you from being
The CV sometimes ends with a list of references the employer may contact considered.
(at other times, references may be listed separately). If your work or internship • Customise your CV for specific employers. Emphasise your strengths as they
experience is limited, non-existent or not relevant, then it is a good idea to pertain to your targeted job.
emphasise your academic and non-academic achievements, showing skills related • Keep your CV compact, usually one or two pages.
to those required for excellent job performance. • Format the text to be attractive, professional and readable. Times New Roman
There are three main types of CVs. Reverse chronological CVs, which emphasise in 12-point size is often the font style and size of choice. So, too, is 1.5 line
career growth, are organised in reverse chronological order, starting with your spacing. Avoid too much ‘design’ or gimmicky flourishes.
most recent job. They focus on job titles within organisations, describing the
responsibilities and accomplishments for each job. Functional CVs focus less on
Write a cover letter, follow up, and assemble
job titles and work history and more on your assets and achievements. This format supporting documents
works best if your job history is scanty or discontinuous. Mixed, or combination, Cover letter
CVs take from each of the other two formats. First, the skills used for a specific job You should include a cover letter informing the employer that a CV is enclosed.
are listed, then the job title is stated. This format works best for applicants whose But a cover letter does more than this. It also serves to summarise in one or two
past jobs are in other fields or seemingly unrelated to the position. For further paragraphs the contents of the CV and explains why you think you are the right
explanation and examples of these types of CVs, see the ‘Resume Format’ page at person for the position. The goal is to persuade the employer to look at the more-
<www.resume-resource.com/format.html>. detailed CV. A typical cover letter is organised as follows: (1) the name and position
Many books can assist you in developing your CV. A popular guide is Martin of the person you are contacting; (2) a statement identifying the position you
Yate, Knock ’Em Dead: Secrets and Strategies for First-Time Job Seekers (Adams are applying for, how you heard of the vacancy and the reasons for your interest;
Media, 2013). Software programs such as ResuméMaker (<www.ResumeMaker. (3) a summary of your qualifications for the job; (4) a description of what follow-
com>) provide hundreds of sample CVs and ready-to-use phrases while ups you intend to make, such as phoning in two weeks to confirm that the CV
guiding you through the CV-preparation process. CareerOne (<career-advice. has been received; and (5) an expression of gratitude for the opportunity of being
careerone.com.au/resume-cover-letter/resume-writing/resume-writing-the-basics/ a candidate for the job. CareerOneStop (<www.careeronestop.org/ResumeGuide/
article.aspx>) offers a step-by-step CV tutorial, and SEEK (<static.seek.com.au/ Writeeffectivecoverletters.aspx>) offers a step-by-step tutorial on how to create
career-resources/faqs/Marketing/documents/MarketingSampleResume.pdf>) a cover letter, and Susan Ireland’s website contains more than 50 cover letter
provides examples. samples (<susanireland.com/letter/cover-letter-examples>). Another popular guide
is Jeremy Schifeling, Get It Done: Write a Cover Letter (Jeremy Schifeling, 2012).
Online CVs
The internet is now a widely used job-search environment so it is a good idea to Follow up
have your CV ready for the online environment. You can forward it to networking Once you send your cover letter and CV to prospective employers via the method
contacts or recruiting professionals through email. You can also post it in online they prefer – email, their website or regular mail – it is often a good idea to follow
databases with the hope that employers and recruiters will find it. It is often wise up. In today’s market, job seekers cannot afford to wait for interviews to find them.
to send your CV in PDF format. A quality CV and an attractive cover letter are crucial, but a proper follow-up may
Successful internet-ready CVs require a different strategy than that for paper CVs. be the key to landing an interview. However, before you engage your potential
For instance, when companies search CV banks, they search key words and industry employer, be sure to research the company. Knowing about the company and
buzz words that describe a skill or the core work required for each job, so nouns are understanding its place in the industry will help you shine. When you place a call,
much more important than verbs. Two good resources for preparing internet-ready send an email or mail a letter to a company contact, be sure to restate your interest
CVs are Susan Ireland’s CV Site (<www.gcflearnfree.org/resumewriting/9/print>) in the position, check on the status of your CV and ask employers for any questions
and the Riley Guide (<www.rileyguide.com/eresume.html>). they may have.
9780655702412_APP4.indd 766 3/3/20 11:20 AM

Letters of recommendation During the interview

Letters of recommendation are written references by professors, former and current During the interview, do the following:
employers, and others, which testify to your character, skills and abilities. Some 1 Shake hands firmly in greeting the interviewer. Introduce yourself, using the
companies may request letters of recommendation to be submitted with your CV or same form of address that the interviewer uses. Focus on creating a good
presented at the interview. Even if letters of recommendation are not requested, it initial impression.
is a good idea to bring them with you to the interview. A good reference letter tells 2 Keep your poise. Relax, smile when appropriate and be upbeat throughout.
why you would be an excellent candidate for the position. In choosing someone 3 Maintain eye contact and good posture, and speak distinctly. Do not clasp
to write a letter of recommendation, be confident that the person will give you a your hands or fiddle with jewellery, hair or clothing. Sit comfortably in your
good reference. In addition, do not assume the person knows everything about you chair.
or the position you are seeking. Rather, provide the person with your CV and other 4 Along with the copies of relevant documents that support your candidacy,
relevant data. As a courtesy, allow the reference writer at least a month to complete carry extra copies of your CV with you.
the letter and enclose a stamped, self-addressed envelope with your materials. 5 Have your story down pat. Present your selling points. Answer questions
In the packet containing your CV, cover letter and letters of recommendation, directly. Avoid both one-word and too-wordy answers.
you may also want to attach other relevant documents that support your candidacy, 6 Let the interviewer take the initiative, but do not be passive. Find an
such as academic transcripts, graphics, portfolios and samples of writing. opportunity to direct the conversation to things about yourself that you want
the interviewer to hear.
Interview for jobs 7 To end on a high note, make your most important point or ask your most
As the old saying goes, ‘The CV gets you the interview; the interview gets you pertinent question during the last part of the interview.
the job.’ The job interview offers you an opportunity to gather more information 8 Don’t hesitate to ‘close’. You might say, ‘I’m very interested in the position,
about the organisation while, at the same time, allowing the organisation to gather and I have enjoyed this interview.’
more information about you. You will want to present your best self. The interview 9 Obtain the interviewer’s business card or address and phone number so that
process consists of three parts: before the interview, the interview itself, and after you can follow up later.
the interview. If you pass through these stages successfully, you will be called back Here is a highly recommended strategy for interviewing well: Find out
for any follow-up interviews. beforehand what it’s like to be a brand manager, sales representative, market
researcher, advertising account executive or other position for which you are
Before the interview interviewing. See if you can find a mentor – someone in a position similar to the
In preparing for your interview, do the following: one you are seeking, perhaps with another company. Talk with this mentor about
1 Understand that interviewers have diverse styles, including the ‘chitchat’, the ins and outs of the job and industry.
let’s-get-to-know-each-other style; the interrogation style of question after After the interview
question; and the tough-probing ‘why, why, why’ style, among others. After the interview, do the following:
Be ready for anything. 1 Record the key points that arose. Be sure to note who is to follow up and when
2 With a friend, practise being interviewed and then ask for a critique. Or make a decision can be expected.
a video of yourself in a practice interview so that you can critique your own 2 Analyse the interview objectively, including the questions asked, the answers
performance. Your college or university placement service may also offer to them, your overall interview presentation and the interviewer’s responses
‘mock’ interviews to help you. to specific points.
3 Prepare at least five good questions whose answers are not easily found in 3 Immediately send a thank-you letter or email, mentioning any additional items
the company literature, such as, ‘What is the future direction of the firm?’, and your willingness to supply further information.
‘How does the firm differentiate itself from competitors?’ or ‘Do you have a 4 If you do not hear from the employer within the specified time, call, email or
new-media division?’. write to the interviewer to determine your status.
4 Anticipate possible interview questions, such as ‘Why do you want to work
for this company?’ or ‘Why should we hire you?’. Prepare solid answers Take a follow-up interview
before the interview. Have a clear idea of why you are interested in joining the If your first interview takes place off-site, such as at your college, university or
company and the industry to which it belongs. at a job fair, and if you are successful with that initial interview, you will be
5 Avoid back-to-back interviews – they can be exhausting, and it is unpredictable invited to visit the organisation. The in-company interview will probably run from
how long each will last. several hours to an entire day, and may be an individual or group interview.
6 Prepare relevant documents that support your candidacy, such as academic The organisation will examine your interest, maturity, enthusiasm, assertiveness,
transcripts, letters of recommendation, graphics, portfolios and samples of logic, how you work with others, and company and functional knowledge.
writing. Bring multiple copies to the interview. You should ask questions about issues of importance to you. Find out about the
7 Dress conservatively and professionally. Be neat and clean. working environment, job role, responsibilities, opportunities for advancement,
8 Arrive 10 minutes early to collect your thoughts and review the major points you current industrial issues and the company’s personality. The company wants to
intend to cover. Check your name on the interview schedule, noting the name of discover if you are the right person for the job, whereas you want to find out if it
the interviewer and the room number. Be courteous and polite to office staff. is the right job for you. The key is to determine if the right fit exists between you
9 Approach the interview enthusiastically. Let your personality shine through. and the company.
9780655702412_APP4.indd 767 3/3/20 11:20 AM

768 Appendix 4 Careers in marketing
Marketing jobs Brand and product management

In this section, we describe some of the key marketing positions. Brand and product managers plan, direct, and control business and marketing
efforts for their products. They are involved with research and development,
packaging, manufacturing, sales and distribution, advertising, promotion, market
Advertising
research, and business analysis and forecasting.
Advertising is one of the most exciting fields in marketing, offering a wide range
of career opportunities. Job descriptions
A company’s brand management team consists of people in several positions:
Job descriptions
Key advertising positions include copywriter, art director, production manager,
• Brand managers guide the development of marketing strategies for a specific
brand.
account executive, account planner and media planner/buyer.
• Copywriters write advertising copy and help find the concepts behind the • Assistant brand managers are responsible for certain strategic components of
the brand.
written words and visual images of advertisements.
• Art directors, the other part of the creative team, help translate the copywriters’ • Product managers oversee several brands within a product line or product group.
ideas into dramatic visuals called ‘layouts’. Agency artists develop print
• Product category managers direct multiple product lines in the product category.
layouts, package designs, television and video layouts (called ‘storyboards’),
• Market analysts research the market and provide important strategic
information to the project managers.
corporate logotypes, trademarks and symbols.
• Production managers are responsible for physically creating ads, either • Project directors are responsible for collecting market information on a
marketing or product project.
in-house or by contracting through outside production houses.
• Account development executives research and understand clients’ markets • Research directors oversee the planning, gathering and analysing of all
organisational research.
and customers and help develop marketing and advertising strategies to
effect them.
Skills needed, career paths and typical salaries
• Account executives serve as liaisons between clients and agencies.
Brand and product management requires high problem-solving, analytical,
They coordinate the planning, creation, production and implementation of an
presentation, communication and leadership skills, as well as the ability to work
advertising campaign for the account.
well in a team. Product management requires long hours and involves the high
• Account planners serve as the voice of the consumer in the agency.
pressure of running large projects. In consumer goods companies, the newcomer –
They research consumers to understand their needs and motivations as a basis
who usually needs an MBA or other specialised master’s degree – joins a brand team
for developing effective ad campaigns.
as an assistant and learns the ropes by doing numerical analyses and assisting senior
• Media planners (or buyers) determine the best mix of television, radio,
brand people. This person eventually heads the team and later moves on to manage
newspaper, magazine, digital and other media for the advertising campaign.
a larger brand, then several brands.
Many industrial goods companies also have product managers. Product
management is one of the best training grounds for future corporate officers.
Work in advertising requires strong people skills in order to be able
Product management also offers good opportunities to move into international
to interact effectively with an often-difficult and demanding client base.
marketing. Product managers command relatively high salaries. Because this job
In addition, advertising attracts people with strong skills in planning, problem
category encourages or requires a master’s degree, starting pay tends to be higher
solving, creativity, communication, initiative, leadership and presentation.
than in other marketing categories, such as advertising or retailing.
Advertising involves working under high levels of stress and pressure created
by unrelenting deadlines. Advertisers frequently have to work long hours to
Sales and sales management
meet deadlines for a presentation. In reward, work achievements are very
Sales and sales management opportunities exist in a wide range of profit and
apparent, with the results of creative strategies observed by thousands or
not-for-profit organisations and in product and service organisations, including
even millions of people.
financial, insurance, consulting and government organisations.
Positions in advertising sometimes require an MBA or other master’s degree.
But most jobs only require a business, graphic arts or liberal arts degree. Advertising Job descriptions
positions often serve as gateways to higher-level management. Moreover, with Key jobs include consumer sales, industrial sales, national account managers,
large advertising agencies opening offices all over the world, there is the possibility service support, sales trainers, and sales management
of eventually working on global campaigns. • Consumer sales involves selling consumer products and services through retailers.
Starting advertising salaries are relatively low compared with those of some • Industrial sales involves selling products and services to other businesses.
other marketing jobs because of strong competition for entry-level advertising jobs. • National account managers (NAMs) oversee a few very large accounts.
Compensation will increase quickly as you move into account executive or other • Service support personnel support salespeople during and after the sale of a
management positions. For more facts and figures, see the online pages of B&T, product.
which is Australia’s leading publication for the advertising, marketing, media and PR • Sales trainers train new hires and provide refresher training for all sales
industries (<www.bandt.com.au>), and the Marketing Industry Associations website personnel.
(<marketing.com.au/business-directories/marketing-industry-associations>), which • Sales management includes a sequence of positions ranging from district
lists the various marketing associations in Australia and New Zealand. manager to vice president of sales.
9780655702412_APP4.indd 768 3/3/20 11:20 AM

Salespeople enjoy active professional lives, working outside the office and and industry associations, marketing research firms, advertising agencies, and
interacting with others. They manage their own time and activities. And successful governmental and private not-for-profit agencies.
salespeople can be very well paid. Competition for top jobs can be intense. Every
sales job is different, but some positions involve extensive travel, long workdays
New product planning
People interested in new-product planning can find opportunities in many types
and working under pressure. Salespeople can also expect to be transferred more
of organisations. They usually need a good background in marketing, marketing
than once between company headquarters and regional offices. However, most
research and sales forecasting; they need organisational skills to motivate and
companies are now working to bring good work–life balance to their salespeople
coordinate others; and they may need a technical background. Usually, these people
and sales managers.
work first in other marketing positions before joining the new-product department.
Supply chain management (logistics and physical
Selling is a people profession in which you will work with people every day, all day
distribution)
long. In addition to people skills, sales professionals need sales and communication
Supply chain management, or marketing logistics and physical distribution, is a
skills. Most sales positions also require strong problem-solving, analytical,
large and dynamic field, with many career opportunities. Major transportation
presentation and leadership abilities, as well as creativity and initiative. Teamwork
carriers, manufacturers, wholesalers and retailers all employ logistics specialists.
skills are increasingly important.
Increasingly, marketing teams include logistics specialists, and marketing managers’
Career paths lead from salesperson to district, regional and higher levels of
career paths include marketing logistics assignments. Coursework in quantitative
sales management and, in many cases, to the top management of the firm. Today,
methods, finance, accounting and marketing will provide you with the necessary
most entry-level sales management positions require a degree. Increasingly,
skills for entering the field.
people seeking selling jobs are acquiring sales experience in an internship
capacity or from a part-time job before graduating. Sales positions are great Public relations
springboards to leadership positions, with more CEOs starting in sales than in Most organisations have a public relations staff to anticipate problems with
any other entry-level position. This might explain why competition for top sales various publics, handle complaints, deal with media and build the corporate image.
jobs is intense. People interested in public relations should be able to speak and write clearly and
Starting base salaries in sales may be moderate, but compensation is persuasively, and they should have a background in journalism, communications
often supplemented by significant commission, bonus or other incentive plans. or the liberal arts. The challenges in this job are highly varied and very people-
In addition, many sales jobs include a company car or car allowance. Successful oriented.
salespeople are among most companies’ highest-paid employees.
Not-for-profit services
The key jobs in not-for-profit organisations include marketing director, director
Other marketing jobs
of development, event coordinator, publication specialist and intern/volunteer.
Retailing
The chief marketing officer (CMO) is in charge of all marketing activities for the
Retailing provides an early opportunity to assume marketing responsibilities.
organisation. The director of development organises, manages and directs the
Key jobs include store manager, regional manager, buyer, department manager and
fundraising campaigns that keep a not-for-profit organisation in existence. An event
salesperson. Store managers direct the management and operation of an individual
coordinator directs all aspects of fundraising events, from initial planning through
store. Regional managers manage groups of stores across several states and report
to implementation. The publication specialist oversees publications designed to
performance to headquarters. Buyers select and buy the merchandise that the
promote awareness of the organisation.
store carries. The department manager acts as store manager of a department,
Although typically an unpaid position, the intern/volunteer performs various
such as clothing, but on the department level. The salesperson sells merchandise to
marketing functions, and this work can be an important step to gaining a full-
retail customers. Retailing can involve relocation, but generally there is little travel,
time position. The not-for-profit sector is typically not for someone who is money-
unless you are a buyer. Retailing requires strong people and sales skills because
driven. Rather, most not-for-profit organisations look for people with a strong
retailers are constantly in contact with customers. Enthusiasm, willingness and
sense of community spirit and the desire to help others. Therefore, starting pay
communication skills are very helpful for retailers, too.
is usually lower than in other marketing fields. However, the bigger the not-for-
Retailers work long hours, but their daily activities are often more structured
profit organisation, the better your chance of rapidly increasing your income when
than in some types of marketing positions. Starting salaries in retailing tend to be
moving into upper management.
low, but pay increases as you move into management or a retailing specialty job.
Marketing research Other resources

Marketing researchers interact with managers to define problems and identify Professional marketing associations and organisations are another source of
the information needed to resolve them. They design research projects, prepare information about careers. Marketers belong to many such societies. As we
questionnaires and samples, analyse data, prepare reports, and present their mentioned earlier, the Marketing Industry Associations (<marketing.com.au/
findings and recommendations to management. They must understand statistics, business-directories/marketing-industry-associations>) lists the various marketing
consumer behaviour, psychology and sociology. As more and more marketing associations in Australia and New Zealand alphabetically. It is worth searching
research goes digital, they must also understand the ins and outs of obtaining and through the list and linking to any associations which take your interest – for
managing online information. An honours bachelor’s or master’s degree helps. example, the Australian Marketing Institute (AMI) (<www.ami.org.au>) and the
Career opportunities exist with manufacturers, retailers, some wholesalers, trade New Zealand Marketing Association (MA) (<www.marketing.org.nz>).
9780655702412_APP4.indd 769 3/3/20 11:20 AM

Glossary
absenteeism The failure to show up advertising objective A specific attribution theory A theory used to
for work. communication task to be accomplished explain how we judge people differently,
active listening Listening for full with a specific target audience during a based on what meaning we attribute to
meaning without making premature specific period of time. a given behaviour.
judgments or interpretations. advertising strategy Consists of authority The rights inherent in a
adjourning stage The final stage two main elements: creating advertising managerial position to give orders and
of group development for temporary messages and selecting advertising media. expect the orders to be obeyed.
groups, during which groups prepare to affordable method The promotion autocratic style A leader who
disband. budget is set at the level the company centralises authority, dictates work
administered vertical marketing can afford. methods, makes unilateral decisions and
network A vertical marketing affective component The part limits employee participation.
network that coordinates successive of an attitude that’s the emotional or baby boomers People born during
stages of production and distribution, feeling part. the period following World War II,
not through common ownership or age and life-cycle between 1946 and 1964.
contractual ties but through the size segmentation Analysing a market balanced scorecard A performance
and power of one of the parties. with the aim of directing marketing measurement tool that looks at more
adoption process The mental focus based on different age and life- than just the financial perspective.
process through which an individual cycle groups. basic corrective action Corrective
passes from first hearing about an agent A person or business who action that looks at how and why
innovation to final adoption. represents buyers or sellers on a more performance deviated before correcting
advertising Any paid form of non- permanent basis, performs only a few the source of deviation.
personal presentation and promotion of functions and does not take title to behaviour The actions of people.
ideas, goods or services by an identified goods. behavioural component The part
sponsor. allowance Promotional monies paid of an attitude that refers to an intention
advertising agency A marketing by suppliers to retailers in return for to behave in a certain way towards
services business that assists companies an agreement to feature the suppliers’ someone or something.
in planning, preparing, implementing products in some way. behavioural segmentation
and evaluating all or portions of their assumed similarity An observer’s Dividing a market into segments based
advertising programs. perception of others is influenced more on consumer knowledge, attitudes, uses
advertising budget The dollars by the observer’s own characteristics or responses to a product.
and other resources allocated to a than by those of the person observed. behavioural theories of
product or company advertising attitude A person’s consistently leadership Theories that isolate
program. favourable or unfavourable evaluations, behaviours that differentiate effective
advertising media The vehicles feelings and tendencies towards an leaders from ineffective leaders.
through which advertising messages are object or idea. belief A descriptive thought that a
delivered to their intended audiences. attitudes Evaluative statements, person holds about something.
either favourable or unfavourable,
concerning objects, people or events.
9780655702412_GLOS.indd 770 3/3/20 11:16 AM

Glossary 771
benchmarking The search for the broker A person or business who career The sequence of work
best practices among competitors or does not take title to goods and whose positions held by a person during their
non-competitors that lead to their function is to bring buyers and sellers lifetime.
superior performance. together and assist in negotiation. career planning The process of
benefit segmentation Analysing business analysis A review of the matching career goals and individual
a market with the aim of directing sales, costs and profit projections for capabilities with opportunities for
marketing focus based on the different a new product to determine whether achieving those goals.
benefits that consumers seek from the these factors satisfy the company’s category killer A giant specialty
product. objectives. store that carries a very deep assortment
big data The huge and complex data business buyer behaviour The of a particular line.
sets generated by today’s sophisticated buying behaviour of the organisations causal research Marketing research
information generation, collection, that buy goods and services for use in used to test hypotheses about cause-
storage and analysis technologies. the production of other products and and-effect relationship.
Big Five model A personality services or to resell or rent them to centralisation The degree to which
trait model that examines five others at a profit. decision making takes place at upper
traits: extraversion, agreeableness, business plan A written document levels of the organisation.
conscientiousness, emotional stability that summarises a business opportunity, certainty A situation in which a
and openness to experience. and defines and articulates how the decision maker can make accurate
blog An online journal where people identified opportunity is to be seized decisions because all outcomes are
post their thoughts, usually on a and exploited. known.
narrowly defined topic. business promotion A sales chain of command The line
body language Non-verbal promotion tool used to generate of authority extending from upper
communication cues such as facial business leads, stimulate purchases, organisational levels to lower levels,
expressions, gestures and other body reward customers and motivate which clarifies who reports to whom.
movements. salespeople.
chain stores (corporate
boundaryless organisation An buying centre All the individuals chains) Two or more outlets
organisation whose design isn’t defined and units that play a role in the that are commonly owned and
by, or limited to, boundaries imposed by purchase decision-making process. controlled, employ central buying and
a predefined structure. by-product pricing Pricing low- merchandising, and sell similar lines of
brainstorming An idea-generating value by-products to get rid of them or merchandise.
process that encourages alternatives to make money on them and the main change agents People who act
while withholding criticism. products. as change catalysts and assume the
brand A name, term, sign, symbol ‘calm waters’ metaphor A responsibility for managing the change
or design, or a combination of these, description of organisational change process.
that identifies the products or services that likens such change to a large ship channel The medium by
of one seller or group of sellers and making a predictable trip across a calm which a message travels. channel
differentiates them from those of sea and experiencing an occasional conflict Disagreements among
competitors. storm. marketing channel members on goals,
brand personality The specific mix capabilities An organisation’s skills roles and rewards – that is, on who
of human traits that may be attributed and abilities in doing the work activities should do what and for what rewards.
to a particular brand. needed in its business. channel level A layer of
breakeven pricing (target-return capitalist economy An economic intermediaries who perform some
pricing) Setting the price to break system in which individuals or work in bringing the product and its
even on the costs of making and corporations own the means of ownership closer to the final buyer.
marketing a product, or to make the production and market forces operate. Circuit Layouts Act 1989
desired profit. captive-product pricing Pricing Legislation protecting the ownership of
products that must be used with the computer-chip circuitry for 20 years.
main product.
9780655702412_GLOS.indd 771 3/3/20 11:16 AM

772 Glossary
charismatic leaders Enthusiastic, competition-based confidential

self-confident leaders whose pricing Setting prices based on information Intellectual property
personalities and actions influence competitors’ strategies, costs, prices and that can be protected only by keeping it
people to behave in certain ways. market offerings. confidential (e.g. trade secrets).
code of ethics A formal document competitive advantage An conflict Perceived differences
that states an organisation’s primary advantage over competitors gained by resulting in interference or opposition.
values and the ethical rules it expects offering greater customer value, either consideration The extent to
managers and non-managerial through lower prices or by providing which a leader has job relationships
employees to follow. more benefits that justify higher prices. characterised by mutual trust, respect
cognitive component The part competitive intelligence A type for employees’ ideas and regard for
of an attitude made up of the beliefs, of environmental scanning that gives their feelings.
opinions, knowledge and information managers accurate information about consumer buyer behaviour The
held by a person. competitors. buying behaviour of final consumers
cognitive dissonance Any competitive marketing – individuals and households – that
incompatibility or inconsistency intelligence The systematic buy goods and services for personal
between attitudes, or between monitoring, collection and analysis consumption.
behaviour and attitudes. Buyer of publicly available information consumer market All the
discomfort caused by post-purchase about consumers, competitors and individuals and households that buy or
conflict. developments in the marketing acquire goods and services for personal
combination store A combined environment. consumption.
grocery and general merchandise store. competitive-parity method The consumer product A product
commercial online promotion budget is set to match bought by final consumers for personal
databases Computerised collections competitors’ outlays. consumption.
of information available from online competitive strategy An consumer promotion A sales
commercial sources or via the internet. organisational strategy for how an promotion tool used to boost short-
commercialisation Introducing a organisation will compete in its term customer buying and involvement
new product into the market. business(es). or to enhance a long-term customer
Competition and Consumer competitors Individuals and relationship.
Act 2010 The Act and regulations organisations with whom an consumer-generated
are designed to protect consumers organisation competes for resources. marketing Brand exchanges created
by focusing on preventing restrictive compressed work week A work by consumers themselves – both invited
practices of corporations. week where employees work longer and uninvited – by which consumers are
communication A transfer of hours per day but fewer days per week. playing an increasing role in shaping
understanding and meaning from one concentrated (niche) their own brand experiences and those
person to another. marketing A market-coverage of other consumers.
communication process The strategy in which a firm goes after a consumer-oriented
process by which understanding and large share of one or a few segments or marketing The philosophy of
meaning are transferred from one niches. sustainable marketing which holds
person to another. conceptual skills A manager’s that the company should consider and
communities of practice Groups ability to analyse and diagnose complex organise its marketing activities from
of people who share a concern, a set situations. the consumer’s point of view.
of problems or a passion about a topic, concept testing Testing new- consumerism An organised
and who deepen their knowledge and product concepts with a group of target movement of citizens and government
expertise in that area by interacting on consumers to determine if the concepts agencies whose aim is to improve the
an ongoing basis. have strong consumer appeal. rights and power of buyers in relation
company A business entity that is concurrent control Control that to sellers.
legally distinct from its owners. takes place while a work activity is in content marketing Creating,
progress. inspiring and sharing valuable, relevant
and consistent brand messages
9780655702412_GLOS.indd 772 3/3/20 11:16 AM

Glossary 773
and conversations with and among corporate and/or brand cultural environment Institutions
consumers across a mix of paid, owned, website Website designed to build and other forces that affect a society’s
earned and shared media channels. customer goodwill, collect customer basic values, perceptions, preferences
contingency approach (or feedback and supplement other sales and behaviours.
situational approach) An approach channels, rather than to sell the cultural group A group of people
to management that says organisations, company’s products directly. with shared value systems based on
employees and situations are different corporate strategy An common life experiences and situations.
and require different ways of managing. organisational strategy that specifies culture The set of basic values,
contractual vertical marketing what businesses a company is in, or perceptions, wants and behaviours
network A vertical marketing wants to be in, and what it wants to do learned by a member of society from
network in which independent firms with those businesses. family and other important institutions.
at different levels of production and corporate vertical marketing customer database An organised
distribution join together through network A vertical marketing collection of comprehensive data about
contracts. network that combines successive stages individual customers or prospects,
control Management function that of production and distribution under including geographic, demographic,
involves monitoring activities to ensure single ownership; channel leadership psychographic and behavioural data.
that they’re being accomplished as is established through common customer
planned and correcting any significant ownership. departmentalisation Grouping
deviations. cost-based pricing Setting prices activities by customer.
control process A three-step process based on the costs for producing, customer equity The total
of measuring actual performance, distributing and selling the product, combined customer lifetime values of
comparing actual performance against a plus a fair rate of return for the all of the company’s customers.
standard, and taking managerial action company’s effort and risk.
customer insights Fresh
to correct deviations. cost-plus pricing (markup understandings of customers and the
controlling The process of pricing) Adding a standard markup to marketplace derived from marketing
monitoring performance, comparing the cost of the product. information that become the basis
it with goals and correcting any creativity The ability to produce for creating customer value and
significant deviations. novel and useful ideas. relationships.
convenience store (C-store) A creative concept A ‘big idea’ that customer (market) salesforce
small store, located near a residential will bring the message strategy to life in structure A salesforce organisation
area, open long hours seven days a a distinctive and memorable way. where salespeople specialise in selling
week, carrying a limited line of high- credibility The degree to which only to certain customers or industries.
turnover convenience goods. followers perceive someone as honest, customer relationship
conventional marketing competent and able to inspire. management (CRM) Managing
channel A channel consisting of cross-functional team A work team detailed information about individual
one or more independent producers, made up of individuals from various customers and carefully managing
wholesalers and retailers, each a departments which cross traditional customer touch points in order to
separate business seeking to maximise departmental lines. maximise customer loyalty.
its own profits, perhaps even at the crowdsourcing Inviting broad customer satisfaction The
expense of profits for the system as a communities of people – customers, extent to which a product’s perceived
whole. employees, independent scientists and performance matches or exceeds a
copyright Protects individual ideas researchers, and even the public at buyer’s expectations.
as expressed in permanent forms such large – into the new-product innovation customer value-based
as original literary, dramatic, musical or process. pricing Setting the price based on
artistic works, sound recordings, films cultural characteristics The buyers’ perceptions of value, rather than
and broadcasts. customs, values, tastes, attitudes and on the seller’s cost.
core competencies The main behaviours in a particular society. customer-centred new-product
value-creating capabilities of an development Focuses on finding
organisation. new ways to solve customers’ problems
9780655702412_GLOS.indd 773 3/3/20 11:16 AM

774 Glossary
and create more customer-satisfying decoding Translating a received descriptive research Marketing
experiences. message. research used to better describe
customer-perceived value The delegation Assigning authority to marketing problems, situations or
customer’s evaluation of the difference another person to carry out specific markets.
between all the benefits and all the costs activities. design Overall appearance of a
of a marketing offer relative to those of demands Human wants that are product, resulting from one or more of
competing offers. backed by buying power. its visual features.
customer-to-company demarketing Marketing in differentiated (segmented)
interaction Interaction whereby which the task is to temporarily or marketing A market-coverage
customers communicate with permanently reduce demand. strategy in which a firm decides to
companies. demographic target several market segments and
customer-to-customer segmentation Dividing the market designs separate offers for each.
interaction Interaction whereby into segments based on variables such as differentiation Differentiating
customers can buy or exchange goods age, gender, family size, family life cycle, the company’s market offering from
or information directly with one income, occupation, education, religion, that offered by competitors, to create
another. Such interaction may also race, generation and nationality. superior customer value.
involve interchanges of information democratic style A leader who digital and social media
through internet forums that appeal to involves employees in decision making, marketing The use of digital
specific special-interest groups. delegates authority, encourages marketing tools, such as websites,
customer-value marketing A participation in deciding work methods social media, mobile ads and apps,
principle of sustainable marketing and uses feedback to coach employees. online video, email, blogs and other
which holds that a company should put demographic conditions The digital platforms, to engage consumers
most of its resources into customer- physical characteristics of the anywhere, anytime via their computers,
value-building marketing investments. population, such as gender, average age, smartphones, tablets, internet-ready
customers People and organisations level of education, geographic dispersal, TVs and other digital devices.
that acquire goods or services from the income and household composition. digital marketing Company efforts
organisation. demography The study of human to market products and services and
data mining Checking databases for populations in terms of size, density, build customer relationships over the
patterns and trends that might exist, or location, age, gender, race, occupation internet and cellular networks.
to find new connections between data and other statistics. direct and digital
items. department store A retail marketing Interacting directly with
decentralisation The degree to organisation that carries a wide variety carefully targeted individual consumers
which lower-level managers provide of product lines, typically clothing, and communities to both obtain an
input or actually make decisions. home furnishings and household goods; immediate response and build lasting
decision criteria Factors that are each line is operated as a separate customer relationships.
relevant in a decision. department, which may be managed direct factory outlet (DFO) An
decision implementation Putting by specialist buyers or merchandisers, off-price retailing operation owned and
a decision into action. or this function may be performed operated by manufacturers, normally
centrally. carrying the manufacturers’ surplus,
decision-making process A set
departmentalisation How jobs are

Malliga Marimuthu - Marketing and Management - Defined, Explained and Applied-Pearson (2022)

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Malliga Marimuthu - Marketing and Management - Defined, Explained and Applied-Pearson (2022)

Uploaded by

Copyright:

Available Formats

MARKETING AND MANAGEMENT

To get in touch, email custom@pearson.com.au.

Compiled by Malliga Marimuthu

9780655702412_C.indd 1 3/4/20 8:30 AM

9780655702412_FM.indd 1 3/3/20 5:31 PM

Project Management Team Leader: Jill Gillies

ISBN: 978 0 6557 0241 2

9780655702412_FM.indd 2 3/3/20 5:31 PM

Session 1 Introduction to marketing and sustainable marketing 1

Session 2 Understanding the marketplace and buyer behaviour 67

Session 3 Marketing analytics 139

Session 4 Products and services 175

Session 5 Price and placement 251

Session 6 Integrated marketing communication 319

Session 7 Managers, management and managerial sustainable

Session 8 Managing the business 453

9780655702412_FM.indd 3 3/3/20 5:31 PM

Session 9 Managing the organisation and individual 489

Session 10 Managing people 553

Session 11 Leading and managing groups 603

Session 12 Control and change management 655

Appendix 1 Case studies 719

9780655702412_FM.indd 4 3/3/20 5:31 PM

9780655702412_FM.indd 5 3/3/20 5:31 PM

9780655702412_FM.indd 6 3/3/20 5:31 PM

9780655702412_FM.indd 7 3/3/20 5:31 PM

5.3 Marketing analytics at work  172 What is a product?  206

9780655702412_FM.indd 8 3/3/20 5:31 PM

Team-based new-product development 238 Psychological pricing 264

9780655702412_FM.indd 9 3/3/20 5:31 PM

Retailing 300 Student Learning Centre

9780655702412_FM.indd 10 3/3/20 5:31 PM

12.3 Marketing analytics at work 367 Session 7 

Direct marketing  375 How are managers different from

Telemarketing375 What is management? 399

Kiosks and electronic dispensing 376 What do managers do? 400

9780655702412_FM.indd 11 3/3/20 5:31 PM

History Module Should organisations be socially

9780655702412_FM.indd 12 3/3/20 5:31 PM

• Discussion questions 465 Session 9 

9780655702412_FM.indd 13 3/3/20 5:31 PM

Chapter 19 What contemporary OB issues do

9780655702412_FM.indd 14 3/3/20 5:31 PM

What is career development? 574 Session 11 Leading and managing

9780655702412_FM.indd 15 3/3/20 5:31 PM

9780655702412_FM.indd 16 3/3/20 5:31 PM

What reaction do employees have to What human resource management (HRM)

9780655702412_FM.indd 17 3/3/20 5:31 PM

9780655702412_FM.indd 18 3/3/20 5:31 PM

9780655702412_CH01.indd 1 3/3/20 10:41 AM

1 Marketing: Creating and capturing

9780655702412_CH01.indd 2 3/3/20 10:41 AM

CREATE VALUE FOR CREATE VALUE

Understand Design a Construct an Build Capture value

guide marketing strategy. g

management, and identify Industry Market

that are changing the marketing

landscape in this age of

9780655702412_CH01.indd 3 3/3/20 10:41 AM

9780655702412_CH01.indd 4 3/3/20 10:41 AM

CREATE VALUE FOR CAPTURE VALUE

Understand Design a Construct an Build Capture value

Figure 1.1 A simple model of the marketing process

Session 1 Introduction to marketing and sustainable marketing 1

Session 2 Understanding the marketplace and buyer behaviour 67

Session 3 Marketing analytics 139

Session 4 Products and services 175

Session 5 Price and placement 251

Session 6 Integrated marketing communication 319

Session 7 Managers, management and managerial sustainable

Session 8 Managing the business 453

Session 9 Managing the organisation and individual 489

Session 10 Managing people 553

Session 11 Leading and managing groups 603

Session 12 Control and change management 655

Appendix 1 Case studies 719

5.3 Marketing analytics at work 172 What is a product? 206

Team-based new-product development 238 Psychological pricing 264

Retailing 300 Student Learning Centre

12.3 Marketing analytics at work 367 Session 7

Direct marketing 375 How are managers different from

Telemarketing375 What is management? 399

Kiosks and electronic dispensing 376 What do managers do? 400

History Module Should organisations be socially

• Discussion questions 465 Session 9

What is career development? 574 Session 11 Leading and managing